0000950123-11-044409.txt : 20110504 0000950123-11-044409.hdr.sgml : 20110504 20110504113959 ACCESSION NUMBER: 0000950123-11-044409 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 52 CONFORMED PERIOD OF REPORT: 20110228 FILED AS OF DATE: 20110504 DATE AS OF CHANGE: 20110504 EFFECTIVENESS DATE: 20110504 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GMO TRUST CENTRAL INDEX KEY: 0000772129 IRS NUMBER: 000000000 STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-04347 FILM NUMBER: 11808884 BUSINESS ADDRESS: STREET 1: 40 ROWES WHARF CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6173467646 MAIL ADDRESS: STREET 1: 40 ROWES WHARF CITY: BOSTON STATE: MA ZIP: 02110 FORMER COMPANY: FORMER CONFORMED NAME: GMO CORE TRUST DATE OF NAME CHANGE: 19900927 0000772129 S000004081 GMO U.S. Core Equity Fund C000011423 Class III GMUEX C000011424 Class IV GMRTX C000011426 Class VI GMCQX C000011427 Class M GMTMX 0000772129 S000004083 GMO Tobacco-Free Core Fund C000011431 Class III GMTCX 0000772129 S000004084 GMO Quality Fund C000011437 Class III GQETX C000011438 Class IV GQEFX C000011439 Class V GQLFX C000011440 Class VI GQLOX 0000772129 S000004135 GMO U.S. Intrinsic Value Fund C000011589 Class III GMVUX 0000772129 S000004138 GMO U.S. Growth Fund C000011603 Class III GMGWX C000011607 Class M GMWMX 0000772129 S000004141 GMO U.S. Small/Mid Cap Value Fund C000011619 Class III GMSUX 0000772129 S000004144 GMO U.S. Small/Mid Cap Growth Fund C000011635 Class III GMSPX 0000772129 S000004146 GMO Real Estate Fund C000011645 Class III GMORX 0000772129 S000004147 GMO Tax-Managed U.S. Equities Fund C000011652 Class III GTMUX 0000772129 S000004157 GMO International Core Equity Fund C000011701 Class III GMIEX C000011702 Class IV GMIRX C000011704 Class VI GCEFX 0000772129 S000004218 GMO International Growth Equity Fund C000011867 Class III GMIGX C000011868 Class IV GMGFX 0000772129 S000004224 GMO International Intrinsic Value Fund C000011880 Class II GMICX C000011881 Class III GMOIX C000011882 Class IV GMCFX C000011885 Class M GMVMX 0000772129 S000004227 GMO Developed World Stock Fund C000011892 Class III GDWTX C000011893 Class IV GDWFX 0000772129 S000004228 GMO Currency Hedged International Equity Fund C000011898 Class III GMOCX 0000772129 S000004229 GMO Foreign Fund C000011904 Class II GMFRX C000011905 Class III GMOFX C000011906 Class IV GMFFX C000011909 Class M GMFMX 0000772129 S000004230 GMO Foreign Small Companies Fund C000011910 Class III GMFSX C000011911 Class IV GFSFX 0000772129 S000004231 GMO International Small Companies Fund C000011914 Class III GMISX 0000772129 S000004911 GMO Emerging Markets Fund C000013268 Class II GMEMX C000013269 Class III GMOEX C000013270 Class IV GMEFX C000013271 Class V GEMVX C000013272 Class VI GEMMX 0000772129 S000004912 GMO Emerging Countries Fund C000013275 Class III GMCEX C000013279 Class M GECMX 0000772129 S000004913 GMO Tax-Managed International Equities Fund C000013282 Class III GTMIX 0000772129 S000004914 GMO Domestic Bond Fund C000013286 Class III GMDBX C000013289 Class VI GDBSX 0000772129 S000004917 GMO Core Plus Bond Fund C000013294 Class III GUGAX C000013295 Class IV GPBFX 0000772129 S000004918 GMO International Bond Fund C000013302 Class III GMIBX 0000772129 S000004919 GMO Currency Hedged International Bond Fund C000013310 Class III GMHBX 0000772129 S000004920 GMO Global Bond Fund C000013318 Class III GMGBX 0000772129 S000004922 GMO Emerging Country Debt Fund C000013327 Class III GMCDX C000013328 Class IV GMDFX 0000772129 S000004924 GMO Short-Duration Investment Fund C000013332 Class III GMSIX 0000772129 S000004926 GMO Alpha Only Fund C000013338 Class III GGHEX C000013339 Class IV GAPOX 0000772129 S000005485 GMO Benchmark-Free Allocation Fund C000014927 Class III GBMFX 0000772129 S000005486 GMO International Equity Allocation Fund C000014930 Class III GIEAX 0000772129 S000005487 GMO Global Balanced Asset Allocation Fund C000014933 Class III GMWAX 0000772129 S000005488 GMO Global Equity Allocation Fund C000014936 Class III GMGEX 0000772129 S000005489 GMO Strategic Opportunities Allocation Fund C000014937 Class III GBATX 0000772129 S000005490 GMO World Opportunities Equity Allocation Fund C000014938 Class III GWOAX 0000772129 S000005491 GMO U.S. Equity Allocation Fund C000014941 Class III GUSAX 0000772129 S000005494 GMO Alternative Asset Opportunity Fund C000014953 Class III 0000772129 S000005495 GMO Taiwan Fund C000014957 Class III GMOTX 0000772129 S000007515 GMO World Opportunity Overlay Fund C000020547 GMO World Opportunity Overlay Fund 0000772129 S000007516 GMO Short-Duration Collateral Fund C000020548 GMO Short-Duration Collateral Fund GMOSX 0000772129 S000007517 GMO Special Purpose Holding Fund C000020549 GMO Special Purpose Holding Fund 0000772129 S000007518 GMO Short-Duration Collateral Share Fund C000020550 Class III GMDCX 0000772129 S000011778 GMO Inflation Indexed Plus Bond Fund C000032211 Class III GMITX C000032214 Class VI GMIPX 0000772129 S000012210 GMO Strategic Fixed Income Fund C000033338 III GFITX C000033341 VI GMFIX 0000772129 S000012211 GMO International Opportunities Equity Allocation Fund C000033342 III GIOTX 0000772129 S000019254 GMO Special Situations Fund C000053096 Class III C000053097 Class VI 0000772129 S000023608 GMO Flexible Equities Fund C000069468 Class III GFEFX C000069469 Class VI GFFEX 0000772129 S000025186 GMO U.S. Treasury Fund C000075084 GMO U.S. Treasury Fund GUSTX 0000772129 S000025199 GMO Asset Allocation Bond Fund C000075099 Class III GMOBX C000075103 Class VI GABFX N-CSR 1 b86187a1nvcsr.htm GMO TRUST nvcsr
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-04347
GMO Trust
(Exact name of the registrant as specified in charter)
     
40 Rowes Wharf, Boston, MA   02110
 
(Address of principal executive offices)   (Zip Code)
J.B. Kittredge, Chief Executive Officer, 40 Rowes Wharf, Boston, MA 02110
 
(Name and address of agent for services)
Registrant’s telephone number, including area code: 617-346-7646
Date of fiscal year end: 02/28/11
Date of reporting period: 02/28/11
 
 

 

 

TABLE OF CONTENTS

Item 1. Reports to Stockholders
Item 2. Code of Ethics
Item 3. Audit Committee Financial Expert
Item 4. Principal Accountant Fees and Services. *
Item 5. Audit Committee of Listed Registrants
Item 6. Schedule of Investments
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers
Item 10. Submission of Matters to a Vote of Security Holders
Item 11. Controls and Procedures
Item 12. Exhibits
SIGNATURES
Item 1. Reports to Stockholders.
    The annual reports for each series of the registrant for the periods ended February 28, 2011 are filed herewith.

 

 

 
GMO Alpha Only Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO Alpha Only Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Asset Allocation Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
The Class III shares of GMO Alpha Only Fund returned -4.3% for the fiscal year ended February 28, 2011, as compared with +0.1% for the Citigroup 3 Month Treasury Bill Index.
 
Underlying fund implementation detracted 3.5% from relative performance, primarily because GMO Quality Fund and GMO U.S. Core Equity both underperformed their respective benchmarks during the period.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice. References to specific securities are not recommendations of such securities and may not be representative of any GMO portfolio’s current or future investments.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO Alpha Only Fund Class III Shares and the Citigroup 3 Month Treasury Bill Index
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited. Performance for classes may vary due to different fees.
 

 

GMO Alpha Only Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary*   % of Total Net Assets  
Common Stocks
    85.8 %
Cash and Cash Equivalents
    78.9  
Short-Term Investments
    7.9  
Investment Funds
    2.2  
Preferred Stocks
    0.4  
Rights and Warrants
    0.0 Ù
Forward Currency Contracts
    (0.5 )
Swap Agreements
    (19.6 )
Futures Contracts
    (65.6 )
Other
    10.5  
         
      100.0 %
         
 
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust (“underlying funds”). Swaps and futures concentrations use the notional value of the respective contracts for purposes of computing asset class exposures.
Ù Rounds to 0.0%.

         
        1

 

GMO Alpha Only Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares / Par Value     Description   Value ($)  
            INVESTMENT FUNDS — 2.0%        
                     
            United States — 2.0%        
      848,341     Vanguard Emerging Markets ETF (a)     39,371,506  
                     
                     
            TOTAL INVESTMENT FUNDS (COST $34,413,743)     39,371,506  
                     
                     
            MUTUAL FUNDS — 93.5%        
                     
            United States — 93.5%        
            Affiliated Issuers        
      18,519,919     GMO International Growth Equity Fund, Class IV     442,255,674  
      18,986,620     GMO International Intrinsic Value Fund, Class IV     442,388,249  
      27,875,087     GMO Quality Fund, Class VI     580,359,319  
      25,064,275     GMO U.S. Core Equity Fund, Class VI     300,019,377  
      3,801,463     GMO U.S. Treasury Fund     95,036,569  
                     
            TOTAL UNITED STATES     1,860,059,188  
                     
                     
            TOTAL MUTUAL FUNDS (COST $1,599,436,954)     1,860,059,188  
                     
                     
            SHORT-TERM INVESTMENTS — 1.2%        
                     
            Time Deposits — 1.2%        
USD
    9,646,961     Commerzbank (Frankfurt) Time Deposit, 0.03%, due 03/01/11     9,646,961  
USD
    15,000,000     Skandinaviska Enskilda Banken, AB (Stockholm) Time Deposit, 0.03%, due 03/01/11     15,000,000  
                     
            Total Time Deposits     24,646,961  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $24,646,961)     24,646,961  
                     
                     
            TOTAL INVESTMENTS — 96.7%
(Cost $1,658,497,658) 		    1,924,077,655  
            Other Assets and Liabilities (net) — 3.3%     66,015,439  
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 1,990,093,094  
                     

         
2
  See accompanying notes to the financial statements.    

 

 
GMO Alpha Only Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
A summary of outstanding financial instruments at February 28, 2011 is as follows:
 
Forward Currency Contracts
 
                                     
                    Net Unrealized
Settlement
 		      Deliver/
 		  Units of
 		      Appreciation
Date   Counterparty   Receive   Currency   Value   (Depreciation)
 
Sales #
                                   
4/20/11
    Bank of America, N.A.     AUD     15,143,271     $ 15,321,646     $ (265,676 )
4/20/11
    Deutsche Bank AG     AUD     14,075,457       14,241,254       (265,718 )
4/20/11
    Royal Bank of Scotland PLC     AUD     6,042,541       6,113,717       (109,667 )
4/20/11
    State Street Bank and Trust and Company     AUD     3,672,959       3,716,223       (65,302 )
4/20/11
    Bank of America, N.A.     CHF     7,955,956       8,566,905       (360,497 )
4/20/11
    Bank of New York Mellon     CHF     9,973,027       10,738,869       (455,278 )
4/20/11
    Barclays Bank PLC     CHF     6,732,543       7,249,544       (312,211 )
4/20/11
    Brown Brothers Harriman & Co.      CHF     9,207,813       9,914,894       (427,976 )
4/20/11
    Bank of America, N.A.     DKK     4,098,504       758,254       (18,142 )
4/20/11
    Barclays Bank PLC     DKK     10,356,732       1,916,073       (47,760 )
4/20/11
    Morgan Stanley Capital Services Inc.      DKK     9,978,405       1,846,080       (45,296 )
4/20/11
    Bank of New York Mellon     EUR     15,361,417       21,184,889       (481,078 )
4/20/11
    Brown Brothers Harriman & Co.      EUR     12,207,051       16,834,711       (397,917 )
4/20/11
    JPMorgan Chase Bank, N.A.     EUR     38,091,255       52,531,547       (1,300,409 )
4/20/11
    Morgan Stanley Capital Services Inc.      EUR     13,589,161       18,740,775       (445,647 )
4/20/11
    Royal Bank of Scotland PLC     EUR     15,267,091       21,054,804       (512,902 )
4/20/11
    State Street Bank and Trust and Company     EUR     8,425,608       11,619,733       (281,056 )
4/20/11
    Bank of America, N.A.     GBP     3,912,372       6,357,239       (87,968 )
4/20/11
    Bank of New York Mellon     GBP     9,275,540       15,071,886       (240,947 )
4/20/11
    Brown Brothers Harriman & Co.      GBP     5,595,736       9,092,548       (136,853 )
4/20/11
    Deutsche Bank AG     GBP     10,068,865       16,360,965       (272,429 )
4/20/11
    JPMorgan Chase Bank, N.A.     GBP     8,204,184       13,331,032       (212,075 )
4/20/11
    Morgan Stanley Capital Services Inc.      GBP     13,048,389       21,202,413       (354,441 )
4/20/11
    State Street Bank and Trust and Company     GBP     11,654,518       18,937,503       (294,644 )
4/20/11
    Bank of New York Mellon     HKD     18,674,121       2,398,995       (1,357 )
4/20/11
    Brown Brothers Harriman & Co.      HKD     18,525,038       2,379,843       (1,789 )
4/20/11
    JPMorgan Chase Bank, N.A.     HKD     62,951,484       8,087,144       (3,642 )
4/20/11
    Bank of America, N.A.     JPY     923,148,204       11,288,512       (202,215 )
4/20/11
    Barclays Bank PLC     JPY     1,979,686,912       24,208,161       (445,264 )
4/20/11
    JPMorgan Chase Bank, N.A.     JPY     1,766,701,190       21,603,712       (397,233 )
4/20/11
    Royal Bank of Scotland PLC     JPY     1,923,346,617       23,519,216       (436,998 )
4/20/11
    State Street Bank and Trust and Company     JPY     1,698,138,783       20,765,312       (384,508 )
4/20/11
    Barclays Bank PLC     NOK     15,398,886       2,742,370       (114,933 )
4/20/11
    Morgan Stanley Capital Services Inc.      NOK     7,803,508       1,389,718       (59,835 )

         
    See accompanying notes to the financial statements.   3

 

 
GMO Alpha Only Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Forward Currency Contracts — continued
 
                                     
                    Net Unrealized
Settlement
 		      Deliver/
 		  Units of
 		      Appreciation
Date   Counterparty   Receive   Currency   Value   (Depreciation)
 
4/20/11
    Brown Brothers Harriman & Co.      NZD     635,612     $ 476,505     $ 1,952  
4/20/11
    Bank of America, N.A.     SEK     12,197,730       1,921,132       (49,379 )
4/20/11
    Bank of New York Mellon     SEK     30,900,171       4,866,750       (124,186 )
4/20/11
    JPMorgan Chase Bank, N.A.     SEK     25,666,866       4,042,509       (110,637 )
4/20/11
    Morgan Stanley Capital Services Inc.      SEK     12,218,973       1,924,477       (51,493 )
4/20/11
    State Street Bank and Trust and Company     SEK     13,630,213       2,146,746       (55,793 )
4/20/11
    Bank of New York Mellon     SGD     3,561,598       2,801,267       (23,447 )
4/20/11
    Deutsche Bank AG     SGD     6,189,068       4,867,824       (37,784 )
                                 
                        $ 464,133,697     $ (9,890,430 )
                                 
 
# Fund sells foreign currency; buys USD.
 
Futures Contracts
 
                             
                Net Unrealized
Number of
 		      Expiration
 		  Contract
 		  Appreciation
Contracts   Type   Date   Value   (Depreciation)
 
Buys
                           
8
    S&P 400 E-Mini Index     March 2011   $ 772,720     $ 34,320  
                         
Sales
                           
135
    Amesterdam Exchanges     March 2011   $ 13,761,961     $ 62,861  
937
    CAC 40     March 2011     53,159,760       539,075  
179
    DAX     March 2011     45,034,225       (1,529,871 )
97
    FTSE/MIB     March 2011     15,048,353       (1,190,516 )
1,178
    FTSE 100 Index     March 2011     114,488,601       (2,684,492 )
98
    Hang Seng     March 2011     14,717,169       (338,894 )
127
    IBEX 35     March 2011     19,012,344       266,434  
148
    MSCI Singapore     March 2011     8,253,394       6,521  
952
    OMXS 30     March 2011     16,992,412       (26,231 )
3,706
    Russell 2000 Mini     March 2011     304,966,740       (23,055,614 )
357
    S&P 400 E-Mini Index     March 2011     34,482,630       (2,777,960 )
7,567
    S&P 500 E-Mini Index     March 2011     501,692,100       (33,519,327 )
368
    SPI 200     March 2011     45,453,910       (827,558 )
1,012
    TOPIX     March 2011     118,164,265       (8,894,355 )
                         
                $ 1,305,227,864     $ (73,969,927 )
                         

         
4
  See accompanying notes to the financial statements.    

 

 
GMO Alpha Only Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Swap Agreements
 
Total Return Swaps
 
                                 
Notional
 		  Expiration
 		              Market
Amount   Date   Counterparty   Fund Pays   Fund Receives   Value
 
  199,886,869         3/30/2011   Deutsche Bank AG   MSCI Daily Total
Return EAFE 		  12 month
USD LIBOR BBA -0.73% 		  $ (28,814,452 )
  100,983,424         5/10/2011   BNP Paribas   MSCI Daily Total
Return EAFE 		  12 month
USD LIBOR BBA -0.78% 		    (22,419,050 )
  48,194,814         1/27/2012   BNP Paribas   MSCI Daily Total
Return EAFE 		  12 month
USD LIBOR BBA -0.54% 		    (1,430,448 )
  40,768,636         2/7/2012   Citibank N.A.   MSCI Daily Total
Return EAFE 		  12 month
USD LIBOR BBA -0.50% 		    (715,949 )
                                 
                            $ (53,379,899 )
                                 
Premiums to (Pay) Receive
  $ —  
         
 
As of February 28, 2011, for futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
 
Notes to Schedule of Investments:
 
ETF - Exchange-Traded Fund
LIBOR - London Interbank Offered Rate
MSCI - Morgan Stanley Capital International
(a) Represents an investment to obtain exposure in Emerging Markets. The Vanguard Emerging Markets ETF is a separate investment portfolio of Vanguard, Inc., a registered investment company. The Vanguard Emerging Markets ETF invests substantially all (normally about 95%) of its assets in the common stocks included in the MSCI Emerging Market Index, while employing a form of sampling to reduce risk.
 
Currency Abbreviations:
 
AUD - Australian Dollar
CHF - Swiss Franc
DKK - Danish Krone
EUR - Euro
GBP - British Pound
HKD - Hong Kong Dollar
JPY - Japanese Yen
NOK - Norwegian Krone
NZD - New Zealand Dollar
SEK - Swedish Krona
SGD - Singapore Dollar
USD - United States Dollar

         
    See accompanying notes to the financial statements.   5

 

GMO Alpha Only Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in affiliated issuers, at value (cost $1,599,436,954) (Notes 2 and 10)
  $ 1,860,059,188  
Investments in unaffiliated issuers, at value (cost $59,060,704) (Note 2)
    64,018,467  
Receivable for Fund shares sold
    9,185,114  
Unrealized appreciation on open forward currency contracts (Note 4)
    1,952  
Receivable for collateral on open futures contracts (Note 4)
    82,314,591  
Receivable for collateral on open swap contracts (Note 4)
    45,595,573  
Receivable for expenses reimbursed by Manager (Note 5)
    701,683  
Miscellaneous receivable
    8,442  
         
Total assets
    2,061,885,010  
         
         
Liabilities:
       
Payable for investments purchased
    8,106  
Payable for Fund shares repurchased
    1,061,351  
Payable to affiliate for (Note 5):
       
Management fee
    760,953  
Shareholder service fee
    154,488  
Trustees and Chief Compliance Officer of GMO Trust fees
    4,791  
Payable for variation margin on open futures contracts (Note 4)
    6,323,818  
Unrealized depreciation on open forward currency contracts (Note 4)
    9,892,382  
Payable for open swap contracts (Note 4)
    53,379,899  
Accrued expenses
    206,128  
         
Total liabilities
    71,791,916  
         
Net assets
  $ 1,990,093,094  
         

         
6
  See accompanying notes to the financial statements.    

 

 
GMO Alpha Only Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011 — (Continued)
 
         
Net assets consist of:
       
Paid-in capital
  $ 3,126,381,921  
Accumulated undistributed net investment income
    9,711,211  
Accumulated net realized loss
    (1,274,376,443 )
Net unrealized appreciation
    128,376,405  
         
    $ 1,990,093,094  
         
Net assets attributable to:
       
Class III shares
  $ 59,746,452  
         
Class IV shares
  $ 1,930,346,642  
         
Shares outstanding:
       
Class III
    2,543,709  
         
Class IV
    82,156,915  
         
Net asset value per share:
       
Class III
  $ 23.49  
         
Class IV
  $ 23.50  
         

         
    See accompanying notes to the financial statements.   7

 

GMO Alpha Only Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends from affiliated issuers (Note 10)
  $ 25,826,929  
Dividends from unaffiliated issuers
    615,984  
         
Total investment income
    26,442,913  
         
Expenses:
       
Management fee (Note 5)
    9,125,313  
Shareholder service fee – Class III (Note 5)
    102,923  
Shareholder service fee – Class IV (Note 5)
    1,756,447  
Custodian and fund accounting agent fees
    292,616  
Legal fees
    78,140  
Audit and tax fees
    73,674  
Transfer agent fees
    44,900  
Trustees fees and related expenses (Note 5)
    39,824  
Registration fees
    12,723  
Miscellaneous
    36,925  
         
Total expenses
    11,563,485  
Fees and expenses reimbursed by Manager (Note 5)
    (518,631 )
Expense reductions (Note 2)
    (63 )
Indirectly incurred fees waived or borne by Manager (Note 5)
    (6,632,040 )
Shareholder service fee waived (Note 5)
    (1,169,893 )
         
Net expenses
    3,242,858  
         
Net investment income (loss)
    23,200,055  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in unaffiliated issuers
    1,507,214  
Investments in affiliated issuers
    125,648,908  
Realized gains distributions from affiliated issuers (Note 10)
    1,314  
Futures contracts
    (173,885,449 )
Swap contracts
    (25,712,024 )
Foreign currency, forward contracts and foreign currency related transactions
    (20,395,542 )
         
Net realized gain (loss)
    (92,835,579 )
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in unaffiliated issuers
    4,957,763  
Investments in affiliated issuers
    135,166,879  
Futures contracts
    (73,962,942 )
Swap contracts
    (67,165,232 )
Foreign currency, forward contracts and foreign currency related transactions
    (10,597,682 )
         
Net unrealized gain (loss)
    (11,601,214 )
         
Net realized and unrealized gain (loss)
    (104,436,793 )
         
Net increase (decrease) in net assets resulting from operations
  $ (81,236,738 )
         

         
8
  See accompanying notes to the financial statements.    

 

GMO Alpha Only Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 23,200,055     $ 27,295,546  
Net realized gain (loss)
    (92,835,579 )     (671,971,029 )
Change in net unrealized appreciation (depreciation)
    (11,601,214 )     537,944,298  
                 
                 
Net increase (decrease) in net assets from operations
    (81,236,738 )     (106,731,185 )
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    —       (6,172,043 )
Class IV
    —       (87,315,114 )
                 
Total distributions from net investment income
    —       (93,487,157 )
                 
Net share transactions (Note 9):
               
Class III
    (8,732,467 )     (34,627,393 )
Class IV
    360,299,813       (21,256,031 )
                 
Increase (decrease) in net assets resulting from net share transactions
    351,567,346       (55,883,424 )
                 
Total increase (decrease) in net assets
    270,330,608       (256,101,766 )
                 
Net assets:
               
Beginning of period
    1,719,762,486       1,975,864,252  
                 
End of period (including accumulated undistributed net investment income of $9,711,211 and $2,133,853, respectively)
  $ 1,990,093,094     $ 1,719,762,486  
                 

         
    See accompanying notes to the financial statements.   9

 

GMO Alpha Only Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011(a)   2010(a)   2009(a)   2008(a)   2007(a)
 
Net asset value, beginning of period
  $ 24.55     $ 28.85     $ 55.55     $ 52.10     $ 51.80  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)(b)†
    0.30       0.55       1.15       1.05       0.85  
Net realized and unrealized gain (loss)
    (1.36 )     (3.35 )     4.65       3.50       0.50  
                                         
                                         
Total from investment operations
    (1.06 )     (2.80 )     5.80       4.55       1.35  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    —       (1.50 )     (22.05 )     (1.10 )     (1.05 )
From net realized gains
    —       —       (10.45 )     —       —  
                                         
                                         
Total distributions
    —       (1.50 )     (32.50 )     (1.10 )     (1.05 )
                                         
                                         
Net asset value, end of period
  $ 23.49     $ 24.55     $ 28.85     $ 55.55     $ 52.10  
                                         
                                         
Total Return(c)
    (4.32 )%     (10.30 )%     11.92 %     8.74 %     2.64 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 59,746     $ 71,481     $ 121,711     $ 176,067     $ 166,626  
Net expenses to average daily net assets(d)
    0.23 %(e)     0.24 %(e)     0.23 %(e)     0.16 %(e)     0.15 %
Net investment income (loss) to average daily net assets(b)
    1.26 %     2.16 %     2.37 %     1.91 %     1.66 %
Portfolio turnover rate
    89 %     114 %     87 %     44 %     22 %
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets:(f)
    0.46 %     0.45 %     0.44 %     0.51 %     0.53 %
Redemption fees consisted of the following per share amounts:†
  $ — (g)   $ — (g)   $ 0.00 (h)   $ 0.01     $ 0.01  
 
(a) Per share amounts were adjusted to reflect a 1:5 reverse stock split effective November 15, 2010.
(b) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(c) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees, if any, which are borne by the shareholder.
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(e) The net expense ratio does not include the effect of expense reductions (Note 2).
(f) Ratios include reimbursement of direct operating expenses and waiver of expenses indirectly incurred through investment in the underlying funds (Note 5).
(g) There were no purchase premiums and redemption fees during the period.
(h) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.

         
10
  See accompanying notes to the financial statements.    

 

GMO Alpha Only Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class IV share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011(a)   2010(a)   2009(a)   2008(a)   2007(a)(b)
 
Net asset value, beginning of period
  $ 24.55     $ 28.85     $ 55.55     $ 52.05     $ 51.85  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)(c)†
    0.31       0.55       1.20       1.05       1.00  
Net realized and unrealized gain (loss)
    (1.36 )     (3.35 )     4.60       3.55       0.30  
                                         
                                         
Total from investment operations
    (1.05 )     (2.80 )     5.80       4.60       1.30  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    —       (1.50 )     (22.05 )     (1.10 )     (1.10 )
From net realized gains
    —       —       (10.45 )     —       —  
                                         
                                         
Total distributions
    —       (1.50 )     (32.50 )     (1.10 )     (1.10 )
                                         
                                         
Net asset value, end of period
  $ 23.50     $ 24.55     $ 28.85     $ 55.55     $ 52.05  
                                         
                                         
Total Return(d)
    (4.28 )%     (10.30 )%     12.00 %     8.90 %     2.54 %**
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 1,930,347     $ 1,648,282     $ 1,854,153     $ 2,557,970     $ 1,693,793  
Net expenses to average daily net assets(e)
    0.18 %(f)     0.18 %(f)     0.18 %(f)     0.11 %(f)     0.10 %*
Net investment income (loss) to average daily net assets(c)
    1.27 %     2.11 %     2.52 %     1.96 %     1.93 %*
Portfolio turnover rate
    89 %     114 %     87 %     44 %     22 %††
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets:(g)
    0.46 %     0.46 %     0.44 %     0.51 %     0.53 %*
Redemption fees consisted of the following per share amounts:†
  $ — (h)   $ — (h)   $ 0.00 (i)   $ 0.01     $ — (h)
 
(a) Per share amounts were adjusted to reflect a 1:5 reverse stock split effective November 15, 2010.
(b) Period from March 2, 2006 (commencement of operations) through February 28, 2007.
(c) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(d) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees, if any, which are borne by the shareholder.
(e) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(f) The net expense ratio does not include the effect of expense reductions (Note 2).
(g) Ratios include reimbursement of direct operating expenses and waiver of expenses indirectly incurred through investment in the underlying funds (Note 5).
(h) There were no purchase premiums and redemption fees during the period.
(i) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the year ended February 28, 2007.
* Annualized.
** Not annualized.

         
    See accompanying notes to the financial statements.   11

 

GMO Alpha Only Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO Alpha Only Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund seeks to outperform its benchmark, the Citigroup 3 Month Treasury Bill Index. The Fund’s investment program involves having both long and short investment exposures. The Fund seeks to construct a portfolio in which it has long investment exposure to asset classes and sub-asset classes that it expects will outperform relative to the asset classes and sub-asset classes to which it has short investment exposure. To gain long investment exposure, the Fund invests primarily in shares of GMO U.S. Equity Funds and GMO International Equity Funds, and also may invest in shares of GMO Emerging Country Debt Fund (GMO Funds in which the Fund invests are collectively referred to as “underlying funds”). In addition, the Fund may gain long investment exposure by investing in securities directly, rather than through the underlying funds. To gain short investment exposure, the Fund may use over-the-counter (“OTC”) and exchange-traded derivatives (including futures, swap contracts, and currency forwards) and by making short sales of securities (e.g., shares of exchange-traded funds), including short sales of securities the Fund does not own.
 
The Manager uses multi-year forecasts of relative value and risk among asset classes (e.g., foreign equity, U.S. equity, emerging country equity, and emerging country debt) and sub-asset classes (e.g., small-to-mid cap stocks in the foreign equity asset class and quality stocks in the U.S. equity and emerging country equity asset classes) to determine the Fund’s long and short exposures. The Manager changes the Fund’s holdings in response to changes in its investment outlook and market valuations and may use redemption/purchase activity to rebalance the Fund’s investments.
 
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
 
Throughout the year ended February 28, 2011, the Fund had two classes of shares outstanding: Class III and Class IV. Each class of shares bears a different shareholder service fee.
 
On October 5, 2010, the Fund’s Board of Trustees approved a one for five reverse stock split for Class III and Class IV shares of the Fund. The reverse stock split was effective as of November 15, 2010. The reverse stock split did not result in a change to the value of the shareholder account balances.

         
12
       

 

 
GMO Alpha Only Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The financial statements of the underlying funds should be read in conjunction with the Fund’s financial statements. These financial statements are available, without charge, upon request by calling (617) 346-7646 (collect) or by visiting GMO’s website at www.gmo.com.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Shares of the funds in which the Fund invests (“underlying funds”) and other investment funds are generally valued at their net asset value. Investments held by the underlying funds are valued as follows. Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the OTC market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. Additionally, because many foreign securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund and the underlying funds generally value those foreign securities (including futures, derivatives and other securities whose values are based on indices compromised of such securities) as of the NYSE close using fair value prices, which are based on adjustments to local closing prices supplied by a third party vendor using that vendor’s proprietary models. As of February 28, 2011, those foreign securities, representing 45.8% and (0.7)%, respectively, of the net assets of the Fund, through investments in the underlying funds, were valued using fair value prices based on those adjustments. Those underlying funds classify such securities (as defined below) as Level 2. See Note 4 for a further discussion on valuation of derivative financial instruments.

         
        13

 

 
GMO Alpha Only Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include: fair value adjustments applied to local closing prices of foreign securities and derivatives due to market events that have occurred since the local market close but before the Fund’s daily NAV calculation.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant.

         
14
       

 

 
GMO Alpha Only Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Investment Funds
                               
United States
  $ 39,371,506     $ —     $      —     $ 39,371,506  
                                 
TOTAL INVESTMENT FUNDS
    39,371,506       —       —       39,371,506  
                                 
Mutual Funds
                               
United States
    1,860,059,188       —       —       1,860,059,188  
                                 
TOTAL MUTUAL FUNDS
    1,860,059,188       —       —       1,860,059,188  
                                 
Short-Term Investments
    24,646,961       —       —       24,646,961  
                                 
Total Investments
    1,924,077,655       —       —       1,924,077,655  
                                 
Derivatives *
                               
Forward Currency Contracts
                               
Foreign currency risk
    —       1,952       —       1,952  
Futures Contracts
                               
Equity risk
    34,320       874,891       —       909,211  
                                 
Total Derivatives
    34,320       876,843       —       911,163  
                                 
Total
  $ 1,924,111,975     $ 876,843     $ —     $ 1,924,988,818  
                                 
 
LIABILITY VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Liabilities
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Derivatives *
                               
Forward Currency Contracts
                               
Foreign currency risk
  $ —     $ (9,892,382 )   $      —     $ (9,892,382 )
Futures Contracts
                               
Equity risk
    (59,352,901 )     (15,491,917 )     —       (74,844,818 )
Swap Agreements
                               
Equity risk
    —       (53,379,899 )     —       (53,379,899 )
                                 
Total Derivatives
    (59,352,901 )     (78,764,198 )     —       (138,117,099 )
                                 
Total
  $ (59,352,901 )   $ (78,764,198 )   $ —     $ (138,117,099 )
                                 

         
        15

 

 
GMO Alpha Only Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The risks referenced above are not intended to be inclusive of all risks. Please see the Investment Risks and Derivative Financial Instruments sections below for a further discussion of risks.
 
            * Because the tables above are based on market values or unrealized appreciation (depreciation) rather than the notional amounts of derivatives, the uncertainties surrounding the valuation inputs for a derivative are likely to be more significant to the Fund’s net asset value than the uncertainties surrounding inputs for a non-derivative security with the same market value.
 
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements. The aggregate net values of the Fund’s indirect investments in securities using Level 3 inputs were 0.1% of total net assets.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
The Fund held no investments or derivative financial instruments directly at either February 28, 2011 or February 28, 2010, whose fair value was categorized using Level 3 inputs.
 
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 pm. Income and expenses denominated in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country’s tax treaty with the United States. The foreign withholding rates applicable to a Fund’s investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.

         
16
       

 

 
GMO Alpha Only Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Taxes related to capital gains realized during the year ended February 28, 2011, if any, are reflected as part of Net realized gain (loss) in the Statement of Operations. Changes in tax liabilities related to capital gain taxes on unrealized investment gains, if any, are reflected as part of Change in net unrealized appreciation (depreciation) in the Statement of Operations. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards, derivative contract transactions, foreign currency transactions, losses on wash sale transactions, net operating losses, and post-October capital losses.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $      —     $ 93,487,157  
                 
Total distributions
  $ —     $ 93,487,157  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.

         
        17

 

 
GMO Alpha Only Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, certain tax attributes consisted of the following:
 
         
Other Tax Attributes:
       
Capital loss carryforwards
  $ (1,019,797,217 )
Post-October capital loss deferral
  $ (122,505,886 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 28, 2018
  $ (710,774,856 )
February 28, 2019
    (309,022,361 )
         
Total
  $ (1,019,797,217 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 1,852,574,071     $ 71,575,042     $ (71,458 )   $ 71,503,584      
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant

         
18
       

 

 
GMO Alpha Only Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
portfolio transactions. Income dividends and capital gain distributions from the underlying funds are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (Note 5).
 
Brown Brothers Harriman & Co. (“BBH”) serves as the Fund’s custodian and fund accounting agent. State Street Bank and Trust Company (“State Street”) serves as the Fund’s transfer agent. BBH’s and State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. References to investments include those held directly by the Fund and indirectly through the Fund’s investments in the underlying funds. The Fund and some of the underlying funds are non-diversified investment companies under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund or an underlying fund may affect the Fund’s or the underlying fund’s performance more than if the Fund or the underlying fund were diversified. The principal risks of investing in the Fund are summarized below, including those risks to which the Fund is exposed as a result of its investments in the underlying funds. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Derivatives Risk — The use of derivatives involves the risk that their value may not correlate with the value of the relevant underlying assets, rates or indices. Derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk. This risk is particularly pronounced because the Fund uses various types of exchange-traded and over-the counter derivatives to attempt to implement its investment strategy.
 
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund or the underlying funds may be subject to foreign taxes on capital gains or other income payable on

         
        19

 

 
GMO Alpha Only Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund or the underlying funds needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund or the underlying funds to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund’s investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund’s investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
 
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. In addition, the value of the Fund’s shares will be adversely affected if the equity investments that are the subject of the Fund’s short positions appreciate in value.
 
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent a Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
 
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in the underlying funds, including the risk that the underlying funds in which it invests will not perform as expected or that the Fund will invest in underlying funds with higher fees or expenses.
 
• Market Risk — Fixed Income Securities — Typically, the value of fixed income securities will decline during periods of rising interest rates and widening credit spreads on asset-backed securities.
 
• Leveraging Risk — The use of reverse repurchase agreements and other derivatives may cause the Fund’s portfolio to be leveraged. The Fund and some underlying funds are not limited in the extent to which they may use derivatives or in the absolute face value of their derivative positions. Leverage increases the Fund’s portfolio losses when the value of its investments decline.
 
Other principal risks of an investment in the Fund include Currency Risk (risk that fluctuations in exchange rates may adversely affect the value of the Fund’s investments denominated in foreign currencies, or that the U.S. dollar will decline in value relative to the foreign currency being hedged); Credit and Counterparty Risk (risk of default of an issuer of a portfolio security, a derivatives counterparty, or a borrower of the Fund’s securities); Market Risk — Value Securities (risk that the price of investments held by the Fund will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Market Risk — Growth Securities (greater price fluctuations resulting from dependence on future earnings expectations); Real Estate Risk (risk to an underlying fund that concentrates its assets in real estate-related investments that factors affecting the real

         
20
       

 

 
GMO Alpha Only Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
estate industry may cause the value of the Fund’s investments to fluctuate more than if it invested in securities of companies in a broader range of industries); Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investment in companies with smaller market capitalizations); Short Sales Risk (risk that an underlying fund’s loss on a short sale of securities that the Fund does not own is unlimited); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by “equitizing” its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically “sell” a portion of the Fund’s portfolio) in combination with a long futures contract on another index (to synthetically “buy” exposure to that index). The Funds also may use currency derivatives in an attempt to

         
        21

 

 
GMO Alpha Only Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral (e.g., foreign currency forwards; see “Currency Risk” above), that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased

         
22
       

 

 
GMO Alpha Only Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
 
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund’s forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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.
 
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. During the year ended February 28, 2011, the Fund used forward currency contracts to hedge some or all of the currency exposure of the underlying funds and assets in which the Fund invests, adjust against anticipated currency exchange rate changes and adjust exposure to foreign currencies. Forward currency contracts outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is marked to market daily and an appropriate payable or receivable for the change in value (“variation margin”) is recorded by

         
        23

 

 
GMO Alpha Only Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because regular trading on many foreign exchanges closes prior to the close of the NYSE, closing prices for these foreign futures contracts (including foreign index futures) on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures contracts using fair value prices, which are based on local closing prices adjusted by a factor supplied by a third party vendor using that vendor’s proprietary models. During the year ended February 28, 2011, the Fund used futures contracts to hedge some or all of the broad market exposure of the underlying funds and assets in which the Fund invests. Futures contracts outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.

         
24
       

 

 
GMO Alpha Only Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic

         
        25

 

 
GMO Alpha Only Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. Because regular trading on many foreign exchanges closes prior to the close of the NYSE, closing prices for certain swap agreements on foreign securities and indices do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign swap agreements on

         
26
       

 

 
GMO Alpha Only Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
foreign securities and indices using fair value prices, which are based on local closing prices and adjusted by a factor supplied by a third party vendor using that vendor’s proprietary models. As of February 28, 2011, swap agreements representing (2.7)% of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified using Level 2 inputs in the table above. During the year ended February 28, 2011, the Fund used swap agreements to hedge some or all of the broad market exposure of the underlying funds and assets in which the Fund invests. Swap agreements outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of
February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Assets:
                                               
Unrealized appreciation on futures contracts *
  $      —     $ —     $      —     $ 909,211     $      —     $ 909,211  
Unrealized appreciation on forward currency contracts
    —       1,952       —       —       —       1,952  
                                                 
Total
  $ —     $ 1,952     $ —     $ 909,211     $ —     $ 911,163  
                                                 
                                                 
Liabilities:
                                               
Unrealized depreciation on futures contracts *
  $ —     $ —     $ —     $ (74,844,818 )   $ —     $ (74,844,818 )
Unrealized depreciation on forward currency contracts
    —       (9,892,382 )     —       —       —       (9,892,382 )
Unrealized depreciation on swap agreements
    —       —       —       (53,379,899 )     —       (53,379,899 )
                                                 
Total
  $ —     $ (9,892,382 )   $ —     $ (128,224,717 )   $ —     $ (138,117,099 )
                                                 

         
        27

 

 
GMO Alpha Only Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
  
  Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of
  February 28, 2011Ù: — continued
 
 
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Futures contracts
  $      —     $ —     $      —     $ (173,885,449 )   $      —     $ (173,885,449 )
Forward currency contracts
    —       (20,636,286 )     —       —       —       (20,636,286 )
Swap agreements
    —       —       —       (25,712,024 )     —       (25,712,024 )
                                                 
Total
  $ —     $ (20,636,286 )   $ —     $ (199,597,473 )   $ —     $ (220,233,759 )
                                                 
                                                 
Change in Unrealized Appreciation (Depreciation) on:
                                               
Futures contracts
  $ —     $ —     $ —     $ (73,962,942 )   $ —     $ (73,962,942 )
Forward currency contracts
    —       (10,615,447 )     —       —       —       (10,615,447 )
Swap agreements
    —       —       —       (67,165,232 )     —       (67,165,232 )
                                                 
Total
  $ —     $ (10,615,447 )   $ —     $ (141,128,174 )   $ —     $ (151,743,621 )
                                                 
 
            * The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
 
The derivative financial instruments outstanding as of period end (as disclosed in the Notes to Schedule of Investments) and the amounts of realized and changes in unrealized gains and losses on derivative financial instruments during the period (as disclosed in the Statement of Operations) serve as indicators of the volume of derivative activity for the Fund during the period.
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.50% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets of each class at the annual rate of 0.15% for Class III shares and 0.10% for Class IV shares. The Manager has contractually agreed through at least June 30, 2011 to waive the Fund’s shareholder service fee to the extent that the aggregate of any direct and indirect shareholder service fees borne by a class of shares of the Fund exceeds 0.15% for Class III shares and 0.10% for Class IV shares;

         
28
       

 

 
GMO Alpha Only Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
provided, however, that the amount of this waiver will not exceed the respective Class’ shareholder service fee.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.50% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in other GMO Funds (excluding those Funds’ Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund’s Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $39,824 and $13,158, respectively. The compensation and expenses of the any Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
             
Indirect Net Expenses
 		           
(excluding shareholder
     Indirect Shareholder
      
service fees)     Service Fees     Total Indirect Expenses
0.366%
    0.064%     0.430%
             
 
6. Purchases and sales of securities
 
For the year ended February 28, 2011 cost of purchases and proceeds from sales of securities, excluding short-term investments, aggregated to $1,570,504,510 and $1,493,303,319, respectively.

         
        29

 

 
GMO Alpha Only Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 90.67% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund’s outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. Two of the shareholders are other funds of the Trust.
 
As of February 28, 2011, 0.12% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and 99.66% of the Fund’s shares were held by accounts for which the Manager had investment discretion.
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares*   Amount   Shares*   Amount
                 
 
Shares sold
    963,045     $ 23,254,195       2,854,832     $ 72,446,196  
Shares issued to shareholders in reinvestment of distributions
    —       —       192,448       5,306,700  
Shares repurchased
    (1,329,071 )     (31,986,662 )     (4,354,242 )     (112,380,289 )
                                 
Net increase (decrease)
    (366,026 )   $ (8,732,467 )     (1,306,962 )   $ (34,627,393 )
                                 
                                 
                                 

         
30
       

 

 
GMO Alpha Only Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class IV:   Shares*   Amount   Shares*   Amount
                 
 
Shares sold
    33,324,185     $ 801,196,824       40,358,770     $ 1,008,931,852  
Shares issued to shareholders in reinvestment of distributions
    —       —       3,155,912       87,315,114  
Shares repurchased
    (18,265,845 )     (440,897,011 )     (40,660,876 )     (1,117,502,997 )
                                 
Net increase (decrease)
    15,058,340     $ 360,299,813       2,853,806     $ (21,256,031 )
                                 
 
            * Shares were adjusted to reflect a 1:5 reverse stock split effective November 15, 2010.
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                 
    Value,
               Distributions
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   period
 
GMO International Growth Equity Fund, Class IV
  $ 373,227,353     $ 165,376,389     $ 181,834,378     $ 4,357,689     $ —     $ 442,255,674  
GMO International Intrinsic Value Fund, Class IV
    370,530,202       176,090,671       184,352,590       6,010,570       —       442,388,249  
GMO International Small Companies Fund, Class III
    16,554,137       152,713       16,859,445       152,713       —       —  
GMO Quality Fund, Class VI
    497,679,365       197,502,490       170,960,421       10,364,189               580,359,319  
GMO U.S. Core Equity Fund, Class VI
    276,676,267       83,511,225       99,358,913       4,867,225       —       300,019,377  
GMO U.S. Treasury Fund
    19,998,853       905,075,856       830,048,936       74,543       1,314       95,036,569  
                                                 
Totals
  $ 1,554,666,177     $ 1,527,709,344     $ 1,483,414,683     $ 25,826,929     $ 1,314     $ 1,860,059,188  
                                                 

         
        31

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Alpha Only Fund:
 
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Alpha Only Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian, brokers and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
32
       

 

GMO Alpha Only Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
        33

 

 
GMO Alpha Only Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.66 %   $ 1,000.00     $ 964.70     $ 3.22  
2) Hypothetical
    0.66 %   $ 1,000.00     $ 1,021.52     $ 3.31  
                                 
Class IV
                               
                                 
1) Actual
    0.61 %   $ 1,000.00     $ 965.10     $ 2.97  
2) Hypothetical
    0.61 %   $ 1,000.00     $ 1,021.77     $ 3.06  
                                 
 
            * Expenses are calculated using each Class’s annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
34
       

 

GMO Alpha Only Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.

         
        35

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
36        

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee;
President and
Chief Executive
Officer of the Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
        37

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
38        

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        39

 

 
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Consolidated Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a private placement memorandum, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The private placement memorandum can be obtained by calling 1-617-346-7646 (collect).
 

 

GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
GMO Alternative Asset Opportunity Fund returned +19.5% for the fiscal year ended February 28, 2011, as compared with +12.2% for the Alternative Asset Opportunity (50% Dow Jones-UBS Commodity Index/50% J.P. Morgan U.S. 3 Month Cash Index) Index.
 
The Fund outperformed its benchmark by 7.3% during the fiscal year. The Fund’s commodity positions contributed 3.8% to the Fund’s outperformance during the fiscal year as the Fund correctly positioned for rising prices in silver, live cattle, soy meal, and gold contracts. Sugar, cocoa, wheat, and heating oil futures contracts detracted during the fiscal year, because of incorrect positioning for the rising prices of these contracts.
 
Gains from the Fund’s investment in GMO Short Duration Collateral Fund (SDCF) contributed 3.75% of the Fund’s outperformance as SDCF’s net asset value increased during the fiscal year. Asset-backed security spreads tightened and pricing and liquidity conditions in securitized credit markets improved during the fiscal year. SDCF’s asset-backed holdings experienced credit downgrades during the fiscal year: SDCF had 55 downgraded securities, representing 11% of its market value from the beginning of the fiscal year. At fiscal year-end, about 52% of SDCF’s portfolio was rated AAA, and 67% of the portfolio was rated single-A or better.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO Alternative Asset Opportunity Fund Shares and the GMO Alternative Asset Opportunity Index
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investors shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited.
 
 
* The GMO Alternative Asset Opportunity Index is a composite benchmark computed by GMO and comprised of 50% Dow Jones-UBS Commodity Index (formerly the Dow Jones-AIG Commodity Index) and 50% J.P. Morgan U.S. 3 Month Cash Index.

 

GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Consolidated Investments Concentration Summary (a)
February 28, 2011 (Unaudited)
 
         
Asset Class Summary*   % of Total Net Assets  
Debt Obligations
    38.5 %
Swap Agreements**
    29.6  
Short-Term Investments
    21.4  
Futures Contracts**
    10.6  
Forward Currency Contracts
    (0.0 )Ù
Other
    (0.1 )
         
      100.0 %
         
 
(a) GMO Alternative Asset SPC Ltd. is a 100% owned subsidiary of GMO Alternative Asset Opportunity Fund.
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust (“underlying funds”). Swaps and futures concentrations use the notional value of respective contracts for purposes of computing asset class exposures.
** Represents commodity exposure. See Consolidated Schedule of Investments.
Ù Rounds to 0.0%.

         
        1

 

GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)
Consolidated Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 Par Value ($) /
 		           
Shares     Description   Value ($)  
            DEBT OBLIGATIONS — 31.8%        
                     
            U.S. Government — 31.8%        
      7,776,360     U.S. Treasury Inflation Indexed Note, 2.00%, due 04/15/12 (a) (b) (c)     8,121,436  
                     
                     
            TOTAL DEBT OBLIGATIONS (COST $8,064,586)     8,121,436  
                     
                     
            MUTUAL FUNDS — 53.6%        
                     
            Affiliated Issuers — 53.6%        
      791,020     GMO Short-Duration Collateral Fund     8,210,791  
      219,277     GMO U.S. Treasury Fund     5,481,937  
                     
                     
            TOTAL MUTUAL FUNDS (COST $14,653,747)     13,692,728  
                     
                     
            SHORT-TERM INVESTMENTS — 13.7%        
                     
            Money Market Funds — 1.6%        
      422,769     SSgA USD Liquidity Fund-Class I Stable NAV Shares (a) (d)     422,769  
      2,095     State Street Institutional Treasury Plus Money Market Fund-Institutional Class     2,095  
                     
            Total Money Market Funds     424,864  
                     
                     
            U.S. Government — 12.1%        
      3,090,000     U.S. Treasury Bill, 0.22%, due 01/12/12 (a) (e)     3,084,151  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $3,507,980)     3,509,015  
                     
                     
            TOTAL INVESTMENTS — 99.1%
(Cost $26,226,313) 		    25,323,179  
            Other Assets and Liabilities (net) — 0.9%     222,636  
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 25,545,815  
                     

         
2
  See accompanying notes to the financial statements.    

 

 
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)

Consolidated Schedule of Investments — (Continued)
February 28, 2011
 
A summary of outstanding financial instruments at February 28, 2011 is as follows:
 
Futures Contracts (a)
 
                             
                Net Unrealized
Number of
 		      Expiration
 		  Contract
 		  Appreciation
Contracts   Type   Date   Value   (Depreciation)
 
Buys
                           
1
    Heating Oil     March 2011   $ 123,434     $ 8,938  
4
    Gasoline RBOB     March 2011     485,973       39,447  
3
    Lean Hogs     April 2011     106,560       (4,364 )
4
    Gold 100 OZ     April 2011     563,960       30,143  
6
    Live Cattle     April 2011     270,960       212  
10
    Sugar 11     April 2011     329,840       8,923  
4
    Copper High Grade     May 2011     449,650       13,333  
8
    Cocoa     May 2011     295,600       23,702  
12
    Soybean Meal     May 2011     434,280       (4,611 )
1
    Silver     May 2011     169,100       4,796  
6
    Soybean Oil     May 2011     206,388       9,425  
4
    Soybean     May 2011     272,950       10,933  
2
    Corn     May 2011     73,100       1,017  
4
    Wheat     May 2011     163,400       (1,817 )
                         
                $ 3,945,195     $ 140,077  
                         
Sales
                           
2
    Cotton No. 2     May 2011   $ 191,230     $ (4,850 )
8
    Natural Gas     March 2011     322,960       (10,222 )
                         
                $ 514,190     $ (15,072 )
                         

         
    See accompanying notes to the financial statements.   3

 

 
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)

Consolidated Schedule of Investments — (Continued)
February 28, 2011
 
Swap Agreements (a)
 
Total Return Swaps
 
                                 
Notional
 		  Expiration
 		              Market
Amount   Date   Counterparty   Fund Pays   Fund Receives   Value
 
  12,501,644     USD   4/14/2011   Barclays Bank PLC   1 month
T-Bill + 0.23% 		  Return on DJ-UBS
Commodity Index (b) 		  $ 241,889  
                                 
                            $ 241,889  
                                 
Premiums to (Pay) Receive
  $ —  
         
 
As of February 28, 2011, for forward currency contracts, futures contracts, swap agreements written options and reverse repurchase agreements, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
 
Notes to Consolidated Schedule of Investments:
 
RBOB - Reformulated Blendstock for Oxygenate Blending.
(a) All or a portion of this security is owned by GMO Alternative Asset SPC Ltd., which is a 100% owned subsidiary of GMO Alternative Asset Opportunity Fund.
(b) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
(c) All or a portion of this security has been pledged to cover margin requirements on futures contracts, collateral requirements on swap contracts, forward currency contracts, and written options, if any. (Note 4).
(d) Fund is domiciled in Ireland.
(e) Rate shown represents yield-to-maturity.
 
Currency Abbreviations:
 
USD - United States Dollar

         
4
  See accompanying notes to the financial statements.    

 

GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)


Consolidating Statement of Assets and Liabilities — February 28, 2011
 
                                 
    GMO Alternative
 		  GMO
 		       
    Asset Opportunity
 		  Alternative Asset
 		      Consolidated
    Fund   SPC Ltd.   Eliminations   Totals
Assets:
                               
Investments in unaffiliated issuers, at value (consolidated cost $11,572,566) (Note 2)
  $ 2,095     $ 11,628,356     $ —     $ 11,630,451  
Investments in affiliated issuers, at value (consolidated cost $14,653,747) (Note 2)
    25,592,130       —       (11,899,402 )     13,692,728  
Dividends and interest receivable
    —       60,409       —       60,409  
Receivable for variation margin on open futures contracts (Note 4)
    —       1,189               1,189  
Receivable for open swap contracts (Note 4)
    —       241,889               241,889  
Receivable for expenses reimbursed by Manager (Note 5)
    17,634       31,146       —       48,780  
                                 
Total assets
    25,611,859       11,962,989       (11,899,402 )     25,675,446  
                                 
                                 
Liabilities:
                               
Payable to affiliate for (Note 5):
                               
Management fee
    13,547       —       —       13,547  
Shareholder service fee
    2,903       —       —       2,903  
Trustees and Chief Compliance Officer of GMO Trust fees
    62       —       —       62  
Accrued expenses
    49,532       63,587       —       113,119  
                                 
Total liabilities
    66,044       63,587       —       129,631  
                                 
Net assets
  $ 25,545,815     $ 11,899,402     $ (11,899,402 )   $ 25,545,815  
                                 
Shareholders’ capital
  $ 25,545,815                     $ 25,545,815  
                                 
Shares outstanding
    784,809                       784,809  
                                 
Net asset value per share
  $ 32.55                     $ 32.55  
                                 

         
    See accompanying notes to the financial statements.   5

 

GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)


Consolidating Statement of Operations — For the Year Ended February 28, 2011
 
                                 
    GMO Alternative
 		  GMO
 		       
    Asset Opportunity
 		  Alternative Asset
 		      Consolidated
    Fund   SPC Ltd.   Eliminations   Totals
Investment Income:
                               
Dividends from affiliated issuers (Note 10)
  $ 3,076,054     $ —     $ (2,930,000 )   $ 146,054  
Dividends from unaffiliated issuers
    10       555       —       565  
Interest
    —       77,966       —       77,966  
                                 
Total income (loss)
    3,076,064       78,521       (2,930,000 )     224,585  
                                 
Expenses:
                               
Management fee (Note 5)
    141,799       —       —       141,799  
Shareholder service fee (Note 5)
    34,269       —       —       34,269  
Custodian and transfer agent fees
    4,659       80,143       —       84,802  
Audit and tax fees
    59,475       —       —       59,475  
Trustees fees and related expenses (Note 5)
    511       36,664       —       37,175  
Legal fees
    19,030       —       —       19,030  
Miscellaneous
    9,529       13,989       —       23,518  
                                 
Total expenses
    269,272       130,796       —       400,068  
                                 
Fees and expenses reimbursed by Manager (Note 5)
    (131,503 )     (130,796 )     —       (262,299 )
                                 
Net expenses
    137,769       —       —       137,769  
                                 
Net investment income (loss)
    2,938,295       78,521       (2,930,000 )     86,816  
                                 
Realized and unrealized gain (loss):
                               
Net realized gain (loss) on:
                               
Investments in unaffiliated issuers
    —       33,860       —       33,860  
Investments in affiliated issuers
    (518,609 )     —       518,056       (553 )
Realized gains distribution from affiliated issuers (Note 10)
    155       —       —       155  
Futures contracts
    —       546,393       —       546,393  
Swap contracts
    —       2,241,492       —       2,241,492  
                                 
Net realized gain (loss)
    (518,454 )     2,821,745       518,056       2,821,347  
                                 
Change in net unrealized appreciation (depreciation) on:
                               
Investments in unaffiliated issuers
    —       42,864       —       42,864  
Investments in affiliated issuers
    1,668,686       —       (944,527 )     724,159  
Futures contracts
    —       131,383       —       131,383  
Swap contracts
    —       281,958       —       281,958  
                                 
Net unrealized gain (loss)
    1,668,686       456,205       (944,527 )     1,180,364  
                                 
Net realized and unrealized gain (loss)
    1,150,232       3,277,950       (426,471 )     4,001,711  
                                 
Net increase (decrease) in net assets resulting from operations
  $ 4,088,527     $ 3,356,471     $ (3,356,471 )   $ 4,088,527  
                                 

         
6
  See accompanying notes to the financial statements.    

 

GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)


Consolidated Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 86,816     $ 441,050  
Net realized gain (loss)
    2,821,347       1,411,897  
Change in net unrealized appreciation (depreciation)
    1,180,364       3,326,812  
                 
                 
Net increase (decrease) in net assets from operations
    4,088,527       5,179,759  
                 
Proceeds from sale of shares
    1,001,547       —  
Cost of shares repurchased
    (2,644,369 )     (4,493,912 )
Redemption fees
    —       25,396  
                 
Net increase (decrease) in Fund share transactions
    (1,642,822 )     (4,468,516 )
                 
Total increase (decrease) in net assets
    2,445,705       711,243  
                 
Net assets:
               
Beginning of period
    23,100,110       22,388,867  
                 
End of period
  $ 25,545,815     $ 23,100,110  
                 

         
    See accompanying notes to the financial statements.   7

 

GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)

Consolidated Financial Highlights
(For a share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 27.24     $ 21.94     $ 33.11     $ 28.54     $ 26.63  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)(a)†
    0.11       0.46       0.93       0.69       1.28  
Net realized and unrealized gain (loss)
    5.20       4.84       (12.10 )     3.88 (b)     0.63  
                                         
                                         
Total from investment operations
    5.31       5.30       (11.17 )     4.57       1.91  
                                         
                                         
Net asset value, end of period
  $ 32.55     $ 27.24     $ 21.94     $ 33.11     $ 28.54  
                                         
                                         
Total Return(c)
    19.49 %     24.16 %     (33.74 )%     16.01 %     7.17 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 25,546     $ 23,100     $ 22,389     $ 33,972     $ 174,514  
Net expenses to average daily net assets(d)
    0.60 %     0.60 %     0.60 %(e)     0.60 %     0.60 %
Net investment income to average daily net assets(a)
    0.38 %     1.85 %     3.24 %     2.41 %     4.60 %
Portfolio turnover rate
    60 %     73 %     89 %     24 %     12 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    1.15 %     1.06 %     0.73 %     0.21 %     0.12 %
Redemption fees consisted of the following per share amounts (Note 2):†
    —     $ 0.03     $ 0.00 (f)     —       —  
 
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(b) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain (loss) on investments due to the timing of purchases and redemptions of Fund shares in relation to fluctuating market values of the investments of the Fund.
(c) Total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown. Calculation excludes redemption fees which are borne by the shareholder.
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(e) The net expense ratio does not include the effect of expense reductions (Note 2).
(f) Redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.

         
8
  See accompanying notes to the financial statements.    

 

GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)

Notes to Consolidated Financial Statements
February 28, 2011
 
1. Organization
 
GMO Alternative Asset Opportunity Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund seeks total return greater than that of its benchmark. The Fund’s benchmark is a composite of the Dow Jones-UBS Commodity Index, which is composed of futures contracts on nineteen physical commodities, and the J.P. Morgan U.S. 3 Month Cash Index, which measures the total return performance of three-month U.S. dollar Euro-deposits. The Dow Jones-UBS Commodity Index and J.P. Morgan U.S. 3 Month Cash Index each represent 50% of the composite benchmark. In constructing the Fund’s portfolio, the Manager does not seek to match the Fund’s portfolio composition to that of its benchmark, and the Fund’s portfolio composition may differ significantly from that of its benchmark.
 
The Fund’s investment program has two primary components. One component is intended to gain exposure to the investment returns of commodities and, from time to time, other alternative asset classes (e.g., currencies). “Commodities” include a range of assets with tangible properties, including oil, natural gas, agricultural products (e.g., wheat, corn, and livestock), precious metals (e.g., gold and silver), industrial metals (e.g., copper), and softs (e.g., cocoa, coffee, and sugar). The Fund typically gains exposure to commodities indirectly, by investing in a wholly owned subsidiary company (discussed below), which, in turn, invests in various commodity-related exchange-traded and over-the-counter (“OTC”) derivatives. The Fund also may use, directly or indirectly through its wholly owned subsidiary, a wide variety of other exchange-traded and OTC derivatives that are not linked to the value of a commodity or other commodity-related instruments (including financial futures, options, and swap contracts). The Fund is not limited in the extent to which it may use derivatives or in the absolute face value of its derivative positions, and, as a result, it may be leveraged in relation to its assets.
 
The second component of the Fund’s investment program consists of investments in U.S. and foreign fixed income securities, primarily asset-backed securities. The Fund has historically gained its investment exposure to fixed income securities through investment in GMO Short-Duration Collateral Fund (“SDCF”). SDCF has primarily invested in asset-backed securities issued by a wide range of private and government issuers.
 
The Manager uses proprietary models to identify trends in commodity prices. The factors considered and models used by the Manager may change over time.

         
        9

 

 
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)

Notes to Consolidated Financial Statements — (Continued)
February 28, 2011
 
A substantial portion of the Fund’s investments (through SDCF) in fixed income securities consist of asset-backed securities, including, but not limited to, securities backed by pools of residential and commercial mortgages, credit-card receivables, home equity loans, automobile loans, educational loans, corporate and sovereign bonds, and bank loans made to corporations. In addition, the Fund may invest (including through SDCF) in government securities, corporate debt securities, money market instruments, and commercial paper, and enter into credit default swaps, reverse repurchase agreements, and repurchase agreements. The Fund’s fixed income securities may include securities issued by a wide range of private issuers and, to a lesser extent, securities issued by federal, state, local, and foreign governments (including securities neither guaranteed nor insured by the U.S. government). The Fund may hold directly or indirectly (through SDCF) fixed income securities whose ratings, after the securities were acquired, were reduced below investment grade. Because of the deterioration in credit markets that became acute in 2008, the Fund, in particular through its investment in SDCF, currently has and may continue to have material exposure to below investment grade securities.
 
In addition to its commodity-related investments, from time to time, the Fund may invest in a range of currency-related investments, including currency futures, forwards, and options. The Fund does not invest directly in commodities and commodity-related derivatives. Instead, to gain exposure to commodities and certain other assets, the Fund invests in a wholly owned subsidiary company (GMO Alternative Asset SPC Ltd.). GMO serves as the investment manager to this company but does not receive any additional management or other fees for such services. The company invests primarily in commodity-related derivatives and fixed income securities.
 
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. If deemed prudent by the Manager, the Fund will take temporary defensive measures until the Manager has determined that normal conditions have returned or that it is otherwise prudent to resume investing in accordance with the Fund’s normal investment strategies. The Fund may not achieve its investment objective while it is taking temporary defensive measures. The Fund does not seek to maintain a specified interest rate duration for its portfolio.
 
Currently, shares of the Fund are not publicly offered and are principally available for purchase by other GMO Funds and certain other accredited investors.
 
The financial statements of the GMO funds in which the Fund invests, collectively referred to as the “underlying funds” should be read in conjunction with the Fund’s financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect) or by visiting GMO’s website at www.gmo.com.
 
The Fund currently limits subscriptions.

         
10
       

 

 
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)

Notes to Consolidated Financial Statements — (Continued)
February 28, 2011
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Basis of presentation and principles of consolidation
The accompanying consolidated financial statements include the accounts of the GMO Alternative Asset Opportunity Fund and its wholly owned investment in GMO Alternative Asset SPC Ltd. The consolidated financial statements include 100% of the assets and liabilities of GMO Alternative Asset SPC Ltd. All significant interfund accounts and transactions have been eliminated in consolidation.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the OTC market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of February 28, 2011, the total value of securities held indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 0.7% of net assets. The underlying funds classify such securities (as defined below) as Level 3. See Note 4 for a further discussion on valuation of derivative financial instruments.
 
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a

         
        11

 

 
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)

Notes to Consolidated Financial Statements — (Continued)
February 28, 2011
 
source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. Although alternative prices are available for securities held by the Fund and the underlying funds, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by the Fund and the underlying funds. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fund and the underlying funds. As of February 28, 2011, the total value of securities held directly and indirectly for which no alternative pricing source was available represented 3.2% of the net assets of the Fund.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include most recent bid prices, interest rates, prepayment spreads, credit risk, yield curves and similar data.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant.

         
12
       

 

 
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)

Notes to Consolidated Financial Statements — (Continued)
February 28, 2011
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Debt Obligations
  $ —     $ 8,121,436     $      —     $ 8,121,436  
Mutual Funds
    13,692,728       —       —       13,692,728  
Short-Term Investments
    3,509,015       —       —       3,509,015  
                                 
Total Investments
    17,201,743       8,121,436       —       25,323,179  
                                 
Derivatives*
                               
Futures Contracts
                               
Commodity contract risk
    150,869       —       —       150,869  
Swap Agreements
                               
Commodity contract risk
    —       241,889       —       241,889  
                                 
Total
  $ 17,352,612     $ 8,363,325     $ —     $ 25,715,937  
                                 
 
LIABILITY VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Liabilities
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Derivatives*
                               
Futures Contracts
                               
Commodity contract risk
  $ (25,864 )   $      —     $      —     $ (25,864 )
                                 
Total
  $ (25,864 )   $ —     $ —     $ (25,864 )
                                 
 
The risks referenced above are not intended to be inclusive of all risks. Please see the Investment Risks and Derivative Financial Instruments sections below for a further discussion of risks.
 
  * Because the tables above are based on market values or unrealized appreciation (depreciation) rather than the notional amounts of derivatives, the uncertainties surrounding the valuation inputs for a derivative are likely to be more significant to the Fund’s net asset value than the uncertainties surrounding inputs for a non-derivative security with the same market value.

         
        13

 

 
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)

Notes to Consolidated Financial Statements — (Continued)
February 28, 2011
 
 
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements. The aggregate net values of the Fund’s indirect investments in securities and other financial instruments using Level 3 inputs were 21.8% and (0.1)% of total net assets, respectively.
 
The Fund held no direct investments or other financial instruments directly at either February 28, 2011 or February 28, 2010, whose fair value was categorized using Level 3 inputs.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 pm. Income and expenses denominated in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.
 
Loan agreements
The Fund may invest in loans to corporate, governmental, or other borrowers. The Fund’s investments in loans may be in the form of participations in loans or assignments of all or a portion of loans. A loan is often administered by a bank or other financial institution that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, (i) the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the party from whom the Fund has purchased the participation and only upon receipt by that party of payments from the borrower and (ii) the Fund generally has no right to enforce compliance by the borrower with the terms of the loan agreement or to vote on matters arising under the loan agreement. Thus, the Fund may be subject to credit risk both of the party from whom it purchased the loan participation and the borrower and the Fund may have minimal control over the terms of any loan modification. When the Fund purchases assignments of loans, it acquires direct rights against the borrower. The Fund had no loan agreements outstanding at the end of the period.
 
Repurchase agreements
The Fund may enter into repurchase agreements. Under a repurchase agreement 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 it acquired

         
14
       

 

 
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)

Notes to Consolidated Financial Statements — (Continued)
February 28, 2011
 
under the repurchase agreement. The value of the securities acquired is required by contract to be marked to market daily and additional collateral is required to be transferred so that the market value is at least equal to the amount owed to the Fund by the seller. If the seller of a repurchase agreement defaults or enters into insolvency proceedings and/or the value of the securities subject to the repurchase agreement is insufficient, the Fund’s recovery of cash from the seller may be delayed and the Fund may incur a loss equal to the difference between the cash it paid and the value of the securities. The Fund had no repurchase agreements outstanding at the end of the period.
 
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at an agreed upon price and date. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which generally causes the Fund’s portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the event of a buyer’s bankruptcy or insolvency, the Fund’s use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund’s right to repurchase the securities. The Fund had no reverse repurchase agreements outstanding at the end of the period.
 
Inflation-indexed bonds
The Fund may invest in inflation indexed bonds. Inflation indexed bonds are fixed income securities whose principal value is adjusted periodically according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that reflects inflation in the principal value of the bond. Most other issuers pay out any inflation related accruals as part of a semiannual coupon.
 
The value of inflation indexed bonds is expected to change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates (i.e., stated interest rates) and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates (i.e. nominal interest rate minus inflation) might decline, leading to an increase in value of inflation indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation indexed bonds. There can be no assurance, however, that the value of inflation indexed bonds will be directly correlated to changes in nominal interest rates, and short term increases in inflation may lead to a decline in their value. Coupon payments received by the Fund from inflation indexed bonds are included in the Fund’s gross income for the period in which they accrue. In addition, any increase or decrease in the principal amount of an inflation indexed bond will increase or decrease taxable ordinary income to the Fund, even though

         
        15

 

 
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)

Notes to Consolidated Financial Statements — (Continued)
February 28, 2011
 
principal is not paid until maturity. Inflation-indexed bonds outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Taxes
The Fund has elected to be treated as a partnership for U.S. federal income tax purposes. As a partnership, the Fund is not itself subject to federal income tax. Instead, each shareholder is required to take into account in determining its tax liability its distributive share of items of Fund income, gain, loss, deduction, credit, and tax preference for each taxable year substantially as though such items have been realized directly by the shareholder and without regard to whether any distribution by the Fund has been or will be received. The Fund trades securities for its own account and, as such, is generally not subject to U.S. tax on such earnings (other than certain withholding taxes). The Manger intends to conduct the business of the Fund to the maximum extent practicable so that the Fund’s activities do not constitute a U.S. trade or business. Accordingly, no provision (benefit) for U.S. federal and state income tax is reflected in the accompanying financial statements. Dividends and other revenue may be subject to withholding or similar taxes imposed by the country in which such dividends or other revenue originate. The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Taxes and associated penalty and interest amounts related to capital gains realized during the year ended February 28, 2011, if any, are reflected as part of Net realized gain (loss) in the Statement of Operations. Changes in tax liabilities related to capital gain taxes on unrealized investment gains, if any, are reflected as part of Change in net unrealized appreciation (depreciation) in the Statement of Operations. Transaction-based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 32,831,317     $ 12,324     $ (7,520,462 )   $ (7,508,138 )    
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did

         
16
       

 

 
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)

Notes to Consolidated Financial Statements — (Continued)
February 28, 2011
 
not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Distributions
Because the Fund has elected to be treated as a partnership for U.S. federal tax purposes, it is not required to make distributions to its shareholders. It is the policy of the Fund to declare and pay distributions as determined by the Trustees (or their delegates).
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (Note 5).
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
Purchases and redemptions of Fund shares
Purchase premiums and redemption fees are paid to and retained by the Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. Such fees are recorded as a component of

         
        17

 

 
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)

Notes to Consolidated Financial Statements — (Continued)
February 28, 2011
 
the Fund’s net share transactions. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of the Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund’s shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund’s shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder’s securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of the Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below, including those risks to which the Fund is exposed as a result of the investments of the Fund’s wholly owned subsidiary, GMO Alternative Asset SPC Ltd. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Commodities Risk — Because of the Fund’s indirect exposure to the global commodity markets, the value of its shares is affected by factors particular to the commodity markets and may fluctuate more than the value of shares of a fund with a broader range of investments.
 
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.

         
18
       

 

 
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)

Notes to Consolidated Financial Statements — (Continued)
February 28, 2011
 
• Credit and Counterparty Risk — The Fund runs the risk that the issuer or guarantor of a fixed income security, the counterparty to an over-the-counter derivatives contract, a borrower of the Fund’s securities or the obligor of an obligation underlying an asset-backed security will be unable or unwilling to make timely principal, interest, or settlement payments or otherwise honor its obligations. Credit risk is particularly pronounced for below investment grade securities. In addition, to the extent that the Fund uses over-the-counter derivatives, including swap contracts with longer term maturities, and/or has significant exposure to a single counterparty, this risk will be particularly pronounced for the Fund. This risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions.
 
• Leveraging Risk — The Fund’s use of reverse repurchase agreements and other derivatives and securities lending may cause its portfolio to be leveraged. The Fund is not limited in the extent to which it uses derivatives. Leverage increases the Fund’s portfolio losses when the value of its investments decline.
 
• Derivatives Risk — The use of derivatives involves the risk that their value may not correlate with the value of the relevant underlying assets, rates or indices. Derivatives also present other Fund risks, including market risk, liquidity risk, and credit and counterparty risk.
 
• Market Risk — Fixed Income Securities — Typically, the value of fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
 
• Management and Operational Risk — The Fund runs the risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations.
 
• Market Disruption and Geopolitical Risk — Geopolitical events may disrupt securities markets and adversely affect global economies and markets. Those events as well as other changes in foreign and domestic economic and political conditions could adversely affect the value of the Fund’s investments.
 
Other principal risks of an investment in the Fund include Focused Investment Risk (increased risk from the Fund’s focus on investments in commodities and in industries with high positive correlations to one another); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).

         
        19

 

 
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)

Notes to Consolidated Financial Statements — (Continued)
February 28, 2011
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps or other derivatives on an index, a single security or a basket of securities to gain investment exposures (e.g., by selling protection under a credit default swap). The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). For example, the Fund may use credit default swaps to take a short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund’s exposure to the credit of an issuer through the debt instrument, but adjust the Fund’s interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed versus variable rates and shorter duration versus longer duration exposure. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the

         
20
       

 

 
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)

Notes to Consolidated Financial Statements — (Continued)
February 28, 2011
 
counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral (e.g., foreign currency forwards; see “Currency Risk” above), that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.

         
        21

 

 
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)

Notes to Consolidated Financial Statements — (Continued)
February 28, 2011
 
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund’s forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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.
 
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. The Fund had no forward currency contracts outstanding at the end of the period.
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. During the year ended February 28, 2011, the Fund used futures contracts to adjust exposure to certain markets and enhance the diversity and liquidity of the portfolio. Futures contracts outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a

         
22
       

 

 
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)

Notes to Consolidated Financial Statements — (Continued)
February 28, 2011
 
set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral. Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or

         
        23

 

 
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)

Notes to Consolidated Financial Statements — (Continued)
February 28, 2011
 
received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price

         
24
       

 

 
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)

Notes to Consolidated Financial Statements — (Continued)
February 28, 2011
 
and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the year ended February 28, 2011, the Fund used swap agreements to adjust exposure to certain markets. Swap agreements outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.

         
        25

 

 
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)

Notes to Consolidated Financial Statements — (Continued)
February 28, 2011
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of
February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign exchange
   Credit
   Equity
   Commodity
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Assets:
                                               
Unrealized appreciation on futures contracts *
  $      —     $      —     $      —     $      —     $ 150,869     $ 150,869  
Unrealized appreciation on swap agreements
    —       —       —       —       241,889       241,889  
                                                 
Total
  $ —     $ —     $ —     $ —     $ 392,758     $ 392,758  
                                                 
Liabilities:
                                               
Unrealized depreciation on futures contracts *
  $ —     $ —     $ —     $ —     $ (25,864 )   $ (25,864 )
                                                 
Total
  $ —     $ —     $ —     $ —     $ (25,864 )   $ (25,864 )
                                                 
 
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign exchange
   Credit
   Equity
   Commodity
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Futures contracts
  $      —     $      —     $      —     $      —     $ 546,393     $ 546,393  
Swap contracts
    —       —       —       —       2,241,492       2,241,492  
                                                 
Total
  $ —     $ —     $ —     $ —     $ 2,787,885     $ 2,787,885  
                                                 
Change in Unrealized Appreciation
(Depreciation) on:
                                               
Futures contracts
  $ —     $ —     $ —     $ —     $ 131,383     $ 131,383  
Swap contracts
    —       —       —       —       281,958       281,958  
                                                 
Total
  $ —     $ —     $ —     $ —     $ 413,341     $ 413,341  
                                                 
 
             Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
            * The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.

         
26
       

 

 
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)

Notes to Consolidated Financial Statements — (Continued)
February 28, 2011
 
The derivative financial instruments outstanding as of year end (as disclosed in the Notes to Schedule of Investments) and the amounts of realized and changes in unrealized gains and losses on derivative financial instruments during the year (as disclosed in the Statement of Operations) serve as indicators of the volume of derivative activity for the Fund during the year.
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. Prior to June 25, 2010, that fee was paid monthly at the annual rate of 0.45% of average daily net assets. Effective June 25, 2010, that fee is paid monthly at the annual rate of 0.70% of average daily net assets. Beginning on June 25, 2010 and continuing through June 30, 2011, the Manager has voluntarily agreed to waive the Fund’s management fee by 0.25% and to reimburse the Fund to the extent the Fund’s total annual operating expenses exceed 0.45% of the Fund’s average daily net assets (excluding the Fund’s Excluded Fund Fees and Expenses described below). The Manager may change or terminate these voluntary waivers and reimbursements at any time, and these voluntary waivers and reimbursements are in addition to the Manager’s contractual expense reimbursement agreement described below. During any period for which these voluntary waivers and reimbursements are in effect, the Fund will incur management fees at an annual rate lower than 0.70% of the Fund’s average daily net assets, and, as a result, total annual operating expenses after expense reimbursement for the Fund will be lower. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15%.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s total annual operating expenses that exceed 0.70% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities-lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). The Manager also has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund’s Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Expense Reimbursement Amount. The Fund’s contractual expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.

         
        27

 

 
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)

Notes to Consolidated Financial Statements — (Continued)
February 28, 2011
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $37,175 and $182, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
                   
Indirect Net
 		                 
Expenses
                  
(excluding
                  
shareholder service
     Indirect
            
fees and interest
     Shareholder
     Indirect Interest
     Total Indirect
expense)     Service Fees     Expense     Expenses
0.002%
    0.000%     0.004%     0.006%
                   
 
The Fund’s investments in commodity-related derivatives are generally made through GMO Alternative Asset SPC Ltd., a wholly owned subsidiary organized as a Bermuda limited liability company, which GMO serves as investment manager but does not receive any additional management or other fees for such services.
 
6. Purchases and sales of securities
 
For the year ended February 28, 2011, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
 
                 
    Purchases   Sales
 
U.S. Government securities
  $ 3,572,710     $ 8,131,766  
Investments (non-U.S. Government securities)
    8,047,531       5,647,000  
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.

         
28
       

 

 
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)

Notes to Consolidated Financial Statements — (Continued)
February 28, 2011
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 97.56% of the outstanding shares of the Fund were held by one shareholder. The shareholder is another fund of the Trust.
 
As of February 28, 2011, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and 99.96% of the Fund’s shares were held by accounts for which the Manager had investment discretion.
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
    Shares   Amount   Shares   Amount
                 
 
Shares sold
    33,402     $ 1,001,547       —     $ —  
Shares repurchased
    (96,619 )     (2,644,369 )     (172,662 )     (4,493,912 )
Redemption Fees
    —       —       —       25,396  
                                 
Net increase (decrease)
    (63,217 )   $ (1,642,822 )     (172,662 )   $ (4,468,516 )
                                 
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                         
    Value,
               Distributions
   Return
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   of
  end of
Affiliate   period   Purchases   Proceeds   Income   Gains   Capital   Period
 
GMO Short-Duration Collateral Fund
  $ 11,849,484     $ —     $ —     $ 144,678     $ —     $ 4,362,419     $ 8,210,791  
GMO U.S. Treasury Fund
    3,081,526       8,047,531       5,647,000       1,376       155       —       5,481,937  
                                                         
Totals
  $ 14,931,010     $ 8,047,531     $ 5,647,000     $ 146,054     $ 155     $ 4,362,419     $ 13,692,728  
                                                         

         
        29

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Alternative Asset Opportunity Fund:
 
In our opinion, the accompanying consolidating statement of assets and liabilities, including the consolidated schedule of investments, and the related consolidating statement of operations and consolidated statement of changes in net assets and the consolidated financial highlights present fairly, in all material respects, the financial position of GMO Alternative Asset Opportunity Fund (the “Fund”) (a series of GMO Trust) and subsidiary at February 28, 2011, the results of their operations for the year then ended, the changes in their net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian, brokers, and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
30
       

 

GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs

         
        31

 

 
GMO Alternative Asset Opportunity Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
1) Actual
    0.61 %   $ 1,000.00     $ 1,198.00     $ 3.32  
2) Hypothetical
    0.61 %   $ 1,000.00     $ 1,021.77     $ 3.06  
                                 
 
            * Expenses are calculated using the Fund’s annualized expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
32
       

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
        33

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
            Principal
   Number of
      
            Occupation(s)
   Portfolios in
      
Name and
   Position(s)
   Length of
   During Past
   Fund Complex
     Other
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Directorships Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee; President
and Chief Executive
Officer of the
Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
34        

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        35

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
36        

 

 
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Fixed Income Division while the overall management and strategic direction of the Fund’s portfolio is the responsibility of the Asset Allocation Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
The Class III shares of GMO Asset Allocation Bond Fund returned +4.5% for the fiscal year ended February 28, 2011, as compared with +0.1% for the Citigroup 3 Month Treasury Bill Index.
 
The Fund outperformed the benchmark during the period by 4.4%. Outperformance came from correctly anticipating interest rate moves. This was primarily achieved through security selection in Treasury TIPS as well as STRIPS.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO Asset Allocation Bond Fund Class III Shares and the Citigroup 3 Month Treasury Bill Index
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited. Performance for classes may vary due to different fees.
 
 
* Class III performance information represents Class VI performance from March 18, 2009 to March 27, 2009 and Class III performance thereafter.

 

GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary*   % of Total Net Assets  
Debt Obligations
    107.5 %
Short-Term Investments
    2.2  
Options Purchased
    0.2  
Written Options
    0.0 ^
Swaps Agreements
    (0.6 )
Futures Contracts
    (5.4 )
Reverse Repurchase Agreements
    (9.6 )
Other
    5.7  
         
      100.0 %
         
 
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust (“underlying funds”).
Rounds to 0.0%.

         
        1

 

GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                 
Par Value ($) /
 		           
Shares / Contracts /
 		           
Principal Amount     Description   Value ($)  
        DEBT OBLIGATIONS — 107.5%        
                 
        U.S. Government — 107.5%        
  124,428,000     U.S. Treasury Inflation Indexed Bond, 0.63%, due 04/15/13 (a) (b)     129,745,306  
  51,779,500     U.S. Treasury Inflation Indexed Bond, 1.25%, due 04/15/14 (a)     55,215,950  
  59,229,510     U.S. Treasury Inflation Indexed Bond, 2.38%, due 01/15/17 (a)     66,725,715  
  67,752,500     U.S. Treasury Inflation Indexed Bond, 3.63%, due 04/15/28 (a)     86,601,449  
  20,016,000     U.S. Treasury Inflation Indexed Bond, 2.13%, due 02/15/41 (a)     20,740,019  
  46,706,814     U.S. Treasury Inflation Indexed Note, 2.38%, due 04/15/11 (a)     47,104,569  
  127,317,719     U.S. Treasury Inflation Indexed Note, 2.00%, due 01/15/16 (a) (c)     140,447,359  
  50,000,000     U.S. Treasury Strip Coupon, due 08/15/22 (b)     31,738,700  
                 
        Total U.S. Government     578,319,067  
                 
                 
        TOTAL DEBT OBLIGATIONS (COST $574,557,258)     578,319,067  
                 
                 
        MUTUAL FUNDS — 1.8%        
                 
        Affiliated Issuers — 1.8%        
  394,315     GMO U.S. Treasury Fund     9,857,886  
                 
                 
        TOTAL MUTUAL FUNDS (COST $9,857,886)     9,857,886  
                 
                 
        OPTIONS PURCHASED — 0.2%        
                 
        Options on Futures — 0.1%        
  500     Euro Dollar Futures Options Call, Expires 06/10/11, Strike 98.88     193,750  
                 
                 
        Options on Interest Rate Swaps — 0.1%        
  300,000,000     USD Swaption Call, Expires 12/01/11, Strike 1.00%     302,400  
  250,000,000     USD Swaption Call, Expires 01/25/12, Strike 0.90%     361,000  
                 
        Total Options on Interest Rate Swaps     663,400  
                 
                 
        TOTAL OPTIONS PURCHASED (COST $1,522,250)     857,150  
                 

         
2
  See accompanying notes to the financial statements.    

 

 
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                 
 
 		           
 
 		           
Shares     Description   Value ($)  
                 
        SHORT-TERM INVESTMENTS — 0.3%        
                 
        Money Market Funds — 0.3%        
  1,793,623     State Street Institutional U.S. Government Money Market Fund-Institutional Class     1,793,623  
                 
                 
        TOTAL SHORT-TERM INVESTMENTS (COST $1,793,623)     1,793,623  
                 
                 
        TOTAL INVESTMENTS — 109.8%
(Cost $587,731,017) 		    590,827,726  
        Other Assets and Liabilities (net) — (9.8%)     (52,949,571 )
                 
                 
        TOTAL NET ASSETS — 100.0%   $ 537,878,155  
                 

         
    See accompanying notes to the financial statements.   3

 

 
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
A summary of outstanding financial instruments at February 28, 2011 is as follows:
 
Futures Contracts
 
                             
                Net Unrealized
Number of
 		      Expiration
 		  Contract
 		  Appreciation
Contracts
  Type   Date   Value   (Depreciation)
 
Buys
                           
8,500
    Euro Dollar 90 Day     June 2011   $ 2,117,243,750     $ 4,357,037  
                         
Sales
                           
8,500
    Euro Dollar 90 Day     March 2012   $ 2,106,512,500     $ (33,394,439 )
                         
 
Reverse Repurchase Agreements
 
                     
Face Value   Description   Market Value
 
                     
USD
    9,018,750     Barclays Bank PLC, 0.23%, dated 2/10/11, to be repurchased on demand at face value plus accrued interest with a stated maturity date of 3/14/11.   $ (9,019,614 )
                     
USD
    21,275,000     Barclays Bank PLC, 0.19%, dated 2/28/11, to be repurchased on demand at face value plus accrued interest with a stated maturity date of 3/30/11.     (21,275,112 )
                     
USD
    21,087,500     Barclays Bank PLC, 0.23%, dated 2/14/11, to be repurchased on demand at face value plus accrued interest with a stated maturity date of 3/14/11.     (21,089,521 )
                     
                     
                $ (51,384,247 )
                     
 
                     
Average balance outstanding
  $ (73,153,482 )
Average interest rate
    0.29 %
Maximum balance outstanding
  $ (97,800,000 )
 
Average balance outstanding was calculated based on daily face value balances outstanding during the period that the Fund has entered into reverse repurchase agreements.

         
4
  See accompanying notes to the financial statements.    

 

 
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Written Options
 
A summary of open written option contracts for the Fund at February 28, 2011 is as follows:
 
Options on Futures
 
                                     
    Number of
 		  Expiration
 		              Market
    Contracts   Date       Description   Premiums   Value
 
Call
    500     6/10/2011   USD   Euro Dollar Futures Option Call,
Strike 99.25 		  $ (36,500 )   $ (21,875 )
                                     
 
Options on Interest Rate Swaps
 
                                     
    Notional
 		  Expiration
 		              Market
    Amount   Date       Description   Premiums   Value
 
Call
    600,000,000     12/1/2011   USD   Interest Rate Swaption Call,
Strike 0.60% 		  $ (360,000 )   $ (43,800 )
                                     
 
Swap Agreements
 
Interest Rate Swaps
 
                                     
Notional
 		  Expiration
 		      Receive
 		  Fixed
 		  Variable
 		  Market
Amount   Date   Counterparty   (Pay)#   Rate   Rate   Value
 
  50,000,000     USD   8/15/2022   Barclays Bank PLC   (Pay)   0.00%   3 month LIBOR   $ (1,479,056 )
  190,000,000     USD   6/10/2016   Barclays Bank PLC   (Pay)   2.48%   3 month LIBOR     914,126  
  105,000,000     USD   6/10/2021   Barclays Bank PLC   Receive   3.61%   3 month LIBOR     (560,380 )
  126,000,000     USD   6/10/2021   Deutsche Bank AG   Receive   3.62%   3 month LIBOR     (564,239 )
  62,000,000     USD   6/10/2041   Deutsche Bank AG   (Pay)   4.25%   3 month LIBOR     959,041  
  1,266,000,000     USD   4/14/2013   Morgan Stanley Capital Services Inc.   (Pay)   1.04%   3 month LIBOR     (1,495,672 )
  500,000,000     USD   4/14/2016   Morgan Stanley Capital Services Inc.   Receive   2.42%   3 month LIBOR     (778,237 )
                                     
                                $ (3,004,417 )
                                     
Premiums to (Pay) Receive
  $ —  
         
 
# Receive - Fund receives fixed rate and pays variable rate.
(Pay) - Fund pays fixed rate and receives variable rate.

         
    See accompanying notes to the financial statements.   5

 

 
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
As of February 28, 2011, for forward currency contracts, futures contracts, swap agreements, written options and reverse repurchase agreements, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
 
Notes to Schedule of Investments:
 
LIBOR - London Interbank Offered Rate
(a) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
(b) All or a portion of this security has been pledged to cover collateral requirements on reverse repurchase agreements (Note 2).
(c) All or a portion of this security has been pledged to cover margin requirements on futures contracts, swap contracts, forward currency contracts, and/or written options, if any (Note 4).
 
Currency Abbreviations:
 
USD - United States Dollar

         
6
  See accompanying notes to the financial statements.    

 

GMO Asset Allocation Bond Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $577,873,131) (Note 2)
  $ 580,969,840  
Investments in affiliated issuers, at value (cost $9,857,886) (Notes 2 and 10)
    9,857,886  
Receivable for Fund shares sold
    6,619,337  
Dividends and interest receivable
    2,386,425  
Receivable for open swap contracts (Note 4)
    1,873,167  
Receivable for expenses reimbursed by Manager (Note 5)
    16,604  
         
Total assets
    601,723,259  
         
         
Liabilities:
       
Payable for investments purchased
    5,200,289  
Payable for Fund shares repurchased
    1,617,770  
Payable to affiliate for (Note 5):
       
Management fee
    102,255  
Shareholder service fee
    26,020  
Trustees and Trust Officers or agents unaffiliated with the Manager
    1,113  
Due to broker (including variation margin on futures contracts) (Note 4)
    487,673  
Payable for open swap contracts (Note 4)
    4,877,584  
Payable for reverse repurchase agreements (Note 2)
    51,384,247  
Written options outstanding, at value (premiums $396,500) (Note 4)
    65,675  
Accrued expenses
    82,478  
         
Total liabilities
    63,845,104  
         
Net assets
  $ 537,878,155  
         

         
    See accompanying notes to the financial statements.   7

 

 
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011 — (Continued)
 
         
Net assets consist of:
       
Paid-in capital
  $ 524,418,039  
Accumulated undistributed net investment income
    837,553  
Accumulated net realized gain
    41,236,848  
Net unrealized depreciation
    (28,614,285 )
         
    $ 537,878,155  
         
Net assets attributable to:
       
Class III shares
  $ 48,675,690  
         
Class VI shares
  $ 489,202,465  
         
Shares outstanding:
       
Class III
    1,946,411  
         
Class VI
    19,560,496  
         
Net asset value per share:
       
Class III
  $ 25.01  
         
Class VI
  $ 25.01  
         

         
8
  See accompanying notes to the financial statements.    

 

GMO Asset Allocation Bond Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Interest
  $ 17,305,100  
Dividends from affiliated issuers (Note 10)
    13,265  
Dividends
    1,364  
         
Total investment income
    17,319,729  
         
Expenses:
       
Management fee (Note 5)
    1,577,619  
Shareholder service fee – Class III (Note 5)
    62,135  
Shareholder service fee – Class VI (Note 5)
    324,293  
Interest expense (Note 2)
    214,261  
Custodian, fund accounting agent and transfer agent fees
    107,760  
Audit and tax fees
    68,163  
Legal fees
    22,633  
Trustees fees and related expenses (Note 5)
    16,422  
Registration fees
    10,178  
Miscellaneous
    20,174  
         
Total expenses
    2,423,638  
Fees and expenses reimbursed by Manager (Note 5)
    (224,192 )
Expense reductions (Note 2)
    (113 )
         
Net expenses
    2,199,333  
         
Net investment income (loss)
    15,120,396  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in unaffiliated issuers
    36,891,842  
Investments in affiliated issuers
    (5,837 )
Realized gains distributions from affiliated issuers (Note 10)
    1,499  
Futures contracts
    12,188,377  
Written options
    14,181,440  
Swap contracts
    2,607,645  
         
Net realized gain (loss)
    65,864,966  
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in unaffiliated issuers
    (18,024,084 )
Investments in affiliated issuers
    2,764  
Futures contracts
    (29,262,274 )
Written options
    369,075  
Swap contracts
    (5,297,528 )
         
Net unrealized gain (loss)
    (52,212,047 )
         
Net realized and unrealized gain (loss)
    13,652,919  
         
Net increase (decrease) in net assets resulting from operations
  $ 28,773,315  
         

         
    See accompanying notes to the financial statements.   9

 

GMO Asset Allocation Bond Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
        Period from
        March 18, 2009
        (commencement of
    Year Ended
 		  operations) through
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 15,120,396     $ 20,059,016  
Net realized gain (loss)
    65,864,966       8,308,306  
Change in net unrealized appreciation (depreciation)
    (52,212,047 )     23,597,762  
                 
                 
Net increase (decrease) in net assets from operations
    28,773,315       51,965,084  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (800,265 )     (804,821 )
Class VI
    (11,443,617 )     (17,695,337 )
                 
Total distributions from net investment income
    (12,243,882 )     (18,500,158 )
                 
Net realized gains
               
Class III
    (2,895,554 )     (261,324 )
Class VI
    (28,083,138 )     (5,471,362 )
                 
Total distributions from net realized gains
    (30,978,692 )     (5,732,686 )
                 
      (43,222,574 )     (24,232,844 )
                 
Net share transactions (Note 9):
               
Class III
    10,435,994       38,394,972  
Class VI
    (358,096,684 )     833,860,892  
                 
Increase (decrease) in net assets resulting from net share transactions
    (347,660,690 )     872,255,864  
                 
                 
Total increase (decrease) in net assets
    (362,109,949 )     899,988,104  
                 
Net assets:
               
Beginning of period
    899,988,104       —  
                 
End of period (including accumulated undistributed net investment income of $837,553 and $167,300, respectively)
  $ 537,878,155     $ 899,988,104  
                 

         
10
  See accompanying notes to the financial statements.    

 

GMO Asset Allocation Bond Fund
(A Series of GMO Trust)


Statement of Cash Flows — Year Ended February 28, 2011
 
         
Cash flows from operating activities:
       
Net increase (decrease) in net assets resulting from operations
  $ 28,773,315  
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities:        
Net change in unrealized (appreciation) depreciation
    52,212,047  
Net realized (gain) loss
    (65,864,966 )
Net amortization of discount and premium
    5,302,384  
Investments purchased
    (2,302,050,215 )
Proceeds from sale of investments
    2,667,261,857  
Short term investments, net
    (1,448,016 )
Realized gain distributions from affiliated issuers
    1,499  
Other proceeds (cost):
       
Swap contracts
    2,607,645  
Futures contracts
    (16,571,224 )
Written option contracts
    10,697,440  
Changes in assets and liabilities:
       
(Increase) decrease in receivable for expenses reimbursed by Manager
    39,640  
(Increase) decrease in dividends and interest receivable
    552,834  
Increase (decrease) in periodic payments due on swap contracts
    (16,394 )
Increase (decrease) in payable to affiliate for:
       
Management fee
    (63,960 )
Shareholder service fee payable
    (13,467 )
Trustee and Chief Compliance Officer of GMO Trust fees
    (345 )
Increase (decrease) in accrued expenses
    (40,949 )
         
Net cash provided by (used in) operating activities
    381,379,125  
         
Cash flows from financing activities:*
       
Proceeds from shares sold
    517,604,417  
Shares repurchased
    (884,726,128 )
Cash distributions paid
    (2,209,625 )
Increase (decrease) in payable for reverse repurchase agreements†
    (12,047,789 )
         
Net cash provided by (used in) financing activities
    (381,379,125 )
         
Net increase in cash
    —  
Cash and cash equivalents, beginning of year
    —  
         
Cash and cash equivalents, end of year
  $ —  
         
Supplemental disclosure of cash flow information:
       
* Reinvestment of dividends and distributions
  $ 41,012,949  
† Interest paid on reverse repurchase agreements was 214,261 for the year ended February 28, 2011.
       

         
    See accompanying notes to the financial statements.   11

 

GMO Asset Allocation Bond Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout the period)
 
                 
        Period from
        March 27, 2009
        (commencement of
    Year Ended
 		  operations) through
    February 28, 2011   February 28, 2010
Net asset value, beginning of period
  $ 26.13     $ 25.15  
                 
Income (loss) from investment operations:
               
Net investment income (loss)†
    0.51       0.92  
Net realized and unrealized gain (loss)
    0.64       0.85  
                 
                 
Total from investment operations
    1.15       1.77  
                 
Less distributions to shareholders:
               
From net investment income
    (0.50 )     (0.60 )
From net realized gains
    (1.77 )     (0.19 )
                 
                 
Total distributions
    (2.27 )     (0.79 )
                 
                 
Net asset value, end of period
  $ 25.01     $ 26.13  
                 
                 
Total Return(a)
    4.51 %     7.07 %**
                 
Ratios/Supplemental Data:
               
Net assets, end of period (000’s)
  $ 48,676     $ 40,225  
Net operating expenses to average daily net assets(b)
    0.41 %(c)     0.40 %*
Interest expense to average daily net assets(d)
    0.03 %     0.03 %*
Total net expenses to average daily net assets(b)
    0.44 %     0.43 %*
Net investment income (loss) to average daily net assets
    1.94 %     3.86 %*
Portfolio turnover rate
    315 %     116 %(e)**
Fees and expenses reimbursed by the Manager to average daily net assets:(f)
    0.04 %     0.04 %*
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(d) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund’s net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income.
(e) Calculation represents portfolio turnover of the Fund for the period from March 18, 2009 (commencement of operations) through February 28, 2010.
(f) Ratios include reimbursement of direct operating expenses and waiver of expenses indirectly incurred through investment in the underlying funds (Note 5).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.

         
12
  See accompanying notes to the financial statements.    

 

GMO Asset Allocation Bond Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class VI share outstanding throughout the period)
 
                 
        Period from
        March 18, 2009
        (commencement of
    Year Ended
 		  operations) through
    February 28, 2011   February 28, 2010
Net asset value, beginning of period
  $ 26.13     $ 25.00  
                 
Income (loss) from investment operations:
               
Net investment income (loss)†
    0.64       0.80  
Net realized and unrealized gain (loss)
    0.54       1.15  
                 
                 
Total from investment operations
    1.18       1.95  
                 
Less distributions to shareholders:
               
From net investment income
    (0.53 )     (0.63 )
From net realized gains
    (1.77 )     (0.19 )
                 
                 
Total distributions
    (2.30 )     (0.82 )
                 
                 
Net asset value, end of period
  $ 25.01     $ 26.13  
                 
                 
Total Return(a)
    4.60 %     7.83 %**
                 
Ratios/Supplemental Data:
               
Net assets, end of period (000’s)
  $ 489,202     $ 859,763  
Net operating expenses to average daily net assets(b)
    0.31 %(c)     0.31 %*
Interest expense to average daily net assets(d)
    0.03 %     0.03 %*
Total net expenses to average daily net assets(b)
    0.34 %     0.34 %*
Net investment income (loss) to average daily net assets
    2.43 %     3.24 %*
Portfolio turnover rate
    315 %     116 %**
Fees and expenses reimbursed by the Manager to average daily net assets:(e)
    0.04 %     0.04 %*
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(d) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund’s net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income.
(e) Ratios include reimbursement of direct operating expenses and waiver of expenses indirectly incurred through investment in the underlying funds (Note 5).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.

         
    See accompanying notes to the financial statements.   13

 

GMO Asset Allocation Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO Asset Allocation Bond Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund seeks total return in excess of that of its benchmark, the Citigroup 3 Month Treasury Bill Index. The Fund is permitted to invest in bonds of any kind (e.g., bonds of any maturity, duration, or credit quality) and under normal circumstances invests directly and indirectly (e.g., through other GMO Funds or derivatives) at least 80% of its assets in bonds. The term “bond” refers to any fixed income security, which includes (i) obligations of an issuer to make payments of principal and/or interest on future dates, (ii) synthetic debt instruments created by the Manager by using derivatives (e.g., a futures contract, swap contract, currency forward or option), and (iii) instruments with variable interest payments. The Fund may invest in any sector of the bond market and is not required to maintain a minimum or maximum allocation of investments in any one sector. The sectors and types of bonds in which the Fund may invest include, but are not limited to: investment grade bonds denominated in various currencies, including securities issued by the U.S. and foreign governments and their agencies or instrumentalities (including securities neither guaranteed nor insured by the U.S. government), corporate bonds, taxable and tax-exempt municipal bonds, and Rule 144A securities; below investment grade bonds (also known as “junk bonds”); inflation indexed bonds issued by the U.S. and foreign governments and their agencies or instrumentalities (including securities neither guaranteed nor insured by the U.S. government), including Inflation-Protected Securities issued by the U.S. Treasury (“TIPS”), and inflation indexed bonds issued by corporations; sovereign debt of emerging countries and other bonds issued in emerging countries (including junk bonds); and asset-backed securities, including mortgage related and mortgage-backed securities.
 
The Fund may also invest in exchange traded and over-the-counter (“OTC”) derivatives, including futures contracts, currency options, currency forwards, reverse repurchase agreements, swap contracts (including credit default swaps), interest rate options, swaps on interest rates, and other types of derivatives. The Fund is not limited in its use of derivatives or in the absolute face value of its derivatives positions, and, as a result, the Fund may be leveraged in relation to its assets.
 
The Fund may gain exposure to the investments described above through investments in shares of other GMO Funds, including GMO High Quality Short-Duration Bond Fund, GMO Debt Opportunities Fund, and GMO U.S. Treasury Fund (“underlying funds”). In addition, the Fund may invest in unaffiliated money market funds. The Fund may invest up to 100% of its assets in below investment grade bonds. The

         
14
       

 

 
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Fund also may hold securities that are downgraded to below investment grade status after they were purchased by the Fund.
 
The Fund may take substantial positions in particular sectors of the bond market, using derivatives and other instruments to adjust its foreign currency exposure independently of its exposure to those sectors.
 
The Manager does not seek to maintain a specified interest rate duration for the Fund, and the Fund’s interest rate duration will change depending on the Fund’s investments and the Manager’s current outlook on different sectors of the bond market. The Fund, if deemed prudent by the Manager, will take temporary defensive measures until the Manager has determined that normal conditions have returned or that it is otherwise prudent to resume investing in accordance with the Fund’s normal investment strategies. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
 
The Fund is not intended to serve as a standalone investment product and is available for investment only by other GMO Funds and other GMO asset allocation clients.
 
The financial statements of the underlying funds should be read in conjunction with the Fund’s financial statements. These financial statements are available, without charge, upon request by calling (617) 346-7646 (collect) or visiting GMO’s website at www.gmo.com.
 
For the period ending February 28, 2011, the Fund had two classes of shares outstanding: Class III and Class VI. Each class of shares bears a different shareholder service fee.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the OTC market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives

         
        15

 

 
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. During the year ended February 28, 2011, the Manager has evaluated the Fund’s OTC derivatives contracts and determined that no reduction in value was warranted on account of the creditworthiness of a counterparty. See Note 4 for a further discussion on valuation of derivative financial instruments.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include most recent bid prices, interest rates, prepayment speeds, credit risk, yield curves and similar data.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant.

         
16
       

 

 
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Debt Obligations
                               
U.S. Government
  $ —     $ 578,319,067     $      —     $ 578,319,067  
                                 
TOTAL DEBT OBLIGATIONS
    —       578,319,067       —       578,319,067  
                                 
Mutual Funds
    9,857,886       —       —       9,857,886  
Options Purchased
    193,750       663,400       —       857,150  
Short-Term Investments
    1,793,623       —       —       1,793,623  
                                 
Total Investments
    11,845,259       578,982,467       —       590,827,726  
                                 
Derivatives*
                               
Futures Contracts
Interest Rate Risk
    4,357,037       —       —       4,357,037  
Swap Agreements
Interest Rate Risk
    —       1,873,167       —       1,873,167  
                                 
Total
  $ 16,202,296     $ 580,855,634     $ —     $ 597,057,930  
                                 
 
LIABILITY VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Liabilities
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Derivatives*
                               
Futures Contracts
                               
Interest Rate Risk
  $ (33,394,439 )   $ —     $      —     $ (33,394,439 )
Written Options
                               
Interest Rate Risk
    (21,875 )     (43,800 )     —       (65,675 )
Swap Agreements
                               
Interest Rate Risk
    —       (4,877,584 )     —       (4,877,584 )
                                 
Total
  $ (33,416,314 )   $ (4,921,384 )   $ —     $ (38,337,698 )
                                 

         
        17

 

 
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The risks referenced above are not intended to be inclusive of all risks. Please see the Investment Risks and Derivative Financial Instruments sections below for a further discussion of risks.
 
*Because the tables above are based on market values or unrealized appreciation (depreciation) rather than the notional amounts of derivatives, the uncertainties surrounding the valuation inputs for a derivative are likely to be more significant to the Fund’s net asset value than the uncertainties surrounding inputs for a non-derivative security with the same market value.
 
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements.
 
The Fund held no investments or other financial instruments directly at either February 28, 2011 or February 28, 2010, whose fair value was categorized using Level 3 inputs.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 pm. Income and expenses denominated in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.
 
Repurchase agreements
The Fund may enter into repurchase agreements. Under a repurchase agreement 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 it acquired under the repurchase agreement. The value of the securities acquired is required by contract to be marked to market daily and additional collateral is required to be transferred so that the market value is at least equal to the amount owed to the Fund by the seller. If the seller of a repurchase agreement defaults or enters into insolvency proceedings and/or the value of the securities subject to the repurchase agreement is insufficient, the Fund’s recovery of cash from the seller may be delayed and the Fund may incur a loss equal to the difference between the cash it paid and the value of the securities. The Fund had no repurchase agreements outstanding at the end of the period.

         
18
       

 

 
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at an agreed upon price and date. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which generally causes the Fund’s portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the event of a buyer’s bankruptcy or insolvency, the Fund’s use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund’s right to repurchase the securities. As of February 28, 2011, the Fund had received $51,381,250 from reverse repurchase agreements relating to securities with a market value, plus accrued interest, of $53,407,738. Reverse repurchase agreements outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Inflation-indexed bonds
The Fund may invest in inflation indexed bonds. Inflation indexed bonds are fixed income securities whose principal value is adjusted periodically according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that reflects inflation in the principal value of the bond. Most other issuers pay out any inflation related accruals as part of a semiannual coupon.
 
The value of inflation indexed bonds is expected to change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates (i.e., stated interest rates) and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates (i.e. nominal interest rate minus inflation) might decline, leading to an increase in value of inflation indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation indexed bonds. There can be no assurance, however, that the value of inflation indexed bonds will be directly correlated to changes in nominal interest rates, and short term increases in inflation may lead to a decline in their value. Coupon payments received by the Fund from inflation indexed bonds are included in the Fund’s gross income for the period in which they accrue. In addition, any increase or decrease in the principal amount of an inflation indexed bond will increase or decrease taxable ordinary income to the Fund, even though principal is not paid until maturity. Inflation-indexed bonds outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Taxes and distributions
The Fund intends to qualify each tax 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

         
        19

 

 
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to derivative contract transactions differing treatment of accretion and amortization, losses on wash sale transactions, and limitation on realized losses imposed by the Code related to share ownership activity.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 42,382,024     $ 22,270,808  
Net long-term capital gain
    840,550       1,962,036  
                 
Total distributions
  $ 43,222,574     $ 24,232,844  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 23,078,898  
Undistributed net long-term capital gain
  $ 7,465,704  
Other tax attributes:
       
Capital loss carryforwards
  ($ 19,383,532 )

         
20
       

 

 
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards and future realized losses, if any, subsequent to February 28, 2011 could be subject to limitations imposed by the Code related to share ownership activity. The Fund’s capital loss carryforwards expire as follows:
 
         
February 28, 2019
  ($ 19,383,532 )
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 587,710,549     $ 3,933,738     $ (816,471 )   $ 3,117,267      
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the year ended February 28, 2010 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.

         
        21

 

 
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, 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 among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class’s operations. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (Note 5).
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below.
 
• Market Risk — Fixed Income Securities — Typically, the value of the Fund’s fixed income securities will decline during periods of rising interest rates and widening of credit spreads.
 
• Credit and Counterparty Risk — The Fund runs the risk that the issuer or guarantor of a fixed income security, the counterparty to an OTC contract, a borrower of the Fund’s securities or the obligor of an obligation underlying an asset-backed security will be unable or unwilling to make timely principal, interest, or settlement payments or otherwise honor its obligations. This risk is particularly pronounced for the Fund because it may invest up to 100% of its assets in below investment grade bonds. Junk bonds have speculative characteristics, and changes in economic conditions or other circumstances are more likely to impair the capacity of issuers to make principal and interest payments than is the case with issuers of investment grade bonds. In addition, to the extent that the Fund uses OTC derivatives, including swap contracts with longer-term maturities, and/or has significant exposure to a single counterparty, this risk will be particularly pronounced for the Fund. The risk of counterparty default is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions.
 
• Derivatives Risk — The use of derivatives involves the risk that their value may not correlate with the value of the relevant underlying assets, rates or indices. Derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk.

         
22
       

 

 
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
• Leveraging Risk — The use of reverse repurchase agreements and other derivatives and securities lending may cause the Fund’s portfolio to be leveraged. The Fund is not limited in the extent to which it uses derivatives. Leverage increases the Fund’s portfolio losses when the value of its investments decline.
 
Other principal risks of an investment in the Fund include Foreign Investment Risk (risk that the market prices of foreign securities will fluctuate more rapidly and to a greater extent than those of U.S. securities, which may adversely affect the value of the Fund’s foreign investments, with the Fund’s investments in emerging countries subject to this risk to a greater extent); Currency Risk (risk that fluctuations in exchange rates will adversely affect the value of the Fund’s foreign currency holdings and investments denominated in foreign currencies); Liquidity Risk (difficulty in selling Fund investments at desirable prices and/or increased likelihood of honoring redemption requests in-kind); Focused Investment Risk (increased risk from the Fund’s focus on investments in countries, regions, sectors or companies with high positive correlations to one another); Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps or other derivatives on an index, a single security or a basket of securities to gain investment exposures (e.g., by selling protection under a credit default swap). The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). For example, the Fund may use credit default swaps to take a short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its

         
        23

 

 
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund’s exposure to the credit of an issuer through the debt instrument, but adjust the Fund’s interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed versus variable rates and shorter duration versus longer duration exposure. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral (e.g., foreign currency forwards; see “Currency Risk” above), that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a

         
24
       

 

 
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
 
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund’s forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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.
 
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. The Fund had no forward currency contracts outstanding at the end of the period.
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the

         
        25

 

 
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. During the year ended February 28, 2011, the Fund used futures contracts to adjust interest-rate exposure and enhance the diversity and liquidity of the portfolio. Futures contracts outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. During the year ended February 28, 2011, the Fund used purchased option contracts to adjust interest rate exposure. Option contracts purchased by the Fund and outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. During the year ended February 28, 2011, the Fund used written option contracts to adjust interest rate exposure. Written options outstanding at the end of the period are listed in the Fund’s Schedule of Investments.

         
26
       

 

 
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
For the year ended February 28, 2011, investment activity in options contracts written by the Fund was as follows:
 
                                                 
    Puts   Calls
    Principal
   Number
       Principal
   Number
    
    Amount
   of Futures
       Amount
   of Futures
    
    of Contracts   Contracts   Premiums   of Contracts   Contracts   Premiums
 
Outstanding, beginning of year
  $      —       (6,000 )   $ (2,050,500 )   $ —       (10,000 )   $ (1,830,000 )
Options written
    —       (15,600 )     (6,525,058 )     (600,000,000 )     (34,700 )     (15,900,022 )
Options bought back
    —       4,600       2,609,558       —       37,000       10,429,150  
Options expired
    —       17,000       5,966,000       —       7,200       6,904,372  
Options sold
    —       —       —       —       —       —  
                                                 
Outstanding, end of year
  $ —       —     $ —     $ (600,000,000 )     (500 )   $ (396,500 )
                                                 
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are

         
        27

 

 
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.

         
28
       

 

 
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the year ended February 28, 2011, the Fund used swap agreements to adjust interest rate exposure. Swap agreements outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Assets:
                                               
Investment, at value
(purchased options)
  $ 857,150     $      —     $      —     $      —     $      —     $ 857,150  
Unrealized appreciation on futures contracts *
    4,357,037       —       —       —       —       4,357,037  
Unrealized appreciation on swap agreements
    1,873,167       —       —       —       —       1,873,167  
                                                 
Total
  $ 7,087,354     $ —     $ —     $ —     $ —     $ 7,087,354  
                                                 
                                                 
Liabilities:
                                               
Written options outstanding
  $ (65,675 )   $ —     $ —     $ —     $ —     $ (65,675 )

         
        29

 

 
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
  
  Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of
  February 28, 2011Ù: — continued
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Unrealized depreciation on futures contracts *
    (33,394,439 )     —       —       —       —       (33,394,439 )
Unrealized depreciation on swap agreements
    (4,877,584 )     —       —       —               (4,877,584 )
                                                 
Total
  $ (38,337,698 )   $ —     $ —     $ —     $ —     $ (38,337,698 )
                                                 
 
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Investments (purchased options)
  $ (14,192,053 )   $      —     $      —     $      —     $      —     $ (14,192,053 )
Written options
    14,181,440       —       —       —       —       14,181,440  
Futures contracts
    12,188,377       —       —       —       —       12,188,377  
Swap contracts
    2,607,645       —       —       —       —       2,607,645  
                                                 
Total
  $ 14,785,409     $ —     $ —     $ —     $ —     $ 14,785,409  
                                                 
                                                 
Change in Unrealized Appreciation (Depreciation) on:
                                               
Investments (purchased options)
  $ (533,085 )   $ —     $ —     $ —     $ —     $ (533,085 )
Written options
    369,075       —       —       —       —       369,075  
Futures contracts
    (29,262,274 )     —       —       —       —       (29,262,274 )
Swap contracts
    (5,297,528 )     —       —       —       —       (5,297,528 )
                                                 
Total
  $ (34,723,812 )   $ —     $ —     $ —     $ —     $ (34,723,812 )
                                                 
 
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
            * The Fair values of derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.

         
30
       

 

 
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The volume of derivative activity, based on absolute values (futures contracts, and options contracts), or notional amounts (swap agreements) outstanding at each month-end, was as follows for the year ended February 28, 2011:
 
                         
    Futures
   Swap
    
    contracts   agreements   Options
 
Average amount outstanding
  $ 4,048,543,333     $ 1,862,106,817     $ 320,250,042  
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.25% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets of each class at the annual rate of 0.15% for Class III shares and 0.055% for Class VI shares. The Manager has contractually agreed through at least June 30, 2011 to waive the Fund’s shareholder service fee to the extent that the aggregate of any direct and indirect shareholder service fees borne by a class of shares of the Fund exceeds 0.15% for Class III shares and 0.055% for Class VI shares; provided, however, that the amount of this waiver will not exceed the respective Class’ shareholder service fee.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.25% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition to the contractual expense reimbursement described above, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in other GMO Funds (excluding those Funds’ Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund’s Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011

         
        31

 

 
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
was $16,422 and $4,625, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
             
Indirect Net Expenses
 		           
(excluding shareholder
            
service fees and
     Indirect Shareholder
      
interest expense)     Service Fees     Total Indirect Expenses
< 0.001%
    0.000%     < 0.001%
             
 
6. Purchases and sales of securities
 
For the year ended February 28, 2011, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
 
                 
    Purchases   Sales
 
U.S. Government securities
  $ 1,935,104,349     $ 2,339,437,174  
Investments (non-U.S. Government securities)
    297,836,263       286,711,098  
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 65.59% of the shares outstanding of the Fund were held by two shareholders, each holding more than 10% of the Fund’s outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. Two of these shareholders are other funds of the Trust.
 
As of February 28, 2011, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and 99.99% of the Fund’s shares were held by accounts for which the Manager had investment discretion.

         
32
       

 

 
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
9. Share transactions
 
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
 
                                 
        Period from
        March 27, 2009
    Year Ended
   (commencement of operations) through
    February 28, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    923,852     $ 24,389,447       4,718,252     $ 119,445,441  
Shares issued to shareholders in reinvestment of distributions
    147,963       3,695,819       41,021       1,066,145  
Shares repurchased
    (664,641 )     (17,649,272 )     (3,220,036 )     (82,116,614 )
                                 
Net increase (decrease)
    407,174     $ 10,435,994       1,539,237     $ 38,394,972  
                                 
                                 
                                 
        Period from
        March 18, 2009
    Year Ended
   (commencement of operations) through
    February 28, 2011   February 28, 2010
Class VI:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    18,322,364     $ 473,280,812       38,433,140     $ 978,458,954  
Shares issued to shareholders in reinvestment of distributions
    1,483,358       37,317,130       891,713       23,166,699  
Shares repurchased
    (33,152,339 )     (868,694,626 )     (6,417,740 )     (167,764,761 )
                                 
Net increase (decrease)
    (13,346,617 )   $ (358,096,684 )     32,907,113     $ 833,860,892  
                                 
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                 
    Value,
               Distributions
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   period
 
GMO U.S. Treasury Fund
  $ 9,396,214     $ 268,514,752     $ 268,050,000     $ 13,265     $ 1,499     $ 9,857,886  
                                                 
Totals
  $ 9,396,214     $ 268,514,752     $ 268,050,000     $ 13,265     $ 1,499     $ 9,857,886  
                                                 

         
        33

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Asset Allocation Bond Fund:
 
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations, of changes in net assets and of cash flows and the financial highlights present fairly, in all material respects, the financial position of GMO Asset Allocation Bond Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets, its cash flows and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian, brokers, and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
34
       

 

GMO Asset Allocation Bond Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: the following information is in relation to the expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
        35

 

 
GMO Asset Allocation Bond Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.44 %   $ 1,000.00     $ 1,008.10     $ 2.19  
2) Hypothetical
    0.44 %   $ 1,000.00     $ 1,022.61     $ 2.21  
                                 
Class VI
                               
                                 
1) Actual
    0.35 %   $ 1,000.00     $ 1,008.50     $ 1.74  
2) Hypothetical
    0.35 %   $ 1,000.00     $ 1,023.06     $ 1.76  
                                 
 
            * Expenses are calculated using each Class’s annualized net expense ratio (including interest expense and indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
36
       

 

GMO Asset Allocation Bond Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
The Fund’s distributions to shareholders include $840,550 from long-term capital gains.
 
The Fund hereby designates as qualified interest income and qualified short-term capital gains with respect to its taxable year ended February 28, 2011, $4,717,117 and $29,532,807, respectively, or if determined to be different, the qualified interest income and qualified short-term capital gains of such year.
 
Of the ordinary income distributions made by the Fund during the fiscal year ended February 28, 2011, 28.89% is derived from investments in U.S. Government and Agency Obligations. All or a portion of the distributions from this income may be exempt from taxation at the state level. Consult your tax advisor for state specific information.

         
        37

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with the
   Length of Time
   During Past
   Complex
     Directorships
Date of Birth   Trust   Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of the
Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
38        

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with the
   Length of Time
   During Past
   Complex
     Directorships
Date of Birth   Trust   Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier
Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007). 		    63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of Time
   During Past
   Complex
     Directorships
Date of Birth   Held with Trust   Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee;
President and
Chief Executive
Officer of the
Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
        39

 

Other Officers:
 
             
Name and
   Position(s)
   Length of Time
   Principal Occupation(s)
Date of Birth   Held with Trust   Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
40        

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of Time
   Principal Occupation(s)
Date of Birth   Held with Trust   Served   During Past Five Years3
 
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        41

 

 
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Asset Allocation Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
Although GMO Benchmark-Free Allocation Fund does not seek to control risk relative to any securities market index or benchmark, a discussion of the Fund’s performance relative to the CPI Index is included for comparative purposes.
 
GMO Benchmark-Free Allocation Fund returned +7.7% for the fiscal year ended February 28, 2011, as compared with +2.2% for the CPI Index.
 
Underlying fund implementation was negative, detracting 2.6% from relative performance as most of the underlying funds underperformed their respective benchmarks. GMO Quality Fund and GMO Alpha Only Fund were the main detractors from relative performance.
 
Asset allocation added 8.1% to relative performance. The Fund’s exposure to equities drove most of the outperformance.
 
Because some of the securities and instruments held directly or indirectly by the Fund had positive fair value adjustments during the fiscal year (and the performance of indices are not fair valued), the Fund’s absolute and relative performance is better than it otherwise would have been.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice. References to specific securities are not recommendations of such securities and may not be representative of any GMO portfolio’s current or future investments.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO Benchmark-Free Allocation Fund Class III Shares and the CPI Index
As of February 28, 2011
 
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Each performance figure assumes a purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of .09% on the purchase and .09% on the redemption. Transaction fees are retained by the Fund to cover trading costs. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. All information is unaudited.
 
 
MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.

 

GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary*   % of Total Net Assets  
Common Stocks
    65.7 %
Debt Obligations
    21.0  
Cash and Cash Equivalents
    14.9  
Short-Term Investments
    11.9  
Preferred Stocks
    1.1  
Investment Funds
    0.6  
Loan Participations
    0.1  
Options Purchased
    0.1  
Loan Assignments
    0.0 Ù
Rights and Warrants
    0.0 Ù
Promissory Notes
    0.0 Ù
Written Options
    (0.0 )Ù
Forward Currency Contracts
    (0.5 )
Reverse Repurchase Agreements
    (1.2 )
Swap Agreements
    (3.9 )
Futures Contracts
    (12.9 )
Other
    3.0  
         
      99.9 %
         
 
         
Country / Region Summary**   % of Investments  
United States
    48.9 %
Emerging***
    16.5  
Australia
    11.4  
Japan
    6.5  
United Kingdom
    4.5  
Switzerland
    2.9  
France
    2.4  
Germany
    1.3  
Italy
    0.8  
New Zealand
    0.8  
Sweden
    0.7  
Netherlands
    0.6  
Singapore
    0.5  
Belgium
    0.4  
Denmark
    0.4  
Canada
    0.3  
Hong Kong
    0.3  
Finland
    0.2  
Spain
    0.2  

         
        1

 

 
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2011 (Unaudited)
 
         
Country / Region Summary**   % of Investments  
Austria
    0.1 %
Greece
    0.1  
Ireland
    0.1  
Norway
    0.1  
         
      100.0 %
         
 
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust (“underlying funds”).
** The table above shows indirect country exposure associated with investments in the underlying funds except for GMO Alpha Only Fund and GMO Special Situations Fund. The table excludes short-term investments. The table includes exposure through the use of derivative financial instruments. The table excludes exposure through forward currency contracts.
*** The “Emerging” exposure is comprised of: Argentina, Brazil, Chile, China, Colombia, Congo, Czech Republic, Dominican Republic, Egypt, Hungary, India, Indonesia, Malaysia, Mexico, Philippines, Poland, Russia, South Africa, South Korea, Taiwan, Thailand, Turkey, Ukraine and Venezuela.
Ù Rounds to 0.0%.

         
2
       

 

GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
Shares /
 		           
Par Value ($)     Description   Value ($)  
            MUTUAL FUNDS — 99.0%        
                     
            Affiliated Issuers — 99.0%        
          25,531,774     GMO Alpha Only Fund, Class IV     599,996,684  
      765,652     GMO Alternative Asset Opportunity Fund     24,921,958  
      9,774,127     GMO Asset Allocation Bond Fund, Class VI     244,450,911  
      15,068,493     GMO Currency Hedged International Equity Fund, Class III     363,301,368  
      6,044,314     GMO Emerging Country Debt Fund, Class IV     54,942,811  
      23,610,473     GMO Emerging Markets Fund, Class VI     340,226,922  
      3,669,876     GMO Flexible Equities Fund, Class VI     72,002,968  
      40,907,585     GMO Quality Fund, Class VI     851,695,924  
      5,380,897     GMO Special Situations Fund, Class VI     148,674,177  
      27,120,568     GMO Strategic Fixed Income Fund, Class VI     417,114,334  
      971,969     GMO World Opportunity Overlay Fund     22,044,262  
                     
                     
            TOTAL MUTUAL FUNDS (COST $3,015,449,477)     3,139,372,319  
                     
                     
            DEBT OBLIGATIONS — 1.0%        
                     
            Asset-Backed Securities — 1.0%        
            Auto Financing — 0.1%        
      700,000     Capital Auto Receivable Asset Trust, Series 08-1, Class A4B, 1 mo. LIBOR + 1.35%, 1.62%, due 07/15/14     706,342  
      500,000     Daimler Chrysler Auto Trust, Series 08-B, Class A4B, 1 mo. LIBOR + 1.85%, 2.11%, due 11/10/14     505,595  
      300,000     Daimler Chrysler Auto Trust, Series 08-B, Class A4A, 5.32%, due 11/10/14     308,220  
      1,400,000     Ford Credit Auto Owner Trust, Series 08-B, Class A4B, 1 mo. LIBOR + 2.00%, 2.27%, due 03/15/13     1,417,654  
      1,300,000     Ford Credit Floorplan Master Owner Trust, Series 06-4, Class A, 1 mo. LIBOR + .25%, 0.52%, due 06/15/13     1,294,333  
                     
            Total Auto Financing     4,232,144  
                     
                     
            Business Loans — 0.1%        
      460,165     Bayview Commercial Asset Trust, Series 04-3, Class A1, 144A, 1 mo. LIBOR + .37%, 0.63%, due 01/25/35     395,742  
      413,770     GE Business Loan Trust, Series 04-1, Class A, 144A, 1 mo. LIBOR + .29%, 0.56%, due 05/15/32     378,600  

         
    See accompanying notes to the financial statements.   3

 

 
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            Business Loans — continued        
      1,020,708     Lehman Brothers Small Balance Commercial, Series 05-2A, Class 1A, 144A, 1 mo. LIBOR + .25%, 0.51%, due 09/25/30     836,981  
                     
            Total Business Loans     1,611,323  
                     
                     
            CMBS — 0.1%        
      700,000     Commercial Mortgage Pass-Through Certificates, Series 06-FL12, Class AJ, 144A, 1 mo. LIBOR + .13%, 0.40%, due 12/15/20     616,000  
      321,160     GE Capital Commercial Mortgage Corp., Series 05-C4, Class A2, 5.31%, due 11/10/45     321,160  
      802,213     GS Mortgage Securities Corp., Series 07-EOP, Class A1, 144A, 1 mo. LIBOR + .09%, 1.14%, due 03/06/20     792,185  
      943,947     J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 06-LDP7, Class A2, 5.85%, due 04/15/45     950,365  
      419,235     Merrill Lynch Mortgage Trust, Series 06-C1, Class A2, 5.62%, due 05/12/39     432,860  
      3,860     Morgan Stanley Dean Witter Capital I, Series 03-TOP9, Class A1, 3.98%, due 11/13/36     3,861  
      407,862     Wachovia Bank Commercial Mortgage Trust, Series 06-WL7A, Class A1, 144A, 1 mo. LIBOR + .09%, 0.36%, due 09/15/21     398,424  
                     
            Total CMBS     3,514,855  
                     
                     
            CMBS Collateralized Debt Obligations — 0.0%        
      1,599,399     American Capital Strategies Ltd. Commercial Real Estate CDO Trust, Series 07-1A, Class A, 144A, 3 mo. LIBOR + .80%, 1.11%, due 11/23/52     15,994  
      1,137,744     Crest Exeter Street Solar, Series 04-1A, Class A1, 144A, 3 mo. LIBOR + .35%, 0.65%, due 06/28/19     1,098,639  
                     
            Total CMBS Collateralized Debt Obligations     1,114,633  
                     
                     
            Credit Cards — 0.2%        
      1,900,000     Capital One Multi-Asset Execution Trust, Series 04-A7, Class A7, 3 mo. LIBOR + .15%, 0.46%, due 06/16/14     1,899,582  
      700,000     Charming Shoppes Master Trust, Series 07-1A, Class A1, 144A, 1 mo. LIBOR + 1.25%, 1.52%, due 09/15/17     700,000  
      200,000     MBNA Credit Card Master Note Trust, Series 04-A8, Class A8, 1 mo. LIBOR + .15%, 0.42%, due 01/15/14     200,028  
      800,000     National City Credit Card Master Trust, Series 08-3, Class A, 1 mo. LIBOR + 1.80%, 2.07%, due 05/15/13     803,000  

         
4
  See accompanying notes to the financial statements.    

 

 
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            Credit Cards — continued        
      1,300,000     World Financial Network Credit Card Master Trust, Series 06-A, Class A, 144A, 1 mo. LIBOR + .13%, 0.40%, due 02/15/17     1,277,393  
                     
            Total Credit Cards     4,880,003  
                     
                     
            Equipment Leases — 0.0%        
      495,018     CNH Equipment Trust, Series 08-A, Class A4B, 1 mo. LIBOR + 1.95%, 2.22%, due 08/15/14     499,572  
                     
                     
            Insured Auto Financing — 0.1%        
      666,685     AmeriCredit Automobile Receivables Trust, Series 07-AX, Class A4, XL, 1 mo. LIBOR + .04%, 0.30%, due 10/06/13     663,018  
      680,537     AmeriCredit Prime Automobile Receivable Trust, Series 07-2M, Class A4B, MBIA, 1 mo. LIBOR + .50%, 0.76%, due 03/08/16     679,243  
      587,410     Santander Drive Auto Receivables Trust, Series 07-3, Class A4B, FGIC, 1 mo. LIBOR + .65%, 0.92%, due 10/15/14     585,301  
      1,100,000     Triad Auto Receivables Owner Trust, Series 07-B, Class A4B, FSA, 1 mo. LIBOR + 1.20%, 1.46%, due 07/14/14     1,110,197  
                     
            Total Insured Auto Financing     3,037,759  
                     
                     
            Insured Other — 0.1%        
      1,000,000     Dominos Pizza Master Issuer LLC, Series 07-1, Class A2, 144A, MBIA, 5.26%, due 04/25/37     1,030,000  
      662,811     Henderson Receivables LLC, Series 06-4A, Class A1, 144A, MBIA, 1 mo. LIBOR + .20%, 0.47%, due 12/15/41     614,317  
      2,500,000     Toll Road Investment Part II, Series C, 144A, MBIA, Zero Coupon, due 02/15/37     211,375  
                     
            Total Insured Other     1,855,692  
                     
                     
            Insured Residential Asset-Backed Securities (United States) Ù — 0.0%        
      252,126     Residential Asset Mortgage Products, Inc., Series 05-RS9, Class AI3, FGIC, 1 mo. LIBOR + .22%, 0.48%, due 11/25/35     177,174  
                     
             
            Insured Residential Mortgage-Backed Securities (United States) — 0.0%
      194,712     Chevy Chase Mortgage Funding Corp., Series 04-1A, Class A2, 144A, AMBAC, 1 mo. LIBOR + .33%, 0.59%, due 01/25/35     136,299  

         
    See accompanying notes to the financial statements.   5

 

 
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            Insured Residential Mortgage-Backed Securities (United States) — continued
      63,783     GreenPoint Home Equity Loan Trust, Series 04-4, Class A, AMBAC, 1 mo. LIBOR + .28%, 0.83%, due 08/15/30     36,590  
                     
            Total Insured Residential Mortgage-Backed Securities (United States)     172,889  
                     
                     
            Residential Asset-Backed Securities (United States) Ù — 0.2%        
      22,881     ACE Securities Corp., Series 06-ASL1, Class A, 1 mo. LIBOR + .14%, 0.40%, due 02/25/36     5,706  
      569,947     ACE Securities Corp., Series 07-WM1, Class A2A, 1 mo. LIBOR + .07%, 0.33%, due 11/25/36     377,590  
      529,525     Argent Securities, Inc., Series 06-M1, Class A2C, 1 mo. LIBOR + .15%, 0.41%, due 07/25/36     232,329  
      1,200,000     Asset Backed Funding Certificates, Series 06-OPT2, Class A3C, 1 mo. LIBOR + .15%, 0.41%, due 10/25/36     834,000  
      551,322     Bayview Financial Acquisition Trust, Series 04-B, Class A2, 144A, 1 mo. LIBOR + .65%, 1.56%, due 05/28/39     210,881  
      866,363     Bayview Financial Acquisition Trust, Series 04-B, Class A1, 144A, 1 mo. LIBOR + .50%, 1.26%, due 05/28/39     366,038  
      222,197     Carrington Mortgage Loan Trust, Series 07-FRE1, Class A1, 1 mo. LIBOR + .12%, 0.38%, due 02/25/37     216,042  
      962,189     Centex Home Equity, Series 06-A, Class AV3, 1 mo. LIBOR + .16%, 0.42%, due 06/25/36     885,858  
      156,158     Countrywide Asset-Backed Certificates, Series 06-BC5, Class 2A1, 1 mo. LIBOR + .08%, 0.34%, due 03/25/37     155,659  
      114,994     Equity One ABS, Inc., Series 04-1, Class AV2, 1 mo. LIBOR + .30%, 0.56%, due 04/25/34     91,258  
      685,352     First Franklin Mortgage Loan Asset Backed Certificates, Series 06-FF5, Class 2A3, 1 mo. LIBOR + .16%, 0.42%, due 04/25/36     506,090  
      114,394     Fremont Home Loan Trust, Series 06-B, Class 2A2, 1 mo. LIBOR + .10%, 0.36%, due 08/25/36     56,196  
      699,747     Household Home Equity Loan Trust, Series 05-3, Class A2, 1 mo. LIBOR + .29%, 0.55%, due 01/20/35     653,389  
      511,652     Master Asset-Backed Securities Trust, Series 06-FRE2, Class A4, 1 mo. LIBOR + .15%, 0.41%, due 03/25/36     299,317  
      2,240,737     Master Asset-Backed Securities Trust, Series 06-HE3, Class A3, 1 mo. LIBOR + .15%, 0.41%, due 08/25/36     840,276  
      742,436     Master Second Lien Trust, Series 06-1, Class A, 1 mo. LIBOR + .16%, 0.42%, due 03/25/36     92,805  

         
6
  See accompanying notes to the financial statements.    

 

 
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            Residential Asset-Backed Securities (United States) — continued        
      180,230     Merrill Lynch Mortgage Investors, Series 07-HE2, Class A2A, 1 mo. LIBOR + .12%, 0.38%, due 02/25/37     107,867  
      511,652     Morgan Stanley Home Equity Loans, Series 07-2, Class A1, 1 mo. LIBOR + .10%, 0.36%, due 04/25/37     483,512  
      578,198     Residential Asset Securities Corp., Series 05-KS12, Class A2, 1 mo. LIBOR + .25%, 0.51%, due 01/25/36     534,741  
                     
            Total Residential Asset-Backed Securities (United States)     6,949,554  
                     
                     
            Residential Mortgage-Backed Securities (Australian) — 0.0%        
      377,893     Interstar Millennium Trust, Series 03-3G, Class A2, 3 mo. LIBOR + .25%, 0.80%, due 09/27/35     356,164  
      186,682     Interstar Millennium Trust, Series 05-1G, Class A, 3 mo. LIBOR + .12%, 0.70%, due 12/08/36     178,281  
      509,310     Medallion Trust, Series 06-1G, Class A1, 3 mo. LIBOR + .05%, 0.35%, due 06/14/37     481,982  
      200,541     Superannuation Members Home Loans Global Fund, Series 8, Class A1, 3 mo. LIBOR + .07%, 0.37%, due 01/12/37     195,728  
                     
            Total Residential Mortgage-Backed Securities (Australian)     1,212,155  
                     
                     
            Residential Mortgage-Backed Securities (European) — 0.1%        
      540,069     Aire Valley Mortgages, Series 06-1A, Class 1A, 144A, 3 mo. LIBOR + .11%, 0.41%, due 09/20/66     460,733  
      580,674     Brunel Residential Mortgages, Series 07-1A, Class A4C, 144A, 3 mo. LIBOR + .10%, 0.40%, due 01/13/39     523,942  
      179,661     Granite Master Issuer Plc, Series 06-2, Class A4, 1 mo. LIBOR + .04%, 0.30%, due 12/20/54     169,780  
      514,319     Paragon Mortgages Plc, Series 14A, Class A2C, 144A, 3 mo. LIBOR + .10%, 0.40%, due 09/15/39     417,885  
      39,689     Paragon Mortgages Plc, Series 7A, Class A1A, 144A, 3 mo. LIBOR + .42%, 0.73%, due 05/15/34     34,418  
                     
            Total Residential Mortgage-Backed Securities (European)     1,606,758  
                     
                     
            Residential Mortgage-Backed Securities (United States) — 0.0%        
      98,636     Chevy Chase Mortgage Funding Corp., Series 04-3A, Class A2, 144A, 1 mo. LIBOR + .30%, 0.56%, due 08/25/35     67,566  
                     

         
    See accompanying notes to the financial statements.   7

 

 
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
Par Value ($) /
 		           
Shares     Description   Value ($)  
                     
            Time Share — 0.0%        
      138,582     Sierra Receivables Funding Co., Series 08-1A, Class A2, 144A, 1 mo. LIBOR + 4.00%, 4.26%, due 02/20/20     145,642  
                     
            Total Asset-Backed Securities     31,077,719  
                     
                     
            U.S. Government Agency — 0.0%        
      33,550     Agency for International Development Floater (Support of C.A.B.E.I), 6 mo. U.S. Treasury Bill + .40%, 0.56%, due 10/01/12 (a)     33,270  
      68,515     Agency for International Development Floater (Support of Honduras), 3 mo. U.S. Treasury Bill x 117%, 0.16%, due 10/01/11 (a)     68,174  
      66,667     Agency for International Development Floater (Support of Zimbabwe), 3 mo. U.S. Treasury Bill x 115%, 0.16%, due 01/01/12 (a)     66,108  
                     
            Total U.S. Government Agency     167,552  
                     
                     
            TOTAL DEBT OBLIGATIONS (COST $28,375,245)     31,245,271  
                     
                     
            SHORT-TERM INVESTMENTS — 0.0%        
                     
            Money Market Funds — 0.0%        
      27,100     State Street Institutional U.S. Government Money Market Fund-Institutional Class     27,100  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $27,100)     27,100  
                     
                     
            TOTAL INVESTMENTS — 100.0%
(COST $3,043,851,822) 		    3,170,644,690  
            Other Assets and Liabilities (net) — (0.0%)     (71,433 )
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 3,170,573,257  
                     
 
Notes to Schedule of Investments:
 
144A - Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors.
AMBAC - Insured as to the payment of principal and interest by AMBAC Assurance Corporation.
C.A.B.E.I. - Central American Bank for Economic Integration
CDO - Collateralized Debt Obligation
CMBS - Commercial Mortgage Backed Security

         
8
  See accompanying notes to the financial statements.    

 

 
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust) 

Schedule of Investments — (Continued)
February 28, 2011
 
FGIC - Insured as to the payment of principal and interest by Financial Guaranty Insurance Corporation.
FSA - Insured as to the payment of principal and interest by Financial Security Assurance.
LIBOR - London Interbank Offered Rate
MBIA - Insured as to the payment of principal and interest by MBIA Insurance Corp.
XL - Insured as to the payment of principal and interest by XL Capital Assurance.
The rates shown on variable rate notes are the current interest rates at February 28, 2011, which are subject to change based on the terms of the security.
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust.
Ù These securities are primarily backed by subprime mortgages.

         
    See accompanying notes to the financial statements.   9

 

GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $28,402,345) (Note 2)
  $ 31,272,371  
Investments in affiliated issuers, at value (cost $3,015,449,477) (Notes 2 and 10)
    3,139,372,319  
Receivable for Fund shares sold
    4,846,844  
Interest receivable
    26,230  
Receivable for expenses reimbursed by Manager (Note 5)
    36,680  
Miscellaneous receivable
    3,881  
         
Total assets
    3,175,558,325  
         
         
Liabilities:
       
Payable for investments purchased
    4,185,114  
Payable for Fund shares repurchased
    665,611  
Payable to affiliate for (Note 5):
       
Trustees and Trust Officers or agents unaffiliated with the Manager
    6,763  
Accrued expenses
    127,580  
         
Total liabilities
    4,985,068  
         
Net assets
  $ 3,170,573,257  
         
Net assets consist of:
       
Paid-in capital
  $ 3,236,934,856  
Accumulated undistributed net investment income
    3,454,367  
Accumulated net realized loss
    (196,608,834 )
Net unrealized appreciation
    126,792,868  
         
    $ 3,170,573,257  
         
Net assets attributable to:
       
Class III shares
  $ 3,170,573,257  
         
Shares outstanding:
       
Class III
    139,574,816  
         
Net asset value per share:
       
Class III
  $ 22.72  
         

         
10
  See accompanying notes to the financial statements.    

 

GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends from affiliated issuers (Note 10)
  $ 30,548,212  
Interest
    2,893,753  
Dividends from unaffiliated issuers
    134  
         
Total investment income
    33,442,099  
         
Expenses:
       
Legal fees
    74,041  
Audit and tax fees
    71,509  
Custodian, fund accounting agent and transfer agent fees
    56,762  
Trustees fees and related expenses (Note 5)
    42,979  
Registration fees
    21,777  
Chief Compliance Officer (Note 5)
    13,854  
Miscellaneous
    23,196  
         
Total expenses
    304,118  
Fees and expenses reimbursed by Manager (Note 5)
    (246,979 )
Expense reductions (Note 2)
    (853 )
         
Net expenses
    56,286  
         
Net investment income (loss)
    33,385,813  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in unaffiliated issuers
    1,696,422  
Investments in affiliated issuers
    (29,619,863 )
Realized gains distributions from affiliated issuers (Note 10)
    6,584,167  
         
Net realized gain (loss)
    (21,339,274 )
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in unaffiliated issuers
    (942,155 )
Investments in affiliated issuers
    152,388,503  
         
Net unrealized gain (loss)
    151,446,348  
         
Net realized and unrealized gain (loss)
    130,107,074  
         
Net increase (decrease) in net assets resulting from operations
  $ 163,492,887  
         

         
    See accompanying notes to the financial statements.   11

 

GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 33,385,813     $ 51,948,450  
Net realized gain (loss)
    (21,339,274 )     (148,179,320 )
Change in net unrealized appreciation (depreciation)
    151,446,348       479,240,924  
                 
                 
Net increase (decrease) in net assets from operations
    163,492,887       383,010,054  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (41,863,110 )     (61,240,647 )
Net realized gains
               
Class III
    —       (1,384,125 )
                 
      (41,863,110 )     (62,624,772 )
                 
Net share transactions (Note 9):
               
Class III
    1,314,856,688       (24,919,659 )
Purchase premiums and redemption fees (Notes 2 and 9):
               
Class III
    914,185       756,234  
                 
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees
    1,315,770,873       (24,163,425 )
                 
                 
Total increase (decrease) in net assets
    1,437,400,650       296,221,857  
                 
Net assets:
               
Beginning of period
    1,733,172,607       1,436,950,750  
                 
End of period (including accumulated undistributed net investment income of $3,454,367 and distributions in excess of net investment income of $24,062,608, respectively)
  $ 3,170,573,257     $ 1,733,172,607  
                 

         
12
  See accompanying notes to the financial statements.    

 

GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 21.49     $ 17.51     $ 25.30     $ 26.92     $ 27.76  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)(a)†
    0.36       0.64       3.21       1.19       0.80  
Net realized and unrealized gain (loss)
    1.28       4.11       (6.72 )     1.18       1.63  
                                         
                                         
Total from investment operations
    1.64       4.75       (3.51 )     2.37       2.43  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.41 )     (0.75 )     (3.71 )     (1.12 )     (1.16 )
From net realized gains
    —       (0.02 )     (0.57 )     (2.87 )     (2.11 )
                                         
                                         
Total distributions
    (0.41 )     (0.77 )     (4.28 )     (3.99 )     (3.27 )
                                         
                                         
Net asset value, end of period
  $ 22.72     $ 21.49     $ 17.51     $ 25.30     $ 26.92  
                                         
                                         
Total Return(b)
    7.69 %     27.18 %     (15.11 )%     8.60 %     9.31 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 3,170,573     $ 1,733,173     $ 1,436,951     $ 1,610,066     $ 1,296,396  
Net expenses to average daily net assets(c)(d)
    0.00 %(e)     0.00 %(e)     0.00 %(e)     0.00 %(e)     0.00 %
Net investment income (loss) to average daily net assets(a)
    1.63 %     3.14 %     14.05 %     4.30 %     2.94 %
Portfolio turnover rate
    19 %     24 %     40 %     57 %     45 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.01 %     0.01 %     0.01 %     0.01 %     0.01 %
Purchase premiums and redemption fees consisted of the following per share amounts (Note 2):†
  $ 0.01     $ 0.01     $ 0.00 (f)   $ 0.00 (f)   $ 0.00 (f)
 
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(d) Net expenses to average daily net assets were less than 0.01%.
(e) The net expense ratio does not include the effect of expense reductions.
(f) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.

         
    See accompanying notes to the financial statements.   13

 

GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO Benchmark-Free Allocation Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund seeks a positive total return. The Fund does not have a particular securities market index as a benchmark and does not seek to outperform a particular index or blend of indices (e.g., the Fund seeks positive return, not “relative” return). The Fund is a fund of funds and invests primarily in shares of other GMO Funds, which may include the GMO International Equity Funds, the GMO U.S. Equity Funds, the GMO Fixed Income Funds, GMO Alpha Only Fund, GMO Alternative Asset Opportunity Fund, GMO Debt Opportunities Fund, GMO High Quality Short-Duration Bond Fund, GMO Special Situations Fund, and GMO World Opportunity Overlay Fund (GMO Funds in which the Fund invests are collectively referred to as “underlying funds”). In addition, the Fund may hold securities (particularly asset-backed securities) directly or through one or more subsidiaries or other entities. The Fund implements its strategy by allocating its assets among asset classes represented by the underlying funds (e.g., foreign equity, U.S. equity, emerging country equity, emerging country debt, foreign fixed income, U.S. fixed income, and commodities). The Fund is not restricted in its exposure to any particular asset class, and at times may be substantially invested in underlying funds that primarily invest in a single asset class (e.g., GMO Fixed Income Funds). In addition, the Fund is not restricted in its exposure to any particular market. Although the Fund generally will have exposure to both emerging countries and developed countries, including the U.S., at times, it also may have substantial exposure to a particular country or type of country (e.g., emerging countries).
 
The Manager uses multi-year forecasts of relative value and risk among asset classes (e.g., foreign equity, U.S. equity, emerging country equity, emerging country debt, foreign fixed income, U.S. fixed income, and commodities) to select the Fund’s investments. The Manager changes the Fund’s holdings of underlying funds in response to changes in its investment outlook and market valuations and may use redemption/purchase activity to rebalance the Fund’s investments. The Manager’s ability to shift investments among the underlying funds is not subject to any limits. The Fund may invest substantially all of its assets in a few underlying funds that primarily invest in the same asset class and may, at times, also invest a substantial portion of its assets in a single underlying Fund.
 
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.

         
14
       

 

 
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The financial statements of the underlying funds should be read in conjunction with the Fund’s financial statements. These financial statements are available, without charge, upon request by calling (617) 346-7646 (collect) or on GMO.com. As of February 28, 2011, shares of GMO Alternative Asset Opportunity Fund, GMO Special Situations Fund and GMO World Opportunity Overlay Fund were not publicly available for direct purchase.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Shares of the underlying funds and other investment funds are generally valued at their net asset value. Investments held by the Fund and the underlying funds are valued as follows. Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the over-the-counter (“OTC”) market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of February 28, 2011, the total value of securities held directly and indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 0.9% of net assets. The Fund and the underlying funds classify such securities (as defined below) as Level 3. Additionally, because many foreign securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund and the underlying funds generally value those foreign securities (including futures, derivatives and other securities whose values are based on indicies comprised of such securities) as of the NYSE close using fair value prices, which are based on adjustments to local closing prices adjusted by a factor supplied by a third party vendor using

         
        15

 

 
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
that vendor’s proprietary models. As of February 28, 2011, those foreign equity securities, foreign index futures contracts and swap agreements representing 32.8% and (0.1)% and (0.5)%, respectively, of the net assets of the Fund, through investments in the underlying funds, were valued using fair value prices based on those adjustments. Those underlying funds classify such securities (as defined below) as Level 2.
 
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. Although alternative prices are available for securities held by the Fund and the underlying funds, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by the Fund and the underlying funds. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fund and the underlying funds. As of February 28, 2011, the total value of securities held directly and indirectly for which no alternative pricing source was available represented 0.4% of the net assets of the Fund.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.

         
16
       

 

 
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include most recent bid prices, interest rates, prepayment speeds, credit risk, yield curves and similar data.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund utilized a number of fair value techniques on Level 3 investments, including the following: The Fund valued certain debt securities using indicative bids received from primary pricing sources. The Fund valued certain other debt securities by using an estimated specified spread above the LIBOR Rate.
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Mutual Funds
  $ 3,139,372,319     $ —     $ —     $ 3,139,372,319  
Debt Obligations
                               
Asset-Backed Securities
    —       9,085,170       21,992,549       31,077,719  
U.S. Government Agency
    —       —       167,552       167,552  
                                 
TOTAL DEBT OBLIGATIONS
    —       9,085,170       22,160,101       31,245,271  
                                 
Short-Term Investments
    27,100       —       —       27,100  
                                 
Total Investments
    3,139,399,419       9,085,170       22,160,101       3,170,644,690  
                                 
Total
  $ 3,139,399,419     $ 9,085,170     $ 22,160,101     $ 3,170,644,690  
                                 
 
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements. The aggregate net values of the Fund’s investments (both direct and indirect) in securities and derivative financial instruments indirectly using Level 3 inputs were 8.0% and (0.1)% of total net assets, respectively.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.

         
        17

 

 
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a reconciliation of investments and derivatives, if any, in which significant unobservable inputs (Level 3) were used in determining value:
 
                                                                           
 
                                      Net Change in
                                      Unrealized
                                      Appreciation
                                      (Depreciation)
                                      from
    Balances
               Change in
           Balances
     Investments
    as of
   Net
   Accrued
   Total
   Unrealized
   Transfers
   Transfers
   as of
     still Held as of
    February 28,
   Purchases/
   Discounts/
   Realized
   Appreciation
   into
   out of
   February 28,
     February 28,
    2010   (Sales)   Premiums   Gain/(Loss)   (Depreciation)   Level 3*   Level 3*   2011     2011
Debt Obligations
                                                                         
Asset-Backed Securities
  $ 34,186,897     $ (14,982,534 )   $ 682,656     $ 2,349,896     $ (74,586 )   $      —     $ (169,780 )**   $ 21,992,549       $ (2,045,444 )
U.S. Government Agency
    314,363       (149,851 )     3,107       2,727       (2,794 )     —               167,552         (2,794 )
                                                                           
Total Debt Obligations
    34,501,260       (15,132,385 )     685,763       2,352,623       (77,380 )     —       (169,780 )     22,160,101       $ (2,048,238 )
                                                                           
Total
  $ 34,501,260     $ (15,132,385 )   $ 685,763     $ 2,352,623     $ (77,380 )   $ —     $ (169,780 )   $ 22,160,101       $ (2,048,238 )
                                                                           
            * The Fund accounts for investments transferred into Level 3 at the value at the beginning of the period and transfers out of Level 3 at the value at the end of the period.
            ** Financial assets transferred between Level 2 and Level 3 were due to a change in observable and/or unobservable inputs.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from

         
18
       

 

 
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards, differing treatment of mutual fund distributions received, losses on wash sale transactions and partnership interest tax allocations.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 41,863,110     $ 61,240,647  
Net long-term capital gain
    —       1,384,125  
                 
Total distributions
  $ 41,863,110     $ 62,624,772  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 3,469,414  
         
Other Tax Attributes:
       
Capital loss carryforwards
  $ (121,807,735 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 28, 2018
  $ (111,308,319 )
February 28, 2019
    (10,499,416 )
         
Total
  $ (121,807,735 )
         

         
        19

 

 
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 3,118,649,481     $ 174,356,144     $ (122,360,935 )   $ 51,995,209      
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Income dividends and capital gain distributions from the underlying funds are recorded on the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (Note 5).

         
20
       

 

 
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
Purchases and redemptions of Fund shares
For the year ended February 28, 2011, the premium on cash purchases and fee on cash redemptions of Fund shares were each 0.09% of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by the Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. Such fees are recorded as a component of the Fund’s net share transactions. The Fund charges purchase premiums and redemption fees based on the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premiums and/or redemption fees, if any, imposed by the underlying funds in which it invests, provided that, if that weighted average is less than 0.05%, the Fund generally will not charge a purchase premium or redemption fee. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of the Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. All or a portion of the Fund’s purchase premiums and/or redemption fees may be waived at the Manager’s discretion when they are de minimis and/or the Manager deems it equitable to do so, including without limitation when the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premium and/or redemption fees, if any, imposed by the underlying funds are less than the purchase premium and/or redemption fee imposed by the Fund. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund’s shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund’s shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder’s securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of the Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.

         
        21

 

 
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. References to investments include those held directly by the Fund and indirectly through the Fund’s investments in the underlying funds. Some of the underlying funds are non-diversified investment companies under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by those funds may affect their performance more than if they were diversified. The principal risks of investing in the Fund are summarized below, including those risks to which the Fund is exposed as a result of its investments in the underlying funds. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Declines in stock market prices generally are likely to reduce the market value of the Fund’s investments.
 
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund or the underlying funds may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund or the underlying funds need to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund or the underlying funds to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund’s investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund’s investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
 
• Market Risk — Fixed Income Securities — From time to time, the Fund may allocate part or all of its assets to fixed income securities, which may include emerging country debt (including below investment grade securities (also known as “junk bonds”)). Typically, the value of fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
 
• Smaller Company Risk — From time to time, the Fund may allocate part or all of its assets to investments in companies with smaller market capitalizations. The securities of companies with smaller

         
22
       

 

 
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
market capitalizations often are less widely held and trade less frequently and in lesser quantities, and their market prices often fluctuate more, than the securities of companies with larger market capitalization.
 
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund or an underlying fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
 
• Derivatives Risk — The use of derivatives involves the risk that their value may not correlate with the value of the relevant underlying assets, rates or indices. Derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk.
 
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of foreign currency holdings and investments denominated in foreign currencies.
 
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in the underlying funds, including the risk that the underlying funds in which it invests do not perform as expected. Because the Fund bears the fees and expenses of the underlying funds in which it invests, new investments in underlying funds with higher fees or expenses than those of the underlying funds in which the Fund is currently invested will increase the Fund’s total expenses. The fees and expenses associated with an investment in the Fund are less predictable and may be higher than fees and expenses associated with an investment in funds that charge a fixed management fee.
 
Other principal risks of an investment in the Fund include Credit and Counterparty Risk (risk of default of an issuer of a portfolio security, a derivatives counterparty, or a borrower of the Fund’s securities); Commodities Risk (value of an underlying fund’s shares may be affected by factors particular to the commodities markets and may fluctuate more than the share value of a fund with a broader range of investments); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities lending); Market Risk — Value Securities (risk that the price of investments held by the Fund will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Market Risk — Growth Securities (greater price fluctuations resulting from dependence on future earnings expectations); Real Estate Risk (risk to an underlying fund that concentrates its assets in real estate-related investments that factors affecting the real estate industry may cause the value of the Fund’s investments to fluctuate more than if it invested in securities of companies in a broader range of industries); Short Sales Risk (risk that an underlying fund’s loss on the short sale of securities that it does not own is unlimited); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional

         
        23

 

 
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
 
The most significant market risk for Funds investing in fixed income securities is that the securities in which they invest experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund because it invests in asset-backed securities. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as “collateralized debt obligations” or “collateralized loan obligations”) and by the fees earned by service providers. Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. Many asset-backed securities owned (directly or indirectly) by the Fund that were once rated investment grade are now rated below investment grade as of the date of this report.
 
The existence of insurance on an asset-backed security does not guarantee that principal and/or interest will be paid because the insurer could default on its obligations. In recent years, a significant number of asset-backed security insurers have defaulted on their obligations.
 
With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.

         
24
       

 

 
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and a Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.
 
The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution’s business may have a material impact on multiple investments.
 
4. Derivative financial instruments
 
At February 28, 2011, the Fund held no derivative financial instruments directly. For a listing of derivative financial instruments held by the underlying funds, if any, please refer to the underlying funds’ Schedule of Investments.
 
5. Fees and other transactions with affiliates
 
The Manager decides how to allocate the assets of the Fund among underlying funds. The Manager does not charge the Fund a management fee or shareholder service fee, but it receives management and shareholder service fees from the underlying funds in which the Fund invests. Because those fees vary from fund to fund, the levels of indirect net expenses set forth below are affected by the Manager’s asset allocation decisions.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.00% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust’s Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). This

         
        25

 

 
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
contractual expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $42,979 and $13,854, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are in the Statement of Operations.
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
                   
Indirect Net
 		                 
Expenses
                  
(excluding
                  
shareholder service
     Indirect
            
fees and interest
     Shareholder
     Indirect Interest
     Total Indirect
expense)     Service Fees     Expense     Expenses
0.431%
    0.075%     0.006%     0.512%
                   
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments and class exchanges, for the year ended February 28, 2011 aggregated $1,712,985,445 and $395,922,767, respectively.
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, no shareholders owned more than 10% of the Fund’s outstanding shares.

         
26
       

 

 
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, 1.20% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and 97.31% of the Fund’s shares were held by accounts for which the Manager had investment discretion.
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    59,229,938     $ 1,321,541,427       8,076,509     $ 171,733,021  
Shares issued to shareholders in reinvestment of distributions
    1,774,179       39,532,172       2,477,429       52,843,672  
Shares repurchased
    (2,092,173 )     (46,216,911 )     (11,939,115 )     (249,496,352 )
Purchase premiums
    —       906,386       —       107,754  
Redemption fees
    —       7,799       —       648,480  
                                 
Net increase (decrease)
    58,911,944     $ 1,315,770,873       (1,385,177 )   $ (24,163,425 )
                                 

         
        27

 

 
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                         
    Value,
               Distributions
   Return
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   of
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   Capital   period
 
GMO Alpha Only Fund, Class IV
  $ 342,509,435     $ 304,454,268     $ 27,702,569     $ —     $ —     $ —     $ 599,996,684  
GMO Alternative Asset Opportunity Fund
    19,956,023       991,548       —       —       —       —       24,921,958  
GMO Asset Allocation Bond Fund, Class VI
    56,220,417       210,550,738       18,227,020       1,776,583       6,584,167       —       244,450,911  
GMO Currency Hedged International Equity Fund, Class III
    —       361,607,194       20,765,596       —       —       —       363,301,368  
GMO Emerging Country Debt Fund, Class IV
    33,345,891       19,799,779       —       5,732,831       —       —       54,942,811  
GMO Emerging Markets Fund, Class VI
    97,647,483       204,761,255       1,416,335       3,468,239       —       —       340,226,922  
GMO Flexible Equities Fund, Class VI
    50,721,211       17,384,969       —       744,701       —       —       72,002,968  
GMO International Small Companies Fund, Class III
    114,873,673       5,047,760       122,104,315       1,263,978       —       —       —  
GMO Quality Fund, Class VI
    661,825,731       309,494,493       182,526,819       10,601,237       —       —       851,695,924  
GMO Special Situations Fund, Class VI
    51,138,284       95,082,168       —       —       —       —       148,674,177  
GMO Strategic Fixed Income Fund, Class VI
    233,830,471       182,869,586       —       6,960,643       —       5,513,628       417,114,334  
GMO World Opportunity Overlay Fund
    19,805,899       941,687       —       —       —       —       22,044,262  
                                                         
Totals
  $ 1,681,874,518     $ 1,712,985,445     $ 372,742,654     $ 30,548,212     $ 6,584,167     $ 5,513,628     $ 3,139,372,319  
                                                         

         
28
       

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Benchmark-Free Allocation Fund:
 
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 Benchmark-Free Allocation Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
        29

 

GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including indirect management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
30
       

 

 
GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.52 %   $ 1,000.00     $ 1,086.30     $ 2.69  
2) Hypothetical
    0.52 %   $ 1,000.00     $ 1,022.22     $ 2.61  
                                 
 
            * Expenses are calculated using the Class’s annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
        31

 

GMO Benchmark-Free Allocation Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
For taxable, non-corporate shareholders, 36.73% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 represents qualified dividend income subject to the 15% rate category.
 
For corporate shareholders, 24.36% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 qualified for the dividends-received deduction.
 
The Fund hereby designates as qualified interest income with respect to its taxable year ended February 28, 2011, $6,334,759, or if determined to be different, the qualified interest income of such year.
 
Of the ordinary income distributions made by the Fund during the fiscal year ended February 28, 2011, 8.00% is derived from investments in U.S. Government and Agency Obligations. All or a portion of the distributions from this income may be exempt from taxation at the state level. Consult your tax advisor for state specific information.

         
32
       

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with the
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
        33

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with the
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
    
            Principal
   Portfolios in
    
            Occupation(s)
   Fund
  Other
Name and
   Position(s)
   Length of
   During Past
   Complex
   Directorships
Date of Birth   Held with Trust   Time Served   Five Years   Overseen   Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee; President
and Chief Executive
Officer of the
Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel,
Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005). 		    63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
34        

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003 – 2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        35

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money
Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
36
       

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO Core Plus Bond Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
The Class III shares of GMO Core Plus Bond Fund returned +10.9% for the fiscal year ended February 28, 2011, as compared with +4.9% for the Barclays Capital U.S. Aggregate Index.
 
The Fund’s investment exposure was achieved directly through a mix of bonds, futures and swaps, and indirectly through its investment in underlying GMO Trust mutual funds, primarily GMO Short-Duration Collateral Fund (SDCF), GMO World Opportunity Overlay Fund (Overlay Fund), and GMO Emerging Country Debt Fund (ECDF).
 
The Fund outperformed its benchmark during the fiscal year by 6.0%. Exposures to asset-backed securities held indirectly through SDCF and Overlay Fund were the largest positive contributors for the year, followed by positive contributions from the exposure to emerging country debt via ECDF, developed markets interest-rate positioning (primarily through exchange-traded futures and interest-rate swaps), and developed markets currency selection (primarily through currency forwards and options).
 
Approximately 4.3% of the outperformance derived from asset-backed securities held indirectly in SDCF and Overlay Fund. Asset-backed security spreads tightened and pricing and liquidity conditions in securitized credit markets improved during the fiscal year. SDCF and Overlay Fund experienced credit downgrades during the fiscal year: SDCF had 55 downgraded securities, and Overlay Fund had 35, representing 11% and 10% of their respective market values from the beginning of the fiscal year. At fiscal year-end, 52% of SDCF’s portfolio was rated AAA, and 72% of Overlay Fund’s was rated AAA.
 
A small exposure to emerging country debt through investment in ECDF added value due to positive contributions from both security and country selection within ECDF.
 
Developed markets interest-rate positioning also contributed positively to performance. Positive contributions from euro zone, Canadian, Swedish, and U.S. positions more than offset losses from Swiss, U.K., and Australian positions.
 
In developed markets currency selection, Australian dollar, Swedish krona, Norwegian krone, and Japanese yen positions drove gains, though this performance was offset somewhat by Swiss franc, Canadian dollar, pound sterling, euro, and opportunistic positions. These positions were achieved directly.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO Core Plus Bond Fund Class III Shares and the Barclays Capital U.S. Aggregate Index
As of February 28, 2011
 
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited. Performance for classes may vary due to different fees.
 

 

GMO Core Plus Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2010 (Unaudited)
 
         
Asset Class Summary*   % of Total Net Assets  
Debt Obligations
    93.1 %
Short-Term Investments
    7.3  
Options Purchased
    0.4  
Swap Agreements
    0.4  
Loan Participations
    0.2  
Loan Assignments
    0.1  
Rights and Warrants
    0.0 Ù
Promissory Notes
    0.0 Ù
Written Options
    (0.0 )
Forward Currency Contracts
    (0.3 )
Futures Contracts
    (0.7 )
Reverse Repurchase Agreements
    (1.4 )
Other
    0.9  
         
      100.0 %
         
 
         
Country / Region Summary**   % of Investments  
United States
    127.6 %
Emerging***
    4.3  
Canada
    3.9  
United Kingdom
    3.3  
New Zealand
    0.0 Ù
Norway
    0.0 Ù
Switzerland
    (2.6 )
Euro Region****
    (3.8 )
Sweden
    (8.9 )
Australia
    (11.1 )
Japan
    (12.7 )
         
      100.0 %
         
 
* The table above incorporates aggregate indirect asset class exposure associated with investments in the funds of GMO Trust (“underlying funds”).
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative financial instruments. The table excludes exposure through certain currency linked derivatives such as forward currency contracts and currency options. The table is based on duration adjusted exposures, taking into account the market value of securities and the notional amounts of swaps and other derivative financial instruments. For example, U.S. asset-backed securities represent a relatively small percentage due to their short duration, even though they represent a large percentage of market value (directly and indirectly). Duration is based on the Manager’s models. The greater the duration of a bond, the greater its contribution to the concentration percentage. Credit default swap exposures (both

         
        1

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2010 (Unaudited)
 
positive and negative) are factored into the duration-adjusted exposure using a reference security and applying the same methodology to that security.
*** The “Emerging” exposure is comprised of Argentina, Brazil, Chile, China, Colombia, Congo, Czech Republic, Dominican Republic, Egypt, Hungary, India, Indonesia, Malaysia, Mexico, Philippines, Russia, South Africa, Turkey and Venezuela. Additional information about the fund’s emerging country exposure is available in the financial statements of the GMO Emerging Country Debt Fund.
**** The “Euro Region” is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
Ù Rounds to 0.0%.

         
2
       

 

GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value     Description   Value ($)  
            DEBT OBLIGATIONS — 38.0%        
                     
            Albania — 2.5%        
            Foreign Government Obligations — 2.5%        
USD
    14,281,227     Republic of Albania Par Bond, Zero Coupon, due 08/31/25 (a)     5,712,491  
                     
                     
            Australia — 0.2%        
            Asset-Backed Securities — 0.2%        
USD
    203,443     Crusade Global Trust, Series 07-1, Class A1, 3 mo. LIBOR + .06%, 0.36%,
due 04/19/38 		    195,573  
USD
    282,588     Medallion Trust, Series 05-1G, Class A1, 3 mo. LIBOR + .08%, 0.39%,
due 05/10/36 		    272,985  
                     
                  468,558  
                     
            Total Australia     468,558  
                     
                     
            United Kingdom — 0.4%        
            Asset-Backed Securities — 0.4%        
USD
    580,674     Brunel Residential Mortgages, Series 07-1A, Class A4C, 144A, 3 mo.
LIBOR + .10%, 0.40%, due 01/13/39 		    523,942  
USD
    35,932     Granite Master Issuer Plc, Series 06-2, Class A4, 1 mo. LIBOR + .04%, 0.30%, due 12/20/54     33,956  
USD
    300,000     Permanent Master Issuer Plc, Series 07-1, Class 4A, 3 mo. LIBOR + .08%, 0.38%, due 10/15/33     296,940  
                     
                  854,838  
                     
            Total United Kingdom     854,838  
                     
                     
            United States — 34.9%        
            Asset-Backed Securities — 4.1%        
USD
    297,061     Alliance Bancorp Trust, Series 07-S1, Class A1, 144A, 1 mo. LIBOR + .20%, 0.46%, due 05/25/37     37,608  
USD
    190,482     AmeriCredit Automobile Receivables Trust, Series 07-AX, Class A4, XL, 1 mo. LIBOR + .04%, 0.30%, due 10/06/13     189,434  
USD
    1,059,049     Argent Securities, Inc., Series 06-M1, Class A2C, 1 mo. LIBOR + .15%, 0.41%, due 07/25/36     464,658  
USD
    886,639     Argent Securities, Inc., Series 06-W5, Class A2C, 1 mo. LIBOR + .15%, 0.41%, due 06/25/36     340,525  

         
    See accompanying notes to the financial statements.   3

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value     Description   Value ($)  
            Asset-Backed Securities — continued        
USD
    105,670     Argent Securities, Inc., Series 06-M2, Class A2B, 1 mo. LIBOR + .11%, 0.37%, due 09/25/36     40,683  
USD
    150,716     Bayview Commercial Asset Trust, Series 05-4A, Class A2, 144A, 1 mo.
LIBOR + .39%, 0.65%, due 01/25/36 		    117,558  
USD
    154,341     Capital Auto Receivable Asset Trust, Series 07-2, Class A4B, 1 mo.
LIBOR + .40%, 0.67%, due 02/18/14 		    154,512  
USD
    500,000     Charming Shoppes Master Trust, Series 07-1A, Class A1, 144A, 1 mo.
LIBOR + 1.25%, 1.52%, due 09/15/17 		    500,000  
USD
    300,000     College Loan Corp. Trust, Series 07-2, Class A1, 3 mo. LIBOR + .25%, 0.55%, due 01/25/24     299,661  
USD
    595,961     Crest Exeter Street Solar, Series 04-1A, Class A1, 144A, 3 mo.
LIBOR + .35%, 0.65%, due 06/28/19 		    575,478  
USD
    300,000     Daimler Chrysler Auto Trust, Series 08-B, Class A4B, 1 mo.
LIBOR + 1.85%, 2.11%, due 11/10/14 		    303,357  
USD
    685,352     First Franklin Mortgage Loan Asset Backed Certificates, Series 06-FF5, Class 2A3, 1 mo. LIBOR + .16%, 0.42%, due 04/25/36     506,090  
USD
    56,811     Ford Credit Auto Owner Trust, Series 06-C, Class A4B, 1 mo.
LIBOR + .04%, 0.31%, due 02/15/12 		    56,804  
USD
    500,000     Ford Credit Floorplan Master Owner Trust, Series 06-4, Class A, 1 mo.
LIBOR + .25%, 0.52%, due 06/15/13 		    497,821  
USD
    100,000     Fremont Home Loan Trust, Series 06-B, Class 2A3, 1 mo. LIBOR + .16%, 0.42%, due 08/25/36     41,750  
USD
    403,188     Fremont Home Loan Trust, Series 06-A, Class 1A2, 1 mo. LIBOR + .20%, 0.46%, due 05/25/36     274,357  
USD
    828,300     GE Business Loan Trust, Series 05-2A, Class A, 144A, 1 mo.
LIBOR + .24%, 0.51%, due 11/15/33 		    716,480  
USD
    800,000     GS Mortgage Securities Corp., Series 07-EOP, Class A2, 144A, 1 mo.
LIBOR + .57%, 1.32%, due 03/06/20 		    787,040  
USD
    170,551     Master Asset-Backed Securities Trust, Series 06-FRE2, Class A4, 1 mo.
LIBOR + .15%, 0.41%, due 03/25/36 		    99,772  
USD
    700,000     Master Asset-Backed Securities Trust, Series 06-HE2, Class A3, 1 mo.
LIBOR + .15%, 0.41%, due 06/25/36 		    266,000  
USD
    500,000     Morgan Stanley Capital, Inc., Series 07-HE4, Class A2C, 1 mo.
LIBOR + .23%, 0.49%, due 02/25/37 		    192,500  
USD
    300,000     National City Credit Card Master Trust, Series 08-3, Class A, 1 mo.
LIBOR + 1.80%, 2.07%, due 05/15/13 		    301,125  

         
4
  See accompanying notes to the financial statements.    

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value     Description   Value ($)  
            Asset-Backed Securities — continued        
USD
    155,950     National Collegiate Student Loan Trust, Series 06-1, Class A2, 1 mo.
LIBOR + .14%, 0.40%, due 08/25/23 		    152,831  
USD
    71,211     Residential Asset Securities Corp., Series 07-KS3, Class AI1, 1 mo.
LIBOR + .11%, 0.37%, due 04/25/37 		    70,122  
USD
    68,975     Residential Funding Mortgage Securities II, Series 03-HS1, Class AII, FGIC, 1 mo. LIBOR + .29%, 0.55%, due 12/25/32     30,211  
USD
    131,336     SBI Heloc Trust, Series 05-HE1, Class 1A, 144A, FSA, 1 mo.
LIBOR + .19%, 0.45%, due 11/25/35 		    96,400  
USD
    344,591     Sierra Receivables Funding Co., Series 06-1A, Class A2, 144A, MBIA, 1 mo. LIBOR + .15%, 0.41%, due 05/20/18     326,138  
USD
    319,927     SLM Student Loan Trust, Series 07-A, Class A1, 3 mo. LIBOR + .03%, 0.33%, due 09/15/22     314,328  
USD
    51,007     Structured Asset Securities Corp., Series 05-S6, Class A2, 1 mo.
LIBOR + .29%, 0.55%, due 11/25/35 		    43,101  
USD
    400,000     Triad Auto Receivables Owner Trust, Series 07-B, Class A4B, FSA, 1 mo. LIBOR + 1.20%, 1.46%, due 07/14/14     403,708  
USD
    800,000     Wachovia Auto Owner Trust, Series 08-A, Class A4B, 1 mo.
LIBOR + 1.15%, 1.41%, due 03/20/14 		    806,080  
USD
    400,000     World Financial Network Credit Card Master Trust, Series 06-A, Class A, 144A, 1 mo. LIBOR + .13%, 0.40%, due 02/15/17     393,044  
                     
                  9,399,176  
                     
            Total Asset-Backed Securities     10,722,572  
                     
                     
            Corporate Debt — 0.6%        
USD
    106,936     CIT Group, Inc., 7.00%, due 05/01/13     109,075  
USD
    210,405     CIT Group, Inc., 7.00%, due 05/01/14     214,087  
USD
    210,405     CIT Group, Inc., 7.00%, due 05/01/15     213,035  
USD
    350,676     CIT Group, Inc., 7.00%, due 05/01/16     353,727  
USD
    490,947     CIT Group, Inc., 7.00%, due 05/01/17     495,219  
                     
                  1,385,143  
                     
                     
            U.S. Government — 30.2%        
USD
    18,252,845     U.S. Treasury Inflation Indexed Note, 2.00%, due 04/15/12 (b) (c)     19,062,815  
USD
    30,000,000     U.S. Treasury Note, 2.50%, due 03/31/15     30,963,300  

         
    See accompanying notes to the financial statements.   5

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
Par Value /
 		           
Principal Amount /
 		           
Shares     Description   Value ($)  
            U.S. Government — continued        
USD
    10,100,000     U.S. Treasury Receipts, 0.00%, due 02/15/12 (d)     9,971,839  
USD
    10,100,000     U.S. Treasury Receipts, 0.00%, due 08/15/12 (d)     9,885,009  
                     
                  69,882,963  
                     
            Total United States     80,667,282  
                     
                     
            TOTAL DEBT OBLIGATIONS (COST $85,140,960)     87,703,169  
                     
                     
            OPTIONS PURCHASED — 0.1%        
                     
            Currency Options — 0.1%        
AUD
         18,200,000     AUD Put/USD Call, Expires 05/12/11, Strike 0.95     97,210  
                     
                     
            TOTAL OPTIONS PURCHASED (COST $687,680)     97,210  
                     
                     
            MUTUAL FUNDS — 60.0%        
                     
            United States — 60.0%        
            Affiliated Issuers — 60.0%        
      779,088     GMO Emerging Country Debt Fund, Class IV     7,081,912  
      7,417,054     GMO Short-Duration Collateral Fund     76,989,022  
      93,858     GMO Special Purpose Holding Fund (e)     46,929  
      302,828     GMO U.S. Treasury Fund     7,570,707  
      2,073,829     GMO World Opportunity Overlay Fund     47,034,438  
                     
            Total United States     138,723,008  
                     
                     
            TOTAL MUTUAL FUNDS (COST $144,130,874)     138,723,008  
                     
                     
            SHORT-TERM INVESTMENTS — 0.6%        
            Money Market Funds — 0.2%        
      477,651     State Street Institutional Treasury Plus Money Market Fund-Institutional Class     477,651  
                     

         
6
  See accompanying notes to the financial statements.    

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value     Description   Value ($)  
                     
            U.S. Government — 0.4%        
USD
    1,000,000     U.S. Treasury Bill, 0.14%, due 11/17/11 (b) (f)     998,659  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $1,475,802)     1,476,310  
                     
                     
            TOTAL INVESTMENTS — 98.7%
(Cost $231,435,316) 		    227,999,697  
            Other Assets and Liabilities (net) — 1.3%     3,106,458  
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 231,106,155  
                     
 
A summary of outstanding financial instruments at February 28, 2011 is as follows:
 
Forward Currency Contracts
 
                                     
                    Net Unrealized
Settlement
 		                  Appreciation
Date   Counterparty   Deliver/Receive   Units of Currency   Value   (Depreciation)
 
Buys †
                                   
3/22/11
    Deutsche Bank AG     AUD     2,500,000     $ 2,539,121     $ 64,996  
3/22/11
    Citibank N.A.     AUD     2,500,000       2,539,121       27,546  
3/29/11
    Deutsche Bank AG     CAD     2,200,000       2,263,139       16,704  
5/03/11
    Citibank N.A.     CHF     900,000       969,210       406  
3/01/11
    Royal Bank of Scotland PLC     CHF     2,100,000       2,260,252       60,204  
5/03/11
    Royal Bank of Scotland PLC     CHF     1,100,000       1,184,590       (3,931 )
3/01/11
    Deutsche Bank AG     CHF     5,300,000       5,704,445       (34,591 )
3/08/11
    Royal Bank of Scotland PLC     EUR     4,300,000       5,933,339       67,033  
3/08/11
    Deutsche Bank AG     EUR     800,000       1,103,877       5,557  
3/08/11
    Citibank N.A.     EUR     7,500,000       10,348,847       276,847  
4/05/11
    Deutsche Bank AG     GBP     300,000       487,561       10,561  
4/05/11
    Citibank N.A.     GBP     700,000       1,137,641       10,193  
4/05/11
    Royal Bank of Scotland PLC     GBP     1,400,000       2,275,283       21,094  
3/15/11
    Citibank N.A.     JPY     60,000,000       733,509       496  
3/15/11
    Deutsche Bank AG     JPY     100,800,000       1,232,295       7,988  
4/19/11
    Deutsche Bank AG     NZD     10,700,000       8,023,125       (146,272 )
                                 
                        $ 48,735,355     $ 384,831  
                                 

         
    See accompanying notes to the financial statements.   7

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Forward Currency Contracts — continued
 
                                     
                    Net Unrealized
Settlement
 		                  Appreciation
Date   Counterparty   Deliver/Receive   Units of Currency   Value   (Depreciation)
 
Sales #
                                   
3/22/11
    Royal Bank of Scotland PLC     AUD     1,500,000     $ 1,523,473     $ (49,603 )
3/22/11
    Deutsche Bank AG     AUD     1,200,000       1,218,778       (17,434 )
3/29/11
    Royal Bank of Scotland PLC     CAD     1,600,000       1,645,920       (40,831 )
3/29/11
    Deutsche Bank AG     CAD     2,700,000       2,777,489       (78,681 )
3/01/11
    Citibank N.A.     CHF     7,400,000       7,964,697       (543,038 )
5/03/11
    Deutsche Bank AG     CHF     5,300,000       5,707,570       34,793  
3/08/11
    Royal Bank of Scotland PLC     EUR     500,000       689,923       (15,078 )
3/08/11
    Deutsche Bank AG     EUR     2,500,000       3,449,616       (151,552 )
4/05/11
    Royal Bank of Scotland PLC     GBP     600,000       975,121       (13,195 )
4/05/11
    Deutsche Bank AG     GBP     300,000       487,561       (256 )
3/15/11
    Royal Bank of Scotland PLC     JPY     100,000,000       1,222,515       (9,085 )
3/15/11
    Citibank N.A.     JPY     90,000,000       1,100,263       (6,584 )
3/15/11
    Deutsche Bank AG     JPY     200,000,000       2,445,030       (16,814 )
4/19/11
    Royal Bank of Scotland PLC     NZD     5,400,000       4,049,053       (11,507 )
                                 
                        $ 35,257,009     $ (918,865 )
                                 
 
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
 
Forward Cross Currency Contracts
 
                                             
                Net Unrealized
Settlement
 		              Appreciation
Date   Counterparty   Deliver/Units of Currency   Receive/In Exchange For   (Depreciation)
 
      Royal Bank of                                      
4/12/11
    Scotland PLC     NOK     9,498,710       EUR       1,200,000     $ (37,392 )
      Royal Bank of                                      
4/26/11
    Scotland PLC     SEK     4,378,270       EUR       500,000       85  
4/12/11
    Deutsche Bank AG     EUR     5,200,000       NOK       40,792,180       96,302  
4/26/11
    Deutsche Bank AG     EUR     6,700,000       SEK       58,511,000       (25,998 )
                                         
                                        $ 32,997  
                                         

         
8
  See accompanying notes to the financial statements.    

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Futures Contracts
 
                             
                Net Unrealized
Number of
 		      Expiration
 		  Contract
 		  Appreciation
Contracts   Type   Date   Value   (Depreciation)
 
Buys
                           
52
    Canadian Government Bond 10 Yr.     June 2011   $ 6,435,572     $ 30,391  
40
    UK Gilt Long Bond     June 2011     7,587,228       15,246  
                         
                $ 14,022,800     $ 45,637  
                         
Sales
                           
45
    Australian Government Bond 10 Yr.     March 2011   $ 4,756,088     $ (51,688 )
92
    Australian Government Bond 3 Yr.     March 2011     9,598,763       (34,777 )
13
    Euro BOBL     March 2011     2,102,133       (393 )
27
    Euro Bund     March 2011     4,624,543       (444 )
15
    Japanese Government Bond 10 Yr. (TSE)     March 2011     25,586,456       80,485  
55
    U.S. Treasury Bond 30 Yr. (CBT)     March 2011     6,706,562       182,526  
43
    U.S. Treasury Note 10 Yr. (CBT)     June 2011     5,119,016       (11,215 )
287
    U.S. Treasury Note 5 Yr. (CBT)     June 2011     33,561,063       (73,474 )
136
    U.S. Treasury Note 2 Yr. (CBT)     June 2011     29,688,375       (32,283 )
                         
                $ 121,742,999     $ 58,737  
                         
 
Written Options
 
A summary of open written option contracts for the Fund at February 28, 2011 is as follows:
 
Currency Options
 
                                     
    Principal
 		  Expiration
 		              Market
    Amount   Date       Description   Premiums   Value
 
Put
    18,200,000     05/12/2011   AUD   AUD Put/USD Call, Strike, 0.89   $ (358,868 )   $ (28,592 )
                                     

         
    See accompanying notes to the financial statements.   9

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Swap Agreements
 
Credit Default Swaps
 
                                                     
                            Maximum
 		   
                            Potential
 		   
                            Amount of
 		   
                            Future
 		   
                            Payments
 		   
                        Implied
 		      by the Fund
 		   
Notional
 		  Expiration
 		      Receive
 		  Annual
 		  Credit
 		  Deliverable
 		  Under the
 		  Market
Amount   Date   Counterparty   (Pay)Ù   Premium   Spread (1)   on Default   Contract (2)   Value
 
  2,000,000     USD   6/20/2011   Barclays Bank PLC   Receive   0.30%   0.13%   Prologis     2,000,000     USD   $ 2,236  
  2,000,000     USD   6/20/2011   UBS AG   Receive   0.26%   0.12%   ERP Operating LP     2,000,000     USD     1,873  
  2,000,000     USD   12/20/2013   Barclays Bank PLC   Receive   0.25%   1.77%   SLM Corp.     2,000,000     USD     (82,455 )
                                                     
                                                $ (78,346 )
                                                     
Premiums to (Pay) Receive
  $  —  
         
 
Ù Receive - Fund receives premium and sells credit protection. If a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.
(Pay) - Fund pays premium and buys credit protection. If a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) receive from the seller of protection an amount equal to the notional amount of the swap and deliver the referenced obligation or underlying securities comprising the referenced index or (ii) receive a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.
(1) Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on the reference security, as of February 28, 2011, serve as an indicator of the current status of the payment/performance risk and reflect the likelihood or risk of default for the reference entity. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection. Wider (i.e.higher) credit spreads represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.
(2) The maximum potential amount the Fund could be required to pay as a seller of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.

         
10
  See accompanying notes to the financial statements.    

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Interest Rate Swaps
 
                                     
Notional
 		  Expiration
 		      Receive
 		          Market
Amount   Date   Counterparty   (Pay)#   Fixed Rate   Variable Rate   Value
 
  57,900,000     SEK   3/16/2016   Citibank N.A.   (Pay)   2.60%   3 Month SEK STIBOR   $ 393,488  
  76,900,000     SEK   3/16/2016   Barclays Bank PLC   (Pay)   2.60%   3 Month SEK STIBOR     522,612  
                JPMorgan Chase                    
  200,000     CHF   3/16/2016   Bank, N.A.   Receive   1.30%   6 Month CHF LIBOR     (3,067 )
  1,400,000     CHF   3/16/2016   Barclays Bank PLC   Receive   1.30%   6 Month CHF LIBOR     (21,465 )
                                     
                                $ 891,568  
                                     
Premiums to (Pay) Receive
  $ (444,085 )
         
 
# Receive - Fund receives fixed rate and pays variable rate.
(Pay) - Fund pays fixed rate and receives variable rate.
 
Total Return Swaps
 
                                 
Notional
 		  Expiration
 		              Market
Amount   Date   Counterparty   Fund Pays   Fund Receives   Value
 
  250,000,000     USD   8/19/2011   Morgan Stanley
Capital Services Inc 		  3 month
LIBOR − 0.01% 		  Barclays Capital Aggregate
Total Return Index 		  $ 2,107,890  
                                 
Premiums to (Pay) Receive
  $ —  
         
 
As of February 28, 2011, for forward currency contracts, futures contracts, swap agreements, and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
 
Notes to Schedule of Investments:
 
144A - Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors.
BOBL - Bundesobligationen
CBT - Chicago Board of Trade
CHF LIBOR - London Interbank Offered Rate denominated in Swiss Franc.
FGIC - Insured as to the payment of principal and interest by Financial Guaranty Insurance Corporation.
FSA - Insured as to the payment of principal and interest by Financial Security Assurance.
LIBOR - London Interbank Offered Rate

         
    See accompanying notes to the financial statements.   11

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
MBIA - Insured as to the payment of principal and interest by MBIA Insurance Corp.
SEK STIBOR - Stockholm Interbank Offered Rate denominated in Swedish Krona.
TSE - Tokyo Stock Exchange
XL - Insured as to the payment of principal and interest by XL Capital Assurance.
The rates shown on variable rate notes are the current interest rates at February 28, 2011, which are subject to change based on the terms of the security.
(a) Security is backed by the U.S. Government.
(b) All or a portion of this security has been pledged to cover margin requirements on open financial futures contracts and/or collateral on open swap contracts.
(c) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
(d) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust.
(e) Underlying investment represents interests in defaulted claims.
(f) Rate shown represents yield-to-maturity.
 
Currency Abbreviations:
 
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
EUR - Euro
GBP - British Pound
JPY - Japanese Yen
NOK - Norwegian Krone
NZD - New Zealand Dollar
SEK - Swedish Krona
USD - United States Dollar

         
12
  See accompanying notes to the financial statements.    

 

GMO Core Plus Bond Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $87,304,442) (Note 2)
  $ 89,276,689  
Investments in affiliated issuers, at value (cost $144,130,874) (Notes 2 and 10)
    138,723,008  
Receivable for investments sold
    500,000  
Dividends and interest receivable
    468,206  
Dividends receivable from affiliated issuer
    975  
Unrealized appreciation on open forward currency contracts (Note 4)
    700,805  
Receivable for open swap contracts (Note 4)
    3,028,099  
Receivable for expenses reimbursed by Manager (Note 5)
    32,657  
         
Total assets
    232,730,439  
         
         
Liabilities:
       
Payable for investments purchased
    560  
Payable to affiliate for (Note 5):
       
Management fee
    43,924  
Shareholder service fee
    19,385  
Trustees and Trust Officers or agents unaffiliated with the Manager
    571  
Payable to broker for closed futures contracts
    34,484  
Payable for variation margin on open futures contracts (Note 4)
    69,602  
Unrealized depreciation on open forward currency contracts (Note 4)
    1,201,842  
Payable for open swap contracts (Note 4)
    106,987  
Written options outstanding, at value (premiums $358,868) (Note 4)
    28,592  
Accrued expenses
    118,337  
         
Total liabilities
    1,624,284  
         
Net assets
  $ 231,106,155  
         

         
    See accompanying notes to the financial statements.   13

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011 — (Continued)
 
         
Net assets consist of:
       
Paid-in capital
  $ 416,878,839  
Accumulated undistributed net investment income
    2,909,781  
Accumulated net realized loss
    (187,657,688 )
Net unrealized depreciation
    (1,024,777 )
         
    $ 231,106,155  
         
Net assets attributable to:
       
Class III shares
  $ 47,772,705  
         
Class IV shares
  $ 183,333,450  
         
Shares outstanding:
       
Class III
    6,581,389  
         
Class IV
    25,213,597  
         
Net asset value per share:
       
Class III
  $ 7.26  
         
Class IV
  $ 7.27  
         

         
14
  See accompanying notes to the financial statements.    

 

GMO Core Plus Bond Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Interest
  $ 3,263,019  
Dividends from affiliated issuers (Note 10)
    2,459,846  
Dividends
    25,315  
         
Total investment income
    5,748,180  
         
Expenses:
       
Management fee (Note 5)
    786,320  
Shareholder service fee – Class III (Note 5)
    80,225  
Shareholder service fee – Class IV (Note 5)
    261,045  
Custodian, fund accounting agent and transfer agent fees
    168,310  
Audit and tax fees
    92,031  
Legal fees
    15,978  
Trustees fees and related expenses (Note 5)
    7,260  
Registration fees
    1,380  
Miscellaneous
    10,717  
         
Total expenses
    1,423,266  
Fees and expenses reimbursed by Manager (Note 5)
    (283,403 )
Expense reductions (Note 2)
    (34 )
Indirectly incurred fees waived or borne by Manager (Note 5)
    (45,474 )
Shareholder service fee waived (Note 5)
    (10,683 )
         
Net expenses
    1,083,672  
         
Net investment income (loss)
    4,664,508  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in unaffiliated issuers
    (151,623 )
Investments in affiliated issuers
    (3,166,383 )
Realized gains distributions from affiliated issuers (Note 10)
    6,442  
Futures contracts
    3,845,215  
Swap contracts
    11,448,819  
Foreign currency, forward contracts and foreign currency related transactions
    1,372,720  
         
Net realized gain (loss)
    13,355,190  
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in unaffiliated issuers
    1,233,547  
Investments in affiliated issuers
    15,374,896  
Futures contracts
    (114,652 )
Written options
    330,276  
Swap contracts
    678,908  
Foreign currency, forward contracts and foreign currency related transactions
    (813,010 )
         
Net unrealized gain (loss)
    16,689,965  
         
Net realized and unrealized gain (loss)
    30,045,155  
         
Net increase (decrease) in net assets resulting from operations
  $ 34,709,663  
         

         
    See accompanying notes to the financial statements.   15

 

GMO Core Plus Bond Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 4,664,508     $ 4,962,892  
Net realized gain (loss)
    13,355,190       8,917,779  
Change in net unrealized appreciation (depreciation)
    16,689,965       58,972,164  
                 
                 
Net increase (decrease) in net assets from operations
    34,709,663       72,852,835  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (3,608,961 )     (5,147,569 )
Class IV
    (18,732,766 )     (23,853,558 )
                 
Total distributions from net investment income
    (22,341,727 )     (29,001,127 )
                 
Net share transactions (Note 9):
               
Class III
    (10,173,273 )     (25,871,935 )
Class IV
    (103,777,751 )     7,038,788  
                 
Increase (decrease) in net assets resulting from net share transactions
    (113,951,024 )     (18,833,147 )
                 
Redemption fees (Notes 2 and 9):
               
Class III
    —       16,973  
Class IV
    —       75,321  
                 
Increase in net assets resulting from redemption fees
    —       92,294  
                 
Total increase (decrease) in net assets resulting from net share transactions and redemption fees
    (113,951,024 )     (18,740,853 )
                 
Total increase (decrease) in net assets
    (101,583,088 )     25,110,855  
                 
Net assets:
               
Beginning of period
    332,689,243       307,578,388  
                 
End of period (including accumulated undistributed net investment income of 2,909,781 and distributions in excess of net investment income of $5,812,484, respectively)
  $ 231,106,155     $ 332,689,243  
                 

         
16
  See accompanying notes to the financial statements.    

 

GMO Core Plus Bond Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 7.02     $ 6.08     $ 9.42     $ 10.49     $ 10.32  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)(a)†
    0.11       0.05       0.27       0.37       0.43  
Net realized and unrealized gain (loss)
    0.65       1.51       (2.08 )     (0.63 )     0.27  
                                         
                                         
Total from investment operations
    0.76       1.56       (1.81 )     (0.26 )     0.70  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.52 )     (0.62 )     (1.53 )     (0.81 )     (0.53 )
                                         
                                         
Total distributions
    (0.52 )     (0.62 )     (1.53 )     (0.81 )     (0.53 )
                                         
                                         
Net asset value, end of period
  $ 7.26     $ 7.02     $ 6.08     $ 9.42     $ 10.49  
                                         
                                         
Total Return(b)
    10.93 %     26.84 %     (20.12 )%     (2.56 )%     6.85 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 47,773     $ 55,839     $ 73,730     $ 125,506     $ 187,045  
Net operating expenses to average daily net assets(c)
    0.39 %(d)     0.38 %(d)     0.39 %(d)     0.39 %(d)     0.39 %
Interest expense to average daily net assets
    —       0.02 %(e)     —       —       —  
Total net expenses to average daily net assets(c)
    0.39 %(d)     0.40 %(d)     0.39 %(d)     0.39 %(d)     0.39 %
Net investment income (loss) to average daily net assets(a)
    1.48 %     0.77 %     3.20 %     3.70 %     4.11 %
Portfolio turnover rate
    46 %     58 %     22 %     44 %     72 %
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets:
    0.11 %     0.09 %     0.08 %     0.06 %     0.06 %
Redemption fees consisted of the following per share amounts:†
  $ —     $ 0.00 (f)   $ 0.01     $ —     $ —  
 
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(d) The net expense ratio does not include the effect of expense reductions (Note 2).
(e) Interest expense incurred as a result of entering into reverse repurchase agreements and payables owed to Lehman Brothers in connection with the termination of derivative contracts in 2008 is included in the Fund’s net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income.
(f) Redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.

         
    See accompanying notes to the financial statements.   17

 

GMO Core Plus Bond Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class IV share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 7.03     $ 6.09     $ 9.44     $ 10.50     $ 10.33  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)(a)†
    0.11       0.12       0.17       0.36       0.45  
Net realized and unrealized gain (loss)
    0.65       1.45       (1.99 )     (0.61 )     0.26  
                                         
                                         
Total from investment operations
    0.76       1.57       (1.82 )     (0.25 )     0.71  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.52 )     (0.63 )     (1.53 )     (0.81 )     (0.54 )
                                         
                                         
Total distributions
    (0.52 )     (0.63 )     (1.53 )     (0.81 )     (0.54 )
                                         
                                         
Net asset value, end of period
  $ 7.27     $ 7.03     $ 6.09     $ 9.44     $ 10.50  
                                         
                                         
Total Return(b)
    10.97 %     26.87 %     (20.23 )%     (2.42 )%     6.90 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 183,333     $ 276,850     $ 233,848     $ 1,017,792     $ 2,182,618  
Net operating expenses to average daily net assets(c)
    0.34 %(d)     0.33 %(d)     0.34 %(d)     0.34 %(d)     0.34 %
Interest expense to average daily net assets
    —       0.02 %(e)     —       —       —  
Total net expenses to average daily net assets(c)
    0.34 %(d)     0.35 %(d)     0.34 %(d)     0.34 %(d)     0.34 %
Net investment income (loss) to average daily net assets(a)
    1.48 %     1.78 %     1.89 %     3.60 %     4.33 %
Portfolio turnover rate
    46 %     58 %     22 %     44 %     72 %
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets:
    0.11 %     0.09 %     0.08 %     0.06 %     0.06 %
Redemption fees consisted of the following per share amounts:†
  $ —     $ 0.00 (f)   $ 0.01     $ —     $ —  
 
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(d) The net expense ratio does not include the effect of expense reductions (Note 2).
(e) Interest expense incurred as a result of entering into reverse repurchase agreements and payables owed to Lehman Brothers in connection with the termination of derivative contracts in 2008 is included in the Fund’s net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income.
(f) Redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.

         
18
  See accompanying notes to the financial statements.    

 

GMO Core Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO Core Plus Bond Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund seeks total return in excess of that of its benchmark, the Barclays Capital U.S. Aggregate Index. The Fund’s investment program has two principal components. One component of the investment program is designed to approximate the return of the Fund’s benchmark. The second component seeks to add value relative to that benchmark by exploiting misvaluations in global markets (e.g., global interest rates, sectors, currencies, credit and emerging country debt markets) beyond those represented in the Fund’s benchmark. As a result, the Fund’s interest rate, sector, credit and currency exposures will differ from those of its benchmark.
 
The Manager seeks to determine the relative values of the interest rate and currency markets, to determine currency and interest rate exposures, and to identify investments the Manager believes are undervalued or are likely to provide downside protection. The Manager selects investments based on an evaluation of various factors including, but not limited to, fundamental factors such as inflation and current account positions, as well as price-based factors such as interest and exchange rates.
 
Under normal circumstances, the Fund invests directly and indirectly (e.g., through the GMO funds in which the Fund invests, collectively referred to as the “underlying funds,” or derivatives) at least 80% of its assets in bonds. The term “bond” refers to any fixed income security, which includes (i) obligations of an issuer to make payments of principal and/or interest on future dates, (ii) synthetic debt instruments created by the Manager by using derivatives (e.g., a futures contract, swap contract, currency forward or option), and (iii) instruments with variable interest payments.
 
The Fund may implement its investment program by investing in or holding: exchange-traded and over-the-counter (“OTC”) derivatives, including without limitation, futures contracts, currency options, interest rate options, currency forwards, reverse repurchase agreements, credit default swaps, and other swap contracts (to gain exposure to the global interest rate, credit, and currency markets); investment-grade bonds denominated in various currencies, including foreign and U.S. government securities, asset-backed securities issued by foreign governments and U.S. government agencies (including securities neither guaranteed nor insured by the U.S. government), corporate bonds, and mortgage-backed and other asset-backed securities issued by private issuers; shares of GMO Short-Duration Collateral Fund (“SDCF”) (a fund that invests primarily in asset-backed securities); shares of GMO World Opportunity Overlay Fund (“Overlay Fund”) (to attempt to exploit misvaluations in world interest rates, currencies and credit

         
        19

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
markets); shares of GMO Emerging Country Debt Fund (“ECDF”) (to gain exposure to emerging country debt markets); shares of GMO High Quality Short-Duration Bond Fund (to seek to generate a return in excess of that of the J.P. Morgan U.S. 3 Month Cash Index by investing in a wide variety of high quality U.S. and foreign debt investments); shares of GMO Debt Opportunities Fund (to seek to generate a positive return by investing in a wide variety of U.S. and foreign debt investments without regard to the credit quality of the investment); and shares of GMO U.S. Treasury Fund (for liquidity management purposes). In addition, the Fund may invest in unaffiliated money market funds.
 
Historically, the Fund has used derivatives and investments in other GMO Funds as the principal means to gain investment exposure. As a result, the Fund has substantial holdings of SDCF (a fund that invests primarily in asset-backed securities) and Overlay Fund (a fund that invests in asset-backed securities and uses derivatives to attempt to exploit misvaluations in world interest rates, currencies and credit markets). Because of the deterioration in credit markets that became acute in 2008, the Fund, including through its investment in SDCF and Overlay Fund, currently has and may continue to have material exposure to below investment grade securities. This is in addition to the Fund’s below investment grade emerging country debt investments. The Fund is not limited in its use of derivatives or in the absolute face value of its derivatives positions, and, as a result, the Fund may be leveraged in relation to its assets.
 
The Manager normally seeks to maintain the Fund’s estimated interest rate duration within +/- 2 years of the benchmark’s duration. The Fund, if deemed prudent by the Manager, will take temporary defensive measures until the Manager has determined that normal conditions have returned or that it is otherwise prudent to resume investing in accordance with the Fund’s normal investment strategies. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
 
Throughout the year ended February 28, 2011, the Fund had two classes of shares outstanding: Class III and Class IV. Each class of shares bears a different shareholder service fee.
 
The financial statements of the underlying funds should be read in conjunction with the Fund’s financial statements. These financial statements are available, without charge, upon request by calling (617) 346-7646 (collect) or at gmo.com. As of February 28, 2011, shares of SDCF, Overlay Fund and GMO Special Purpose Holding Fund (“SPHF”) were not publicly available for direct purchase.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.

         
20
       

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the over-the-counter (“OTC”) market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of February 28, 2011, the total value of securities held directly and indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 9.5% of net assets. The Fund and the underlying funds classify such securities (as defined below) as Level 3. During the year ended February 28, 2011, the Manager has evaluated the Fund’s OTC derivatives contracts and determined that no reduction in value was warranted on account of the creditworthiness of a counterparty. See Note 4 for a further discussion on valuation of derivative financial instruments.
 
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. Although alternative prices are available for securities held by the Fund and the underlying funds, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by the Fund and the underlying funds. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fund and the underlying funds. As of February 28, 2011, the total value of securities held directly and indirectly for which no alternative pricing source was available represented 8.2% of the net assets of the Fund.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

         
        21

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include most recent bid prices, interest rates, prepayment speeds, credit risk, yield curves and similar data. The Fund also used third party valuation services (which use industry models and inputs from pricing vendors) to value credit default swaps.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund utilized a number of fair value techniques on Level 3 investments, including the following: The Fund valued certain debt securities using indicative bids received from primary pricing sources. The Fund valued certain other debt securities by using an estimated specified spread above the LIBOR Rate or U.S. Treasury yield.

         
22
       

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Debt Obligations
                               
U.S. Government
  $ 30,963,300     $ 19,062,815     $ 19,856,848     $ 69,882,963  
Foreign Government Obligations
    —       5,712,491       —       5,712,491  
Asset-Backed Securities
    —       1,535,545       9,187,027       10,722,572  
Corporate Debt
    —       1,385,143       —       1,385,143  
                                 
TOTAL DEBT OBLIGATIONS
    30,963,300       27,695,994       29,043,875       87,703,169  
                                 
Options Purchased
    —       97,210       —       97,210  
Mutual Funds
    138,676,079       46,929       —       138,723,008  
Short-Term Investments
    1,476,310       —       —       1,476,310  
                                 
Total Investments
    171,115,689       27,840,133       29,043,875       227,999,697  
                                 
Derivatives *
                               
Swap Agreements
                               
Credit Risk
    —       4,109       —       4,109  
Interest Rate Risk
    —       3,023,990       —       3,023,990  
Futures Contracts
                               
Interest Rate Risk
    308,648       —       —       308,648  
Forward Currency Contracts
                               
Foreign Currency Risk
    —       700,805       —       700,805  
                                 
Total
  $ 171,424,337     $ 31,569,037     $ 29,043,875     $ 232,037,249  
                                 

         
        23

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
LIABILITY VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Liabilities
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Derivatives *
                               
Written Options
                               
Foreign Currency Risk
  $ —     $ (28,592 )   $      —     $ (28,592 )
Swap Agreements
                               
Credit Risk
    —       (82,455 )     —       (82,455 )
Interest Rate Risk
    —       (24,532 )     —       (24,532 )
Futures Contracts
                               
Interest Rate Risk
    (204,274 )     —       —       (204,274 )
Forward Currency Contracts
                               
Foreign Currency Risk
    —       (1,201,842 )     —       (1,201,842 )
                                 
Total
  $ (204,274 )   $ (1,337,421 )   $ —     $ (1,541,695 )
                                 
 
The risks referenced above are not intended to be inclusive of all risks. Please see the Investment Risks and Derivative Financial Instruments sections below for a further discussion of risks.
 
            * Because the tables above are based on market values or unrealized appreciation (depreciation) rather than the notional amounts of derivatives, the uncertainties surrounding the valuation inputs for a derivative are likely to be more significant to the Fund’s net asset value than the uncertainties surrounding inputs for a non-derivative security with the same market value.
 
The underlying funds held at period end are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements. The aggregate net values of the Fund’s investments (both direct and indirect) in securities and other financial instruments using Level 3 inputs were 44.4% and (0.1)% of total net assets, respectively.

         
24
       

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a reconciliation of investments and derivatives, if any, in which significant unobservable inputs (Level 3) were used in determining value:
 
                                                                           
 
                                      Net Change in
                                      Unrealized
                                      Appreciation
                                      (Depreciation)
                                      from
    Balances
               Change in
           Balances
     Investments
    as of
   Net
   Accrued
   Total
   Unrealized
   Transfers
   Transfers
   as of
     Held as
    February 28,
   Purchases/
   Discounts/
   Realized
   Appreciation
   into
   out of
   February 28,
     of February 28,
    2010   (Sales)   Premiums   Gain/(Loss)   (Depreciation)   Level 3*   Level 3*   2011     2011
Debt Obligations
                                                                         
U.S. Government Agency
  $ 19,347,600     $ —     $ 1,199,178     $ —     $ (689,930 )   $ —     $ —       19,856,848       $ (689,930 )
Foreign Government Obligations
    —       —       349,815       —       78,622       5,284,054 **     (5,712,491 )**     —         —  
Asset-Backed Securities
    12,731,231       (4,682,362 )     230,781       474,108       467,225       —       (33,956 )**     9,187,027         878,105  
                                                                           
Total Debt Obligations
    32,078,831       (4,682,362 )     1,779,774       474,108       (144,083 )     5,284,054       (5,746,447 )     29,043,875         188,175  
                                                                           
Preferred Stock
    900,000       (1,564,100 )     —       (574,751 )     1,238,851       —       —       —         —  
Swap Agreements
    (341,027 )     (16,279 )     —       16,279       262,682       —       78,345 **     —         —  
                                                                           
Total
  $ 32,637,804     $ (6,262,741 )   $ 1,779,774     $ (84,364 )   $ 1,357,450     $ 5,284,054     $ (5,668,102 )   $ 29,043,875       $ 188,175  
                                                                           
 
            * The Fund recognizes investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the value at the end of the period.
            ** Financial assets transferred between Level 2 and Level 3 were due to a change in observable and/or unobservable inputs.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 pm. Income and expenses denominated in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.

         
        25

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Repurchase agreements
The Fund may enter into repurchase agreements. Under a repurchase agreement 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 it acquired under the repurchase agreement. The value of the securities acquired is required by contract to be marked to market daily and additional collateral is required to be transferred so that the market value is at least equal to the amount owed to the Fund by the seller. If the seller of a repurchase agreement defaults or enters into insolvency proceedings and/or the value of the securities subject to the repurchase agreement is insufficient, the Fund’s recovery of cash from the seller may be delayed and the Fund may incur a loss equal to the difference between the cash it paid and the value of the securities. The Fund had no repurchase agreements outstanding at the end of the period.
 
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at an agreed upon price and date. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which generally causes the Fund’s portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the event of a buyer’s bankruptcy or insolvency, the Fund’s use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund’s right to repurchase the securities. The Fund had no reverse repurchase agreements outstanding at the end of the period.
 
Inflation-indexed bonds
The Fund may invest in inflation indexed bonds. Inflation indexed bonds are fixed income securities whose principal value is adjusted periodically according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that reflects inflation in the principal value of the bond. Most other issuers pay out any inflation related accruals as part of a semiannual coupon.
 
The value of inflation indexed bonds is expected to change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates (i.e., stated interest rates) and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates (i.e. nominal interest rate minus inflation) might decline, leading to an increase in value of inflation indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation indexed bonds. There can be no assurance, however, that the value of inflation indexed bonds will be directly correlated to changes

         
26
       

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
in nominal interest rates, and short term increases in inflation may lead to a decline in their value. Coupon payments received by the Fund from inflation indexed bonds are included in the Fund’s gross income for the period in which they accrue. In addition, any increase or decrease in the principal amount of an inflation indexed bond will increase or decrease taxable ordinary income to the Fund, even though principal is not paid until maturity. Inflation-indexed bonds outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate capital loss carryforwards, losses on wash sale transactions, foreign currency transactions, derivative contract transactions, partnership interest tax allocations, differing treatment of accretion and amortization, post-October capital losses, and adjustments for security exchanges.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 22,341,727     $ 29,001,127  
                 
Total distributions
  $ 22,341,727     $ 29,001,127  
                 

         
        27

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 3,060,083  
Other Tax Attributes:
       
Capital loss carryforwards
  $ (161,834,336 )
Post-October capital loss deferral
  $ (626,389 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards, post-October capital and currency losses and future realized losses, if any, subsequent to February 28, 2011 could be subject to limitations imposed by the Code related to share ownership activity. The Fund’s capital loss carryforwards expire as follows:
 
         
February 28, 2014
  $ (34,693,380 )
February 28, 2015
    (2,795,728 )
February 29, 2016
    (33,008,915 )
February 28, 2017
    (74,050,257 )
February 28, 2018
    (17,147,333 )
February 28, 2019
    (138,723 )
         
Total
  $ (161,834,336 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 256,942,042     $ 3,811,688     $ (32,754,033 )   $ (28,942,345 )    
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S.

         
28
       

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, 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 among the classes of the shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are indirectly attributable to a class of shares, are charged to that class’s operations. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (Note 5).
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
Purchases and redemptions of Fund shares
Purchase premiums and redemption fees are paid to and retained by the Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. Such fees are recorded as a component of

         
        29

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
the Fund’s net share transactions. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of the Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund’s shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund’s shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder’s securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of the Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
 
Other matters
GMO Special Purpose Holding Fund (“SPHF”), an investment of the Fund, has litigation pending against various entities related to the 2002 fraud and related default of securities previously held by SPHF. The outcome of the lawsuits against the remaining defendants is not known and any potential recoveries are not reflected in the net asset value of SPHF. For the year ended February 28, 2011, the Fund received no distributions from SPHF in connection with the defaulted securities or the related litigation.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Fixed Income Securities — Typically, the value of the Fund’s fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset backed and other fixed income securities.

         
30
       

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
• Credit and Counterparty Risk — The Fund runs the risk that the issuer or guarantor of a fixed income security, the counterparty to an over-the-counter derivatives contract, a borrower of the Fund’s securities or the obligor of an obligation underlying an asset-backed security will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations. This risk is particularly pronounced for the Fund because it typically uses over-the-counter derivatives, including swap contracts with longer-term maturities, and may have significant exposure to a single counterparty. The risk of counterparty default is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions.
 
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
 
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in underlying funds, including the risk that the underlying funds in which it invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments.
 
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund’s foreign currency holdings and investments denominated in foreign currencies.
 
Other principal risks of an investment in the Fund include Foreign Investment Risk (risk that the market prices of foreign securities will fluctuate more rapidly and to a greater extent than those of U.S. securities); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities lending); Focused Investment Risk (increased risk from the Fund’s focus on investments in countries, regions, sectors or companies with high positive correlations to one another); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, accredited investors, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
 
The most significant market risk for Funds investing in fixed income securities is that the securities in which they invest experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund because it invests in asset-backed securities. Asset-backed securities may be backed by many types of

         
        31

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as “collateralized debt obligations” or “collateralized loan obligations”) and by the fees earned by service providers. Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. Many asset-backed securities owned (directly or indirectly) by the Fund that were once rated investment grade are now rated below investment grade as of the date of this report.
 
The existence of insurance on an asset-backed security does not guarantee that principal and/or interest will be paid because the insurer could default on its obligations. In recent years, a significant number of asset-backed security insurers have defaulted on their obligations.
 
With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.
 
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and a Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.

         
32
       

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution’s business may have a material impact on multiple investments.
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps or other derivatives on an index, a single security or a basket of securities to gain investment exposures (e.g., by selling protection under a credit default swap). The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). For example, the Fund may use credit default swaps to take a short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund’s exposure to the credit of an issuer through the debt instrument, but adjust the Fund’s interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed versus variable rates and shorter duration versus longer duration exposure. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.

         
        33

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral (e.g., foreign currency forwards; see “Currency Risk” above), that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.

         
34
       

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
 
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund’s forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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.
 
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. During the year ended February 28, 2011, the Fund used forward currency contracts to hedge some or all of the broad market exposure of the underlying Funds and assets in which the Fund invests, adjust against anticipated currency exchange rate changes and adjust exposure to foreign currencies. Forward currency contracts outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts

         
        35

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. During the year ended February 28, 2011, the Fund used futures contracts to adjust exposure to certain markets and enhance the diversity and liquidity of the portfolio. Futures contracts outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. During the year ended February 28, 2011, the Fund purchased option contracts to adjust exposure to currencies and otherwise manage currency exchange rate risk. Option contracts purchased by the Fund and outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. During the year ended February 28, 2011, the Fund used written option contracts to adjust exposure to foreign currencies and otherwise manage currency exchange rate risk. Written options outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales

         
36
       

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
For the year ended February 28, 2011, investment activity in options contracts written by the Fund was as follows:
 
                                                 
    Puts   Calls
    Principal
           Principal
        
    Amount
   Number
       Amount
   Number
    
    of Contracts   of Contracts   Premiums   of Contracts   of Contracts   Premiums
 
Outstanding, beginning of year
    —            —     $ —            —            —     $      —  
Options written
    (18,200,000 )     —       (358,868 )     —       —       —  
Options exercised
                                               
Options expired
    —       —       —       —       —       —  
Options sold
    —       —       —       —       —       —  
                                                 
Outstanding, end of year
    (18,200,000 )     —     $ (358,868 )     —       —     $ —  
                                                 
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.

         
        37

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.

         
38
       

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the year ended February 28, 2011, the Fund used swap agreements to adjust interest rate exposure, achieve exposure to a reference entity’s credit, and/or provide a measure of protection against default loss. Swap agreements outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
Fair values of derivative instruments on the Statement of Assets and Liabilities as of February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Assets:
                                               
Investments at value (purchased options)
  $ —     $ 97,210     $ —     $      —     $      —     $ 97,210  
Unrealized appreciation on futures contracts *
    308,648       —       —       —       —       308,648  
Unrealized appreciation on forward currency contracts
    —       700,805       —       —       —       700,805  
Unrealized appreciation on swap agreements
    3,023,990       —       4,109       —       —       3,028,099  
                                                 
Total
  $ 3,332,638     $ 798,015     $ 4,109     $ —     $ —     $ 4,134,762  
                                                 

         
        39

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
  
  Fair values of derivative instruments on the Statement of Assets and Liabilities as of February 28, 2011Ù: — continued
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Liabilities:
                                               
Unrealized depreciation on futures contracts *
  $ (204,274 )   $ —     $ —     $ —     $ —     $ (204,274 )
Unrealized depreciation on forward currency contracts
    —       (1,201,842 )     —       —       —       (1,201,842 )
Unrealized appreciation on written options
    —       (28,592 )     —       —       —       (28,592 )
Unrealized depreciation on swap agreements
    (24,532 )     —       (82,455 )     —       —       (106,987 )
                                                 
Total
  $ (228,806 )   $ (1,230,434 )   $ (82,455 )   $ —     $ —     $ (1,541,695 )
                                                 
 
The Effect of Derivative Instruments on the Statement of Operations for the Period Ended February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Futures contracts
  $ 3,845,215     $ —     $ —     $      —     $      —     $ 3,845,215  
Forward currency contracts
    —       1,328,946       —       —       —       1,328,946  
Swap contracts
    11,432,540       —       16,279       —       —       11,448,819  
                                                 
Total
  $ 15,277,755     $ 1,328,946     $ 16,279     $ —     $ —     $ 16,622,980  
                                                 
                                                 
Change in Unrealized Appreciation (Depreciation) on:
                                               
Investments (purchased options)
  $ —     $ (590,470 )   $ —     $ —     $ —     $ (590,470 )
Futures contracts
    (114,652 )     —       —       —       —       (114,652 )
Forward currency contracts
    —       (813,072 )     —       —       —       (813,072 )
Written Options
    —       330,276       —       —       —       330,276  
Swap contracts
    416,227       —       262,681       —       —       678,908  
                                                 
Total
  $ 301,575     $ (1,073,266 )   $ 262,681     $ —     $ —     $ (509,010 )
                                                 
 
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
            * The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.

         
40
       

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The volume of derivative activity, based on absolute values (forward currency contracts and futures contracts), principal amounts (options) or notional amounts (swap agreements) outstanding at each month-end, was as follows for the year ended February 28, 2011:
 
                                 
    Forward
            
    currency
   Futures
   Swap
    
    contracts   contracts   agreements   Options
 
Average amount outstanding
  $ 142,905,281     $ 119,559,578     $ 307,997,467     $ 12,118,165  
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.25% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets of each class at the annual rate of 0.15% for Class III shares and 0.10% for Class IV shares. The Manager has contractually agreed through at least June 30, 2011 to waive the Fund’s shareholder service fee to the extent that the aggregate of any direct and indirect shareholder service fees borne by a class of shares of the Fund exceeds 0.15% for Class III shares and 0.10% for Class IV shares; provided, however, that the amount of this waiver will not exceed the respective Class’s shareholder service fee.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.25% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in other GMO Funds (excluding those Funds’ Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund’s Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.

         
        41

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $7,260 and $2,437, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
                   
Indirect Net
 		                 
Expenses
                  
(excluding
                  
shareholder service
     Indirect
            
fees and interest
     Shareholder
     Indirect Interest
     Total Indirect
expense)     Service Fees     Expense     Expenses
0.019%
    0.004%     0.010%     0.034%
                   
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 were as follows:
 
                 
    Purchases   Sales
 
U.S. Government securities
  $ 49,093,913     $ 22,485,235  
Investments (non-U.S. Government securities)
    90,447,387       193,992,736  
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 89.69% of the outstanding shares of the Fund were held by four shareholders, each holding more than 10% of the Fund’s outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.

         
42
       

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, 0.05% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and 26.78% of the Fund’s shares were held by accounts for which the Manager had investment discretion.
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    436,418     $ 3,104,427       8,422     $ 55,888  
Shares issued to shareholders in reinvestment of distributions
    38,131       277,484       143,966       944,061  
Shares repurchased
    (1,850,226 )     (13,555,184 )     (4,319,478 )     (26,871,884 )
Redemption fees
    —       —       —       16,973  
                                 
Net increase (decrease)
    (1,375,677 )   $ (10,173,273 )     (4,167,090 )   $ (25,854,962 )
                                 
                                 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class IV:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    1,318,105     $ 9,642,493       735,754     $ 4,833,902  
Shares issued to shareholders in reinvestment of distributions
    2,573,711       18,732,766       1,212,971       8,296,723  
Shares repurchased
    (18,067,031 )     (132,153,010 )     (938,917 )     (6,091,837 )
Redemption fees
    —       —       —       75,721  
                                 
Net increase (decrease)
    (14,175,215 )   $ (103,777,751 )     1,009,808     $ 7,114,109  
                                 

         
        43

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                         
    Value,
               Distributions
   Return
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   of
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   Capital   period
 
GMO Emerging Country Debt Fund, Class IV
  $ 13,942,458     $ 1,026,056     $ 9,300,000     $ 1,026,056     $ —     $ —     $ 7,081,912  
GMO Short-Duration Collateral Fund
    111,107,471       —       —       1,356,581       —       40,904,510       76,989,022  
GMO Special Purpose Holding Fund
    51,622       —       —       —       —       —       46,929  
GMO U.S. Treasury Fund
    72,662,938       88,533,651       153,625,000       77,209       6,442       —       7,570,707  
GMO World Opportunity Overlay Fund
    67,319,816       200,000       24,500,000       —       —       —       47,034,438  
                                                         
Totals
  $ 265,084,305     $ 89,759,707     $ 187,425,000     $ 2,459,846     $ 6,442     $ 40,904,510     $ 138,723,008  
                                                         

         
44
       

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Core Plus Bond Fund:
 
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 Plus Bond Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian, brokers, and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
        45

 

GMO Core Plus Bond Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including redemption fees; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
46
       

 

 
GMO Core Plus Bond Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.41 %   $ 1,000.00     $ 1,023.70     $ 2.06  
2) Hypothetical
    0.41 %   $ 1,000.00     $ 1,022.76     $ 2.06  
                                 
Class IV
                               
                                 
1) Actual
    0.35 %   $ 1,000.00     $ 1,022.80     $ 1.76  
2) Hypothetical
    0.35 %   $ 1,000.00     $ 1,023.06     $ 1.76  
                                 
 
            * Expenses are calculated using each Class’s annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
        47

 

GMO Core Plus Bond Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
The Fund hereby designates as qualified interest income with respect to its taxable year ended February 28, 2011, $2,831,405 or if determined to be different, the qualified interest income of such year.
 
Of the ordinary income distributions made by the Fund during the fiscal year ended February 28, 2011, 7.96% is derived from investments in U.S. Government and Agency Obligations. All or a portion of the distributions from this income may be exempt from taxation at the state level. Consult your tax advisor for state specific information.

         
48
       

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
        49

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee;
President and
Chief Executive
Officer of the
Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
50        

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        51

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
52        

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
GMO Currency Hedged International Bond Fund returned +7.4% for the fiscal year ended February 28, 2011, as compared with +1.3% for the J.P. Morgan Non-U.S. Government Bond Index (Hedged) (ex-Japan).
 
The Fund’s investment exposures were achieved directly and indirectly through investment in underlying GMO Trust mutual funds, including GMO Short-Duration Collateral Fund (SDCF), GMO World Opportunity Overlay Fund (Overlay Fund), GMO Emerging Country Debt Fund (ECDF), and GMO U.S. Treasury Fund (USTF).
 
The Fund outperformed the benchmark during the fiscal year by 6.0%. Exposures to asset-backed securities held indirectly through SDCF and Overlay Fund were the largest positive contributors for the fiscal year, followed by positive contributions from developed markets interest-rate positioning (primarily through exchange-traded futures and interest-rate swaps), exposure to emerging country debt via ECDF, and developed markets currency selection (primarily through currency forwards and options).
 
Approximately 5.2% of the outperformance derived from asset-backed securities held indirectly in SDCF and Overlay Fund. Asset-backed security spreads tightened and pricing and liquidity conditions in securitized credit markets improved during the fiscal year. SDCF and Overlay Fund experienced credit downgrades during the fiscal year: SDCF had 55 downgraded securities, and Overlay Fund had 35, representing 11% and 10% of their respective market values from the beginning of the fiscal year. At fiscal year-end, 52% of SDCF’s portfolio was rated AAA, and 72% of Overlay Fund’s was rated AAA.
 
Developed markets interest-rate positioning also contributed positively to performance. Positive contributions from euro zone, Canadian, Swedish, and U.S. positions more than offset losses from Swiss, U.K., and Australian positions. Within the euro zone, strategy underweights in Italy and Spain relative to Germany contributed positively. These underweights were achieved directly.
 
A small exposure to emerging country debt through investment in ECDF added value due to positive contributions from both security and country selection within ECDF. In developed markets currency selection, Australian dollar, Swedish krona, Norwegian krone, and Japanese yen positions drove gains, though this performance was offset somewhat by Swiss franc, Canadian dollar, euro, pound sterling, and opportunistic positions.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO Currency Hedged International Bond Fund Class III Shares and the
J.P. Morgan Non-U.S. Government Bond Index (Hedged) (ex-Japan)
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com http://www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited.
 
 
* J.P. Morgan Non-U.S. Government Bond Index (Hedged) (ex-Japan) + represents the J.P. Morgan Non-U.S. Government Bond Index (Hedged) prior to December 31, 2003 and the J.P. Morgan Non-U.S. Government Bond Index (Hedged) (ex-Japan) thereafter.

 

GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary*   % of Total Net Assets  
Debt Obligations
    91.2 %
Short-Term Investments
    12.2  
Options Purchased
    0.4  
Loan Participations
    0.2  
Loan Assignments
    0.1  
Rights and Warrants
    0.0 Ù
Promissory Notes
    0.0 Ù
Written Options
    (0.0 )
Futures Contracts
    (0.7 )
Forward Currency Contracts
    (1.3 )
Reverse Repurchase Agreements
    (1.4 )
Swap Agreements
    (1.7 )
Other
    1.0  
         
      100.0 %
         
 
Ù Rounds to 0.0%
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust (“underlying funds”).
 
         
Country / Region Summary**   % of Investments  
Euro Region***
    87.8 %
United Kingdom
    24.5  
Canada
    10.4  
United States
    5.5  
Emerging****
    4.2  
Norway
    0.0 Ù
New Zealand
    0.0 Ù
Switzerland
    (2.6 )
Sweden
    (7.3 )
Australia
    (8.5 )
Japan
    (14.0 )
         
      100.0 %
         
 
Ù Rounds to 0.0%
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative financial instruments. The table is based on duration adjusted exposures, taking into account the market value of securities and the notional amounts of swaps and other derivative financial instruments. For example, U.S. asset-backed securities represent a relatively small percentage due to their short duration, even though they represent a large percentage of market value (directly and indirectly). Duration is based on the Manager’s models. The greater the duration of a bond,

         
        1

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Investments Concentration — (Continued)
Summary February 28, 2011 (Unaudited)
 
the greater its contribution to the concentration percentage. Credit default swap exposures (both positive and negative) are factored into the duration-adjusted exposure using a reference security and applying the same methodology to that security.
*** The “Euro Region” is comprised of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
**** The “Emerging” exposure is associated only with investments in GMO Emerging Country Debt Fund, which is exposed to emerging countries primarily comprised of Russia, Argentina, Brazil, Philippines, Mexico, Venezuela, Colombia, Ukraine, Turkey, and Indonesia. Additional information about the fund’s emerging country exposure is available in the financial statements of GMO Emerging Country Debt Fund.

         
2
       

 

GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value     Description   Value ($)  
                     
            DEBT OBLIGATIONS — 30.4%        
                     
            Canada — 2.9%        
            Foreign Government Obligations — 2.9%        
CAD
    2,000,000     Government of Canada, 3.50%, due 06/01/20     2,091,503  
                     
                     
            France — 4.9%        
            Foreign Government Obligations — 4.9%        
EUR
    2,500,000     Government of France, 4.00%, due 10/25/38     3,445,390  
                     
                     
            Germany — 5.6%        
            Foreign Government Obligations — 5.6%        
EUR
    2,500,000     Republic of Deutschland, 4.75%, due 07/04/34 (a)     4,007,374  
                     
                     
            Italy — 4.3%        
            Foreign Government Obligations — 4.3%        
EUR
    2,700,000     Republic of Italy, 4.00%, due 02/01/37     3,021,751  
                     
                     
            Spain — 2.4%        
            Foreign Government Obligations — 2.4%        
EUR
    1,500,000     Government of Spain, 4.70%, due 07/30/41     1,698,953  
                     
                     
            United Kingdom — 4.7%        
            Foreign Government Obligations — 4.7%        
GBP
    2,000,000     United Kingdom Gilt, 3.75%, due 09/07/19     3,301,368  
                     
                     
            United States — 5.6%        
            U.S. Government — 5.6%        
USD
    3,780,175     U.S. Treasury Inflation Indexed Note, 2.00%, due 04/15/12 (a) (b)     3,947,920  
                     
                     
            TOTAL DEBT OBLIGATIONS (COST $20,670,518)     21,514,259  
                     

         
    See accompanying notes to the financial statements.   3

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares /
 		           
Principal Amount     Description   Value ($)  
                     
            MUTUAL FUNDS — 69.5%        
                     
            United States — 69.5%        
            Affiliated Issuers — 69.5%        
      229,817     GMO Emerging Country Debt Fund, Class IV     2,089,035  
      2,683,050     GMO Short-Duration Collateral Fund     27,850,062  
      5,496     GMO Special Purpose Holding Fund (c)     2,748  
      200,353     GMO U.S. Treasury Fund     5,008,836  
      628,548     GMO World Opportunity Overlay Fund     14,255,462  
                     
                  49,206,143  
                     
            Total United States     49,206,143  
                     
                     
            TOTAL MUTUAL FUNDS (COST $50,484,130)     49,206,143  
                     
                     
            OPTIONS PURCHASED — 0.1%        
                     
            Currency Options — 0.1%        
AUD
    8,000,000     AUD Put/USD Call, Expires 05/12/11, Strike 0.95     42,730  
                     
                     
            TOTAL OPTIONS PURCHASED (COST $302,277)     42,730  
                     
                     
            SHORT-TERM INVESTMENTS — 1.7%        
                     
            Money Market Funds — 0.8%        
      589,786     State Street Institutional Treasury Plus Money Market Fund-Institutional Class     589,786  
                     
                     
            U.S. Government — 0.9%        
      625,000     U.S. Treasury Bill, 0.19%, due 11/17/11 (a) (d)     624,162  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $1,213,642)     1,213,948  
                     
                     
            TOTAL INVESTMENTS — 101.7%
(Cost $72,670,567) 		    71,977,080  
            Other Assets and Liabilities (net) — (1.7%)     (1,178,009 )
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 70,799,071  
                     

         
4
  See accompanying notes to the financial statements.    

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
A summary of outstanding financial instruments at February 28, 2011 is as follows:
 
Forward Currency Contracts
 
                                     
                    Net Unrealized
Settlement
 		                  Appreciation
Date   Counterparty   Deliver/Receive   Units of Currency   Value   (Depreciation)
 
Buys †
                                   
3/22/11
    Citibank N.A.     AUD     900,000     $ 914,084     $ 9,917  
3/22/11
    Deutsche Bank AG     AUD     800,000       812,519       20,799  
3/29/11
    Deutsche Bank AG     CAD     700,000       720,090       6,185  
3/01/11
    Deutsche Bank AG     CHF     1,600,000       1,722,097       (10,443 )
3/01/11
    Royal Bank of Scotland PLC     CHF     700,000       753,417       18,308  
5/03/11
    Citibank N.A.     CHF     300,000       323,070       135  
5/03/11
    Royal Bank of Scotland PLC     CHF     300,000       323,070       (1,072 )
3/08/11
    Citibank N.A.     EUR     2,400,000       3,311,631       90,223  
3/08/11
    Deutsche Bank AG     EUR     500,000       689,923       7,895  
3/08/11
    Royal Bank of Scotland PLC     EUR     1,400,000       1,931,785       20,897  
4/05/11
    Citibank N.A.     GBP     200,000       325,040       2,912  
4/05/11
    Royal Bank of Scotland PLC     GBP     400,000       650,081       6,027  
3/15/11
    Citibank N.A.     JPY     20,000,000       244,503       166  
3/15/11
    Deutsche Bank AG     JPY     34,800,000       425,435       2,900  
4/19/11
    Deutsche Bank AG     NZD     3,300,000       2,474,421       (45,112 )
                                 
                        $ 15,621,166     $ 129,737  
                                 
Sales #
                                   
3/22/11
    Deutsche Bank AG     AUD     400,000     $ 406,259     $ (5,811 )
3/22/11
    Royal Bank of Scotland PLC     AUD     500,000       507,824       (16,534 )
3/29/11
    Deutsche Bank AG     CAD     3,000,000       3,086,099       (93,711 )
3/29/11
    Royal Bank of Scotland PLC     CAD     400,000       411,480       (10,208 )
3/01/11
    Citibank N.A.     CHF     2,300,000       2,475,514       (168,294 )
5/03/11
    Deutsche Bank AG     CHF     1,600,000       1,723,040       10,503  
3/08/11
    Deutsche Bank AG     EUR     10,100,000       13,936,447       (625,556 )
3/08/11
    Royal Bank of Scotland PLC     EUR     200,000       275,969       (6,031 )
4/05/11
    Deutsche Bank AG     GBP     2,100,000       3,412,924       (70,489 )
4/05/11
    Royal Bank of Scotland PLC     GBP     100,000       162,520       (2,199 )
3/15/11
    Citibank N.A.     JPY     30,000,000       366,755       (2,195 )
3/15/11
    Deutsche Bank AG     JPY     60,000,000       733,509       (5,044 )
3/15/11
    Royal Bank of Scotland PLC     JPY     30,000,000       366,755       (2,725 )
4/19/11
    Royal Bank of Scotland PLC     NZD     1,600,000       1,199,720       (3,336 )
                                 
                        $ 29,064,815     $ (1,001,630 )
                                 
 
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.

         
    See accompanying notes to the financial statements.   5

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Forward Cross Currency Contracts
 
                                             
                Net Unrealized
Settlement
 		          Receive/In
 		  Appreciation
Date   Counterparty   Deliver/Units of Currency   Exchange For   (Depreciation)
 
4/12/11
    Deutsche Bank AG     EUR     1,600,000       NOK       12,551,440     $ 29,632  
      Royal Bank of                                      
4/12/11
    Scotland PLC     NOK     3,168,068       EUR       400,000       (12,790 )
4/26/11
    Deutsche Bank AG     EUR     2,100,000       SEK       18,340,500       (7,955 )
      Royal Bank of                                      
4/26/11
    Scotland PLC     SEK     1,751,308       EUR       200,000       34  
                                         
                                        $ 8,921  
                                         
 
Futures Contracts
 
                             
                Net Unrealized
Number of
 		      Expiration
 		  Contract
 		  Appreciation
Contracts   Type   Date   Value   (Depreciation)
 
Buys
                           
23
    Canadian Government Bond 10 Yr.     June 2011   $ 2,837,740     $ 15,493  
46
    Euro Bund     March 2011     7,885,990       (25,286 )
8
    U.S. Treasury Bond 30 Yr. (CBT)     March 2011     975,500       (16,711 )
13
    U.S. Treasury Note 5 Yr. (CBT)     June 2011     1,520,188       2,297  
67
    UK Gilt Long Bond     June 2011     12,715,263       32,163  
                         
                $ 25,934,681     $ 7,956  
                         
Sales
                           
19
    Australian Government Bond 3 Yr.     March 2011   $ 1,982,646     $ (7,685 )
9
    Australian Government Bond 10 Yr.     March 2011     951,358       (10,214 )
20
    Euro BOBL     March 2011     3,236,981       (4,459 )
5
    Japanese Government Bond 10 Yr. (TSE)     March 2011     8,515,807       26,828  
5
    U.S. Treasury Note 10 Yr. (CBT)     June 2011     595,234       (1,304 )
                         
                $ 15,282,026     $ 3,166  
                         

         
6
  See accompanying notes to the financial statements.    

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Written Options
 
A summary of open written option contracts for the Fund at February 28, 2011 is as follows:
 
                                     
    Principal
 		  Expiration
 		              Market
   
Amount
  Date       Description   Premiums   Value
 
Put AUD
    8,000,000     05/12/2011       AUD Put/USD Call, Strike 0.89   $ (157,744 )   $ (12,568 )
                                     
 
Swap Agreements
 
Credit Default Swaps
 
                                                     
                            Maximum
 		   
                            Potential
 		   
                            Amount of
 		   
                            Future
 		   
                            Payments
 		   
                        Implied
 		      by the Fund
 		   
Notional
 		  Expiration
 		      Receive
 		  Annual
 		  Credit
 		  Deliverable
 		  Under the
 		  Market
Amount   Date   Counterparty   (Pay)Ù   Premium   Spread (1)   on Default  
Contract (2)
  Value
 
  28,000,000     USD   3/20/2014   Deutsche
Bank AG 		  (Pay)   1.70%   1.55%   Republic of Italy     NA         $ (214,039 )
  20,000,000     USD   3/20/2019   Deutsche
Bank AG 		  Receive   1.66%   1.84%   Republic of Italy     20,000,000     USD     (178,935 )
                                                     
                                                $ (392,974 )
                                                     
Premiums to (Pay) Receive
  $  —  
         
 
Ù Receive - Fund receives premium and sells credit protection. If a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.
(Pay) - Fund pays premium and buys credit protection. If a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) receive from the seller of protection an amount equal to the notional amount of the swap and deliver the referenced obligation or underlying securities comprising the referenced index or (ii) receive a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.
(1) Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on the reference security, as of February 28, 2011, serve as an indicator of the current status of the payment/performance risk and reflect the likelihood or risk of default for the reference entity. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection. Wider (i.e. higher) credit spreads represent

         
    See accompanying notes to the financial statements.   7

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.
(2) The maximum potential amount the Fund could be required to pay as a seller of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.
 
Interest Rate Swaps
 
                                     
Notional
 		  Expiration
 		      Receive
 		          Market
Amount   Date   Counterparty   (Pay)#   Fixed Rate   Variable Rate   Value
 
  30,000,000     EUR   5/20/2013   Deutsche Bank AG   Receive   1.79%   6 Month EUR LIBOR   $ (384,927 )
  19,900,000     SEK   3/16/2016   Citibank N.A.   (Pay)   2.60%   3 Month SEK STIBOR     135,240  
  13,700,000     SEK   3/16/2016   Barclays Bank PLC   (Pay)   2.60%   3 Month SEK STIBOR     93,105  
  500,000     CHF   3/16/2016   Barclays Bank PLC   Receive   1.30%   6 Month CHF LIBOR     (7,666 )
                                     
                                $ (164,248 )
                                     
Premiums to (Pay) Receive
  $ (139,600 )
         
 
# Receive - Fund receives fixed rate and pays variable rate.
(Pay) - Fund pays fixed rate and receives variable rate.
 
As of February 28, 2011, for forward currency contracts, futures contracts, swap agreements, written options, and reverse repurchase agreements, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
 
Notes to Schedule of Investments:
 
BOBL - Bundesobligationen
CBT - Chicago Board of Trade
CHF LIBOR - London Interbank Offered Rate denominated in Swiss Franc.
EUR LIBOR - London Interbank Offered Rate denominated in Euros.
SEK STIBOR - Stockholm Interbank Offered Rate denominated in Swedish Krona.
TSE - Tokyo Stock Exchange
(a) All or a portion of this security has been pledged to cover margin requirements on futures contracts, collateral on swap contracts, forward currency contracts, and written options, if any (Note 4).
(b) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
(c) Underlying investment represents interests in defaulted claims.
(d) Rate shown represents yield-to-maturity.

         
8
  See accompanying notes to the financial statements.    

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
 
Currency Abbreviations:
 
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
EUR - Euro
GBP - British Pound
JPY - Japanese Yen
NOK - Norwegian Krone
NZD - New Zealand Dollar
SEK - Swedish Krona
USD - United States Dollar

         
    See accompanying notes to the financial statements.   9

 

GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $22,186,437) (Note 2)
  $ 22,770,937  
Investments in affiliated issuers, at value (cost $50,484,130) (Notes 2 and 10)
    49,206,143  
Dividends and interest receivable
    329,928  
Unrealized appreciation on open forward currency contracts (Note 4)
    226,533  
Receivable for variation margin on open futures contracts (Note 4)
    269,983  
Receivable for open swap contracts (Note 4)
    228,345  
Receivable for expenses reimbursed by Manager (Note 5)
    23,486  
         
Total assets
    73,055,355  
         
         
Liabilities:
       
Payable for investments purchased
    428  
Payable to affiliate for (Note 5):
       
Management fee
    13,494  
Shareholder service fee
    8,097  
Trustees and Trust Officers or agents unaffiliated with the Manager
    218  
Payable to broker for closed futures contracts
    267,425  
Unrealized depreciation on open forward currency contracts (Note 4)
    1,089,505  
Payable for open swap contracts (Note 4)
    785,567  
Written options outstanding, at value (premiums $157,744) (Note 4)
    12,568  
Accrued expenses
    78,982  
         
Total liabilities
    2,256,284  
         
Net assets
  $ 70,799,071  
         
Net assets consist of:
       
Paid-in capital
  $ 88,805,920  
Accumulated undistributed net investment income
    899,953  
Accumulated net realized loss
    (16,814,790 )
Net unrealized depreciation
    (2,092,012 )
         
    $ 70,799,071  
         
Net assets attributable to:
       
Class III shares
  $ 70,799,071  
         
Shares outstanding:
       
Class III
    8,655,221  
         
Net asset value per share:
       
Class III
  $ 8.18  
         

         
10
  See accompanying notes to the financial statements.    

 

GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Interest
  $ 1,210,188  
Dividends from affiliated issuers (Note 10)
    1,088,965  
Dividends from unaffiliated issuers
    232  
         
Total investment income
    2,299,385  
         
Expenses:
       
Management fee (Note 5)
    317,038  
Shareholder service fee – Class III (Note 5)
    190,223  
Custodian, fund accounting agent and transfer agent fees
    97,213  
Audit and tax fees
    72,705  
Legal fees
    7,081  
Trustees fees and related expenses (Note 5)
    3,206  
Registration fees
    2,629  
Miscellaneous
    12,749  
         
Total expenses
    702,844  
Fees and expenses reimbursed by Manager (Note 5)
    (190,101 )
Expense reductions (Note 2)
    (9 )
Indirectly incurred fees waived or borne by Manager (Note 5)
    (17,180 )
Shareholder service fee waived (Note 5)
    (5,599 )
         
Net expenses
    489,955  
         
Net investment income (loss)
    1,809,430  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in unaffiliated issuers
    973,965  
Investments in affiliated issuers
    (5,760,850 )
Realized gains distributions from affiliated issuers (Note 10)
    1,770  
Futures contracts
    3,736,162  
Swap contracts
    468,513  
Foreign currency, forward contracts and foreign currency related transactions
    648,363  
         
Net realized gain (loss)
    67,923  
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in unaffiliated issuers
    (53,127 )
Investments in affiliated issuers
    11,568,146  
Futures contracts
    (628,200 )
Written options
    145,176  
Swap contracts
    (983,872 )
Foreign currency, forward contracts and foreign currency related transactions
    (1,304,434 )
         
Net unrealized gain (loss)
    8,743,689  
         
Net realized and unrealized gain (loss)
    8,811,612  
         
Net increase (decrease) in net assets resulting from operations
  $ 10,621,042  
         

         
    See accompanying notes to the financial statements.   11

 

GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 1,809,430     $ 1,550,734  
Net realized gain (loss)
    67,923       760,571  
Change in net unrealized appreciation (depreciation)
    8,743,689       23,482,671  
                 
Net increase (decrease) in net assets from operations
    10,621,042       25,793,976  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (6,700,944 )     (7,460,660 )
Return of capital
               
Class III
    —       (1,339,340 )
                 
      (6,700,944 )     (8,800,000 )
                 
Net share transactions (Note 9):
               
Class III
    (70,421,683 )     (6,882,359 )
Purchase premiums and redemption fees (Notes 2 and 9):
               
Class III
    —       107,884  
                 
Total increase (decrease) in net assets resulting from net share transactions and redemption fees
    (70,421,683 )     (6,774,475 )
                 
Total increase (decrease) in net assets
    (66,501,585 )     10,219,501  
                 
Net assets:
               
Beginning of period
    137,300,656       127,081,155  
                 
End of period (including accumulated undistributed net investment income of $899,953 and distributions in excess of net investment income of $23,919,312, respectively)
  $ 70,799,071     $ 137,300,656  
                 

         
12
  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,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 7.98       $ 7.00     $ 8.79     $ 9.21     $ 9.04  
                                           
                                           
Income (loss) from investment operations:
                                         
Net investment income (loss)(a)†
    0.12         0.09       0.26       0.33       0.17  
Net realized and unrealized gain (loss)
    0.47         1.39       (1.49 )     (0.62 )     0.15  
                                           
                                           
Total from investment operations
    0.59         1.48       (1.23 )     (0.29 )     0.32  
                                           
                                           
Less distributions to shareholders:
                                         
From net investment income
    (0.39   )     (0.42 )     (0.56 )     (0.01 )     —  
From net realized gains
    —         —       —       —       (0.14 )
Return of capital
    —         (0.08 )     —       (0.12 )     (0.01 )
                                           
                                           
Total distributions
    (0.39   )     (0.50 )     (0.56 )     (0.13 )     (0.15 )
                                           
                                           
Net asset value, end of period
  $ 8.18       $ 7.98     $ 7.00     $ 8.79     $ 9.21  
                                           
                                           
Total Return(b)
    7.35   %     22.19 %     (13.93 )%     (3.08 )%     3.58 %
                                           
Ratios/Supplemental Data:
                                         
Net assets, end of period (000’s)
  $ 70,799       $ 137,301     $ 127,081     $ 155,952     $ 274,422  
Net expenses to average daily net assets(c)
    0.39   %(d)     0.39 %(d)     0.39 %(d)     0.38 %(d)     0.39 %
Net investment income (loss) to average daily net assets(a)
    1.43   %     1.19 %     3.24 %     3.62 %     1.93 %
Portfolio turnover rate
    51   %     31 %     28 %     55 %     25 %
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets:
    0.17   %     0.12 %     0.13 %     0.09 %     0.06 %
Redemption fees consisted of the following per share amounts (Note 2):†
  $ — (f )   $ 0.01     $ 0.00 (e)   $ —     $ —  
 
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(d) The net expense ratio does not include the effect of expense reductions (Note 2).
(e) Redemption fees were less than $0.01 per share.
(f) There were no redemption fees during the period.
† Calculated using average shares outstanding throughout the period.

         
    See accompanying notes to the financial statements.   13

 

GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO Currency Hedged International Bond Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund seeks total return in excess of that of its benchmark, the J.P. Morgan Non-U.S. Government Bond Index (Hedged) (ex-Japan). The Fund seeks to add value relative to its benchmark by exploiting misvaluations in global interest rates, sectors, currencies, credit and emerging country debt markets. As a result, the Fund’s interest rate, sector, credit and currency exposures will differ from those of its benchmark.
 
The Manager seeks to determine the relative values of the interest rate and currency markets, to determine currency and interest rate exposures, and to identify investments the Manager believes are undervalued or are likely to provide downside protection. The Manager selects investments based on an evaluation of various factors including, but not limited to, fundamental factors such as inflation and current account positions, as well as price-based factors such as interest and exchange rates.
 
Under normal circumstances, the Fund invests directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the “underlying funds”, or derivatives) at least 80% of its assets in bonds. The term “bond” refers to any fixed income security, which includes (i) obligations of an issuer to make payments of principal and/or interest on future dates, (ii) synthetic debt instruments created by the Manager by using derivatives (e.g., a futures contract, swap contract, currency forward or option), and (iii) instruments with variable interest payments.
 
The Fund may implement its investment program by investing in or holding: exchange-traded and over-the-counter (“OTC”) derivatives, including without limitation, futures contracts, currency options, interest rate options, currency forwards, reverse repurchase agreements, credit default swaps, and other swap contracts (to gain exposure to the global interest rate, credit, and currency markets); investment-grade bonds denominated in various currencies, including foreign and U.S. government securities, asset-backed securities issued by foreign governments and U.S. government agencies (including securities neither guaranteed nor insured by the U.S. government), corporate bonds, and mortgage-backed and other asset-backed securities issued by private issuers; shares of GMO Short-Duration Collateral Fund (“SDCF”) (a fund that invests primarily in U.S. asset-backed securities); shares of GMO World Opportunity Overlay Fund (“Overlay Fund”) (to attempt to exploit misvaluations in world interest rates, currencies and credit markets); shares of GMO Emerging Country Debt Fund (“ECDF”) (to gain exposure to emerging country debt markets); shares of GMO High Quality Short-Duration Bond Fund (to seek to generate a return in

         
14
       

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
excess of that of the J.P. Morgan U.S. 3 Month Cash Index by investing in a wide variety of high quality U.S. and foreign debt investments); shares of GMO Debt Opportunities Fund (to seek to generate a positive return by investing in a wide variety of U.S. and foreign debt investments without regard to the credit quality of the investment); and shares of GMO U.S. Treasury Fund (for liquidity management purposes). In addition, the Fund may invest in unaffiliated money market funds. The Fund generally attempts to hedge at least 75% of its net foreign currency exposure into U.S. dollars.
 
Historically, the Fund has used derivatives and investments in other GMO Funds as the principal means to gain investment exposure. As a result, the Fund has substantial holdings of SDCF and Overlay Fund (a fund that invests in U.S. asset-backed securities and uses derivatives to attempt to exploit misvaluations in world interest rates, currencies and credit markets). Because of the deterioration in credit markets that became acute in 2008, the Fund, including through its investment in SDCF and Overlay Fund, currently has and may continue to have material exposure to below investment grade U.S. securities. This is in addition to the Fund’s below investment grade emerging country debt investments. The Fund is not limited in its use of derivatives or in the absolute face value of its derivatives positions, and, as a result, the Fund may be leveraged in relation to its assets.
 
The Manager normally seeks to maintain the Fund’s estimated interest rate duration within +/- 2 years of the benchmark’s duration. The Fund, if deemed prudent by the Manager, will take temporary defensive measures until the Manager has determined that normal conditions have returned or that it is otherwise prudent to resume investing in accordance with the Fund’s normal investment strategies. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
 
The financial statements of the underlying funds should be read in conjunction with the Fund’s financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect). As of August 31, 2010, shares of SDCF, GMO Special Purpose Holding Fund (“SPHF”) and Overlay Fund were not publicly available for direct purchase.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or

         
        15

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
official closing price (or in the event the Manager deems the OTC market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of February 28, 2011, the total value of securities held indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 1.0% of net assets. The underlying funds classify such securities (as defined below) as Level 3. During the year ended February 28, 2011, the Manager has evaluated the Fund’s OTC derivatives contracts and determined that no reduction in value was warranted on account of the creditworthiness of a counterparty. See Note 4 for a further discussion on valuation of derivative financial instruments.
 
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. Although alternative prices are available for securities held by the Fund and the underlying funds, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by the Fund and the underlying funds. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fund and the underlying funds. As of February 28, 2011, the total value of securities held directly and indirectly for which no alternative pricing source was available represented 5.5% of the net assets of the Fund.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions,

         
16
       

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
(b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include most recent bid prices, interest rates, prepayment speeds, credit risk, yield curves and similar data. The Fund also used third party valuation services (which use industry models and inputs from pricing vendors) to value credit default swaps.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Debt Obligations
                               
U.S. Government
  $ —     $ 3,947,920     $      —     $ 3,947,920  
Foreign Government Obligations
    —       17,566,339       —       17,566,339  
                                 
TOTAL DEBT OBLIGATIONS
    —       21,514,259       —       21,514,259  
                                 
Mutual Funds
    49,203,395       2,748       —       49,206,143  
Options Purchased
    —       42,730       —       42,730  
Short-Term Investments
    1,213,948       —       —       1,213,948  
                                 
Total Investments
    50,417,343       21,559,737       —       71,977,080  
                                 
Derivatives *
                               
Forward Currency Contracts
                               
Foreign Currency Risk
    —       226,533       —       226,533  

         
        17

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
  
  ASSET VALUATION INPUTS — continued
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Futures Contracts
                               
Interest Rate Risk
  $ 76,781     $ —     $ —     $ 76,781  
Swap Agreements
                               
Interest Rate Risk
    —       228,345       —       228,345  
                                 
Total
  $ 50,494,124     $ 22,014,615     $ —     $ 72,508,739  
                                 
 
LIABILITY VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Liabilities
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Derivatives *
                               
Forward Currency Contracts
                               
Foreign Currency Risk
  $ —     $ (1,089,505 )   $      —     $ (1,089,505 )
Futures Contracts
                               
Interest Rate Risk
    (65,659 )     —       —       (65,659 )
Swap Agreements
                               
Credit Risk
    —       (392,974 )     —       (392,974 )
Interest Rate Risk
    —       (392,593 )     —       (392,593 )
Written Options
                               
Foreign Currency Risk
    —       (12,568 )     —       (12,568 )
                                 
Total
  $ (65,659 )   $ (1,887,640 )   $ —     $ (1,953,299 )
                                 
 
The risks referenced above are not intended to be inclusive of all risks. Please see the Investment Risks and Derivative Financial Instruments sections below for a further discussion of risks.
            * Because the tables above are based on market values or unrealized appreciation (depreciation) rather than the notional amounts of derivatives, the uncertainties surrounding the valuation inputs for a derivative are likely to be more significant to the Fund’s net asset value than the uncertainties surrounding inputs for a non-derivative security with the same market value.
 
The underlying funds held at period end are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the

         
18
       

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
underlying funds’ portfolio valuation notes in their financial statements. The aggregate net values of the Fund’s investments (both direct and indirect) in securities and other financial instruments using Level 3 inputs were 35.7% and (0.1)% of total net assets, respectively.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
The following is a reconciliation of investments and derivatives, if any, in which significant unobservable inputs (Level 3) were used in determining value:
 
                                                                             
 
                                      Net Change in
                                      Unrealized
                                      Appreciation
                                      (Depreciation)
                                      from
                                      Investments
    Balances
 		              Change in
 		          Balances
     Still Held
    as of
 		  Net
 		  Accrued
 		  Total
 		  Unrealized
 		  Transfers
 		  Transfers
   as of
     as of
    February 28,
 		  Purchases/
 		  Discounts/
 		  Realized
 		  Appreciation
 		  into
 		  out of
   February 28,
     February 28,
    2010   (Sales)   Premiums   Gain/(Loss)   (Depreciation)   Level 3 *   Level 3 *   2011     2011
Swap Agreements
  $ 23,924     $ 145,600     $      —     $ (145,600 )   $ (416,898 )   $      —     $ 392,974  **     $ —       $ —  
                                                                             
Total
  $ 23,924     $ 145,600     $ —     $ (145,600 )   $ (416,898 )   $ —     $ 392,974       $      —       $      —  
                                                                             
 
            * The Fund accounts for investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the value at the end of the period.
            ** Financial assets transferred between Level 2 and Level 3 were due to a change in observable and/or unobservable inputs.
 
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 pm. Income and expenses denominated in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.
 
Repurchase agreements
The Fund may enter into repurchase agreements. Under a repurchase agreement the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an

         
        19

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
agreed upon price and date. The Fund, through its custodian, takes possession of securities it acquired under the repurchase agreement. The value of the securities acquired is required by contract to be marked to market daily and additional collateral is required to be transferred so that the market value is at least equal to the amount owed to the Fund by the seller. If the seller of a repurchase agreement defaults or enters into insolvency proceedings and/or the value of the securities subject to the repurchase agreement is insufficient, the Fund’s recovery of cash from the seller may be delayed and the Fund may incur a loss equal to the difference between the cash it paid and the value of the securities. The Fund had no repurchase agreements outstanding at the end of the period.
 
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at an agreed upon price and date. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which generally causes the Fund’s portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the event of a buyer’s bankruptcy or insolvency, the Fund’s use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund’s right to repurchase the securities. The Fund had no reverse repurchase agreements outstanding at the end of the period.
 
Inflation-indexed bonds
The Fund may invest in inflation indexed bonds. Inflation indexed bonds are fixed income securities whose principal value is adjusted periodically according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that reflects inflation in the principal value of the bond. Most other issuers pay out any inflation related accruals as part of a semiannual coupon.
 
The value of inflation indexed bonds is expected to change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates (i.e., stated interest rates) and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates (i.e. nominal interest rate minus inflation) might decline, leading to an increase in value of inflation indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation indexed bonds. There can be no assurance, however, that the value of inflation indexed bonds will be directly correlated to changes in nominal interest rates, and short term increases in inflation may lead to a decline in their value. Coupon payments received by the Fund from inflation indexed bonds are included in the Fund’s gross income for the period in which they accrue. In addition, any increase or decrease in the principal amount of an

         
20
       

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
inflation indexed bond will increase or decrease taxable ordinary income to the Fund, even though principal is not paid until maturity. Inflation-indexed bonds outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country’s tax treaty with the United States. The foreign withholding rates applicable to a Fund’s investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction based taxes imposed by certain countries in which it invests. Taxes related to capital gains realized during the year ended February 28, 2011, if any, are reflected as part of Net realized gain (loss) in the Statement of Operations. Changes in tax liabilities related to capital gain taxes on unrealized investment gains, if any, are reflected as part of Change in net unrealized appreciation (depreciation) in the Statement of Operations. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards, partnership interest tax allocations, losses on wash sale transactions, foreign currency transactions, derivative contract transactions, distribution character reclassifications and post-October capital losses.

         
        21

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 6,700,944     $ 7,460,660  
Tax return of capital
    —       1,339,340  
                 
Total distributions
  $ 6,700,944     $ 8,800,000  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of February 28, 2011, certain other tax attributes consisted of the following:
 
         
Capital loss carryforwards
  $ (5,078,205 )
Post-October capital loss deferral
  $ (4,468,208 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 28, 2017
  $ (1,749,220 )
February 28, 2018
    (3,328,985 )
         
Total
  $ (5,078,205 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 79,913,547     $ 1,142,821     $ (9,079,288 )   $ (7,936,467 )    
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S.

         
22
       

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (Note 5).
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
Purchases and redemptions of Fund shares
Purchase premiums and redemption fees are paid to and retained by the Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. Such fees are recorded as a component of the Fund’s net share transactions. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any

         
        23

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of the Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund’s shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund’s shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder’s securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of the Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
 
Other matters
SPHF, an investment of the Fund, has litigation pending against various entities related to the 2002 fraud and related default of securities previously held by SPHF. The outcome of the lawsuits against the remaining defendants is not known and any potential recoveries are not reflected in the net asset value of SPHF. For the year ended February 28, 2011, the Fund received no distributions from SPHF in connection with the defaulted securities or the related litigation.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Fixed Income Securities — Typically, the value of fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
 
• Credit and Counterparty Risk — The Fund runs the risk that the issuer or guarantor of a fixed income security, the counterparty to an over-the-counter derivatives contract, a borrower of the Fund’s securities or the obligor of an obligation underlying an asset-backed security, will be unable or unwilling to make

         
24
       

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
timely principal, interest, or settlement payments, or otherwise honor its obligations. This risk is particularly pronounced for the Fund because it typically uses over-the-counter derivatives, including swap contracts with longer-term maturities, and may have significant exposure to a single counterparty. The risk of counterparty default is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions.
 
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
 
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in underlying funds, including the risk that the underlying funds in which it invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments.
 
Other principal risks of an investment in the Fund include Foreign Investment Risk (risk that the market prices of foreign securities will fluctuate more rapidly and to a greater extent than those of U.S. securities); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities lending); Currency Risk (risk that fluctuations in exchange rates will adversely affect the value of the Fund’s foreign currency holdings and investments denominated in foreign currencies); Focused Investment Risk (increased risk from the Fund’s focus on investments in countries, regions, sectors or companies with high positive correlations to one another); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
 
The most significant market risk for Funds investing in fixed income securities is that the securities in which they invest experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund because it invests in asset-backed securities. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as “collateralized debt obligations” or “collateralized loan obligations”) and by the fees earned by service

         
        25

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
providers. Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. Many asset-backed securities owned by the Fund that were once rated investment grade are now rated below investment grade as of the date of this report.
 
The existence of insurance on an asset-backed security does not guarantee that principal and/or interest will be paid because the insurer could default on its obligations. In recent years, a significant number of asset-backed security insurers have defaulted on their obligations.
 
With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.
 
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and a Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.
 
The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the

         
26
       

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
deterioration in worldwide economic and liquidity conditions referred to above. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution’s business may have a material impact on multiple investments.
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps or other derivatives on an index, a single security or a basket of securities to gain investment exposures (e.g., by selling protection under a credit default swap). The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). For example, the Fund may use credit default swaps to take a short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund’s exposure to the credit of an issuer through the debt instrument, but adjust the Fund’s interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed versus variable rates and shorter duration versus longer duration exposure. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically

         
        27

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral (e.g., foreign currency forwards; see “Currency Risk” above), that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In

         
28
       

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
 
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund’s forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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.
 
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. During the year ended February 28, 2011, the Fund used forward currency contracts to adjust exposure to foreign currencies and otherwise adjust currency exchange rate risk. Forward currency contracts outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. During the year ended February 28, 2011, the Fund used futures contracts to adjust interest-rate exposure and enhance the

         
        29

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
diversity and liquidity of the portfolio. Futures contracts outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. During the year ended February 28, 2011, the Fund used purchased option contracts to adjust interest rate exposure, to adjust exposure to currencies and otherwise manage currency exchange rate risk. Option contracts purchased by the Fund and outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. During the year ended February 28, 2011, the Fund used written option contracts to adjust exposure to foreign currencies and otherwise manage currency exchange rate risk. Written options outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.

         
30
       

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
For the year ended February 28, 2011, investment activity in options contracts written by the Fund was as follows:
 
                                                 
    Puts     Calls  
    Principal
                 Principal
              
    Amount
     Number
          Amount
     Number
        
    of Contracts     of Contracts     Premiums     of Contracts     of Contracts     Premiums  
 
Outstanding, beginning of year
    —       —     $ —     $      —            —     $      —  
Options written
    (8,000,000 )     —       (157,744 )     —       —       —  
Options exercised
    —       —       —       —       —       —  
Options expired
    —       —       —       —       —       —  
Options bought back
    —       —       —       —       —       —  
                                                 
Outstanding, end of year
    (8,000,000 )     —     $ (157,744 )   $ —       —     $ —  
                                                 
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).

         
        31

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility

         
32
       

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the year ended February 28, 2011, the Fund used swap agreements to adjust interest rate exposure, achieve exposure to a reference entity’s credit, and/or provide a measure of protection against default loss. Swap agreements outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of
February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Assets:
                                               
Investments, at value (purchased options)
  $ —     $ 42,730     $ —     $      —     $      —     $ 42,730  
Unrealized appreciation on futures contracts*
    76,781       —       —       —       —       76,781  
Unrealized appreciation on forward currency contracts
    —       226,533       —       —       —       226,533  
Unrealized appreciation on swap agreements
    228,345       —       —       —       —       228,345  
                                                 
Total
  $ 305,126     $ 269,263     $ —     $ —     $ —     $ 574,389  
                                                 

         
        33

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
  
  Fair values of derivative instruments on the Statement of Assets and Liabilities as of
  February 28, 2011Ù: — continued
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Liabilities:
                                               
Written options outstanding
  $ —     $ (12,568 )   $ —     $ —     $ —     $ (12,568 )
Unrealized depreciation on futures contracts*
    (65,659 )     —       —       —       —       (65,659 )
Unrealized depreciation on forward currency contracts
    —       (1,089,505 )     —       —       —       (1,089,505 )
Unrealized depreciation on swap agreements
    (392,593 )     —       (392,974 )     —       —       (785,567 )
                                                 
Total
  $ (458,252 )   $ (1,102,073 )   $ (392,974 )   $ —     $ —     $ (1,953,299 )
                                                 
 
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended February 28, 2011Ù:
 
                                                 
        Foreign
                
    Interest rate
   currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Investments (purchased options)
  $ —     $ 490,381     $ —     $      —     $      —     $ 490,381  
Forwards contracts
    —       404,147       —       —       —       404,147  
Futures contracts
    3,736,162       —       —       —       —       3,736,162  
Swap agreements
    —       —       468,513       —       —       468,513  
                                                 
Total
  $ 3,736,162     $ 894,528     $ 468,513     $ —     $ —     $ 5,099,203  
                                                 
Change in Unrealized Appreciation (Depreciation) on:
                                               
Investments (purchased options)
  $ —     $ (538,103 )   $ —     $ —     $ —     $ (538,103 )
Written options
    —       145,176       —       —       —       145,176  
Futures contracts
    (628,200 )     —       —       —       —       (628,200 )
Forward currency contracts
    —       (1,328,531 )     —       —       —       (1,328,531 )
Swap agreements
    (566,974 )     —       (416,898 )     —       —       (983,872 )
                                                 
Total
  $ (1,195,174 )   $ (1,721,458 )   $ (416,898 )   $ —     $ —     $ (3,333,530 )
                                                 
 
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
            * The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.

         
34
       

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The volume of derivative activity, based on absolute values (forward currency contracts and futures contracts), principal amounts (options), or notional amounts (swap agreements) outstanding at each month-end, was as follows for the year ended February 28, 2011:
 
                                 
    Forward
            
    currency
   Futures
        
    contracts   contracts   Swap agreements   Options
 
Average amount outstanding
  $ 90,082,931     $ 80,457,077     $ 132,002,574     $ 12,006,069  
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.25% of average daily net assets. The Fund has adopted a Shareholder Service Plan underwhich the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, an other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares. The Manager has contractually agreed through at least June 30, 2011 to waive the Fund’s shareholder service fee to the extent that the aggregate of any direct and indirect shareholder service fees borne by the Fund exceeds 0.15%; provided, however, that the amount of this waiver will not exceed 0.15%.
 
The Manager has contractually agreed to reimburse the Fund for expenses incurred by the Fund through at least June 30, 2011 to the extent the Fund’s total annual operating expenses (excluding “Excluded Fund Fees and Expenses”, as defined below) exceed 0.25% of the Fund’s average daily net assets. Excluded Fund Fees and Expenses include shareholder service fees, expenses indirectly incurred by investment in the underlying funds, fees and expenses of the independent Trustees of the Trust, fees and expenses for legal services not approved by the Manager for the Trust, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Section 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes) (collectively, “Excluded Fund Fees and Expenses”). In addition, the Manager has contractually agreed to reimburse the Fund through at least June 30, 2011 to the extent that the sum of (a) the Fund’s total annual operating expenses (excluding Excluded Fund Fees and Expenses); (b) the amount of fees and expenses incurred indirectly by the Fund through its investment in ECDF (excluding ECDF’s Excluded Fund Fees and Expenses); and (c) the amount of fees and expenses incurred indirectly (through investment in other underlying funds) by the Fund through its (direct or indirect) investment in GMO U.S. Treasury Fund (excluding U.S. Treasury Fund’s Excluded Fund Fees and Expenses) exceeds 0.25% of the Fund’s average daily net assets, subject to a maximum total reimbursement to such Fund equal to 0.25% of the Fund’s average daily net assets.

         
        35

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ending February 28, 2011 was $3,206 and $1,039, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
                   
Indirect Net
 		                 
Expenses
                  
(excluding
                  
shareholder service
     Indirect
            
fees and interest
     Shareholder
     Indirect Interest
     Total Indirect
expense)     Service Fees     Expense     Expenses
0.017%
    0.004%     0.011%     0.032%
                   
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 were as follows:
 
                 
    Purchases   Sales
 
U.S. Government securities
  $ 3,928,894     $ 3,897,357  
Investments (non-U.S. Government securities)
    57,724,912       107,013,113  
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 99.60% of the outstanding shares of the Fund was held by one shareholder.

         
36
       

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, 0.03% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and 99.60% of the Fund’s shares were held by accounts for which the Manager had investment discretion.
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    6,521     $ 52,298       1,015     $ 7,425  
Shares issued to shareholders in reinvestment of distributions
    814,210       6,700,944       1,976       14,179  
Shares repurchased
    (9,377,297 )     (77,174,925 )     (952,161 )     (6,903,963 )
Redemption fees
    —       —       —       107,884  
                                 
Net increase (decrease)
    (8,556,566 )   $ (70,421,683 )     (949,170 )   $ (6,774,475 )
                                 

         
        37

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                         
    Value,
               Distributions
       Value,
    beginning of
       Sales
   Dividend
   of Realized
   Return of
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   Capital   period
 
                                                         
GMO Emerging Country Debt Fund, Class III
  $ 4,905,670     $ 176,405     $ 5,698,138     $ 176,406     $ —     $ —     $ —  
GMO Emerging Country Debt Fund, Class IV
    —       4,823,730       2,700,000       175,592       —       —       2,089,035  
GMO Short-Duration Collateral Fund
    64,898,691       —       19,000,000       719,181       —       21,685,228       27,850,062  
GMO Special Purpose Holding Fund
    3,023       —       —       —       —       —       2,748  
GMO U.S. Treasury Fund
    8,291,499       41,219,556       44,500,000       17,786       1,770       —       5,008,836  
GMO World Opportunity Overlay Fund
    27,663,640       1,400,000       16,400,000       —       —       —       14,255,462  
                                                         
Totals
  $ 105,762,523     $ 47,619,691     $ 88,298,138     $ 1,088,965     $ 1,770     $ 21,685,228     $ 49,206,143  
                                                         

         
38
       

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Currency Hedged International Bond Fund:
 
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Currency Hedged International Bond Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian, brokers, and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
        39

 

GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
40
       

 

 
GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.42 %   $ 1,000.00     $ 976.80     $ 2.06  
2) Hypothetical
    0.42 %   $ 1,000.00     $ 1,022.71     $ 2.11  
                                 
 
            * Expenses are calculated using the Class’s annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
        41

 

GMO Currency Hedged International Bond Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
Of the ordinary income distributions made by the Fund during the fiscal year ended February 28, 2011, 3.64% is derived from investments in U.S. Government and Agency Obligations. All or a portion of the distributions from this income may be exempt from taxation at the state level. Consult your tax advisor for state specific information.

         
42        

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
            Principal
   Number of
      
            Occupation(s)
   Portfolios in
      
Name and
   Position(s)
   Length of
   During Past
   Fund Complex
     Other Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
        43

 

Independent Trustees: — (Continued)
 
                         
            Principal
   Number of
      
            Occupation(s)
   Portfolios in
      
Name and
   Position(s)
   Length of
   During Past
   Fund Complex
     Other Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 –
December 2007). 		    63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
            Principal
   Number of
      
            Occupation(s)
   Portfolios in
     Other
Name and
   Position(s)
   Length of
   During Past
   Fund Complex
     Directorships
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee; President
and Chief Executive
Officer of the Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
44        

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        45

 

             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
46        

 

 
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
 
Portfolio Managers
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Quantitative Equity Division while the overall management and strategic direction of the Fund’s portfolio is the responsibility of the Asset Allocation Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
GMO Currency Hedged International Equity Fund returned +14.2% for the fiscal year ended February 28, 2011, as compared with +13.1% for the MSCI EAFE Index (Hedged).
 
The Fund was approximately evenly allocated between Class IV shares of GMO International Intrinsic Value Fund, which returned +21.0%, and Class IV shares of GMO International Growth Equity Fund, which returned +22.6% during the period. The Fund outperformed as these two underlying Funds each outperformed their respective style benchmarks.
 
Currency hedging reduced the Fund’s absolute returns since foreign currencies generally appreciated relative to the U.S. dollar. In U.S. dollar terms, the unhedged MSCI EAFE Index returned +20.0% during the period, 6.9% more than the hedged benchmark.
 
Because some of the securities and instruments held directly or indirectly by the Fund had positive fair value adjustments during the fiscal year (and the performance of indices are not fair valued), the Fund’s absolute and relative performance is better than it otherwise would have been.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice. References to specific securities are not recommendations of such securities and may not be representative of any GMO portfolio’s current or future investments.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO Currency Hedged International Equity Fund Class III Shares
and the MSCI EAFE Index (Hedged)
As of February 28, 2011
 
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited.
 
 
MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.

 

GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary*   % of Total Net Assets  
Common Stocks
    96.1 %
Short-Term Investments
    4.4  
Preferred Stocks
    1.0  
Futures Contracts
    0.1  
Rights and Warrants
    0.0 Ù
Forward Currency Contracts
    (2.3 )
Other
    0.7  
         
      100.0 %
         
 
         
Country / Region Summary**   % of Investments  
Japan
    22.3 %
United Kingdom
    22.2  
France
    9.7  
Germany
    8.9  
Switzerland
    7.0  
Italy
    5.0  
Sweden
    4.8  
Singapore
    3.4  
Denmark
    2.5  
Hong Kong
    2.2  
Canada
    2.1  
Netherlands
    2.0  
Spain
    1.6  
Australia
    1.4  
Finland
    1.1  
Belgium
    1.0  
Austria
    0.6  
Greece
    0.6  
Ireland
    0.6  
Norway
    0.5  
Israel
    0.3  
New Zealand
    0.2  
Portugal
    0.0 Ù
         
      100.0 %
         
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust (“underlying funds”).
** The table above shows indirect country exposure associated with investments in underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative financial instruments. The table excludes exposure through forward currency contracts. The Fund attempts to hedge at least 70% of the foreign currency exposure in the underlying fund’s holdings relative to the U.S. Dollar. Therefore, the Fund’s currency exposures will be different than the country exposures noted above.
Ù Rounds to 0.0%.

         
        1

 

GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
Shares /
 		           
Par Value     Description   Value ($)  
            MUTUAL FUNDS — 99.3%        
                     
            United States — 99.3%        
            Affiliated Issuers        
      10,184,911     GMO International Growth Equity Fund, Class IV     243,215,675  
      10,457,938     GMO International Intrinsic Value Fund, Class IV     243,669,947  
                     
                     
            TOTAL MUTUAL FUNDS (COST $425,988,426)     486,885,622  
                     
                     
            SHORT-TERM INVESTMENTS — 2.9%        
                     
            Time Deposits — 2.9%        
USD
    8,122,337     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.03%, due 03/01/11     8,122,337  
USD
    2,000,000     Citibank (New York) Time Deposit, 0.03%, due 03/01/11     2,000,000  
USD
    2,000,000     HSBC Bank (New York) Time Deposit, 0.03%, due 03/01/11     2,000,000  
USD
    2,000,000     Bank of America (Charlotte) Time Deposit, 0.03%, due 03/01/11     2,000,000  
CAD
    16     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.23%, due 03/01/11     15  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $14,122,352)     14,122,352  
                     
                     
            TOTAL INVESTMENTS — 102.2%
(COST $440,110,778) 		    501,007,974  
            Other Assets and Liabilities (net) — (2.2%)     (10,961,342 )
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 490,046,632  
                     

         
2
  See accompanying notes to the financial statements.    

 

 
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
A summary of outstanding financial instruments at February 28, 2011 is as follows:
 
Forward Currency Contracts
 
                                     
                    Net Unrealized
Settlement
 		                  Appreciation
Date   Counterparty   Deliver/Receive   Units of Currency   Value   (Depreciation)
 
Buys †
                                   
4/20/11
    JPMorgan Chase Bank, N.A.     HKD     8,163,023     $ 1,048,673     $ 472  
4/20/11
    State Street Bank and Trust and Company     HKD     14,301,597       1,837,273       1,523  
                                 
                        $ 2,885,946     $ 1,995  
                                 
Sales #
                                   
4/20/11
    Bank of America, N.A.     AUD     8,730,409     $ 8,833,246     $ (153,167 )
4/20/11
    Barclays Bank PLC     AUD     6,901,572       6,982,867       (120,012 )
4/20/11
    JPMorgan Chase Bank, N.A.     AUD     7,728,572       7,819,608       (141,658 )
4/20/11
    Morgan Stanley Capital Services Inc.      AUD     7,514,591       7,603,106       (131,424 )
4/20/11
    Royal Bank of Scotland PLC     AUD     7,453,000       7,540,790       (135,265 )
4/20/11
    State Street Bank and Trust and Company     AUD     7,388,000       7,475,024       (131,352 )
4/20/11
    Bank of America, N.A.     CAD     2,372,750       2,439,595       (42,597 )
4/20/11
    Barclays Bank PLC     CAD     4,517,000       4,644,252       (79,482 )
4/20/11
    Royal Bank of Scotland PLC     CAD     3,477,249       3,575,210       (61,325 )
4/20/11
    State Street Bank and Trust and Company     CAD     3,703,000       3,807,321       (63,664 )
4/20/11
    Bank of New York Mellon     CHF     9,320,000       10,035,696       (425,467 )
4/20/11
    Barclays Bank PLC     CHF     7,669,967       8,258,954       (355,683 )
4/20/11
    Brown Brothers Harriman & Co.      CHF     6,184,000       6,658,878       (287,430 )
4/20/11
    Deutsche Bank AG     CHF     7,194,000       7,746,437       (351,973 )
4/20/11
    JPMorgan Chase Bank, N.A.     CHF     9,566,000       10,300,586       (448,735 )
4/20/11
    Morgan Stanley Capital Services Inc.      CHF     1,725,000       1,857,465       (87,583 )
4/20/11
    State Street Bank and Trust and Company     CHF     7,164,000       7,714,133       (329,252 )
4/20/11
    Bank of New York Mellon     DKK     55,163,000       10,205,567       (232,686 )
4/20/11
    Brown Brothers Harriman & Co.      DKK     20,467,155       3,786,577       (90,543 )
4/20/11
    JPMorgan Chase Bank, N.A.     DKK     18,116,000       3,351,595       (89,038 )

         
    See accompanying notes to the financial statements.   3

 

 
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Forward Currency Contracts — continued
 
                                     
                    Net Unrealized
Settlement
 		                  Appreciation
Date   Counterparty   Deliver/Receive   Units of Currency   Value   (Depreciation)
 
4/20/11
    Morgan Stanley Capital Services Inc.      DKK     29,512,000     $ 5,459,941     $ (133,966 )
4/20/11
    State Street Bank and Trust and Company     DKK     16,476,000       3,048,183       (72,726 )
4/20/11
    Bank of New York Mellon     EUR     18,220,967       25,128,486       (570,631 )
4/20/11
    Barclays Bank PLC     EUR     5,985,005       8,253,904       (184,847 )
4/20/11
    Brown Brothers Harriman & Co.      EUR     5,289,215       7,294,342       (172,414 )
4/20/11
    JPMorgan Chase Bank, N.A.     EUR     28,835,122       39,766,439       (984,411 )
4/20/11
    Morgan Stanley Capital Services Inc.      EUR     2,419,001       3,336,038       (79,329 )
4/20/11
    Royal Bank of Scotland PLC     EUR     4,343,142       5,989,615       (145,909 )
4/20/11
    State Street Bank and Trust and Company     EUR     14,757,242       20,351,673       (492,262 )
4/20/11
    Bank of America, N.A.     GBP     8,632,000       14,026,193       (194,087 )
4/20/11
    Bank of New York Mellon     GBP     8,641,000       14,040,818       (224,464 )
4/20/11
    Barclays Bank PLC     GBP     11,365,670       18,468,152       (284,785 )
4/20/11
    Deutsche Bank AG     GBP     5,927,268       9,631,257       (160,372 )
4/20/11
    JPMorgan Chase Bank, N.A.     GBP     9,463,732       15,377,680       (244,633 )
4/20/11
    Morgan Stanley Capital Services Inc.      GBP     8,234,000       13,379,481       (223,665 )
4/20/11
    Royal Bank of Scotland PLC     GBP     5,640,000       9,164,473       (144,178 )
4/20/11
    Bank of America, N.A.     JPY     1,549,079,206       18,942,570       (339,325 )
4/20/11
    Bank of New York Mellon     JPY     769,207,836       9,406,087       (177,734 )
4/20/11
    Brown Brothers Harriman & Co.      JPY     707,928,023       8,656,740       (158,307 )
4/20/11
    JPMorgan Chase Bank, N.A.     JPY     716,618,562       8,763,011       (161,128 )
4/20/11
    Morgan Stanley Capital Services Inc.      JPY     2,272,180,990       27,784,860       (514,095 )
4/20/11
    State Street Bank and Trust and Company     JPY     2,158,021,445       26,388,885       (488,639 )
4/20/11
    Bank of America, N.A.     NOK     3,340,774       594,955       (25,705 )
4/20/11
    Barclays Bank PLC     NOK     52,934,000       9,426,956       (395,084 )
4/20/11
    Brown Brothers Harriman & Co.      NOK     16,407,750       2,922,038       (122,606 )

         
4
  See accompanying notes to the financial statements.    

 

 
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Forward Currency Contracts — continued
 
                                     
                    Net Unrealized
Settlement
 		                  Appreciation
Date   Counterparty   Deliver/Receive   Units of Currency   Value   (Depreciation)
 
4/20/11
    Morgan Stanley Capital Services Inc.      NOK     27,468,000     $ 4,891,745     $ (210,617 )
4/20/11
    JPMorgan Chase Bank, N.A.     NZD     1,299,000       973,834       3,014  
4/20/11
    Morgan Stanley Capital Services Inc.      NZD     4,050,000       3,036,203       10,689  
4/20/11
    State Street Bank and Trust and Company     NZD     3,181,000       2,384,731       8,399  
4/20/11
    Brown Brothers Harriman & Co.      SEK     40,815,000       6,428,326       (166,052 )
4/20/11
    Deutsche Bank AG     SEK     819,886       129,131       (3,509 )
4/20/11
    State Street Bank and Trust and Company     SEK     3,724,121       586,546       (15,244 )
4/20/11
    Brown Brothers Harriman & Co.      SGD     500,227       393,438       (3,173 )
4/20/11
    Deutsche Bank AG     SGD     1,078,344       848,139       (6,583 )
                                 
                        $ 475,911,777     $ (10,836,714 )
                                 
 
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
 
Currency Abbreviations:
 
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
DKK - Danish Krone
EUR - Euro
GBP - British Pound
HKD - Hong Kong Dollar
JPY - Japanese Yen
NOK - Norwegian Krone
NZD - New Zealand Dollar
SEK - Swedish Krona
SGD - Singapore Dollar
USD - United States Dollar

         
    See accompanying notes to the financial statements.   5

 

GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $14,122,352) (Note 2)
  $ 14,122,352  
Investments in affiliated issuers, at value (cost $425,988,426) (Notes 2 and 10)
    486,885,622  
Receivable for Fund shares sold
    1,000  
Unrealized appreciation on open forward currency contracts (Note 4)
    24,097  
Receivable for expenses reimbursed by Manager (Note 5)
    253,826  
         
Total assets
    501,286,897  
         
         
Liabilities:
       
Payable to affiliate for (Note 5):
       
Management fee
    203,358  
Shareholder service fee
    56,489  
Trustees and Trust Officers or agents unaffiliated with the Manager
    1,108  
Unrealized depreciation on open forward currency contracts (Note 4)
    10,858,816  
Accrued expenses
    120,494  
         
Total liabilities
    11,240,265  
         
Net assets
  $ 490,046,632  
         
Net assets consist of:
       
Paid-in capital
  $ 441,233,069  
Accumulated undistributed net investment income
    10,207,805  
Accumulated net realized loss
    (11,456,719 )
Net unrealized appreciation
    50,062,477  
         
    $ 490,046,632  
         
Net assets attributable to:
       
Class III shares
  $ 490,046,632  
         
Shares outstanding:
       
Class III
    20,324,432  
         
Net asset value per share:
       
Class III
  $ 24.11  
         

         
6
  See accompanying notes to the financial statements.    

 

GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends from affiliated issuers (Note 10)
  $ 4,757,677  
Interest
    2,686  
         
Total investment income
    4,760,363  
         
Expenses:
       
Management fee (Note 5)
    1,788,494  
Shareholder service fee — Class III (Note 5)
    496,804  
Custodian and fund accounting agent fees
    112,932  
Audit and tax fees
    64,559  
Transfer agent fees
    27,536  
Registration fees
    18,602  
Legal fees
    15,540  
Trustees fees and related expenses (Note 5)
    6,887  
Miscellaneous
    13,021  
         
Total expenses
    2,544,375  
Fees and expenses reimbursed by Manager (Note 5)
    (250,067 )
Indirectly incurred fees waived or borne by Manager (Note 5)
    (1,611,561 )
Shareholder service fee waived (Note 5)
    (290,081 )
         
Net expenses
    392,666  
         
Net investment income (loss)
    4,367,697  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in affiliated issuers
    2,746,601  
Foreign currency, forward contracts and foreign currency related transactions
    (23,461,736 )
         
Net realized gain (loss)
    (20,715,135 )
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in affiliated issuers
    60,184,680  
Foreign currency, forward contracts and foreign currency related transactions
    (10,895,920 )
         
Net unrealized gain (loss)
    49,288,760  
         
Net realized and unrealized gain (loss)
    28,573,625  
         
Net increase (decrease) in net assets resulting from operations
  $ 32,941,322  
         

         
    See accompanying notes to the financial statements.   7

 

GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 4,367,697     $ 902,826  
Net realized gain (loss)
    (20,715,135 )     (13,368,507 )
Change in net unrealized appreciation (depreciation)
    49,288,760       19,958,116  
                 
                 
Net increase (decrease) in net assets from operations
    32,941,322       7,492,435  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    —       (2,756,296 )
                 
Net share transactions (Note 9):
               
Class III
    431,710,108       (4,758,078 )
                 
                 
Total increase (decrease) in net assets
    464,651,430       (21,939 )
                 
Net assets:
               
Beginning of period
    25,395,202       25,417,141  
                 
End of period (including accumulated undistributed net investment income of $10,207,805 and distributions in excess of net investment income of $57,047, respectively)
  $ 490,046,632     $ 25,395,202  
                 

         
8
  See accompanying notes to the financial statements.    

 

GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011(a)   2010(a)   2009(a)   2008(a)   2007(a)
 
Net asset value, beginning of period
  $ 21.12     $ 18.08     $ 42.56     $ 59.60     $ 72.56  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)(b)†
    0.30       0.64       1.20       0.24       0.80  
Net realized and unrealized gain (loss)
    2.69       4.40       (12.80 )     (2.32 )     9.36  
                                         
                                         
Total from investment operations
    2.99       5.04       (11.60 )     (2.08 )     10.16  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    —       (2.00 )(c)     (1.60 )     —       (0.96 )
From net realized gains
    —       —       (11.28 )     (14.96 )     (22.16 )
                                         
                                         
Total distributions
    —       (2.00 )     (12.88 )     (14.96 )     (23.12 )
                                         
                                         
Net asset value, end of period
  $ 24.11     $ 21.12     $ 18.08     $ 42.56     $ 59.60  
                                         
                                         
Total Return(d)
    14.16 %     29.15 %     (35.57 )%     (6.75 )%     15.60 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 490,047     $ 25,395     $ 25,417     $ 30,273     $ 227,096  
Net expenses to average daily net assets(e)
    0.12 %     0.11 %     0.11 %(f)     0.08 %(f)     0.07 %
Net investment income (loss) to average daily net assets(b)
    1.32 %     3.25 %     3.96 %     0.42 %     1.23 %
Portfolio turnover rate
    32 %     15 %     17 %     11 %     18 %
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets:(g)
    0.65 %     1.16 %     1.24 %     0.71 %     0.68 %
 
(a) Per share amounts were adjusted to reflect a 1:8 reverse stock split effective November 15, 2010.
(b) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(c) Distributions from net investment income include amounts (approximately $2.00 per share for 2010) from foreign currency transactions which are treated as realized capital gain for book purposes.
(d) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions.
(e) The net expense ratio does not include the effect of expense reductions (Note 2).
(f) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(g) Ratios include reimbursement of direct operating expenses and waiver of expenses indirectly incurred through investment in the underlying funds (Note 5).
† Calculated using average shares outstanding throughout the period.

         
    See accompanying notes to the financial statements.   9

 

GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO Currency Hedged International Equity Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund seeks total return greater than that of its benchmark, the MSCI EAFE Index (Europe, Australasia, and Far East) (Hedged). The Fund is a fund of funds and invests primarily in other GMO Funds. The Fund may invest in GMO International Core Equity Fund, GMO International Intrinsic Value Fund, GMO International Growth Equity Fund, GMO International Small Companies Fund, and GMO Flexible Equities Fund (GMO Funds in which the Fund invests are collectively referred to as “underlying funds”). In addition, the Fund may invest in securities directly, rather than through the underlying funds. Under normal circumstances, the Fund invests directly and indirectly (through investment in the underlying funds) at least 80% of its assets in equity investments. The term “equity investments” refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts.
 
The Manager uses multi-year forecasts of relative value and risk among major sectors in the international equity markets (e.g., large-cap value, large-cap growth, large-cap core, small- and mid-cap value and small- and mid-cap growth) to select the underlying funds and decide how much to invest in each. The Manager shifts investments among the underlying funds in response to changes in its investment outlook and market valuations and may use redemption/purchase activity to rebalance the Fund’s investments.
 
The Manager assesses the currency exposure of the underlying funds’ holdings and then attempts to hedge at least 70% of that exposure relative to the U.S. dollar through the use of currency forwards and other derivatives. While the Fund’s benchmark is fully hedged, the Fund may take active overweighted and underweighted positions in particular currencies relative to its benchmark. The Fund may invest in unaffiliated money market funds, and the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund also may lend its portfolio securities. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
 
On October 5, 2010, the Fund’s Board of Trustees approved a one for eight reverse stock split for the Fund. The reverse stock split was effective as of November 15, 2010. The reverse stock split did not result in a change to the value of the shareholder account balances.

         
10
       

 

 
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The financial statements of the underlying funds should be read in conjunction with the Fund’s financial statements. These financial statements are available, without charge, upon request by calling (617) 346-7646 (collect) or visiting GMO’s website at www.gmo.com.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Shares of the underlying funds and other investment funds are generally valued at their net asset value. Investments held by the underlying funds are valued as follows. Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the over-the-counter (“OTC”) market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of February 28, 2011, the total value of securities held indirectly that were fair valued using methods determined in good faith by or at the discretion of the Trustees of the Trust represented less than 0.1% of net assets. Additionally, because many foreign securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund and the underlying funds generally value those foreign securities (including futures, derivatives and other securities whose values are based on indices comprised of such securities) as of the NYSE close using fair value prices, which are based on local closing prices adjusted by a factor supplied by a third party vendor using that vendor’s proprietary models. As of February 28, 2011, those foreign equity securities and foreign index futures contracts representing 93.8% and 0.2%, respectively, of the net assets of the Fund, through investments in the underlying funds, were valued using fair value prices based on those adjustments. Those underlying funds classify such securities

         
        11

 

 
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
(as defined below) as Level 2. See Note 4 for a further discussion on valuation of derivative financial instruments.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant.

         
12
       

 

 
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Mutual Funds
                               
United States
  $ 486,885,622     $ —     $      —     $ 486,885,622  
                                 
TOTAL MUTUAL FUNDS
    486,885,622       —       —       486,885,622  
                                 
Short-Term Investments
    14,122,352       —       —       14,122,352  
                                 
Total Investments
    501,007,974       —       —       501,007,974  
                                 
Derivatives*
                                
Forward Currency Contracts
                               
Foreign currency risk
    —       24,097       —       24,097  
                                 
Total
  $ 501,007,974     $ 24,097     $ —     $ 501,032,071  
                                 
 
LIABILITY VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Liabilities
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Derivatives*
                                
Forward Currency Contracts
                               
Foreign currency risk
  $      —     $ (10,858,816 )   $      —     $ (10,858,816 )
                                 
Total
  $ —     $ (10,858,816 )   $ —     $ (10,858,816 )
                                 
 
The risks referenced above are not intended to be inclusive of all risks. Please see the Investment Risks and Derivative Financial Instruments sections below for a further discussion of risks.
 
            * Because the tables above are based on market values or unrealized appreciation (depreciation) rather than the notional amounts of derivatives, the uncertainties surrounding the valuation inputs for a derivative are likely to be more significant to the Fund’s net asset value than the uncertainties surrounding inputs for a non-derivative security with the same market value.

         
        13

 

 
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements. The aggregate net values of the Fund’s indirect investments in securities using Level 3 inputs were less than 0.1% of total net assets.
 
The Fund held no investments or derivative financial instruments directly at either February 28, 2011 or February 28, 2010, whose fair value was categorized using Level 3 inputs.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 pm. Income and expenses denominated in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country’s tax treaty with the United States. The foreign withholding rates applicable to a Fund’s investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Taxes related to capital gains realized during the year ended February 28, 2011, if any, are reflected as part of Net realized gain (loss) in the Statement of Operations. Changes in tax liabilities related to capital gain taxes on unrealized investment gains, if any, are reflected as part of Change in net unrealized appreciation (depreciation) in the Statement of

         
14
       

 

 
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Operations. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards, derivative contract transactions, foreign currency transactions, losses on wash sale transactions, and net operating losses.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $      —     $ 2,756,296  
                 
Total distributions
  $ —     $ 2,756,296  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed net long-term capital gain
    2,299,447  
Tax Attributes:
       
Capital loss carryforwards
  $ (6,392,893 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 28, 2018
  $ (6,392,893 )
         
Total
  $ (6,392,893 )
         

         
        15

 

 
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 447,474,051     $ 53,533,923     $ —     $ 53,533,923      
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may

         
16
       

 

 
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (Note 5).
 
Brown Brothers Harriman & Co. (“BBH”) serves as the Fund’s custodian and fund accounting agent. State Street Bank and Trust Company (“State Street”) serves as the Fund’s transfer agent. BBH’s and State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. References to investments include those held directly by the Fund and indirectly through the Fund’s investments in the underlying funds. The Fund and some of the underlying funds are non-diversified investment companies under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund or an underlying fund may affect the Fund’s or the underlying fund’s performance more than if the Fund or underlying fund were diversified. The principal risks of investing in the Fund are summarized below, including those risks to which the Fund is exposed as a result of its investments in the underlying funds. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund and the underlying funds normally do not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund’s investments.
 
• Derivatives Risk — The use of derivatives involves the risk that their value may not correlate with the value of the relevant underlying assets, rates or indices. Derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The risk to the Fund of using derivatives is particularly pronounced because the Fund often uses currency forwards and other derivatives for hedging purposes.
 
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund or the underlying funds may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund or the underlying funds to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing

         
        17

 

 
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund’s investments.
 
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
 
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in the underlying funds, including the risk that the underlying funds in which it invests will not perform as expected or that the Fund will invest in underlying funds with higher fees or expenses.
 
Other principal risks of an investment in the Fund include Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Market Risk — Value Securities (risk that the price of investments held by the Fund will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Market Risk — Growth Securities (greater price fluctuations resulting from dependence on future earnings expectations); Currency Risk (risk that fluctuations in exchange rates may adversely affect the value of investments denominated in foreign currencies, or that the U.S. dollar will decline in value relative to the foreign currency being hedged by the Fund or an underlying fund); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund’s securities); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by “equitizing” its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including

         
18
       

 

 
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically “sell” a portion of the Fund’s portfolio) in combination with a long futures contract on another index (to synthetically “buy” exposure to that index). The Funds also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral (e.g., foreign currency forwards; see “Currency Risk” above), that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a

         
        19

 

 
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
 
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund’s forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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.
 
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the

         
20
       

 

 
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. During the year ended February 28, 2011, the Fund used forward currency contracts to hedge foreign currency exposure in the underlying Funds’ investments relative to the U.S. dollar. Forward currency contracts outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. The Fund had no futures contracts outstanding at the end of the period.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of

         
        21

 

 
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset

         
22
       

 

 
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in

         
        23

 

 
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of
February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Assets:
                                               
Unrealized appreciation on forward currency contracts
  $      —     $ 24,097     $      —     $      —     $      —     $ 24,097  
                                                 
Total
  $ —     $ 24,097     $ —     $ —     $ —     $ 24,097  
                                                 
Liabilities:
                                               
Unrealized depreciation on forward currency contracts
  $ —     $ (10,858,816 )   $ —     $ —     $ —     $ (10,858,816 )
                                                 
Total
  $ —     $ (10,858,816 )   $ —     $ —     $ —     $ (10,858,816 )
                                                 
 
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended February 28, 2011Ù:

         
24
       

 

 
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Forward currency contracts
  $      —     $ (23,337,512 )   $      —     $      —     $      —     $ (23,337,512 )
                                                 
Total
  $ —     $ (23,337,512 )   $ —     $ —     $ —     $ (23,337,512 )
                                                 
Change in Unrealized Appreciation (Depreciation) on:
                                               
Forward currency contracts
  $ —     $ (10,895,920 )   $ —     $ —     $ —     $ (10,895,920 )
                                                 
Total
  $ —     $ (10,895,920 )   $ —     $ —     $ —     $ (10,895,920 )
                                                 
 
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
 
The volume of derivative activity, based on absolute values (forward currency contracts) outstanding at each month-end, was as follows for the year ended February 28, 2011:
 
         
    Forward
    currency
    contracts
 
Average amount outstanding
  $ 392,628,233  
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.54% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares. The Manager contractually agreed through at least June 30, 2011 to waive the Fund’s shareholder service fee to the extent that the aggregate of any direct and indirect shareholder service fees borne by the Fund exceeds 0.15%; provided, however, that the amount of this waiver will not exceed 0.15%.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.54% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions,

         
        25

 

 
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in other GMO Funds (excluding those Funds’ Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund’s Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $6,887 and $1,999, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
             
Indirect Net Expenses
 		           
(excluding shareholder
     Indirect Shareholder
      
service fees)     Service Fees     Total Indirect Expenses
0.491%
    0.088%     0.579%
             
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 aggregated $499,387,678 and $100,610,000, respectively.
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.

         
26
       

 

 
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 93.55% of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund’s outstanding shares. One of the shareholders is another fund of the Trust.
 
As of February 28, 2011, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and 99.99% of the Fund’s shares were held by accounts for which the Manager had investment discretion.
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares*   Amount   Shares*   Amount
                 
 
Shares sold
    24,851,257     $ 559,719,467       —     $ —  
Shares issued to shareholders in reinvestment of distributions
    —       —       148,506       2,756,270  
Shares repurchased
    (5,727,242 )     (128,009,359 )     (354,475 )     (7,514,348 )
                                 
Net increase (decrease)
    19,124,015     $ 431,710,108       (205,969 )   $ (4,758,078 )
                                 
 
            * Shares were adjusted to reflect a 1:8 reverse stock split effective November 15, 2010.
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                 
    Value,
               Distributions
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   period
 
GMO International Growth Equity Fund, Class IV
  $ 12,603,325     $ 250,197,510     $ 51,415,000     $ 2,007,509     $      —     $ 243,215,675  
GMO International Intrinsic Value Fund, Class IV
    12,573,339       249,190,168       49,195,000       2,750,168       —       243,669,947  
                                                 
Totals
  $ 25,176,664     $ 499,387,678     $ 100,610,000     $ 4,757,677     $ —     $ 486,885,622  
                                                 

         
        27

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Currency Hedged International Equity Fund:
 
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 Equity Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian, brokers, and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
28
       

 

GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
        29

 

 
GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.70 %   $ 1,000.00     $ 1,150.30     $ 3.73  
2) Hypothetical
    0.70 %   $ 1,000.00     $ 1,021.32     $ 3.51  
                                 
 
            * Expenses are calculated using the Class’s annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
30
       

 

GMO Currency Hedged International Equity Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.

         
        31

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
  Position(s)
   Length of
  During Past
   Complex
     Other Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
32        

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
  Position(s)
   Length of
  During Past
   Complex
     Other Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since
March 2010. 		  Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee; President
and Chief Executive
Officer of the Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
        33

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and
Chief Financial
Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003 – 2007).
             
John McGinty
DOB: 08/11/1962 		  Chief
Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
34        

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President
and Anti-Money
Laundering
Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        35

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO Developed World Stock Fund
(A Series of GMO Trust)
 
Portfolio Managers
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Quantitative Equity Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
The Class III shares of GMO Developed World Stock Fund returned +21.4% for the fiscal year ended February 28, 2011, as compared with +21.7% for the MSCI World Index. The Fund was invested substantially in global equity securities throughout the period.
 
Stock selection had a positive impact on performance relative to the benchmark. Holdings in U.S. technology company Apple Inc. and U.K. oil company Royal Dutch Shell were among the most significant contributors to relative returns. Major detractors included holdings in U.S. pharmaceuticals Johnson & Johnson and Merck & Co.
 
Sector selection had a negative impact on performance relative to the benchmark. The Fund’s focus on high quality companies resulted in an overweight to Health Care, which underperformed, and underweight to Materials, which outperformed. These positions detracted from relative performance.
 
Country selection had a small negative impact on relative performance. This was mainly from overweights to Japan and Italy, which both underperformed.
 
Currency selection had a negative impact on relative performance as the impact from an underweight in the Australian dollar outweighed the value added from an overweight in the Swedish krone.
 
Because some of the securities and instruments held directly or indirectly by the Fund had positive fair value adjustments during the fiscal year (and the performance of indices are not fair valued), the Fund’s absolute and relative performance is better than it otherwise would have been.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice. References to specific securities are not recommendations of such securities and may not be representative of any GMO portfolio’s current or future investments.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO Developed World Stock Fund Class III Shares and the MSCI World Index
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Each performance figure assumes a purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of .25% on the purchase and .25% on the redemption. Transaction fees are retained by the Fund to cover trading costs. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. All information is unaudited. Performance for classes may vary due to different fees.
 
 
 
MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.

 

GMO Developed World Stock Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary   % of Total Net Assets  
Common Stocks
    95.2 %
Mutual Funds
    2.9  
Preferred Stocks
    0.6  
Short-Term Investments
    0.6  
Futures Contracts
    0.1  
Forward Currency Contracts
    0.0 Ù
Rights and Warrants
    0.0 Ù
Other
    0.6  
         
      100.0 %
         
 
Ù Rounds to 0.0%
 
         
Country Summary   % of Investments*  
United States
    48.2 %
United Kingdom
    12.7  
Japan
    11.4  
France
    6.3  
Germany
    6.3  
Italy
    5.9  
Singapore
    2.8  
Canada
    1.5  
Sweden
    1.5  
Switzerland
    0.9  
Ireland
    0.5  
Netherlands
    0.5  
Spain
    0.5  
Hong Kong
    0.4  
Belgium
    0.2  
Denmark
    0.2  
Australia
    0.1  
Greece
    0.1  
         
      100.0 %
         
 
* The table above shows country exposure in the Fund. The table excludes short-term investments. The table includes exposure through derivative financial instruments, if any. The table excludes exposure through forward currency contracts. The table takes into account the market value of securities and options and the notional amounts of swap agreements and other derivative financial instruments, if any.
 

         
        1

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2011 (Unaudited)
 
         
Industry Group Summary   % of Equity Investments**  
Energy
    12.9 %
Pharmaceuticals, Biotechnology & Life Sciences
    12.2  
Capital Goods
    9.8  
Banks
    6.5  
Technology Hardware & Equipment
    5.9  
Software & Services
    5.6  
Materials
    5.6  
Food, Beverage & Tobacco
    5.0  
Automobiles & Components
    4.5  
Insurance
    4.0  
Telecommunication Services
    3.9  
Utilities
    3.4  
Transportation
    2.9  
Health Care Equipment & Services
    2.5  
Retailing
    2.3  
Food & Staples Retailing
    2.3  
Consumer Durables & Apparel
    1.9  
Real Estate
    1.9  
Consumer Services
    1.7  
Diversified Financials
    1.7  
Media
    1.6  
Semiconductors & Semiconductor Equipment
    1.0  
Household & Personal Products
    0.8  
Commercial & Professional Services
    0.1  
         
      100.0 %
         
 
** Equity investments may consist of common stocks and other stock-related securities, such as preferred stocks. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.

         
2
       

 

GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            COMMON STOCKS — 95.2%        
                     
            Australia — 0.8%        
      29,579     Commonwealth Bank of Australia     1,607,841  
      9,715     Rio Tinto Ltd     848,272  
      304,006     Telstra Corp Ltd     865,644  
                     
            Total Australia     3,321,757  
                     
                     
            Belgium — 0.2%        
      150,823     Dexia SA *     658,922  
                     
                     
            Canada — 1.4%        
      14,000     Bank of Nova Scotia     864,598  
      18,800     Barrick Gold Corp     992,295  
      12,900     Canadian Pacific Railway Ltd     875,535  
      46,700     EnCana Corp     1,517,972  
      53,200     Husky Energy Inc     1,641,093  
                     
            Total Canada     5,891,493  
                     
                     
            Denmark — 0.2%        
      7,982     Novo-Nordisk A/S Class B     1,006,070  
                     
                     
            France — 6.2%        
      98     APERAM *     4,052  
      46,045     AXA     967,361  
      57,045     BNP Paribas     4,452,089  
      23,667     Bouygues SA     1,093,220  
      9,337     Casino Guichard-Perrachon SA     914,287  
      33,466     CNP Assurances     742,598  
      9,490     Compagnie de Saint-Gobain     566,827  
      9,788     GDF Suez     397,006  
      6,350     Lafarge SA     385,754  
      7,388     LVMH Moet Hennessy Louis Vuitton SA     1,165,174  
      24,387     Peugeot SA *     976,782  
      5,320     PPR     807,131  
      26,274     Renault SA *     1,611,190  

         
    See accompanying notes to the financial statements.   3

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            France — continued        
      53,158     Sanofi-Aventis     3,675,765  
      3,695     Schneider Electric SA     612,014  
      26,635     Societe Generale     1,872,859  
      65,220     Total SA     3,997,987  
      2,561     Vallourec SA     265,876  
      41,828     Vivendi SA     1,192,133  
                     
            Total France     25,700,105  
                     
                     
            Germany — 4.1%        
      19,303     Allianz SE (Registered)     2,787,550  
      11,024     BASF AG     919,181  
      13,728     Bayerische Motoren Werke AG     1,115,297  
      23,310     Daimler AG (Registered) *     1,647,298  
      18,055     Deutsche Lufthansa AG (Registered) *     369,899  
      70,105     E.ON AG     2,302,586  
      10,117     Hannover Rueckversicherung AG (Registered)     589,581  
      65,627     Infineon Technologies AG     720,946  
      4,190     K+S AG     323,900  
      4,641     Lanxess AG     345,819  
      3,832     Linde AG     585,644  
      3,844     MAN SE     489,908  
      5,834     Metro AG     427,432  
      7,936     Muenchener Rueckversicherungs-Gesellschaft AG (Registered)     1,326,868  
      16,701     RWE AG     1,129,389  
      6,150     Salzgitter AG     511,779  
      27,028     Suedzucker AG     743,846  
      3,145     Volkswagen AG     478,413  
                     
            Total Germany     16,815,336  
                     
                     
            Greece — 0.1%        
      60,902     National Bank of Greece SA *     566,206  
                     

         
4
  See accompanying notes to the financial statements.    

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Hong Kong — 0.4%        
      39,500     CLP Holdings Ltd     321,733  
      86,237     Esprit Holdings Ltd     424,444  
      58,500     Power Assets Holdings Ltd     382,432  
      24,000     Sun Hung Kai Properties Ltd     390,039  
                     
            Total Hong Kong     1,518,648  
                     
                     
            Ireland — 0.5%        
      92,476     CRH Plc     2,138,547  
                     
                     
            Italy — 4.6%        
      677,146     Enel SPA     4,035,300  
      270,797     ENI SPA     6,602,727  
      24,707     Fiat SPA     229,444  
      64,090     Finmeccanica SPA     802,400  
      69,050     Mediaset SPA     444,537  
      64,471     Mediobanca SPA     682,544  
      154,164     Parmalat SPA     472,664  
      20,294     Saipem SPA     1,025,220  
      856,402     Telecom Italia SPA     1,337,034  
      803,741     Telecom Italia SPA-Di RISP     1,063,796  
      927,292     UniCredit SPA     2,385,745  
                     
            Total Italy     19,081,411  
                     
                     
            Japan — 10.9%        
      6,600     Astellas Pharma Inc     259,519  
      152,000     Cosmo Oil Co Ltd     552,140  
      5,800     Fanuc Ltd     906,013  
      3,400     Fast Retailing Co Ltd     533,816  
      33,000     Fuji Heavy Industries Ltd     284,363  
      182,000     Hitachi Ltd     1,107,729  
      55,600     Honda Motor Co Ltd     2,426,505  
      96     INPEX Corp     674,580  
      155,000     Itochu Corp     1,611,857  
      381,520     JX Holdings Inc     2,687,609  

         
    See accompanying notes to the financial statements.   5

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Japan — continued        
      142,000     Kawasaki Kisen Kaisha Ltd     621,455  
      251     KDDI Corp     1,630,010  
      16,800     Komatsu Ltd     515,402  
      173,000     Marubeni Corp     1,327,869  
      238,000     Mazda Motor Corp     616,381  
      89,000     Mitsubishi Chemical Holdings Corp     652,703  
      30,500     Mitsubishi Corp     848,579  
      48,800     Mitsui & Co Ltd     892,062  
      96,000     Mitsui OSK Lines Ltd     638,352  
      234,300     Mizuho Financial Group Inc     482,969  
      12,100     Murata Manufacturing Co Ltd     902,040  
      1,600     Nintendo Co Ltd     470,537  
      61,300     Nippon Telegraph & Telephone Corp     2,998,666  
      205,000     Nippon Yusen KK     906,669  
      275,800     Nissan Motor Co Ltd     2,833,873  
      7,000     Nitto Denko Corp     424,484  
      117     NTT Data Corp     418,150  
      391     NTT Docomo Inc     734,523  
      13,760     ORIX Corp     1,549,675  
      176,100     Resona Holdings Inc     962,047  
      71,000     Ricoh Company Ltd     947,347  
      13,600     Sankyo Co Ltd     770,283  
      69,800     Showa Shell Sekiyu KK     633,212  
      11,600     SoftBank Corp     476,923  
      385,800     Sojitz Corp     870,109  
      168,000     Sumitomo Corp     2,496,010  
      216,000     Taisei Corp     512,357  
      7,000     Taisho Pharmaceutical Co Ltd     153,383  
      47,000     Takeda Pharmaceutical Co Ltd     2,341,538  
      62,000     TonenGeneral Sekiyu KK     732,160  
      52,500     Toyota Motor Corp     2,453,189  
      53,400     Toyota Tsusho Corp     1,013,999  
                     
            Total Japan     44,871,087  
                     

         
6
  See accompanying notes to the financial statements.    

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Netherlands — 0.5%        
      113,400     ING Groep NV *     1,422,549  
      8,678     Koninklijke DSM NV     509,775  
                     
            Total Netherlands     1,932,324  
                     
                     
            Singapore — 2.3%        
      704,000     Genting Singapore Plc *     1,060,079  
      3,349,000     Golden Agri-Resources Ltd     1,717,791  
      136,000     Keppel Corp Ltd     1,208,517  
      391,000     Neptune Orient Lines Ltd *     633,449  
      161,818     Noble Group Ltd     262,494  
      233,000     Oversea-Chinese Banking Corp Ltd     1,691,461  
      187,000     Sembcorp Industries Ltd     703,225  
      107,200     Singapore Airlines Ltd     1,151,119  
      393,600     Singapore Telecommunications     921,776  
                     
            Total Singapore     9,349,911  
                     
                     
            Spain — 1.0%        
      74,618     Banco Bilbao Vizcaya Argentaria SA     919,857  
      130,241     Banco Santander SA     1,603,494  
      19,889     Gas Natural SDG SA     339,821  
      41,056     Repsol YPF SA     1,378,208  
                     
            Total Spain     4,241,380  
                     
                     
            Sweden — 1.5%        
      19,617     Assa Abloy AB Class B     549,398  
      37,787     Atlas Copco AB Class A     950,067  
      23,579     Boliden AB     504,186  
      30,863     Sandvik AB     592,342  
      19,604     SKF AB Class B     547,153  
      60,986     Svenska Cellulosa AB Class B     1,007,885  
      82,296     Swedbank AB Class A *     1,450,062  
      27,736     Volvo AB Class B *     480,046  
                     
            Total Sweden     6,081,139  
                     

         
    See accompanying notes to the financial statements.   7

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Switzerland — 0.9%        
      10,947     Compagnie Financiere Richemont SA Class A     626,431  
      31,825     Novartis AG (Registered)     1,788,458  
      620     Swisscom AG (Registered)     273,738  
      1,613     Synthes Inc     221,448  
      2,926     Zurich Financial Services AG     849,955  
                     
            Total Switzerland     3,760,030  
                     
                     
            United Kingdom — 11.4%        
      34,677     3i Group Plc     176,049  
      29,984     Antofagasta Plc     686,686  
      82,185     ARM Holdings Plc     821,216  
      68,050     AstraZeneca Plc     3,329,844  
      250,994     Aviva Plc     1,905,158  
      165,467     BAE Systems Plc     884,867  
      338,583     Barclays Plc     1,757,123  
      16,490     BHP Billiton Plc     653,654  
      314,774     BP Plc     2,537,604  
      670,179     BT Group Plc     1,990,588  
      5,954     Carnival Plc     266,166  
      69,902     Compass Group Plc     628,990  
      173,388     GlaxoSmithKline Plc     3,328,427  
      77,904     Home Retail Group Plc     279,537  
      8,632     Kazakhmys Plc     202,897  
      601,774     Legal & General Group Plc     1,162,583  
      676,437     Lloyds Banking Group Plc *     683,112  
      88,644     Marks & Spencer Group Plc     499,113  
      11,252     Next Plc     361,427  
      659,852     Old Mutual Plc     1,411,840  
      2,396     Randgold Resources Ltd *     194,033  
      27,402     Rio Tinto Plc     1,929,557  
      30,739     Rolls–Royce Group Plc *     308,530  
      1,927,009     Royal Bank of Scotland Group Plc *     1,413,514  
      10,973     Royal Dutch Shell Plc A Shares (Amsterdam)     395,025  
      192,970     Royal Dutch Shell Plc A Shares (London)     6,941,679  

         
8
  See accompanying notes to the financial statements.    

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            United Kingdom — continued        
      138,667     Royal Dutch Shell Plc B Shares (London)     4,957,113  
      44,132     Scottish & Southern Energy Plc     888,809  
      21,133     Standard Chartered Plc     558,943  
      1,154,782     Vodafone Group Plc     3,278,536  
      28,797     Wolseley Plc *     1,002,665  
      45,320     WPP Plc     623,711  
      29,669     Xstrata Plc     678,563  
                     
            Total United Kingdom     46,737,559  
                     
                     
            United States — 48.2%        
      37,500     3M Co.      3,458,625  
      77,300     Abbott Laboratories     3,718,130  
      53,200     Accenture Plc.-Class A     2,738,736  
      11,100     ACE, Ltd.      702,075  
      2,900     Affiliated Managers Group, Inc. *     309,575  
      31,400     Allstate Corp. (The)     997,892  
      11,100     Altera Corp.      464,646  
      76,400     Altria Group, Inc.      1,938,268  
      13,500     AMDOCS Ltd. *     402,840  
      18,900     Ameren Corp.      528,444  
      22,100     American International Group, Inc. *     819,026  
      13,600     Ameriprise Financial, Inc.      861,152  
      42,800     Annaly Capital Management, Inc. REIT     767,404  
      35,400     Apple, Inc. *     12,503,634  
      10,400     Assurant, Inc.      422,552  
      47,500     Automatic Data Processing, Inc.      2,375,000  
      1,800     AutoZone, Inc. *     464,310  
      5,600     AvalonBay Communities, Inc. REIT     677,768  
      6,700     Baker Hughes, Inc.      476,035  
      25,900     Baxter International, Inc.      1,376,585  
      14,800     Becton, Dickinson and Co.      1,184,000  
      12,300     Best Buy Co., Inc.      396,552  
      9,600     Boston Properties, Inc. REIT     920,832  
      23,500     Bristol–Myers Squibb Co.      606,535  

         
    See accompanying notes to the financial statements.   9

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            United States — continued        
      14,400     Broadcom Corp.-Class A     593,568  
      7,300     C.R. Bard, Inc.      713,648  
      15,600     Capital One Financial Corp.      776,412  
      21,200     Caterpillar, Inc.      2,182,116  
      22,200     CenterPoint Energy, Inc.      352,092  
      21,100     Chevron Corp.      2,189,125  
      15,900     CH Robinson Worldwide, Inc.      1,151,001  
      4,600     Cimarex Energy Co.      534,198  
      46,200     Cisco Systems, Inc. *     857,472  
      6,500     CIT Group, Inc. *     281,580  
      33,000     Coach, Inc.      1,812,360  
      128,800     Coca–Cola Co. (The)     8,232,896  
      15,600     Cognizant Technology Solutions Corp.-Class A *     1,199,172  
      20,900     Computer Sciences Corp.      1,005,917  
      5,200     Concho Resources Inc. *     553,904  
      60,153     ConocoPhillips     4,684,114  
      8,300     CSX Corp.      619,678  
      8,800     Cummins, Inc.      889,856  
      10,200     Danaher Corp.      516,120  
      12,000     Deere & Co.      1,081,800  
      28,200     Discover Financial Services     613,350  
      13,300     DTE Energy Co.      626,164  
      20,800     Duke Energy Corp.      374,192  
      31,700     E.I. du Pont de Nemours & Co.      1,739,379  
      5,500     Eaton Corp.      609,290  
      25,000     Ecolab, Inc.      1,216,000  
      64,700     Eli Lilly & Co.      2,236,032  
      14,500     Emerson Electric Co.      865,070  
      12,500     Equity Residential REIT     688,875  
      20,900     Expeditors International of Washington, Inc.      999,020  
      10,200     FLIR Systems, Inc.      329,460  
      6,100     FMC Technologies, Inc. *     573,705  
      85,900     Ford Motor Co. *     1,292,795  
      17,200     Forest Laboratories, Inc. *     557,280  

         
10
  See accompanying notes to the financial statements.    

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            United States — continued        
      21,000     Freeport–McMoRan Copper & Gold, Inc.      1,111,950  
      59,200     General Electric Co.      1,238,464  
      28,800     General Dynamics Corp.      2,192,256  
      9,300     Genuine Parts Co.      490,017  
      14,300     Google, Inc.-Class A *     8,771,620  
      12,900     HCP, Inc. REIT     490,200  
      33,000     Home Depot, Inc.      1,236,510  
      8,200     Honeywell International, Inc.      474,862  
      17,600     Hospitality Properties Trust REIT     404,800  
      50,400     Host Hotels & Resorts, Inc. REIT     927,360  
      63,800     Intel Corp.      1,369,786  
      3,200     IntercontinentalExchange, Inc. *     410,240  
      15,900     Intuit, Inc. *     836,022  
      229,400     Johnson & Johnson     14,094,336  
      39,500     Kimberly–Clark Corp.      2,603,050  
      31,100     Las Vegas Sands Corp. *     1,450,504  
      11,600     Limited Brands, Inc.      371,432  
      4,100     Lubrizol Corp.      446,367  
      7,200     M&T Bank Corp.      633,960  
      41,000     Macy’s, Inc.      979,900  
      37,800     Marathon Oil Corp.      1,874,880  
      11,300     Marriott International, Inc.-Class A     443,073  
      16,400     McDonald’s Corp.      1,241,152  
      47,100     Medtronic, Inc.      1,880,232  
      193,200     Merck & Co., Inc.      6,292,524  
      12,500     National Oilwell Varco, Inc.      994,625  
      14,000     NetApp, Inc. *     723,240  
      2,200     Netflix, Inc. *     454,674  
      6,500     Newfield Exploration Co. *     473,135  
      14,000     Newmont Mining Corp.      773,780  
      28,200     Nike, Inc.-Class B     2,510,646  
      37,200     NiSource, Inc.      712,752  
      10,600     Nordstrom, Inc.      479,756  
      9,400     Norfolk Southern Corp.      616,452  

         
    See accompanying notes to the financial statements.   11

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            United States — continued        
      29,600     Oracle Corp.      973,840  
      45,800     Paychex, Inc.      1,540,254  
      8,000     Peabody Energy Corp.      523,920  
      28,900     Pepco Holdings, Inc.      541,297  
      88,600     PepsiCo, Inc.      5,619,012  
      242,073     Pfizer, Inc.      4,657,485  
      18,900     Philip Morris International, Inc.      1,186,542  
      6,600     Pinnacle West Capital Corp.      278,718  
      12,500     PNC Financial Services Group, Inc.      771,250  
      6,300     PPG Industries, Inc.      556,794  
      3,400     Praxair, Inc.      337,892  
      1,000     Priceline.com Inc. *     453,880  
      6,600     Public Storage REIT     740,850  
      75,200     Qualcomm, Inc.      4,480,416  
      12,100     Rockwell Collins, Inc.      779,724  
      19,100     RR Donnelley & Sons Co.      355,642  
      10,500     Sigma–Aldrich Corp.      670,845  
      19,700     Southern Copper Corp.      833,704  
      27,700     Southwest Airlines Co.      327,691  
      24,800     Starbucks Corp.      817,904  
      7,500     Starwood Hotels & Resorts Worldwide, Inc.      458,250  
      24,100     Stryker Corp.      1,524,566  
      9,400     St Jude Medical, Inc. *     450,072  
      7,800     Sunoco, Inc.      326,508  
      27,442     Supervalu, Inc.      236,824  
      42,900     Sysco Corp.      1,192,191  
      13,500     Teradata Corp. *     645,570  
      6,300     Time Warner Cable, Inc.      454,734  
      12,100     Time Warner, Inc.      462,220  
      14,200     TJX Cos. (The), Inc.      708,154  
      7,700     Torchmark Corp.      502,425  
      9,000     Travelers Cos. (The), Inc.      539,370  
      20,700     Tyco Electronics Ltd.      746,028  
      15,700     Union Pacific Corp.      1,497,937  
      13,500     United Parcel Service, Inc.-Class B     996,300  

         
12
  See accompanying notes to the financial statements.    

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            United States — continued        
      24,215     UnitedHealth Group, Inc.      1,031,075  
      23,700     United Technologies Corp.      1,979,898  
      53,900     Valero Energy Corp.      1,518,902  
      5,800     Varian Medical Systems, Inc. *     401,824  
      7,300     Ventas, Inc. REIT     404,566  
      6,000     VF Corp.      574,020  
      17,000     Viacom, Inc.-Class B     759,220  
      16,800     Virgin Media, Inc.      457,632  
      7,200     Visa, Inc.-Class A     525,960  
      4,400     VMware, Inc. *     368,060  
      10,500     Vornado Realty Trust REIT     979,965  
      43,200     Walt Disney Co. (The)     1,889,568  
      117,900     Wal–Mart Stores, Inc.      6,128,442  
      14,400     WellPoint, Inc. *     957,168  
      11,000     Western Digital Corp. *     336,380  
      49,300     Xerox Corp.      529,975  
      9,000     Yum! Brands, Inc.      452,970  
                     
            Total United States     198,547,248  
                     
                     
            TOTAL COMMON STOCKS (COST $352,722,671)     392,219,173  
                     
                     
            PREFERRED STOCKS — 0.6%        
                     
            Germany — 0.6%        
      9,637     Henkel AG & Co KGaA 1.61%     580,649  
      11,430     Porsche Automobil Holding SE 0.17%     910,589  
      6,292     Volkswagen AG 1.87%     1,069,985  
                     
            Total Germany     2,561,223  
                     
                     
            TOTAL PREFERRED STOCKS (COST $1,963,500)     2,561,223  
                     
                     
            RIGHTS AND WARRANTS — 0.0%        
                     
            United States — 0.0%        
      6,727     American International Group, Inc., Warrants, Strike 45.00, Expires 01/19/21 *     78,033  
                     
                     
            TOTAL RIGHTS AND WARRANTS (COST $125,109)     78,033  
                     

         
    See accompanying notes to the financial statements.   13

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
Shares /
 		           
Par Value     Description   Value ($)  
                     
            MUTUAL FUNDS — 2.9%        
                     
            United States — 2.9%        
            Affiliated Issuers        
      476,920     GMO U.S. Treasury Fund     11,923,000  
                     
                     
            TOTAL MUTUAL FUNDS (COST $11,923,000)     11,923,000  
                     
                     
            SHORT-TERM INVESTMENTS — 0.6%        
                     
            Time Deposits — 0.6%        
AUD
    10,005     Brown Brothers Harriman (Grand Cayman) Time Deposit, 3.84%, due 03/01/11     10,187  
CAD
    18,716     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.23%, due 03/01/11     19,264  
CHF
    33,334     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.01%, due 03/01/11     35,878  
DKK
    55,970     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.05%, due 03/01/11     10,359  
GBP
    14,954     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.09%, due 03/01/11     24,310  
HKD
    77,772     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.01%, due 03/01/11     9,986  
JPY
    1,809,080     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.01%, due 03/01/11     22,114  
NOK
    58,743     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.97%, due 03/01/11     10,489  
SEK
    64,344     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.54%, due 03/01/11     10,159  
SGD
    12,758     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.01%, due 03/01/11     10,032  
EUR
    14,412     Citibank (New York) Time Deposit, 0.12%, due 03/01/11     19,888  
USD
    2,167,718     Citibank (New York) Time Deposit, 0.03%, due 03/01/11     2,167,718  
                     
            Total Time Deposits     2,350,384  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $2,350,384)     2,350,384  
                     
                     
            TOTAL INVESTMENTS — 99.3%
(Cost $369,084,664) 		    409,131,813  
            Other Assets and Liabilities (net) — 0.7%     2,769,365  
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 411,901,178  
                     

         
14
  See accompanying notes to the financial statements.    

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
A summary of outstanding financial instruments at February 28, 2011 is as follows:
 
Forward Currency Contracts
 
                                     
                    Net Unrealized
Settlement
 		      Deliver/
 		  Units of
 		      Appreciation
Date   Counterparty   Receive   Currency   Value   (Depreciation)
 
Buys †
                                   
4/20/11
    Barclays Bank PLC     CAD     3,146,071     $ 3,234,702     $ 55,359  
4/20/11
    Bank of America, N.A.     CHF     3,575,237       3,849,784       162,000  
4/20/11
    Royal Bank of Scotland PLC     CHF     2,160,310       2,326,203       98,250  
4/20/11
    Brown Brothers Harriman & Co.      GBP     1,287,643       2,092,300       31,491  
4/20/11
    Deutsche Bank AG     HKD     37,993,622       4,880,900       2,574  
4/20/11
    Royal Bank of Scotland PLC     HKD     37,993,622       4,880,900       3,481  
4/20/11
    Bank of America, N.A.     SEK     20,990,562       3,305,995       84,974  
4/20/11
    Bank of New York Mellon     SEK     5,162,681       813,118       20,748  
4/20/11
    Brown Brothers Harriman & Co.      SEK     4,003,522       630,551       16,288  
4/20/11
    Bank of New York Mellon     SGD     3,066,619       2,411,956       20,189  
4/20/11
    State Street Bank and Trust and Company     SGD     4,005,840       3,150,672       27,137  
4/20/11
    JPMorgan Chase Bank, N.A.     SGD     4,005,840       3,150,672       27,186  
                                 
                        $ 34,727,753     $ 549,677  
                                 
Sales #
                                   
4/20/11
    Deutsche Bank AG     EUR     4,955,795     $ 6,834,524     $ (181,096 )
4/20/11
    Bank of America, N.A.     EUR     5,105,970       7,041,629       (168,876 )
4/20/11
    Morgan Stanley Capital Services Inc.      EUR     3,356,248       4,628,593       (110,066 )
4/20/11
    Brown Brothers Harriman & Co.      EUR     4,447,864       6,134,037       (144,988 )
4/20/11
    Bank of New York Mellon     JPY     56,992,510       696,920       (12,753 )
4/20/11
    JPMorgan Chase Bank, N.A.     JPY     350,984,457       4,291,935       (78,917 )
                                 
                        $ 29,627,638     $ (696,696 )
                                 
 
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.

         
    See accompanying notes to the financial statements.   15

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Futures Contracts
 
                             
                Net Unrealized
Number of
 		      Expiration
 		  Contract
 		  Appreciation
Contracts   Type   Date   Value   (Depreciation)
 
Buys
                           
25
    DAX     March 2011   $ 6,289,696     $ 288,173  
47
    FTSE 100     March 2011     4,567,882       97,616  
32
    FTSE/MIB     March 2011     4,964,405       394,709  
34
    MSCI Singapore     March 2011     1,896,050       (3,651 )
10
    TOPIX     March 2011     1,167,631       35,916  
                         
                $ 18,885,664     $ 812,763  
                         
Sales
                           
16
    IBEX 35     March 2011   $ 2,395,256     $ (19,314 )
22
    SPI 200     March 2011     2,717,354       (47,149 )
51
    S&P 500 E-Mini Index     March 2011     3,381,300       (161,675 )
                         
                $ 8,493,910     $ (228,138 )
                         
 
As of February 28, 2011, for futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
 
Notes to Schedule of Investments:
 
REIT - Real Estate Investment Trust
* Non-income producing security.
 
Currency Abbreviations:
 
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
DKK - Danish Krone
EUR - Euro
GBP - British Pound
HKD - Hong Kong Dollar
JPY - Japanese Yen
NOK - Norwegian Krone
SEK - Swedish Krona
SGD - Singapore Dollar
USD - United States Dollar

         
16
  See accompanying notes to the financial statements.    

 

GMO Developed World Stock Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $357,161,664) (Note 2)
  $ 397,208,813  
Investments in affiliated issuers, at value (cost $11,923,000) (Notes 2 and 10)
    11,923,000  
Foreign currency, at value (cost $15,735) (Note 2)
    15,712  
Receivable for Fund shares sold
    1,464  
Dividends receivable
    994,137  
Foreign taxes receivable
    18,179  
Unrealized appreciation on open forward currency contracts (Note 4)
    549,677  
Receivable for collateral on open futures contracts (Note 4)
    2,112,911  
Receivable for variation margin on open futures contracts (Note 4)
    73,889  
Receivable for expenses reimbursed by Manager (Note 5)
    32,368  
Miscellaneous receivable
    1,144  
         
Total assets
    412,931,294  
         
         
Liabilities:
       
Payable to affiliate for (Note 5):
       
Management fee
    141,468  
Shareholder service fee
    39,481  
Trustees and Trust Officers or agents unaffiliated with the Manager
    964  
Unrealized depreciation on open forward currency contracts (Note 4)
    696,696  
Accrued expenses
    151,507  
         
Total liabilities
    1,030,116  
         
Net assets
  $ 411,901,178  
         
Net assets consist of:
       
Paid-in capital
  $ 476,070,457  
Accumulated undistributed net investment income
    3,284,482  
Accumulated net realized loss
    (107,945,773 )
Net unrealized appreciation
    40,492,012  
         
    $ 411,901,178  
         
Net assets attributable to:
       
Class III shares
  $ 210,780,177  
         
Class IV shares
  $ 201,121,001  
         
Shares outstanding:
       
Class III
    10,955,905  
         
Class IV
    10,443,647  
         
Net asset value per share:
       
Class III
  $ 19.24  
         
Class IV
  $ 19.26  
         

         
    See accompanying notes to the financial statements.   17

 

GMO Developed World Stock Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends (net of withholding taxes of $469,000)
  $ 9,138,569  
Interest
    9,062  
Dividends from affiliated issuers (Note 10)
    5,595  
         
Total investment income
    9,153,226  
         
Expenses:
       
Management fee (Note 5)
    1,628,921  
Shareholder service fee — Class III (Note 5)
    277,255  
Shareholder service fee — Class IV (Note 5)
    177,146  
Custodian and fund accounting agent fees
    217,450  
Audit and tax fees
    80,022  
Transfer agent fees
    40,148  
Legal fees
    14,229  
Trustees fees and related expenses (Note 5)
    7,675  
Registration fees
    3,929  
Miscellaneous
    33,083  
         
Total expenses
    2,479,858  
Fees and expenses reimbursed by Manager (Note 5)
    (386,001 )
Expense reductions (Note 2)
    (23 )
         
Net expenses
    2,093,834  
         
Net investment income (loss)
    7,059,392  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in unaffiliated issuers
    2,699,800  
Realized gains distributions from affiliated issuers (Note 10)
    238  
Futures contracts
    (798,754 )
Foreign currency, forward contracts and foreign currency related transactions
    1,617,005  
         
Net realized gain (loss)
    3,518,289  
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in unaffiliated issuers
    60,818,722  
Futures contracts
    1,150,451  
Foreign currency, forward contracts and foreign currency related transactions
    (223,235 )
         
Net unrealized gain (loss)
    61,745,938  
         
Net realized and unrealized gain (loss)
    65,264,227  
         
Net increase (decrease) in net assets resulting from operations
  $ 72,323,619  
         

         
18
  See accompanying notes to the financial statements.    

 

GMO Developed World Stock Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 7,059,392     $ 6,710,356  
Net realized gain (loss)
    3,518,289       (58,783,013 )
Change in net unrealized appreciation (depreciation)
    61,745,938       178,199,951  
                 
                 
Net increase (decrease) in net assets from operations
    72,323,619       126,127,294  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (4,894,827 )     (4,837,784 )
Class IV
    (4,765,301 )     (3,886,700 )
                 
Total distributions from net investment income
    (9,660,128 )     (8,724,484 )
                 
Net share transactions (Note 9):
               
Class III
    6,993,972       (52,270,384 )
Class IV
    4,933,764       3,886,700  
                 
Increase (decrease) in net assets resulting from net share transactions
    11,927,736       (48,383,684 )
                 
Purchase premiums and redemption fees (Notes 2 and 9):
               
Class III
    22,800       269,314  
Class IV
    125       —  
                 
Increase in net assets resulting from purchase premiums and redemption fees
    22,925       269,314  
                 
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees
    11,950,661       (48,114,370 )
                 
                 
Total increase (decrease) in net assets
    74,614,152       69,288,440  
                 
Net assets:
               
Beginning of period
    337,287,026       267,998,586  
                 
End of period (including accumulated undistributed net investment income of $3,284,482 and $4,265,413, respectively)
  $ 411,901,178     $ 337,287,026  
                 

         
    See accompanying notes to the financial statements.   19

 

GMO Developed World Stock Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 16.28     $ 11.34     $ 21.88     $ 24.58     $ 22.24  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.33       0.29       0.51       0.54       0.43  
Net realized and unrealized gain (loss)
    3.09       5.03       (10.20 )     (0.74 )     2.84  
                                         
                                         
Total from investment operations
    3.42       5.32       (9.69 )     (0.20 )     3.27  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.46 )     (0.38 )     (0.64 )     (0.67 )     (0.32 )
From net realized gains
    —       —       (0.21 )     (1.83 )     (0.61 )
                                         
                                         
Total distributions
    (0.46 )     (0.38 )     (0.85 )     (2.50 )     (0.93 )
                                         
                                         
Net asset value, end of period
  $ 19.24     $ 16.28     $ 11.34     $ 21.88     $ 24.58  
                                         
                                         
Total Return(a)
    21.41 %     47.03 %     (45.56 )%     (1.73 )%     14.87 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 210,780     $ 171,842     $ 155,560     $ 309,609     $ 282,446  
Net expenses to average daily net assets
    0.60 %(b)(d)     0.60 %(b)     0.61 %(c)     0.62 %(c)     0.62 %
Net investment income (loss) to average daily net assets
    1.93 %     1.93 %     2.79 %     2.15 %     1.83 %
Portfolio turnover rate
    34 %     47 %     50 %     53 %     43 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.11 %     0.11 %     0.12 %     0.11 %     0.12 %
Purchase premiums and redemption fees consisted of the following per share amounts (Note 2):†
  $ 0.00 (e)   $ 0.02     $ 0.01     $ 0.02     $ 0.03  
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(e) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.

         
20
  See accompanying notes to the financial statements.    

 

GMO Developed World Stock Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class IV share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 16.30     $ 11.35     $ 21.90     $ 24.59     $ 22.25  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.34       0.30       0.51       0.56       0.45  
Net realized and unrealized gain (loss)
    3.09       5.04       (10.20 )     (0.74 )     2.82  
                                         
                                         
Total from investment operations
    3.43       5.34       (9.69 )     (0.18 )     3.27  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.47 )     (0.39 )     (0.65 )     (0.68 )     (0.32 )
From net realized gains
    —       —       (0.21 )     (1.83 )     (0.61 )
                                         
                                         
Total distributions
    (0.47 )     (0.39 )     (0.86 )     (2.51 )     (0.93 )
                                         
                                         
Net asset value, end of period
  $ 19.26     $ 16.30     $ 11.35     $ 21.90     $ 24.59  
                                         
                                         
Total Return(a)
    21.44 %     47.16 %     (45.52 )%     (1.66 )%     14.88 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 201,121     $ 165,445     $ 112,438     $ 206,408     $ 209,937  
Net expenses to average daily net assets
    0.55 %(b)(d)     0.55 %(b)     0.56 %(c)     0.57 %(c)     0.57 %
Net investment income (loss) to average daily net assets
    1.98 %     1.94 %     2.82 %     2.22 %     1.93 %
Portfolio turnover rate
    34 %     47 %     50 %     53 %     43 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.11 %     0.11 %     0.12 %     0.11 %     0.12 %
Purchase premiums and redemption fees consisted of the following per share amounts (Note 2):†
  $ 0.00 (e)     —(f )     —(f )     —(f )   $ 0.02  
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(e) Purchase premiums and redemption fees were less than $0.01 per share.
(f) The class received no purchase premiums or redemption fees.
† Calculated using average shares outstanding throughout the period.

         
    See accompanying notes to the financial statements.   21

 

GMO Developed World Stock Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO Developed World Stock Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund’s investment objective is high total return. The Manager seeks to achieve the Fund’s investment objective by investing in stocks or groups of stocks that the Manager believes will provide higher returns than the MSCI World Index. The Manager uses active investment management methods, which means that stocks are bought and sold according to the Manager’s evaluation of companies’ published financial information, securities’ prices, equity and bond markets, and the overall economy.
 
In selecting stocks for the Fund, the Manager may use a combination of investment methods to identify stocks that the Manager believes present positive return potential relative to other stocks. Some of these methods evaluate individual stocks or a group of stocks based on the ratio of their price relative to historical financial information and forecasted financial information provided by industry analysts. Historical financial information may include book value, cash flow and earnings. The Manager may compare these ratios to industry or market averages in order to assess the relative attractiveness of a stock. Other methods focus on evaluating patterns of price movement or volatility of a stock or group of stocks relative to the Fund’s investment universe. The Manager also may adjust the Fund’s portfolio for factors such as position size, market capitalization, and exposure to groups such as industry, sector, country or currency.
 
As a substitute for direct investments in equities, the Manager may use exchange-traded and over-the-counter (“OTC”) derivatives. The Manager also may use derivatives: (i) in an attempt to reduce investment exposures (which may result in a reduction below zero); (ii) to effect transactions intended as substitutes for securities lending; and (iii) in an attempt to adjust elements of the Fund’s investment exposure. Derivatives used may include futures, options, forward currency contracts and swap contracts. In addition, the Fund may lend its portfolio securities.
 
Under normal circumstances, the Fund invests directly and indirectly (e.g., through underlying funds or derivatives) at least 80% of its assets in stocks tied economically to developed markets. For this purpose, the term “stocks” refers to investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts, and the term “developed markets” refers to those countries included in the MSCI World Index, a global developed markets equity index, and countries with similar characteristics. The Manager may make investments tied economically to emerging countries.

         
22
       

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
For cash management purposes, the Fund may invest in unaffiliated money market funds and/or GMO U.S. Treasury Fund.
 
Throughout the year ended February 28, 2011, the Fund had two classes of shares outstanding: Class III and Class IV. Each class of shares bears a different shareholder service fee.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the OTC market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. Additionally, because many foreign equity securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices adjusted by a factor supplied by a third party vendor using that vendor’s proprietary models. As of February 28, 2011, 46.2% of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified as using Level 2 inputs in the table below. See Note 4 for a further discussion on valuation of derivative financial instruments.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation

         
        23

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include: fair value adjustments applied to local closing prices of foreign securities and derivatives due to market events that have occurred since the local market close but before the Fund’s daily NAV calculation.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Common Stocks
                               
Australia
  $ —     $ 3,321,757     $      —     $ 3,321,757  
Belgium
    —       658,922       —       658,922  
Canada
    5,891,493       —       —       5,891,493  

         
24
       

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
  
  ASSET VALUATION INPUTS — continued
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Denmark
  $ —     $ 1,006,070     $ —     $ 1,006,070  
France
    4,052       25,696,053       —       25,700,105  
Germany
    —       16,815,336       —       16,815,336  
Greece
    —       566,206       —       566,206  
Hong Kong
    —       1,518,648       —       1,518,648  
Ireland
    —       2,138,547       —       2,138,547  
Italy
    —       19,081,411       —       19,081,411  
Japan
    —       44,871,087       —       44,871,087  
Netherlands
    —       1,932,324       —       1,932,324  
Singapore
    —       9,349,911       —       9,349,911  
Spain
    —       4,241,380       —       4,241,380  
Sweden
    —       6,081,139       —       6,081,139  
Switzerland
    —       3,760,030       —       3,760,030  
United Kingdom
    —       46,737,559       —       46,737,559  
United States
    198,547,248       —       —       198,547,248  
                                 
TOTAL COMMON STOCKS
    204,442,793       187,776,380       —       392,219,173  
                                 
Preferred Stocks
                               
Germany
    —       2,561,223       —       2,561,223  
                                 
TOTAL PREFERRED STOCKS
    —       2,561,223       —       2,561,223  
                                 
Rights and Warrants
                               
United States
    —       78,033       —       78,033  
                                 
TOTAL RIGHTS AND WARRANTS
    —       78,033       —       78,033  
                                 
Mutual Funds
                               
United States
    11,923,000       —       —       11,923,000  
                                 
TOTAL MUTUAL FUNDS
    11,923,000       —       —       11,923,000  
                                 
Short-Term Investments
    2,350,384       —       —       2,350,384  
                                 
Total Investments
    218,716,177       190,415,636       —       409,131,813  
                                 

         
        25

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
  
  ASSET VALUATION INPUTS — continued
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Derivatives *
                               
Forward Currency Contracts
                               
Foreign Currency risk
  $ —     $ 549,677     $ —     $ 549,677  
Futures Contracts
                               
Equity risk
    —       816,414       —       816,414  
                                 
Total Derivatives
    —       1,366,091       —       1,366,091  
                                 
Total
  $ 218,716,177     $ 191,781,727     $ —     $ 410,497,904  
                                 
 
LIABILITY VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Liabilities
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Derivatives *
                               
Forward Currency Contracts
                               
Foreign Currency risk
  $ —     $ (696,696 )   $      —     $ (696,696 )
Futures Contracts
                               
Equity risk
    (161,675 )     (70,114 )     —       (231,789 )
                                 
Total Derivatives
    (161,675 )     (766,810 )     —       (928,485 )
                                 
Total
  $ (161,675 )   $ (766,810 )   $ —     $ (928,485 )
                                 
 
The risks referenced above are not intended to be inclusive of all risks. Please see the Investment Risks and Derivative Financial Instruments sections below for a further discussion of risks.
 
            * Because the tables above are based on market values or unrealized appreciation (depreciation) rather than the notional amounts of derivatives, the uncertainties surrounding the valuation inputs for a derivative are likely to be more significant to the Fund’s net asset value than the uncertainties surrounding inputs for a non-derivative security with the same market value.
 
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements.

         
26
       

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund held no investments or derivative financial instruments directly at either February 28, 2011 or February 28, 2010, whose fair value was categorized using Level 3 inputs.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 pm. Income and expenses denominated in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country’s tax treaty with the United States. The foreign withholding rates applicable to a Fund’s investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if paid by the shareholders of the Fund.
 
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Taxes related to capital gains realized during the year ended February 28, 2011, if any, are reflected as part of Net realized gain (loss) in the Statement of Operations. Changes in tax liabilities related to capital gain taxes on unrealized investment gains, if any, are reflected as part of Change in net unrealized appreciation (depreciation) in the Statement of

         
        27

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Operations. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards, foreign currency transactions, losses on wash sale transactions and passive foreign investment company transactions.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 9,660,128     $ 8,724,484  
                 
Total distributions
  $ 9,660,128     $ 8,724,484  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 3,762,404  
         
Other Tax Attributes:
       
Capital loss carryforwards
  $ (102,512,999 )

         
28
       

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains, if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 28, 2017
  $ (12,590,155 )
February 28, 2018
    (76,431,352 )
February 28, 2019
    (13,491,492 )
         
Total
  $ (102,512,999 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 375,269,992     $ 63,405,994     $ (29,544,173 )   $ 33,861,821      
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if

         
        29

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, 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 among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class’s operations. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (Note 5).
 
Brown Brothers Harriman & Co. (“BBH”) serves as the Fund’s custodian and fund accounting agent. State Street Bank and Trust Company (“State Street”) serves as the Fund’s transfer agent. BBH’s and State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
Purchases and redemptions of Fund shares
For the year ended February 28, 2011, the premium on cash purchases and fee on cash redemptions of Fund shares were each 0.25% of the amount invested or redeemed. An additional purchase premium and redemption fee of 0.005% is charged for any purchases/redemptions (or any portion of a purchase/redemption) effected in a currency other than the U.S. dollar. Purchase premiums and redemption fees are paid to and retained by the Fund (and are allocated pro rata among the classes) to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. Such fees are recorded as a component of the Fund’s net share transactions. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of the Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund’s shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund’s shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder’s securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of the Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be

         
30
       

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund’s investments.
 
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund’s investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund’s investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
 
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund’s foreign currency holdings and investments denominated in foreign currencies.
 
Other principal risks of an investment in the Fund include Market Risk — Value Securities (risk that the price of the Fund’s investments will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives

         
        31

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund’s securities); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by “equitizing” its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically “sell” a portion of the Fund’s portfolio) in combination with a long futures contract on another index (to synthetically “buy” exposure to that index). The Funds also may use currency derivatives in an attempt to

         
32
       

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral (e.g., foreign currency forwards; see “Currency Risk” above), that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased

         
        33

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
 
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund’s forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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.
 
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. During the year ended February 28, 2011, the Fund used forward currency contracts to manage against anticipated currency exchange rate changes and adjust exposure to foreign currencies. Forward currency contracts outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is 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 settled on the following business day. Gains or losses are

         
34
       

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because regular trading on many foreign exchanges closes prior to the close of the NYSE, closing prices for these foreign futures contracts (including foreign index futures) do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures contracts using fair value prices, which are based on local closing prices adjusted by a factor, supplied by a third party vendor using that vendor’s proprietary models. As of February 28, 2011, futures contracts representing 0.2% of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified using Level 2 inputs in the table above. During the year ended February 28, 2011, the Fund used futures contracts to adjust exposure to certain securities markets and maintain the diversity and liquidity of the portfolio. Futures contracts outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.

         
        35

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon

         
36
       

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use

         
        37

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. During the year ended February 28, 2011, the Fund held rights and warrants as a result of a corporate action. Rights and warrants held by the Fund at the end of the period are listed in the Fund’s Schedule of Investments.
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of
February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Assets:
                                               
Investments, at value (rights and warrants)
  $      —     $ —     $      —     $ 78,033     $      —     $ 78,033  
Unrealized appreciation on futures contracts *
    —       —       —       816,414       —       816,414  
Unrealized appreciation on forward currency contracts
    —       549,677       —       —       —       549,677  
                                                 
Total
  $ —     $ 549,677     $ —     $ 894,447     $ —     $ 1,444,124  
                                                 
Liabilities:
                                               
Unrealized depreciation on futures contracts *
  $ —     $ —     $ —     $ (231,789 )   $ —     $ (231,789 )
Unrealized depreciation on forward currency contracts
    —       (696,696 )     —       —       —       (696,696 )
                                                 
Total
  $ —     $ (696,696 )   $ —     $ (231,789 )   $ —     $ (928,485 )
                                                 
 
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Futures contracts
  $      —     $ —     $      —     $ (798,754 )   $      —     $ (798,754 )
Forward currency contracts
    —       1,679,351       —       —       —       1,679,351  
                                                 
Total
  $ —     $ 1,679,351     $ —     $ (798,754 )   $ —     $ 880,597  
                                                 

         
38
       

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended February 28, 2011Ù: — continued
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Change in Unrealized Appreciation (Depreciation) on:
                                               
Investments (rights and warrants)
  $ —     $ —     $ —     $ (47,076 )   $ —     $ (47,076 )
Futures contracts
    —       —       —       1,150,451       —       1,150,451  
Forward currency contracts
    —       (234,938 )     —       —       —       (234,938 )
                                                 
Total
  $ —     $ (234,938 )   $ —     $ 1,103,375     $ —     $ 868,437  
                                                 
 
            * The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.
 
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
 
The volume of derivative activity, based on absolute values (forward currency contracts, futures contracts, and rights and warrants) outstanding at each month-end, was as follows for the year ended February 28, 2011:
 
                         
    Forward
        
    Currency
        
    Contracts   Futures   Rights/Warrants
 
Average amount outstanding
  $ 77,249,562     $ 29,635,056     $ 20,173  
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.45% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares and 0.10% for Class IV shares.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.45% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the

         
        39

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund’s Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund’s Expense Reimbursement Amount. These contractual expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $7,675 and $2,583, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
             
Indirect Net
 		           
Expenses
            
(excluding
            
shareholder service
     Indirect
      
fees and
     Shareholder
     Total Indirect
interest expense)     Service Fees     Expenses
< 0.001%
    0.000%     < 0.001%
             
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 aggregated $140,154,546 and $119,284,268, respectively.
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss

         
40
       

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 61.77% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund’s outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
 
As of February 28, 2011, 0.01% of the Fund were held by senior management of the Manager and GMO Trust officers and none of the Fund’s shares were held by accounts for which the Manager had investment discretion.
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    350,679     $ 6,192,421       1,741,328     $ 25,959,247  
Shares issued to shareholders in reinvestment of distributions
    227,058       3,832,385       218,646       3,473,940  
Shares repurchased
    (176,281 )     (3,030,834 )     (5,124,626 )     (81,703,571 )
Purchase premiums
    —       15,520       —       65,061  
Redemption fees
    —       7,280       —       204,253  
                                 
Net increase (decrease)
    401,456     $ 7,016,772       (3,164,652 )   $ (52,001,070 )
                                 
                                 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class IV:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    9,942     $ 168,463       —     $ —  
Shares issued to shareholders in reinvestment of distributions
    281,957       4,765,301       244,409       3,886,700  
Purchase premiums
    —       125       —       —  
                                 
Net increase (decrease)
    291,899     $ 4,933,889       244,409     $ 3,886,700  
                                 

         
        41

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                 
    Value,
               Distributions
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   period
 
GMO U.S. Treasury Fund
  $      —     $ 18,644,000     $ 6,721,000     $ 5,595     $ 238     $ 11,923,000  
                                                 
Totals
  $ —     $ 18,644,000     $ 6,721,000     $ 5,595     $ 238     $ 11,923,000  
                                                 

         
42
       

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Developed World Stock Fund:
 
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 Developed World Stock Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian, brokers, and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
        43

 

GMO Developed World Stock Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
44
       

 

 
GMO Developed World Stock Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.60 %   $ 1,000.00     $ 1,249.70     $ 3.35  
2) Hypothetical
    0.60 %   $ 1,000.00     $ 1,021.82     $ 3.01  
                                 
Class IV
                               
                                 
1) Actual
    0.55 %   $ 1,000.00     $ 1,250.60     $ 3.07  
2) Hypothetical
    0.55 %   $ 1,000.00     $ 1,022.07     $ 2.76  
                                 
 
            * Expenses are calculated using each Class’s annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
        45

 

GMO Developed World Stock Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
For taxable, non-corporate shareholders, 86.56% of the Fund’s income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 represents qualified dividend income subject to the 15% rate category.
 
For corporate shareholders, 37.31% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 qualified for the dividends-received deduction.

         
46
       

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and Date
   Position(s)
   Length of
  During Past
   Complex
     Other Directorships
of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
        47

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and Date
   Position(s)
   Length of
  During Past
   Complex
     Other Directorships
of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and Date of
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Birth   Held with Trust   Time Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee;
President and
Chief Executive
Officer
of the Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
48        

 

Other Officers:
 
             
Name and Date
   Position(s)
   Length of
   Principal Occupation(s)
of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003 – 2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        49

 

Other Officers: — (Continued)
 
             
Name and Date
   Position(s)
   Length of
   Principal Occupation(s)
of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money
Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
50        

 

 
GMO Domestic Bond Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO Domestic Bond Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
The Class III shares of GMO Domestic Bond Fund returned +8.2% for the fiscal year ended February 28, 2011, as compared with +3.5% for the Barclays Capital U.S. Government Index.
 
The Fund outperformed its benchmark during the fiscal year by 4.7%. The Fund’s outperformance is attributable to increases in the net asset value of the Fund’s holdings of GMO Short-Duration Collateral Fund (SDCF) and to increases in the value of the asset-backed securities that it holds directly.
 
SDCF returned 9.3% for the fiscal year ended February 28, 2011, as compared with 0.5% for its benchmark, the J.P. Morgan U.S. 3 Month Cash Index. SDCF outperformed its benchmark during the fiscal year by 8.8%, with positive performance attributable to improved pricing in asset-backed security holdings.
 
Asset-backed security spreads tightened and pricing and liquidity conditions in securitized credit markets improved during the fiscal year. SDCF’s asset-backed holdings experienced credit downgrades during the fiscal year: SDCF had 55 downgraded securities, representing 11% of its market value from the beginning of the fiscal year. At fiscal year-end, about 52% of SDCF’s portfolio was rated AAA, and 67% of the portfolio was rated single-A or better.
 
During the fiscal year ended February 28, 2011, the Fund and SDCF did not pursue active investment programs.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO Domestic Bond Fund Class III Shares and the Barclays Capital U.S. Government Index
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, please call (617) 330-7500. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited. Performance for classes may vary due to different fees.
 

 

GMO Domestic Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary*   % of Total Net Assets  
Debt Obligations
    94.3 %
Short-Term Investments
    5.6  
Swap Agreements
    0.0 ^
Forward Currency Contracts
    (0.1 )
Other
    0.2  
         
      100.0 %
         
 
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust (“underlying funds”).
Ù Rounds to 0.0%.

         
        1

 

GMO Domestic Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
Par Value ($) /
           
Shares     Description   Value ($)  
            DEBT OBLIGATIONS — 7.4%        
                     
            Corporate Debt — 1.9%        
      9,312,000     Health Care Property Investors, Inc., Series G, MTN, 5.63%, due 02/28/13     10,150,080  
                     
                     
            U.S. Government — 5.3%        
      27,325,265     U.S. Treasury Inflation Indexed Note, 2.00%, due 04/15/12 (a)     28,537,824  
                     
                     
            U.S. Government Agency — 0.2%        
      534,537     Agency for International Development Floater (Support of Jamaica), 6 mo. U.S. Treasury Bill + 0.75%, 0.91%, due 03/30/19 (b)     520,811  
      466,669     Agency for International Development Floater (Support of Zimbabwe), 3 mo. U.S. Treasury Bill x 115%, 0.16%, due 01/01/12 (b)     462,756  
                     
            Total U.S. Government Agency     983,567  
                     
                     
            TOTAL DEBT OBLIGATIONS (COST $38,626,497)     39,671,471  
                     
                     
            MUTUAL FUNDS — 90.5%        
                     
            Affiliated Issuers — 90.5%        
      45,578,624     GMO Short-Duration Collateral Fund     473,106,122  
      1,483     GMO Special Purpose Holding Fund (c)     741  
      586,541     GMO U.S. Treasury Fund     14,663,527  
                     
                     
            TOTAL MUTUAL FUNDS (COST $499,749,306)     487,770,390  
                     
                     
            SHORT-TERM INVESTMENTS — 2.1%        
                     
            Money Market Funds — 2.1%        
      11,618,337     State Street Institutional Treasury Plus Money Market Fund-Institutional Class     11,618,337  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $11,618,337)     11,618,337  
                     
                     
            TOTAL INVESTMENTS — 100.0%
(Cost $549,994,140) 		    539,060,198  
            Other Assets and Liabilities (net) — 0.00%     22,928  
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 539,083,126  
                     

         
2
  See accompanying notes to the financial statements.    

 

 
GMO Domestic Bond Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
A summary of outstanding financial instruments at February 28, 2011 is as follows:
 
Swap Agreements
 
Credit Default Swaps
 
                                                     
                            Maximum
 		       
                            Potential
 		       
                            Amount of
 		       
                            Future
 		       
                            Payments
 		       
                        Implied
 		      by the Fund
 		       
Notional
 		  Expiration
 		      Receive
 		  Annual
 		  Credit
 		  Deliverable
 		  Under the
 		  Market
 		   
Amount   Date   Counterparty   (Pay)Ù   Premium   Spread (1)   on Default   Contract (2)   Value    
 
  11,500,000     USD   3/20/2013   Barclays Bank PLC   (Pay)   0.61%   0.37%   Health Care Properties     NA     $(70,874)        
                                                     
                                            $(70,874)        
                                                     
Premiums to (Pay) Receive
  $  —        
             
 
Ù Receive - Fund receives premium and sells credit protection. If a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.
(Pay) - Fund pays premium and buys credit protection. If a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) receive from the seller of protection an amount equal to the notional amount of the swap and deliver the referenced obligation or underlying securities comprising the referenced index or (ii) receive a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.
(1) Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on the reference security, as of February 28, 2011, serve as an indicator of the current status of the payment/performance risk and reflect the likelihood or risk of default for the reference entity. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection. Wider (i.e.higher) credit spreads represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.
(2) The maximum potential amount the Fund could be required to pay as a seller of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.
 
As of February 28, 2011, for forward currency contracts, futures contracts, swap agreements, written options and reverse repurchase agreements, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.

         
    See accompanying notes to the financial statements.   3

 

 
GMO Domestic Bond Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Notes to Schedule of Investments:
 
MTN - Medium Term Note
The rates shown on variable rate notes are the current interest rates at February 28, 2011, which are subject to change based on the terms of the security.
(a) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
(b) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust.
(c) Underlying investment represents interests in defaulted claims.
 
Currency Abbreviations:
 
USD - United States Dollar

         
4
  See accompanying notes to the financial statements.    

 

GMO Domestic Bond Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $50,244,834) (Note 2)
  $ 51,289,808  
Investments in affiliated issuers, at value (cost $499,749,306) (Notes 2 and 10)
    487,770,390  
Dividends and interest receivable
    212,702  
Receivable for expenses reimbursed by Manager (Note 5)
    27,785  
         
Total assets
    539,300,685  
         
         
Liabilities:
       
Payable to affiliate for (Note 5):
       
Management fee
    41,178  
Shareholder service fee
    31,384  
Trustees and Trust Officers or agents unaffiliated with the Manager
    1,326  
Payable for open swap contracts (Note 4)
    70,874  
Accrued expenses
    72,797  
         
Total liabilities
    217,559  
         
Net assets
  $ 539,083,126  
         
Net assets consist of:
       
Paid-in capital
  $ 571,390,785  
Accumulated undistributed net investment income
    19,794  
Accumulated net realized loss
    (21,322,637 )
Net unrealized depreciation
    (11,004,816 )
         
    $ 539,083,126  
         
Net assets attributable to:
       
Class III shares
  $ 120,397,354  
         
Class VI shares
  $ 418,685,772  
         
Shares outstanding:
       
Class III
    26,334,882  
         
Class VI
    91,421,261  
         
Net asset value per share:
       
Class III
  $ 4.57  
         
Class VI
  $ 4.58  
         

         
    See accompanying notes to the financial statements.   5

 

GMO Domestic Bond Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends from affiliated issuers (Note 10)
  $ 8,595,789  
Interest
    793,294  
Dividends
    22,656  
         
Total investment income
    9,411,739  
         
Expenses:
       
Management fee (Note 5)
    652,930  
Shareholder service fee – Class III (Note 5)
    212,687  
Shareholder service fee – Class VI (Note 5)
    281,125  
Custodian, fund accounting agent and transfer agent fees
    83,160  
Audit and tax fees
    54,559  
Legal fees
    28,443  
Trustees fees and related expenses (Note 5)
    16,438  
Registration fees
    552  
Miscellaneous
    21,817  
         
Total expenses
    1,351,711  
Fees and expenses reimbursed by Manager (Note 5)
    (507,029 )
Expense reductions (Note 2)
    (3 )
         
Net expenses
    844,679  
         
Net investment income (loss)
    8,567,060  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in unaffiliated issuers
    (744,318 )
Investments in affiliated issuers
    (881,057 )
Realized gains distributions from affiliated issuers (Note 10)
    3,341  
Swap contracts
    (70,929 )
         
Net realized gain (loss)
    (1,692,963 )
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in unaffiliated issuers
    2,169,990  
Investments in affiliated issuers
    43,760,782  
Swap contracts
    (414,634 )
         
Net unrealized gain (loss)
    45,516,138  
         
Net realized and unrealized gain (loss)
    43,823,175  
         
Net increase (decrease) in net assets resulting from operations
  $ 52,390,235  
         

         
6
  See accompanying notes to the financial statements.    

 

GMO Domestic Bond Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 8,567,060     $ 12,335,502  
Net realized gain (loss)
    (1,692,963 )     276,315  
Change in net unrealized appreciation (depreciation)
    45,516,138       174,476,751  
                 
                 
Net increase (decrease) in net assets from operations
    52,390,235       187,088,568  
                 
Distributions to shareholders from (Note 2):
               
Net investment income
               
Class III
    (1,756,513 )     (6,119,682 )
Class VI
    (6,704,779 )     (15,263,975 )
                 
Total distributions from net investment income
    (8,461,292 )     (21,383,657 )
                 
Net realized gains
               
Class III
    —       (19,446,942 )
Class VI
    —       (41,539,732 )
                 
Total distributions from net realized gains
    —       (60,986,674 )
                 
Return of capital
               
Class III
    (49,386,398 )     (105,823,350 )
Class VI
    (176,952,317 )     (263,406,325 )
                 
Total distributions from return of capital
    (226,338,715 )     (369,229,675 )
                 
      (234,800,007 )     (451,600,006 )
                 
Net share transactions (Note 9):
               
Class III
    (13,361,510 )     (85,021,180 )
Class VI
    (53,179,239 )     79,276,331  
                 
Increase (decrease) in net assets resulting from net share transactions
    (66,540,749 )     (5,744,849 )
                 
Redemption fees (Notes 2 and 9):
               
Class III
    —       10,529  
Class VI
    —       24,504  
                 
Increase in net assets resulting from redemption fees
    —       35,033  
                 
Total increase (decrease) in net assets resulting from net share transactions and redemption fees
    (66,540,749 )     (5,709,816 )
                 
                 
Total increase (decrease) in net assets
    (248,950,521 )     (270,221,254 )
                 
Net assets:
               
Beginning of period
    788,033,647       1,058,254,901  
                 
End of period (including accumulated undistributed net investment income of $19,794 and distributions in excess of net investment income of $4,700, respectively)
  $ 539,083,126     $ 788,033,647  
                 

         
    See accompanying notes to the financial statements.   7

 

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,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 5.99     $ 7.99     $ 9.47     $ 9.81     $ 9.81  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)(a)†
    0.06       0.09       0.39       0.42       0.43  
Net realized and unrealized gain (loss)
    0.34       1.33       (1.36 )     (0.01 )     0.06  
                                         
                                         
Total from investment operations
    0.40       1.42       (0.97 )     0.41       0.49  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.06 )     (0.16 )     (0.50 )     (0.75 )     (0.49 )
From net realized gains
    —       (0.46 )     (0.01 )     —       —  
Return of capital
    (1.76 )     (2.80 )     —       —       —  
                                         
                                         
Total distributions
    (1.82 )     (3.42 )     (0.51 )     (0.75 )     (0.49 )
                                         
                                         
Net asset value, end of period
  $ 4.57     $ 5.99     $ 7.99     $ 9.47     $ 9.81  
                                         
                                         
Total Return(b)
    8.19 %     23.87 %     (10.39 )%     4.35 %     5.09 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 120,397     $ 173,619     $ 337,524     $ 144,286     $ 94,159  
Net expenses to average daily net assets(c)
    0.20 %(d)     0.21 %     0.26 %(d)     0.25 %(d)     0.25 %
Net investment income (loss) to average daily net assets(a)
    1.25 %     1.37 %     4.43 %     4.28 %     4.42 %
Portfolio turnover rate
    8 %     30 %     68 %     22 %     17 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.08 %     0.07 %     0.02 %     0.03 %     0.03 %
Redemption fees consisted of the following per share amounts (Note 2):†
    —     $ 0.00 (e)   $ 0.00 (e)     —       —  
 
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(d) The net expense ratio does not include the effect of expense reductions (Note 2).
(e) Redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.

         
8
  See accompanying notes to the financial statements.    

 

GMO Domestic Bond Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class VI share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 5.99     $ 7.99     $ 9.48     $ 9.82     $ 9.82  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)(a)†
    0.07       0.09       0.44       0.57       0.48  
Net realized and unrealized gain (loss)
    0.35       1.33       (1.41 )     (0.15 )     0.02  
                                         
                                         
Total from investment operations
    0.42       1.42       (0.97 )     0.42       0.50  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.07 )     (0.17 )     (0.51 )     (0.76 )     (0.50 )
From net realized gains
    —       (0.46 )     (0.01 )     —       —  
Return of capital
    (1.76 )     (2.79 )     —       —       —  
                                         
                                         
Total distributions
    (1.83 )     (3.42 )     (0.52 )     (0.76 )     (0.50 )
                                         
                                         
Net asset value, end of period
  $ 4.58     $ 5.99     $ 7.99     $ 9.48     $ 9.82  
                                         
                                         
Total Return(b)
    8.46 %     23.87 %     (10.40 )%     4.42 %     5.19 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 418,686     $ 614,415     $ 720,731     $ 581,526     $ 327,796  
Net expenses to average daily net assets(c)
    0.11 %(d)     0.12 %     0.16 %(d)     0.16 %(d)     0.16 %
Net investment income (loss) to average daily net assets(a)
    1.33 %     1.43 %     5.02 %     5.87 %     4.85 %
Portfolio turnover rate
    8 %     30 %     68 %     22 %     17 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.08 %     0.08 %     0.02 %     0.03 %     0.03 %
Redemption fees consisted of the following per share amounts (Note 2):†
    —     $ 0.00 (e)   $ 0.00 (e)     —       —  
 
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(d) The net expense ratio does not include the effect of expense reductions (Note 2).
(e) Redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.

         
    See accompanying notes to the financial statements.   9

 

GMO Domestic Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO Domestic Bond Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund is not currently pursuing an active investment program.
 
Historically, the Fund has implemented its strategies: (i) synthetically by using exchange-traded and over-the-counter (“OTC”) derivatives and investing in other GMO Funds and/or (ii) directly by purchasing bonds. The term “bond” refers to any fixed income security, which includes (i) obligations of an issuer to make payments of principal and/or interest on future dates, (ii) synthetic debt instruments created by the Manager by using derivatives (e.g., a futures contract, swap contract, currency forward or option), and (iii) instruments with variable interest payments. The Fund has used derivatives and investments in other GMO Funds as the principal means to gain investment exposure. As a result, the Fund has substantial holdings of GMO Short-Duration Collateral Fund (“SDCF”) (a fund that invests primarily in asset-backed securities).
 
Because of the deterioration in credit markets that became acute in 2008, the Fund, including through its investment in SDCF, currently has and may continue to have material exposure to below investment grade securities. The Fund is not limited in its use of derivatives or in the absolute face value of its derivatives positions, and, as a result, the Fund may be leveraged in relation to its assets. The Manager does not seek to maintain a specified interest rate duration for the Fund.
 
As of February 28, 2011, the Fund had two classes of shares outstanding: Class III and Class VI. Each class of shares bears a different shareholder service fee.
 
Since April 2009, the Fund has declared and paid distributions when it has acquired a meaningful cash position rather than reinvesting that cash in portfolio securities. The Fund currently intends to continue this practice. A substantial portion of any such distributions could constitute a return of capital to shareholders for tax purposes.
 
The financial statements of the underlying funds should be read in conjunction with the Fund’s financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect). As of February 28, 2011, shares of SCDF and GMO Special Purpose Holding Fund (“SPHF”) were not publicly available for direct purchase.

         
10
       

 

 
GMO Domestic Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund currently limits subscriptions.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the OTC market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of February 28, 2011, the total value of securities held directly and indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 2.1% of net assets. The Fund and the underlying funds classify such securities (as defined below) as Level 3. During the year ended February 28, 2011, the Manager has evaluated the Fund’s OTC derivatives contracts and determined that no reduction in value was warranted on account of the creditworthiness of a counterparty. Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. Although alternative prices are available for securities held by the Fund and the underlying funds, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by the Fund and the underlying funds. Therefore, the existence of those alternative

         
        11

 

 
GMO Domestic Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
sources does not necessarily provide greater certainty about the prices used by the Fund and the underlying funds. As of February 28, 2011, the total value of securities held indirectly for which no alternative pricing source was available represented 8.7% of the net assets of the Fund.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include most recent bid prices, interest rates, prepayment speeds, credit risk, yield curves and similar data. The Fund also used third party valuation services (which use industry models and market data from pricing vendors) to value credit default swaps.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund used the following fair value techniques on Level 3 investments: The Fund valued certain debt securities by using an estimated specified spread above the LIBOR Rate.

         
12
       

 

 
GMO Domestic Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Debt Obligations
                               
Corporate Debt
  $ —     $ 10,150,080     $ —     $ 10,150,080  
U.S. Government
    —       28,537,824       —       28,537,824  
U.S. Government Agency
    —       —       983,567       983,567  
                                 
TOTAL DEBT OBLIGATIONS
    —       38,687,904       983,567       39,671,471  
                                 
Mutual Funds
    487,769,649       741       —       487,770,390  
Short-Term Investments
    11,618,337       —       —       11,618,337  
                                 
Total Investments
    499,387,986       38,688,645       983,567       539,060,198  
                                 
Total
  $ 499,387,986     $ 38,688,645     $ 983,567     $ 539,060,198  
                                 
 
LIABILITY VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Liabilities
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Derivatives*
                               
Swap Agreements
                               
Credit risk
  $      —     $ (70,874 )   $      —     $ (70,874 )
                                 
Total
  $ —     $ (70,874 )   $ —     $ (70,874 )
                                 
 
The risks referenced above are not intended to be inclusive of all risks. Please see the Investment Risks and Derivative Financial Instruments sections below for a further discussion of risks.
 
* Because the tables above are based on market values or unrealized appreciation (depreciation) rather than the notional amounts of derivatives, the uncertainties surrounding the valuation inputs for a derivative are likely to be more significant to the Fund’s net asset value than the uncertainties surrounding inputs for a non-derivative security with the same market value.

         
        13

 

 
GMO Domestic Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The underlying funds held at period end are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements. The aggregate net values of the Fund’s investments (both direct and indirect) in securities and derivative financial instruments using Level 3 inputs were 59.8% and (0.1)% of total net assets, respectively.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
The following is a reconciliation of investments and derivatives, if any, in which significant unobservable inputs (Level 3) were used in determining value:
 
                                                                           
 
                                      Net Change in
                                      Unrealized
                                      Appreciation
                                      (Depreciation)
                                      from
    Balances
               Change in
           Balances
     Investments
    as of
   Net
   Accrued
   Total
   Unrealized
   Transfers
   Transfers
   as of
     Still Held as of
    February 28,
   Purchases/
   Discounts/
   Realized
   Appreciation
   into
   out of
   February 28,
     February 28,
    2010   (Sales)   Premiums   Gain/(Loss)   (Depreciation)   Level 3*   Level 3*   2011     2011
Debt Obligations
                                                                         
U.S. Government Agency
  $ 1,501,469     $ (529,553 )   $ (114 )   $ (109 )   $ 11,874     $      —     $ —     $ 983,567       $ 11,874  
Preferred Stocks
    720,000       (1,251,280 )     —       (809,689 )     1,340,969       —       —       —         —  
Swap Agreements
    343,760       70,929       —       (70,929 )     (414,634 )     —       70,874 **     —         —  
                                                                           
Total
  $ 2,565,229     $ (1,709,904 )   $ (114 )   $ (880,727 )   $ 938,209     $ —     $ 70,874     $ 983,567       $ 11,874  
                                                                           
 
            * The Fund accounts for investments and derivatives transferred into Level 3 at the value beginning of the period and transferred out of Level 3 at the value at the end of the period.
            ** Financial assets transferred between Level 2 and Level 3 were due to a change in observable and/or unobservable inputs.
 
Repurchase agreements
The Fund may enter into repurchase agreements. Under a repurchase agreement 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 it acquired under the repurchase agreement. The value of the securities acquired is required by contract to be marked to market daily and additional collateral is required to be transferred so that the market value is at least equal to the amount owed to the Fund by the seller. If the seller of a repurchase agreement defaults or enters into insolvency proceedings and/or the value of the securities subject to the repurchase agreement is insufficient, the Fund’s recovery of cash from the seller may be delayed and the Fund may incur a loss equal to the difference between the cash it paid and the value of the securities. The Fund had no repurchase agreements outstanding at the end of the period.

         
14
       

 

 
GMO Domestic Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at an agreed upon price and date. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which generally causes the Fund’s portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the event of a buyer’s bankruptcy or insolvency, the Fund’s use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund’s right to repurchase the securities. The Fund had no reverse repurchase agreements outstanding at the end of the period.
 
Inflation-indexed bonds
The Fund may invest in inflation indexed bonds. Inflation indexed bonds are fixed income securities whose principal value is adjusted periodically according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that reflects inflation in the principal value of the bond. Most other issuers pay out any inflation related accruals as part of a semiannual coupon.
 
The value of inflation indexed bonds is expected to change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates (i.e., stated interest rates) and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates (i.e. nominal interest rate minus inflation) might decline, leading to an increase in value of inflation indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation indexed bonds. There can be no assurance, however, that the value of inflation indexed bonds will be directly correlated to changes in nominal interest rates, and short term increases in inflation may lead to a decline in their value. Coupon payments received by the Fund from inflation indexed bonds are included in the Fund’s gross income for the period in which they accrue. In addition, any increase or decrease in the principal amount of an inflation indexed bond will increase or decrease taxable ordinary income to the Fund, even though principal is not paid until maturity. Inflation-indexed bonds outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after

         
        15

 

 
GMO Domestic Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, quarterly, and from net realized short-term and long-term capital gain, if any, at least annually. The Fund is permitted to, and will from time to time, declare and pay distributions from net investment income, if any, more frequently (e.g. monthly). As of February 28, 2011, all distributions have been paid in cash. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards, losses on wash sale transactions and Post-October capital losses.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 8,461,292     $ 42,318,244  
Net long-term capital gain
    —       40,052,087  
Tax return of capital
    226,338,715       369,229,675  
                 
Total distributions
  $ 234,800,007     $ 451,600,006  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of February 28, 2011, certain tax attributes consisted of the following:
 
         
Capital loss carryforwards
  $ (4,044,146 )
Post-October capital loss deferral
  $ (797,187 )

         
16
       

 

 
GMO Domestic Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 28, 2018
  $ (3,229,648 )
February 28, 2019
  $ (814,498 )
         
Total
  $ (4,044,146 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 566,469,297     $ 1,063,715     $ (28,472,814 )   $ (27,409,099 )    
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection

         
        17

 

 
GMO Domestic Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (Note 5).
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
Purchases and redemptions of Fund shares
Purchase premiums and redemption fees are paid to and retained by the Fund (and are allocated pro rata among the classes) to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. Such fees are recorded as a component of the Fund’s net share transactions. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of the Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of a Fund’s shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund’s shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder’s securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of the Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.

         
18
       

 

 
GMO Domestic Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Other matters
GMO Special Purpose Holding Fund (“SPHF”), an investment of the Fund, has litigation pending against various entities related to the 2002 fraud and related default of securities previously held by SPHF. The outcome of the lawsuits against the remaining defendants is not known and any potential recoveries are not reflected in the net asset value of SPHF. For the year ended February 28, 2011, the Fund received no distributions from SPHF in connection with the defaulted securities or the related litigation.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Fixed Income Securities — Typically, the value of the Fund’s fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
 
• Derivatives Risk — The use of derivatives involves the risk that their value may not correlate with the value of the relevant underlying assets, rates or indices. Derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk.
 
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. In addition, holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
 
• Focused Investment Risk — Focusing investments in countries, regions, sectors or companies with high positive correlations to one another creates additional risk. This risk may be particularly pronounced for the Fund because of its exposure to asset-backed securities secured by different types of consumer debt (e.g., credit-card receivables, automobile loans and home equity loans).
 
Other principal risks of an investment in the Fund include Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments); Credit and Counterparty Risk (risk of default of an issuer or guarantor of fixed income securities, a derivatives counterparty, or a borrower of the Fund’s securities); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities lending); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service

         
        19

 

 
GMO Domestic Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by redeeming Fund shares in large amounts and/or on a frequent basis).
 
The most significant market risk for Funds investing in fixed income securities is that the securities in which they invest experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund because it invests in asset-backed securities. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as “collateralized debt obligations” or “collateralized loan obligations”) and by the fees earned by service providers. Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. Many asset-backed securities owned (directly or indirectly) by the Fund that were once rated investment grade are now rated below investment grade as of the date of this report.
 
The existence of insurance on an asset-backed security does not guarantee that principal and/or interest will be paid because the insurer could default on its obligations. In recent years, a significant number of asset-backed security insurers have defaulted on their obligations.
 
With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g.,

         
20
       

 

 
GMO Domestic Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.
 
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and a Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.
 
The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution’s business may have a material impact on multiple investments.
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps or other derivatives on an index, a single security or a basket of securities to gain investment exposures (e.g., by selling protection under a credit default swap). The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). For example, the Fund may use credit default swaps to take a short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or

         
        21

 

 
GMO Domestic Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
make new direct investments. For instance, the Manager may alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund’s exposure to the credit of an issuer through the debt instrument, but adjust the Fund’s interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed versus variable rates and shorter duration versus longer duration exposure. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral (e.g., foreign currency forwards; see “Currency Risk” above), that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.

         
22
       

 

 
GMO Domestic Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. The Fund had no futures contracts outstanding at the end of the period.

         
        23

 

 
GMO Domestic Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an

         
24
       

 

 
GMO Domestic Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral. Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A

         
        25

 

 
GMO Domestic Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the year ended February 28, 2011, the Fund used swap agreements to provide a measure of protection against default loss. Swap agreements outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.

         
26
       

 

 
GMO Domestic Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of
February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Liabilities:
                                               
Unrealized depreciation on swap agreements
  $      —     $      —     $ (70,874 )   $      —     $      —     $ (70,874 )
                                                 
Total
  $ —     $ —     $ (70,874 )   $ —     $ —     $ (70,874 )
                                                 
 
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Swap contracts
  $      —     $      —     $ (70,929 )   $      —     $      —     $ (70,929 )
                                                 
Total
  $ —     $ —     $ (70,929 )   $ —     $ —     $ (70,929 )
                                                 
Change in Unrealized Appreciation (Depreciation) on:
                                               
Swap contracts
  $ —     $ —     $ (414,634 )   $ —     $ —     $ (414,634 )
                                                 
Total
  $ —     $ —     $ (414,634 )   $ —     $ —     $ (414,634 )
                                                 
 
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
 
The derivative financial instruments outstanding as of year end (as disclosed in the Notes to Schedules of Investments) and the amounts of realized and changes in unrealized gains and losses on derivative financial instruments during the year serve as indicators of the volume of derivative activity for the Fund during the year.
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.10% of average daily net assets. The Manager has voluntarily agreed to waive the Fund’s management fee by 0.05% and to reimburse the Fund to the extent the Fund’s total annual operating expenses exceed 0.05% of the Fund’s average daily net assets (excluding the Fund’s Excluded Fund Fees and Expenses described below). The Manager may change or terminate these voluntary waivers and

         
        27

 

 
GMO Domestic Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
reimbursements at any time, and these voluntary waivers and reimbursements are in addition to the Manager’s contractual expense reimbursement agreement described below. During any period for which these voluntary waivers and reimbursements are in effect, the Fund will incur management fees at an annual rate lower than 0.10% of the Fund’s average daily net assets, and, as a result, total annual operating expenses after expense reimbursement for the Fund will be lower. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares and 0.055% for Class VI shares. The Manager has contractually agreed through at least June 30, 2011 to waive the Fund’s shareholder service fee to the extent that the aggregate of any direct and indirect shareholder service fees borne by a class of shares of the Fund exceeds 0.15% for Class III shares and 0.055% for Class VI shares; provided, however, that the amount of this waiver will not exceed the respective Class’s shareholder service fee.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.10% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). The Manager also has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund’s Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Expense Reimbursement Amount. These contractual expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $16,438 and $5,116, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.

         
28
       

 

 
GMO Domestic Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund incurs fees and expenses indirectly as a shareholder of the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
                   
Indirect Net
 		                 
Expenses
                  
(excluding
     Indirect
            
shareholder service
     Shareholder
     Indirect Interest
     Total Indirect
fees and interest expense)     Service Fees     Expense     Expenses
0.003%
    0.000%     0.008%     0.011%
                   
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 were as follows:
 
                 
    Purchases   Sales
 
U.S. Government securities
  $ 28,384,590     $ 33,672,285  
Investments (non-U.S. Government securities)
    22,335,976       60,951,220  
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 87.74% of the shares outstanding of the Fund were held by three shareholders, each holding more than 10% of the Fund’s outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. One of the shareholders is another fund of the Trust.
 
As of February 28, 2011, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and 99.49% of the Fund’s shares were held by accounts for which the Manager had investment discretion.

         
        29

 

 
GMO Domestic Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    —     $ —       —     $ —  
Shares issued to shareholders in reinvestment of distributions
    —       —       —       —  
Shares repurchased
    (2,670,650 )     (13,361,510 )     (13,246,482 )     (85,021,180 )
Redemption fees
    —       —       —       10,529  
                                 
Net increase (decrease)
    (2,670,650 )   $ (13,361,510 )     (13,246,482 )   $ (85,010,651 )
                                 
                                 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class VI:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    —     $ —       12,490,708     $ 80,209,775  
Shares issued to shareholders in reinvestment of distributions
    —       —       —       —  
Shares repurchased
    (11,101,709 )     (53,179,239 )     (144,024 )     (933,444 )
Redemption fees
    —       —       —       24,504  
                                 
Net increase (decrease)
    (11,101,709 )   $ (53,179,239 )     12,346,684     $ 79,300,835  
                                 

         
30
       

 

 
GMO Domestic Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                         
    Value,
               Distributions
   Return
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   of
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   Capital   period
 
GMO Short-
                                                       
Duration
                                                       
Collateral Fund
  $ 707,409,374     $ —     $ 18,950,000     $ 8,564,191     $ —     $ 258,233,051     $ 473,106,122  
GMO Special
                                                       
Purpose Holding
                                                       
Fund
    815       —       —       —       —       —       741  
GMO U.S.
                                                       
Treasury Fund
    34,032,551       22,335,976       41,705,000       31,598       3,341       —       14,663,527  
                                                         
Totals
  $ 741,442,740     $ 22,335,976     $ 60,655,000     $ 8,595,789     $ 3,341     $ 258,233,051     $ 487,770,390  
                                                         

         
        31

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Domestic Bond Fund:
 
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 (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian, brokers, and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
32
       

 

GMO Domestic Bond Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
        33

 

 
GMO Domestic Bond Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.22 %   $ 1,000.00     $ 1,040.90     $ 1.11  
2) Hypothetical
    0.22 %   $ 1,000.00     $ 1,023.70     $ 1.10  
                                 
Class VI
                               
                                 
1) Actual
    0.12 %   $ 1,000.00     $ 1,041.30     $ 0.61  
2) Hypothetical
    0.12 %   $ 1,000.00     $ 1,024.20     $ 0.60  
                                 
 
            * Expenses are calculated using each Class’s annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
34
       

 

GMO Domestic Bond Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
The Fund hereby designates as qualified interest income with respect to its taxable year ended February 28, 2011, $7,350,455 or if determined to be different, the qualified interest income of such year.
 
Of the ordinary income distributions made by the Fund during the fiscal year ended February 28, 2011, 3.22% is derived from investments in U.S. Government and Agency Obligations. All or a portion of the distributions from this income may be exempt from taxation at the state level. Consult your tax advisor for state specific information.

         
        35

 

GMO Domestic Bond Fund
(A Series of GMO Trust)


Note Concerning Distributions (Unaudited)
 
For the fiscal year ending February 28, 2011, the Fund previously reported estimated sources of any dividends, short-term capital gains, long-term capital gains and return of capital distributions paid on a per share basis. Pursuant to Rule 19a-1(e) of the Investment Company Act of 1940, the table below serves as a correction of such estimates on a per share basis. The Statement of Changes in Net Assets includes the corrected amounts on a dollar basis.
 
                                             
                Dividend
   Net
   Net
    
                Paid from
   Short-Term
   Long-Term
    
                Current
   Capital
   Capital
    
                and/or
   Gains
   Gains
    
                Prior Years
   From Sale of
   From Sale of
   Distribution
                Accumulated
   Securities &
   Securities &
   from
    Record
           Undistributed
   Other
   Other
   Return of
Class   Date   Ex-Date   Payable Date   Net Income*   PropertyÙ   PropertyÙ   Capital
 
III
  March 2, 2010   March 3, 2010   March 4, 2010   $ 0.00446473     $ 0.00000000     $ 0.00000000     $ 0.12019904  
III
  April 1, 2010   April 5, 2010   April 6, 2010   $ 0.01040660     $ 0.00000000     $ 0.00000000     $ 0.28811787  
III
  May 3, 2010   May 4, 2010   May 5, 2010   $ 0.00193067     $ 0.00000000     $ 0.00000000     $ 0.06100454  
III
  June 1, 2010   June 2, 2010   June 3, 2010   $ 0.00455505     $ 0.00000000     $ 0.00000000     $ 0.12935936  
III
  July 14, 2010   July 15, 2010   July 16, 2010   $ 0.01056716     $ 0.00000000     $ 0.00000000     $ 0.29771480  
III
  August 4, 2010   August 5, 2010   August 6, 2010   $ 0.01328365     $ 0.00000000     $ 0.00000000     $ 0.36063375  
III
  August 27, 2010   August 30, 2010   August 31, 2010   $ 0.00298724     $ 0.00000000     $ 0.00000000     $ 0.08758248  
III
  September 28, 2010   September 29, 2010   September 30, 2010   $ 0.00383762     $ 0.00000000     $ 0.00000000     $ 0.11148430  
III
  January 5, 2011   January 6, 2011   January 7, 2011   $ 0.01042615     $ 0.00000000     $ 0.00000000     $ 0.30289716  
VI
  March 2, 2010   March 3, 2010   March 4, 2010   $ 0.00449557     $ 0.00000000     $ 0.00000000     $ 0.12019904  
VI
  April 1, 2010   April 5, 2010   April 6, 2010   $ 0.01085818     $ 0.00000000     $ 0.00000000     $ 0.28811787  
VI
  May 3, 2010   May 4, 2010   May 5, 2010   $ 0.00237524     $ 0.00000000     $ 0.00000000     $ 0.06100454  
VI
  June 1, 2010   June 2, 2010   June 3, 2010   $ 0.00490789     $ 0.00000000     $ 0.00000000     $ 0.12935936  
VI
  July 14, 2010   July 15, 2010   July 16, 2010   $ 0.01127185     $ 0.00000000     $ 0.00000000     $ 0.29771480  
VI
  August 4, 2010   August 5, 2010   August 6, 2010   $ 0.01351878     $ 0.00000000     $ 0.00000000     $ 0.36063375  
VI
  August 27, 2010   August 30, 2010   August 31, 2010   $ 0.00334947     $ 0.00000000     $ 0.00000000     $ 0.08758248  
VI
  September 28, 2010   September 29, 2010   September 30, 2010   $ 0.00424699     $ 0.00000000     $ 0.00000000     $ 0.11148430  
VI
  January 5, 2011   January 6, 2011   January 7, 2011   $ 0.01156655     $ 0.00000000     $ 0.00000000     $ 0.30289716  
 
Notes:
 
            * Net investment income may include amounts derived from dividends, interest, net foreign currency gains and net amounts from transacting in certain derivative contracts.
 
            Ù Short-term and long-term capital gains may include amounts derived from the sale of securities/other property and net amounts from transacting in certain derivative contracts.

         
36
       

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with
   Length of
   During Past
   Complex
     Directorships
Date of Birth   the Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1;
Author of Legal Treatises. 		    63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
        37

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with
   Length of
   During Past
   Complex
     Directorships
Date of Birth   the Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since
March 2010. 		  Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee;
President and
Chief Executive
Officer of the Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
38        

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        39

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
40        

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO Emerging Countries Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Emerging Markets Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
The Class III shares of GMO Emerging Countries Fund returned +25.9% for the fiscal year ended February 28, 2011, as compared with +22.1% for the S&P/IFCI (Investable) Composite Index.
 
Country selection added 2.1% to the Fund’s relative returns for the fiscal year. The Fund’s underweights in China and India, along with its overweights in Russia, Thailand, and Turkey contributed to relative performance. The Fund’s overweight in Egypt and underweight in South Africa detracted from relative performance.
 
Stock selection added 1.6% to relative returns during the fiscal year. In particular, the Fund’s stock selections in Korea and Taiwan added to relative performance.
 
Because some of the securities and instruments held directly or indirectly by the Fund had positive fair value adjustments during the fiscal year (and the performance of indices are not fair valued), the Fund’s absolute and relative performance is better than it otherwise would have been.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO Emerging Countries Fund Class III Shares and the S&P/IFCI Composite Index
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited. Performance for classes may vary due to different fees.
 

 

GMO Emerging Countries Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary   % of Total Net Assets  
Common Stocks
    90.0 %
Preferred Stocks
    8.4  
Short-Term Investments
    0.5  
Mutual Funds
    0.0 Ù
Rights and Warrants
    0.0 Ù
Other
    1.1  
         
      100.0 %
         
 
         
Country Summary*   % of Investments  
South Korea
    19.5 %
Russia
    15.7  
China
    14.0  
Brazil
    13.1  
Taiwan
    11.4  
Thailand
    3.8  
South Africa
    3.6  
Indonesia
    3.4  
Turkey
    3.2  
India
    2.3  
Hungary
    1.9  
Mexico
    1.9  
Poland
    1.7  
Czech Republic
    1.4  
Egypt
    1.1  
Malaysia
    0.8  
Philippines
    0.6  
Chile
    0.3  
Morocco
    0.2  
Sri Lanka
    0.1  
Argentina
    0.0 Ù
         
      100.0 %
         
 
Ù Rounds to 0.0%.
* The table above shows country exposure in the Fund. The table excludes short-term investments. The table includes exposure through derivative financial instruments, if any. The table excludes exposure through forward currency contracts. The table takes into account the market value of securities and options and the notional amounts of swap agreements and other derivative financial instruments, if any.
 

         
        1

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2011 (Unaudited)
 
         
Industry Group Summary   % of Equity Investments**  
Energy
    22.7 %
Banks
    19.2  
Materials
    14.6  
Telecommunication Services
    12.6  
Semiconductors & Semiconductor Equipment
    6.6  
Capital Goods
    5.3  
Technology Hardware & Equipment
    4.4  
Automobiles & Components
    3.2  
Utilities
    2.6  
Diversified Financials
    1.2  
Software & Services
    1.2  
Real Estate
    1.1  
Insurance
    1.0  
Food, Beverage & Tobacco
    0.8  
Pharmaceuticals, Biotechnology & Life Sciences
    0.6  
Transportation
    0.6  
Retailing
    0.6  
Food & Staples Retailing
    0.5  
Consumer Services
    0.5  
Media
    0.2  
Household & Personal Products
    0.2  
Health Care Equipment & Services
    0.2  
Consumer Durables & Apparel
    0.1  
         
      100.0 %
         
 
** Equity investments may consist of common stocks and other stock-related securities, such as preferred stocks. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.

         
2
       

 

GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            COMMON STOCKS — 89.9%        
                     
            Argentina — 0.0%        
      3,584     Petrobras Energia SA ADR     82,468  
                     
                     
            Brazil — 6.5%        
      73,802     Banco Bradesco ADR     1,445,043  
      195,600     Banco do Brasil SA     3,497,476  
      44,380     Banco Santander Brasil SA ADR     540,548  
      47,900     BR Malls Participacoes SA     456,314  
      8,660     Brasil Telecom SA ADR     199,613  
      4,700     Braskem SA     114,586  
      4,570     Centrais Eletricas Brasileiras SA Sponsored ADR     65,260  
      5,360     Cia de Saneamento Basico do Estado de Sao Paulo ADR     267,678  
      11,900     Cia de Saneamento de Minas Gerais-Copasa MG     207,417  
      800     Cia Paranaense de Energia Sponsored ADR     20,416  
      12,100     Cia Siderurgica Nacional SA Sponsored ADR     196,867  
      4,100     Companhia Energetica de Minas Gerais Sponsored ADR     69,126  
      20,809     Companhia Saneamento Basico Sao Paulo     509,907  
      200     CPFL Energia SA ADR     15,846  
      16,600     Electrobras (Centro)     234,463  
      39,100     Gerdau SA     400,682  
      30,360     Gerdau SA Sponsored ADR     409,860  
      133,390     Itau Unibanco Holding SA ADR     2,963,926  
      24,200     Light SA     397,079  
      8,400     Lojas Renner SA     257,483  
      10,000     Natura Cosmeticos SA     253,696  
      51,030     Petroleo Brasileiro SA (Petrobras) ADR     2,032,525  
      18,300     Porto Seguro SA     291,471  
      11,600     Sul America SA     132,817  
      11,000     Tractebel Energia SA     171,896  
      14,400     Ultrapar Participacoes SA Sponsored ADR     230,256  
      18,300     Usinas Siderurgicas de Minas Gerais SA     294,991  
      5,500     Usinas Siderurgicas de Minas Gerais SA Sponsored ADR     63,085  
      15,900     Vale SA     538,027  

         
    See accompanying notes to the financial statements.   3

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Brazil — continued        
      9,800     Vale SA Sponsored ADR     335,454  
      8,700     Vivo Participacoes SA ADR     320,247  
                     
            Total Brazil     16,934,055  
                     
                     
            Chile — 0.3%        
      196,575     Banco de Chile     27,017  
      210     Banco de Chile ADR     17,430  
      7,610     Banco Santander Chile     609  
      830     Banco Santander Chile SA ADR     69,014  
      10,222     Cencosud SA     69,600  
      1,283,201     Corpbanca     19,173  
      1,750     Embotelladora Andina SA ADR Class A     37,713  
      1,060     Embotelladora Andina SA ADR Class B     28,217  
      53,766     Empresa Nacional de Electricidad SA     93,792  
      1,190     Empresa Nacional de Electricidad SA Sponsored ADR     62,106  
      12,400     Empresa National de Telecomunicaciones SA     211,857  
      1,960     Enersis SA Sponsored ADR     39,808  
                     
            Total Chile     676,336  
                     
                     
            China — 13.7%        
      164,000     Agile Property Holdings Ltd     208,123  
      1,952,000     Agricultural Bank of China Ltd Class H *     971,732  
      46,000     Anhui Conch Cement Co Ltd Class H     222,222  
      4,742,000     Bank of China Ltd Class H     2,502,196  
      868,000     Bank of Communications Co Ltd Class H     842,816  
      744,000     China CITIC Bank Class H     490,569  
      198,900     China Coal Energy Co Class H     285,599  
      383,200     China Communication Services Corp Ltd Class H     246,085  
      579,000     China Communications Construction Co Ltd Class H     434,711  
      3,002,000     China Construction Bank Class H     2,633,830  
      66,500     China Merchants Bank Co Ltd Class H     160,237  
      6,000     China Merchants Holdings International Co Ltd     25,462  
      456,000     China Minsheng Banking Corp Ltd     398,837  
      585,664     China Mobile Ltd     5,516,169  

         
4
  See accompanying notes to the financial statements.    

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            China — continued        
      15,782     China Mobile Ltd Sponsored ADR     746,015  
      28,000     China National Building Material Co Ltd Class H     69,421  
      93,900     China Oilfield Services Ltd Class H     188,434  
      14,000     China Overseas Land & Investment Ltd     23,401  
      3,483,083     China Petroleum & Chemical Corp Class H     3,535,060  
      16,000     China Shenhua Energy Co Ltd Class H     66,712  
      2,665,900     China Telecom Corp Ltd Class H     1,582,057  
      754,000     China Unicom Hong Kong Ltd     1,264,551  
      188,200     Citic Pacific Ltd     494,670  
      401,000     CNOOC Ltd     914,521  
      2,880     CNOOC Ltd ADR     657,619  
      320,000     Cosco Pacific Ltd     620,729  
      386,000     Country Garden Holdings Co     154,000  
      682,000     Evergrande Real Estate Group Ltd     323,190  
      645,000     GOME Electrical Appliances Holdings Ltd *     220,782  
      21,600     Guangzhou R&F Properties Co Ltd Class H     29,026  
      32,500     Hengan International Group Co Ltd     242,403  
      290,000     Hopson Development Holdings Ltd *     322,384  
      4,652,000     Industrial and Commercial Bank of China Ltd Class H     3,584,061  
      264,000     Jiangxi Copper Co Ltd Class H     838,737  
      62,850     Lianhua Supermarket Holdings Co Ltd     282,942  
      216,000     Longfor Properties Co Ltd     305,667  
      1,683,553     PetroChina Co Ltd Class H     2,297,374  
      76,000     Ping An Insurance (Group) Co of China Ltd Class H     784,322  
      23,000     Shanghai Industrial Holdings Ltd     82,554  
      22,000     Shimao Property Holdings Ltd     30,166  
      30,000     Sino-Ocean Land Holdings Ltd     18,070  
      207,000     Yangzijiang Shipbuilding Holdings Ltd     292,489  
      7,200     Yanzhou Coal Mining Co Ltd ADR     216,000  
      115,500     Zhongsheng Group Holdings Ltd *     222,004  
      480,000     Zijin Mining Group Co Ltd Class H     395,270  
                     
            Total China     35,743,219  
                     

         
    See accompanying notes to the financial statements.   5

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Czech Republic — 1.4%        
      41,045     CEZ AS     1,883,808  
      4,068     Komercni Banka AS     979,039  
      4,045     Pegas Nonwovens SA     100,392  
      356     Philip Morris CR AS     185,265  
      22,085     Telefonica 02 Czech Republic AS     500,626  
      1,300     Unipetrol AS *     12,886  
                     
            Total Czech Republic     3,662,016  
                     
                     
            Egypt — 1.1%        
      15,862     Alexandria Mineral Oils Co (a)     116,810  
      155,645     Commercial International Bank (a)     857,355  
      30,311     EFG-Hermes Holding SAE (a)     119,299  
      6,991     Egyptian Co for Mobile Services (a)     139,758  
      18,291     ElSwedy Electric Co * (a)     125,556  
      11,437     Orascom Construction Industries (a)     380,525  
      494,281     Orascom Telecom Holding SAE * (a)     273,025  
      19,791     Oriental Weavers Co (a)     96,617  
      88,442     Sidi Kerir Petrochemicals Co (a)     170,158  
      131,908     South Valley Cement (a)     75,034  
      100,687     Talaat Moustafa Group * (a)     98,670  
      157,554     Telecom Egypt (a)     396,092  
                     
            Total Egypt     2,848,899  
                     
                     
            Hungary — 1.9%        
      1,708     Egis Gyogyszergyar Nyrt     178,886  
      136,180     Magyar Telekom Nyrt     381,931  
      3,844     MOL Hungarian Oil and Gas Nyrt *     465,439  
      102,323     OTP Bank Nyrt *     3,063,775  
      3,670     Richter Gedeon Nyrt     708,991  
                     
            Total Hungary     4,799,022  
                     
                     
            India — 2.3%        
      866     ACC Ltd     19,164  
      9,950     Ambuja Cements Ltd     26,278  

         
6
  See accompanying notes to the financial statements.    

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            India — continued        
      73,650     Aurobindo Pharma Ltd     280,336  
      79,231     Bharti Airtel Ltd     581,598  
      5,843     Grasim Industries Ltd (a)     304,019  
      63,046     Hindalco Industries Ltd     282,681  
      467     Hindustan Zinc Ltd     13,163  
      5,609     Infosys Technologies Ltd     373,000  
      13,760     Infosys Technologies Ltd Sponsored ADR     917,792  
      32,588     Ipca Laboratories Ltd     196,195  
      1,730     Jindal Steel & Power Ltd     25,334  
      17,924     Mphasis Ltd     172,475  
      150,319     Reliance Communications Ltd     286,421  
      42,620     Rural Electrification Corp Ltd (a)     222,677  
      50,745     Sesa Goa Ltd     297,454  
      108,719     Shree Renuka Sugars Ltd     171,340  
      12,220     Steel Authority of India Ltd     41,235  
      66,338     Sterlite Industries India Ltd     242,940  
      48,094     Tata Consultancy Services Ltd     1,182,931  
      14,179     Tata Steel Ltd     191,512  
      18,840     Wipro Ltd     182,582  
                     
            Total India     6,011,127  
                     
                     
            Indonesia — 3.3%        
      892,500     Adaro Energy Tbk PT     249,669  
      560,000     Astra International Tbk PT     3,323,798  
      102,000     Bank Central Asia Tbk PT     73,238  
      26,500     Bank Danamon Indonesia Tbk PT     19,323  
      1,337,672     Bank Mandiri Tbk PT     884,033  
      1,615,000     Bank Negara Indonesia (Persero) Tbk PT     653,200  
      1,390,500     Bank Rakyat Tbk PT     745,250  
      141,500     Charoen Pokphand Indonesia Tbk PT     24,381  
      21,750     Indah Kiat Pulp and Paper Corp Tbk PT *     3,818  
      156,000     Indosat Tbk PT     90,173  
      781,000     Kalbe Farma Tbk PT     260,384  
      109,500     Tambang Batubara Bukit Asam Tbk PT     249,991  

         
    See accompanying notes to the financial statements.   7

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Indonesia — continued        
      1,197,000     Telekomunikasi Indonesia Tbk PT     1,015,488  
      13,300     Telekomunikasi Indonesia Tbk PT Sponsored ADR     454,727  
      210,000     United Tractors Tbk PT     555,650  
                     
            Total Indonesia     8,603,123  
                     
                     
            Malaysia — 0.8%        
      217,700     AMMB Holdings Berhad     444,340  
      90,960     Genting Berhad     298,421  
      133,600     Kulim Malaysia Berhad     151,579  
      155,800     Landmarks Berhad     76,958  
      127,119     Lion Industries Corp Berhad     79,873  
      5,400     MISC Berhad     13,486  
      96,900     PLUS Expressways Bhd     140,542  
      200,300     Scomi Group Berhad *     21,789  
      260,700     Sime Darby Berhad     766,235  
      21,875     Tenaga Nasional Berhad     45,249  
      27,300     YTL Power International Berhad     20,351  
      505,300     Zelan Berhad *     82,351  
                     
            Total Malaysia     2,141,174  
                     
                     
            Mexico — 1.8%        
      45,720     America Movil SAB de CV Class L ADR     2,625,242  
      88,300     Grupo Financiero Banorte SAB de CV Class O     400,551  
      69,400     Grupo Televisa SA-Series CPO *     328,636  
      74,300     Sare Holding SA de CV Class B *     18,234  
      78,045     Telefonos de Mexico SAB de CV Class L Sponsored ADR     1,411,834  
                     
            Total Mexico     4,784,497  
                     
                     
            Morocco — 0.2%        
      2,499     Attijariwafa Bank     129,248  
      23,261     Maroc Telecom     457,422  
                     
            Total Morocco     586,670  
                     

         
8
  See accompanying notes to the financial statements.    

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Philippines — 0.6%        
      115,400     Aboitiz Power Corp     76,825  
      563,600     Alliance Global Group Inc     148,517  
      2,171,300     Lopez Holding Corp *     240,145  
      301,000     Megaworld Corp     14,364  
      177,907     Metropolitan Bank & Trust Co     235,441  
      9,950     Philippine Long Distance Telephone Co     492,166  
      1,500     Philippine Long Distance Telephone Co Sponsored ADR     74,520  
      35,700     Security Bank Corp     63,915  
      80,000     Universal Robina Corp     61,597  
      1,262,900     Vista Land & Lifescapes Inc     67,039  
                     
            Total Philippines     1,474,529  
                     
                     
            Poland — 1.7%        
      17,228     Asseco Poland SA     307,766  
      11,670     Grupa Lotos SA *     163,890  
      51,875     KGHM Polska Miedz SA     3,178,780  
      7,552     Kopex SA *     54,984  
      20,530     Polski Koncern Naftowy Orlen SA *     326,449  
      56,458     Telekomunikacja Polska SA     340,475  
                     
            Total Poland     4,372,344  
                     
                     
            Russia — 14.4%        
      16,345     Gazprom Neft Class S (a)     88,356  
      434,407     Gazprom OAO Sponsored ADR     12,786,283  
      62,000     KamAZ * (a)     175,248  
      118,003     Lukoil OAO ADR     8,355,716  
      27,689     Magnit OJSC Sponsored GDR (Registered Shares)     786,939  
      26,817     Magnitogorsk Iron & Steel Works Sponsored GDR (Registered Shares)     388,321  
      6,890     Mechel Sponsored ADR     209,663  
      94,524     MMC Norilsk Nickel JSC ADR (a)     2,282,074  
      47,200     Mobile Telesystems Sponsored ADR     888,776  
      20,125     NovaTek OAO Sponsored GDR (Registered Shares)     2,616,860  
      3,293     Novolipetsk Steel GDR (Registered Shares)     151,315  
      34,432     OAO Tatneft Sponsored GDR (Registered Shares)     1,439,337  

         
    See accompanying notes to the financial statements.   9

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Russia — continued        
      677     Polyus Gold Sponsored ADR     23,120  
      332,942     Rosneft OJSC GDR (Registered Shares)     3,145,055  
      120,940     Sberbank Class S (a)     427,448  
      202,587     Surgutneftegas Sponsored ADR     2,357,416  
      424,000     United Co RUSAL Plc *     718,669  
      12,600     Uralkali Sponsored GDR     514,962  
                     
            Total Russia     37,355,558  
                     
                     
            South Africa — 3.5%        
      12,267     Absa Group Ltd     228,489  
      28,925     African Bank Investments Ltd     148,634  
      577     African Rainbow Minerals Ltd     17,497  
      7,190     AngloGold Ashanti Ltd     350,941  
      23,449     ArcelorMittal South Africa Ltd     303,611  
      200,689     Aveng Ltd     1,054,592  
      14,609     Bidvest Group Ltd     327,372  
      6,658     Exxaro Resources Ltd     145,798  
      141,466     FirstRand Ltd     397,905  
      22,532     Foschini Ltd     254,340  
      5,834     Gold Fields Ltd     104,502  
      110,645     Growthpoint Properties Ltd     270,265  
      9,798     Impala Platinum Holdings Ltd     289,317  
      776     Kumba Iron Ore Ltd     52,493  
      72,733     MTN Group Ltd     1,284,553  
      99,185     Murray & Roberts Holdings Ltd     356,048  
      6,795     Nedbank Group Ltd     124,643  
      30,383     Sanlam Ltd     117,942  
      37,972     Sasol Ltd     2,079,273  
      600     Sasol Ltd Sponsored ADR     32,922  
      94,194     Telkom South Africa Ltd     479,552  
      1,039     Tiger Brands Ltd     27,215  
      19,597     Vodacom Group (Pty) Ltd     210,999  
      31,400     Wilson Bayly Holmes-Ovcon Ltd     522,550  
                     
            Total South Africa     9,181,453  
                     

         
10
  See accompanying notes to the financial statements.    

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            South Korea — 18.2%        
      49,669     Busan Bank     599,188  
      28,192     Daegu Bank     381,941  
      3,278     Daelim Industrial Co Ltd     286,022  
      8,130     Daewoo Securities Co Ltd     167,111  
      8,029     Daewoo Shipbuilding & Marine Engineering Co Ltd     246,571  
      7,054     Dongbu Insurance Co Ltd     287,561  
      930     Doosan Corp     103,478  
      15,472     GS Holdings Corp     958,764  
      46,702     Hana Financial Group Inc     1,870,816  
      24,925     Hanwha Chemical Corp     746,293  
      24,942     Hanwha Corp     987,025  
      3,155     Honam Petrochemical Corp     874,313  
      28,019     Hynix Semiconductor Inc *     705,359  
      6,652     Hyosung Corp     461,738  
      8,602     Hyundai Heavy Industries Co Ltd     3,329,919  
      4,077     Hyundai Mipo Dockyard     627,359  
      7,833     Hyundai Mobis     1,827,028  
      9,735     Hyundai Motor Co     1,541,236  
      8,033     Hyundai Steel Co     926,779  
      52,445     Industrial Bank of Korea     789,571  
      9,737     INTOPS Co Ltd     177,132  
      41,888     Kangwon Land Inc     932,249  
      26,448     KB Financial Group Inc     1,295,996  
      925     KCC Corp     257,775  
      21,490     Kia Motors Corp     1,098,318  
      68,710     Korea Exchange Bank     558,346  
      13,706     Korea Investment Holdings Co Ltd     510,589  
      3,278     Korea Kumho Petrochemical Co Ltd     391,691  
      2,769     Korea Zinc Co Ltd     824,697  
      11,150     KT Corp     388,392  
      7,200     KT Corp Sponsored ADR *     142,488  
      22,596     KT&G Corp     1,148,043  
      1,753     LG Chem Ltd     580,014  
      13,261     LG Corp     913,853  

         
    See accompanying notes to the financial statements.   11

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            South Korea — continued        
      3,050     LG Display Co Ltd     97,031  
      67,688     LG Uplus Corp     340,960  
      1,603     Lotte Shopping Co Ltd     558,946  
      2,494     OCI Company Ltd     825,538  
      8,821     POSCO     3,612,566  
      1,000     POSCO ADR     103,080  
      2,516     S-Oil Corp     240,154  
      47,580     Samho International Co Ltd *     128,896  
      3,770     Samsung C&T Corp     225,626  
      1,748     Samsung Fire & Marine Insurance Co Ltd     347,108  
      13,853     Samsung Heavy Industries Co Ltd     448,394  
      6,090     Samsung Life Insurance Co Ltd     576,875  
      657     Samsung SDI Co Ltd     97,358  
      9,259     Samsung Securities Co Ltd     624,235  
      8,658     Samsung Electronics Co Ltd     7,100,859  
      37,047     Shinhan Financial Group Co Ltd     1,552,982  
      370     Shinsegae Co Ltd     81,875  
      1,572     SK Energy Co Ltd     245,823  
      4,576     SK Telecom Co Ltd     661,326  
      46,939     SK Telecom Co Ltd ADR     825,657  
      8,138     SK Holdings Co Ltd     959,176  
      59,976     Woori Finance Holdings Co Ltd     730,212  
                     
            Total South Korea     47,322,332  
                     
                     
            Sri Lanka — 0.1%        
      100,074     Hatton National Bank Plc     359,537  
                     
                     
            Taiwan — 11.2%        
      16,000     Acer Inc     39,063  
      458,983     Advanced Semiconductor Engineering Inc     518,001  
      111,796     Asustek Computer Inc     1,019,984  
      25,300     AU Optronics Corp Sponsored ADR *     227,194  
      367,000     Chang Hwa Commercial Bank     271,431  
      134,000     China Airlines Ltd *     87,654  

         
12
  See accompanying notes to the financial statements.    

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Taiwan — continued        
      49,000     China Development Financial Holding Corp     18,946  
      440,500     China Petrochemical Development Corp. *     505,572  
      753,307     China Steel Corp     853,194  
      764,136     Chinatrust Financial Holding Co Ltd     602,240  
      645,594     Chunghwa Telecom Co Ltd     1,919,239  
      4,600     Chunghwa Telecom Co Ltd ADR     135,746  
      1,049,577     Compal Electronics Inc     1,236,932  
      61,237     Delta Electronics Inc     256,022  
      168,000     Eva Airways Corp *     152,534  
      581,967     Evergreen Marine Corp *     515,961  
      257,000     Far Eastern Textile Co Ltd     402,009  
      562,195     Far Eastone Telecommunications Co Ltd     804,990  
      355,500     First Financial Holding Co Ltd     290,699  
      193,000     Formosa Chemicals & Fibre Co     659,311  
      50,987     Formosa Petrochemical Corp     154,359  
      268,000     Formosa Plastics Corp     900,887  
      261,356     Hon Hai Precision Industry Co Ltd     969,780  
      96,031     HTC Corp     3,468,697  
      10,522     Largan Precision Co Ltd     289,255  
      250,028     Lite-On Technology Corp     313,629  
      845,000     Mega Financial Holding Co Ltd     613,360  
      376,289     Nan Ya Plastics Corp     1,091,964  
      165,219     Novatek Microelectronics Corp Ltd     509,309  
      172,962     Pegatron Corp *     205,963  
      124,000     Powertech Technology Inc     435,033  
      830,200     ProMOS Technologies Inc *     58,210  
      586,715     Quanta Computer Inc     1,154,406  
      2,000     Siliconware Precision Industries Co ADR     13,580  
      817,545     Taishin Financial Holding Co Ltd *     426,762  
      376,476     Taiwan Mobile Co Ltd     843,309  
      22,200     Taiwan Semiconductor Manufacturing Co Ltd Sponsored ADR     272,838  
      1,807,606     Taiwan Semiconductor Manufacturing Co Ltd     4,307,059  
      17,997     TPK Holding Co Ltd *     494,892  
      1,583,000     United Microelectronics Corp     823,553  

         
    See accompanying notes to the financial statements.   13

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Taiwan — continued        
      519,832     Wistron Corp     932,293  
      142,800     WPG Holdings Co Ltd     247,680  
      86,000     Yuanta Financial Holding Co Ltd     59,086  
                     
            Total Taiwan     29,102,626  
                     
                     
            Thailand — 3.7%        
      231,990     Advanced Info Service Pcl (Foreign Registered) (a)     605,475  
      1,509,240     Asian Property Development Pcl (Foreign Registered) (a)     308,218  
      13,000     Bangkok Bank Pcl (Foreign Registered) (a)     68,296  
      96,050     Bangkok Bank Pcl NVDR     504,601  
      270,300     Bangkok Dusit Medical Service Pcl (Foreign Registered) (a)     437,023  
      10,100     Banpu Pcl (Foreign Registered) (a)     241,350  
      131,500     Electricity Generating Pcl (Foreign Registered) (a)     428,403  
      74,310     Kasikornbank Pcl (Foreign Registered) (a)     295,347  
      847,500     Krung Thai Bank Pcl (Foreign Registered) (a)     456,509  
      630,900     LPN Development Pcl (Foreign Registered) (a)     192,218  
      103,300     PTT Chemical Pcl (Foreign Registered) (a)     490,174  
      43,600     PTT Exploration & Production Pcl (Foreign Registered) (a)     261,416  
      284,122     PTT Pcl (Foreign Registered) (a)     3,155,146  
      69,039     Siam Cement Pcl (Foreign Registered) (a)     752,657  
      46,600     Siam Cement Pcl NVDR     477,332  
      99,450     Siam Commercial Bank Pcl (Foreign Registered) (a)     332,934  
      264,970     Thai Oil Pcl (Foreign Registered) (a)     645,097  
      24,300     Total Access Communication PCL (a)     32,743  
                     
            Total Thailand     9,684,939  
                     
                     
            Turkey — 3.2%        
      40,104     Akbank TAS     187,739  
      67,394     Asya Katilim Bankasi AS     108,743  
      113,864     Haci Omer Sabanci Holding AS     457,338  
      30,989     Tupras-Turkiye Petrol Rafineriler AS     773,701  
      343,419     Turk Telekomunikasyon AS     1,533,258  
      213,350     Turkcell Iletisim Hizmet AS     1,200,645  
      375,601     Turkiye Garanti Bankasi     1,664,418  

         
14
  See accompanying notes to the financial statements.    

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Turkey — continued        
      245,081     Turkiye IS Bankasi Class C     763,819  
      133,493     Turkiye Vakiflar Bankasi TAO Class D     323,214  
      63,072     Turkiye Halk Bankasi AS     459,332  
      289,638     Yapi ve Kredi Bankasi AS *     808,040  
                     
            Total Turkey     8,280,247  
                     
                     
            TOTAL COMMON STOCKS (COST $209,354,772)     234,006,171  
                     
                     
            PREFERRED STOCKS — 8.5%        
                     
            Brazil — 6.4%        
      42,400     AES Tiete SA 10.36%     586,128  
      1,741     Banco Bradesco SA *     33,809  
      105,108     Banco Bradesco SA 0.55%     2,021,551  
      44,800     Banco do Estado do Rio Grande do Sul SA Class B 1.79%     490,059  
      27,900     Bradespar SA 0.08%     724,079  
      12,200     Brasil Telecom SA 4.38%     92,024  
      10,700     Braskem SA Class A *     130,422  
      41,800     Centrais Eletricas Brasileiras SA Class B 5.69%     760,228  
      1,000     Cia Energetica de Sao Paulo Class B .35%     16,408  
      13,785     Cia Energetica de Minas Gerais 2.44%     229,087  
      6,600     Companhia de Transmissao de Energia Eletrica Paulista 1.45%     202,229  
      3,900     Companhia Paranaense de Energia Class B 0.18%     97,980  
      5,200     Eletropaulo Metropolitana SA 5.93%     100,325  
      7,000     Gerdau SA 1.12%     92,517  
      163,652     Itausa-Investimentos Itau SA 0.47%     1,194,095  
      32,200     Metalurgica Gerdau SA 1.42%     500,089  
      15,524     Petroleo Brasileiro SA (Petrobras) 0.46%     266,664  
      100,190     Petroleo Brasileiro SA Sponsored ADR 0.42%     3,523,682  
      19,100     Tele Norte Leste Participacoes ADR 4.29%     301,589  
      92,700     Usinas Siderrurgicas de Minas Gerais SA Class A 2.69%     1,058,601  
      15,856     Vale SA Class A 2.62%     472,688  
      127,430     Vale SA Sponsored ADR 2.53%     3,819,077  
                     
            Total Brazil     16,713,331  
                     

         
    See accompanying notes to the financial statements.   15

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Chile — 0.0%        
      21,433     Embotelladora Andina SA B Shares 1.86%     95,038  
                     
                     
            Russia — 1.1%        
      2,199,690     Surgutneftegaz Class S 5.91% (a)     1,302,568  
      1,112     Transneft 0.57% (a)     1,575,747  
                     
            Total Russia     2,878,315  
                     
                     
            South Korea — 1.0%        
      6,002     Hyundai Motor Co 2.55%     335,317  
      4,064     Samsung Electronics Co Ltd (Non Voting) 1.66%     2,193,309  
                     
            Total South Korea     2,528,626  
                     
                     
            TOTAL PREFERRED STOCKS (COST $19,549,205)     22,215,310  
                     
                     
            RIGHTS AND WARRANTS — 0.0%        
                     
            Malaysia — 0.0%        
      16,700     Kulim Malaysia Berhad, Warrants, Expires 02/27/16 *     —  
                     
                     
            TOTAL RIGHTS AND WARRANTS (COST $0)     —  
                     
                     
            MUTUAL FUNDS — 0.0%        
                     
            United States — 0.0%        
            Affiliated Issuers        
      1     GMO U.S. Treasury Fund     14  
                     
                     
            TOTAL MUTUAL FUNDS (COST $14)     14  
                     

         
16
  See accompanying notes to the financial statements.    

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value     Description   Value ($)  
                     
            SHORT-TERM INVESTMENTS — 0.5%        
                     
            Time Deposits — 0.5%        
EUR
    61     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.12%, due 03/01/11     17  
USD
    1,323,694     Citibank (New York) Time Deposit, 0.03%, due 03/01/11     1,323,694  
                     
            Total Time Deposits     1,323,711  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $1,323,711)     1,323,711  
                     
                     
            TOTAL INVESTMENTS — 98.9%
(Cost $230,227,702) 		    257,545,206  
            Other Assets and Liabilities (net) — 1.1%     2,842,160  
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 260,387,366  
                     
 
Notes to Schedule of Investments:
 
ADR - American Depositary Receipt
CPO - Ordinary Participation Certificate (Certificado de Participacion Ordinares), representing a bundle of shares of the multiple series of one issuer that trade together as a unit.
GDR - Global Depository Receipt
NVDR - Non-Voting Depository Receipt
* Non-income producing security.
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
 
Currency Abbreviations:
 
EUR - Euro
USD - United States Dollar

         
    See accompanying notes to the financial statements.   17

 

GMO Emerging Countries Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $230,227,688) (Note 2)
  $ 257,545,192  
Investments in affiliated issuers, at value (cost $14) (Notes 2 and 10)
    14  
Foreign currency, at value (cost $616,808) (Note 2)
    617,516  
Receivable for investments sold
    2,304,017  
Receivable for Fund shares sold
    74,565  
Dividends and interest receivable
    666,329  
Foreign taxes receivable
    323,992  
Miscellaneous receivable
    17,588  
         
Total assets
    261,549,213  
         
         
Liabilities:
       
Payable for investments purchased
    405,594  
Payable for Fund shares repurchased
    182,901  
Payable to affiliate for (Note 5):
       
Management fee
    131,947  
Shareholder service fee
    26,973  
Administration fee – Class M
    4,638  
Trustees and Chief Compliance Officer of GMO Trust fees
    693  
Payable for 12b-1 fee – Class M
    13,966  
Payable for foreign currency purchased
    1,010  
Accrued expenses
    394,125  
         
Total liabilities
    1,161,847  
         
Net assets
  $ 260,387,366  
         

         
18
  See accompanying notes to the financial statements.    

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011 — (Continued)
 
         
Net assets consist of:
       
Paid-in capital
  $ 260,215,816  
Distributions in excess of net investment income
    (333,740 )
Accumulated net realized loss
    (26,830,450 )
Net unrealized appreciation
    27,335,740  
         
    $ 260,387,366  
         
Net assets attributable to:
       
Class III shares
  $ 231,920,751  
         
Class M shares
  $ 28,466,615  
         
Shares outstanding:
       
Class III
    20,164,849  
         
Class M
    2,509,613  
         
Net asset value per share:
       
Class III
  $ 11.50  
         
Class M
  $ 11.34  
         

         
    See accompanying notes to the financial statements.   19

 

GMO Emerging Countries Fund
(A Series of GMO Trust)


Statement of Operations – Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends (net of withholding taxes of $719,970)
  $ 5,388,974  
Interest
    1,848  
Dividends from affiliated issuers (Note 10)
    766  
         
Total investment income
    5,391,588  
         
Expenses:
       
Management fee (Note 5)
    1,585,171  
Shareholder service fee – Class III (Note 5)
    314,859  
12b-1 fee – Class M (Note 5)
    84,917  
Administration fee – Class M (Note 5)
    67,933  
Custodian and fund accounting agent fees
    960,706  
Audit and tax fees
    123,186  
Transfer agent fees
    52,427  
Registration fees
    30,004  
Legal fees
    12,051  
Trustees fees and related expenses (Note 5)
    5,358  
Miscellaneous
    45,304  
         
Total expenses
    3,281,916  
Fees and expenses reimbursed by Manager (Note 5)
    (372,021 )
Expense reductions (Note 2)
    (93 )
         
Net expenses
    2,909,802  
         
Net investment income (loss)
    2,481,786  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in unaffiliated issuers (net of capital gains tax of $385,869) (Note 2)
    49,784,630  
Investments in affiliated issuers
    (240 )
Realized gains distributions from affiliated issuers (Note 10)
    105  
Foreign currency, forward contracts and foreign currency related transactions (net of foreign transaction taxes of $33,325) (Note 2)
    (373,897 )
         
Net realized gain (loss)
    49,410,598  
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in unaffiliated issuers (net of change in foreign capital gains tax of $391) (Note 2)
    4,744,364  
Investments in affiliated issuers
    239  
Foreign currency, forward contracts and foreign currency related transactions
    98,648  
         
Net unrealized gain (loss)
    4,843,251  
         
Net realized and unrealized gain (loss)
    54,253,849  
         
Net increase (decrease) in net assets resulting from operations
  $ 56,735,635  
         

         
20
  See accompanying notes to the financial statements.    

 

GMO Emerging Countries Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 2,481,786     $ 1,876,303  
Net realized gain (loss)
    49,410,598       9,818,239  
Change in net unrealized appreciation (depreciation)
    4,843,251       79,466,031  
                 
                 
Net increase (decrease) in net assets from operations
    56,735,635       91,160,573  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (2,619,986 )     (2,129,850 )
Class M
    (337,720 )     (354,273 )
                 
Total distributions from net investment income
    (2,957,706 )     (2,484,123 )
                 
Net realized gains
               
Class III
    —       (400,445 )
Class M
    —       (80,952 )
                 
Total distributions from net realized gains
    —       (481,397 )
                 
      (2,957,706 )     (2,965,520 )
                 
Net share transactions (Note 9):
               
Class III
    10,750,817       12,118,023  
Class M
    (10,657,117 )     (4,647,521 )
                 
Increase (decrease) in net assets resulting from net share transactions
    93,700       7,470,502  
                 
Total increase (decrease) in net assets
    53,871,629       95,665,555  
                 
Net assets:
               
Beginning of period
    206,515,737       110,850,182  
                 
End of period (including distributions in excess of net investment income of $333,740 and $65,494, respectively)
  $ 260,387,366     $ 206,515,737  
                 

         
    See accompanying notes to the financial statements.   21

 

GMO Emerging Countries Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 9.24     $ 5.06     $ 15.26     $ 16.04     $ 19.20  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.11       0.09       0.24       0.23       0.32  
Net realized and unrealized gain (loss)
    2.28       4.23       (8.10 )     4.87       2.50  
                                         
                                         
Total from investment operations
    2.39       4.32       (7.86 )     5.10       2.82  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.13 )     (0.12 )     (0.22 )     (0.30 )     (0.36 )
From net realized gains
    —       (0.02 )     (2.12 )     (5.58 )     (5.62 )
                                         
                                         
Total distributions
    (0.13 )     (0.14 )     (2.34 )     (5.88 )     (5.98 )
                                         
                                         
Net asset value, end of period
  $ 11.50     $ 9.24     $ 5.06     $ 15.26     $ 16.04  
                                         
                                         
Total Return
    25.89 %(a)     85.52 %(a)     (58.58 )%(a)     30.68 %(a)     16.20 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 231,921     $ 174,933     $ 89,902     $ 371,540     $ 339,268  
Net expenses to average daily net assets
    1.15 %(b)(c)     1.17 %(b)     1.16 %(d)     1.11 %(d)     1.06 %
Net investment income (loss) to average daily net assets
    1.05 %     1.10 %     2.25 %     1.31 %     1.74 %
Portfolio turnover rate
    124 %     138 %     128 %     72 %     58 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.15 %     0.25 %     0.14 %     0.03 %     —  
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(d) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† Calculated using average shares outstanding throughout the period.

         
22
  See accompanying notes to the financial statements.    

 

GMO Emerging Countries Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class M share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 9.12     $ 5.00     $ 15.07     $ 15.90     $ 19.05  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.08       0.07       0.16       0.18       0.30  
Net realized and unrealized gain (loss)
    2.24       4.17       (7.92 )     4.82       2.44  
                                         
                                         
Total from investment operations
    2.32       4.24       (7.76 )     5.00       2.74  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.10 )     (0.10 )     (0.19 )     (0.25 )     (0.27 )
From net realized gains
    —       (0.02 )     (2.12 )     (5.58 )     (5.62 )
                                         
                                         
Total distributions
    (0.10 )     (0.12 )     (2.31 )     (5.83 )     (5.89 )
                                         
                                         
Net asset value, end of period
  $ 11.34     $ 9.12     $ 5.00     $ 15.07     $ 15.90  
                                         
                                         
Total Return
    25.48 %(a)     84.90 %(a)     (58.67 )%(a)     30.29 %(a)     15.89 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 28,467     $ 31,582     $ 20,948     $ 31,386     $ 29,423  
Net expenses to average daily net assets
    1.45 %(b)(c)     1.47 %(c)     1.48 %(d)     1.41 %(d)     1.36 %
Net investment income (loss) to average daily net assets
    0.80 %     0.83 %     1.68 %     0.99 %     1.63 %
Portfolio turnover rate
    124 %     138 %     128 %     72 %     58 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.15 %     0.25 %     0.23 %     0.03 %     —  
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(c) The net expense ratio does not include the effect of expense reductions (Note 2).
(d) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† Calculated using average shares outstanding throughout the period.

         
    See accompanying notes to the financial statements.   23

 

GMO Emerging Countries Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO Emerging Countries Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund seeks total return in excess of that of its benchmark, the S&P/IFCI Composite Index. The Fund typically makes equity investments directly and indirectly (e.g., through underlying funds or derivatives) in companies tied economically to emerging countries. “Emerging countries” include all countries that are not considered to be “developed market countries” by the MSCI World Index or MSCI EAFE Index. The term “equity investments” refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts. Under normal circumstances, the Fund invests directly and indirectly at least 80% of its assets in investments tied economically to emerging countries.
 
The Manager uses proprietary quantitative techniques and fundamental analysis to evaluate and select countries, sectors, and equity investments.
 
In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the-counter (“OTC”) derivatives (including options, futures, warrants, swap contracts, and reverse repurchase agreements) and exchange-traded funds (“ETFs”) (i) as a substitute for direct investment; (ii) in an attempt to reduce investment exposures (which may result in a reduction below zero); (iii) to effect transactions intended as substitutes for securities lending; and/or (iv) in an attempt to adjust elements of its investment and/or foreign currency exposure. The Fund’s foreign currency exposure may differ from the currency exposure represented by its equity investments. In addition, the Fund may take active overweighted and underweighted positions in particular currencies relative to its benchmark. In addition, the Fund may lend its portfolio securities.
 
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
 
Throughout the year ended February 28, 2011, the Fund had two classes of shares outstanding: Class III and Class M. Class M shares bear an administration fee and a 12b-1 fee while Class III shares bear a shareholder service fee (See Note 5). The principal economic difference between the classes of shares is the type and level of fees they bear.

         
24
       

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund currently limits subscriptions due to capacity considerations.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the OTC market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of February 28, 2011, the total value of securities held directly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 6.9% of net assets. The Fund classifies such securities (as defined below) as Level 3. Additionally, because many foreign equity securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices adjusted by a factor supplied by a third party vendor using that vendor’s proprietary models. As of February 28, 2011, 74.0% of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified as using Level 2 inputs in the table below. See Note 4 for a further discussion on valuation of derivative financial instruments.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The

         
        25

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include: fair value adjustments applied to local closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund’s daily NAV calculation.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund utilized a number of fair value techniques on Level 3 investments, including the following: Certain of the Fund’s securities in Thailand and India were valued at the local price as adjusted by applying a premium or discount when the holdings exceed foreign ownership limitations. The Fund values certain Russian securities using a price from a secondary exchange. The Fund valued certain equity securities based on the value of underlying securities or an underlying index to which the securities are linked. The Fund valued Egyptian securities based on movements in related GDRs as no observable market prices were available on February 28, 2011 due to the continued suspension of trading and political unrest in Egypt.

         
26
       

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Common Stocks
                               
Argentina
  $ 82,468     $ —     $ —     $ 82,468  
Brazil
    16,934,055       —       —       16,934,055  
Chile
    676,336       —       —       676,336  
China
    1,619,634       34,123,585       —       35,743,219  
Czech Republic
    —       3,662,016       —       3,662,016  
Egypt
    —       —       2,848,899       2,848,899  
Hungary
    —       4,799,022       —       4,799,022  
India
    917,792       4,566,639       526,696       6,011,127  
Indonesia
    454,727       8,148,396       —       8,603,123  
Malaysia
    —       2,141,174       —       2,141,174  
Mexico
    4,784,497       —       —       4,784,497  
Morocco
    —       586,670       —       586,670  
Philippines
    74,520       1,400,009       —       1,474,529  
Poland
    —       4,372,344       —       4,372,344  
Russia
    1,098,439       33,283,993       2,973,126       37,355,558  
South Africa
    32,922       9,148,531       —       9,181,453  
South Korea
    1,071,225       46,251,107       —       47,322,332  
Sri Lanka
    —       359,537       —       359,537  
Taiwan
    1,144,250       27,958,376       —       29,102,626  
Thailand
    —       981,933       8,703,006       9,684,939  
Turkey
    —       8,280,247       —       8,280,247  
                                 
TOTAL COMMON STOCKS
    28,890,865       190,063,579       15,051,727       234,006,171  
                                 
Preferred Stocks
                               
Brazil
    16,713,331       —       —       16,713,331  
Chile
    95,038       —       —       95,038  
Russia
    —       —       2,878,315       2,878,315  
South Korea
    —       2,528,626       —       2,528,626  
                                 
TOTAL PREFERRED STOCKS
    16,808,369       2,528,626       2,878,315       22,215,310  
                                 

         
        27

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
  
  ASSET VALUATION INPUTS — continued
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Rights and Warrants
                               
Malaysia
  $ —     $ 0 *   $ —     $ 0  
                                 
TOTAL RIGHTS AND WARRANTS
    —       0       —       0  
                                 
Mutual Funds
                               
United States
    14       —       —       14  
                                 
TOTAL MUTUAL FUNDS
    14       —       —       14  
                                 
Short-Term Investments
    1,323,711       —       —       1,323,711  
                                 
Total Investments
    47,022,959       192,592,205       17,930,042       257,545,206  
                                 
Total
  $ 47,022,959     $ 192,592,205     $ 17,930,042     $ 257,545,206  
                                 
 
            * Represents the interest in securities that have no value as of February 28, 2011.
 
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements. The aggregate net value of the Fund’s direct investments in securities using Level 3 inputs was 6.9% of total net assets.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.

         
28
       

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a reconciliation of investments and derivatives, if any, in which significant unobservable inputs (Level 3) were used in determining value:
 
                                                                           
 
                                      Net Change in
                                      Unrealized
                                      Appreciation
                                      (Depreciation)
                                      from
                                      Investments
    Balances
               Change in
           Balances
 		    Still
    as of
   Net
   Accrued
   Total
   Unrealized
   Transfer
   Transfer
 		  as of
 		    Held as of
    February 28,
   Purchases/
   Discounts/
   Realized
   Appreciation
   into
   out of
 		  February 28,
 		    February
    2010   (Sales)   Premiums   Gain/(Loss)   (Depreciation)   level 3*   level 3*   2011     28, 2011
Common Stocks
                                                                         
Egypt
  $ —     $ 694,700     $ —     $ 44,839     $ (1,118,459 )   $ 3,227,819 **   $ —     $ 2,848,899       $ (1,118,459 )
India
    —       (30,192 )     —       287,642       6,635       262,611 **     —       526,696         6,635  
Russia
    —       (4,821,632 )     —       2,082,395       51,795       5,660,568 **     —       2,973,126         51,795  
South Korea
    —       (27,475 )     —       27,475       —       —       —       —         —  
Thailand
    10,959,643       (6,841,161 )     —       4,623,151       943,306       —       (981,933 )**     8,703,006         1,064,212  
Preferred Stocks
                                                                         
Russia
    —       709,504       —       (54,043 )     814,907       1,407,947 **     —       2,878,315         814,907  
                                                                           
Total
  $ 10,959,643     $ (10,316,256 )   $ —     $ 7,011,459     $ 698,184     $ 10,558,945     $ (981,933 )   $ 17,930,042       $ 819,090  
                                                                           
 
            * The Fund accounts for investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the value at the end of the period.
            ** Financial assets transferred between Level 2 and Level 3 were due to a change in observable and/or unobservable inputs.
 
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 pm. Income and expenses denominated in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.

         
        29

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country’s tax treaty with the United States. The foreign withholding rates applicable to a Fund’s investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if paid by the shareholders of the Fund.
 
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Taxes related to capital gains realized during the year ended February 28, 2011, if any, are reflected as part of Net realized gain (loss) in the Statement of Operations. Changes in tax liabilities related to capital gain taxes on unrealized investment gains, if any, are reflected as part of Change in net unrealized appreciation (depreciation) in the Statement of Operations. Transaction-based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards, foreign currency transactions, losses on wash sale transactions, differing treatment of capital gain taxes, passive foreign investment company transactions and post-October currency losses.

         
30
       

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 2,957,706     $ 2,486,135  
Net long-term capital gain
    —       479,385  
                 
Total distributions
  $ 2,957,706     $ 2,965,520  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of February 28, 2011, certain tax attributes consisted of the following:
 
         
Tax Attributes:
       
Capital loss carryforwards
  $ (23,106,078 )
Post-October currency loss deferral
  $ (312,302 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 28, 2018
  $ (23,106,078 )
         
Total
  $ (23,106,078 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 233,968,537     $ 30,143,649     $ (6,566,980 )   $ 23,576,669      
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S.

         
        31

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, 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 among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service, 12b-1, and administration fees, which are directly attributable to a class of shares, are charged to that class’s operations. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (Note 5).
 
Brown Brothers Harriman & Co. (“BBH”) serves as the Fund’s custodian and fund accounting agent. State Street Bank and Trust Company (“State Street”) serves as the Fund’s transfer agent. BBH’s and State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not

         
32
       

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Equity Securities — Equity securities may decline in value due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund generally seeks to be fully invested and normally does not take temporary defensive positions, declines in stock market prices generally are likely to result in declines in the value of the Fund’s investments.
 
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund’s investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund’s investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
 
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund’s foreign currency holdings and investments denominated in foreign currencies.
 
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind. These risks are particularly pronounced for the Fund because it typically makes equity investments in companies tied economically to emerging countries and may make investments in companies with smaller market capitalizations. In addition, the Fund may buy securities that are less liquid than those in its benchmark.
 
• Market Disruption and Geopolitical Risk — Geopolitical events may disrupt securities markets and adversely affect global economies and markets. Those events as well as other changes in foreign and domestic economic and political conditions could adversely affect the value of the Fund’s investments.
 
• Smaller Company Risk — The securities of small- and mid-cap companies often are less widely held and trade less frequently and in lesser quantities, and their market prices often fluctuate more, than the securities of companies with larger market capitalizations. The Fund may buy securities that have smaller market capitalizations than those in its benchmark.

         
        33

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Other principal risks of an investment in the Fund include Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund’s securities); Focused Investment Risk (increased risk from the Fund’s focus on investments in a limited number of countries and geographic regions); Market Risk — Value Securities (risk that the price of the Fund’s investments will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Fund of Funds Risk (risk that the underlying funds (including exchange-traded funds (ETFs)) in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities lending); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by “equitizing” its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in

         
34
       

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically “sell” a portion of the Fund’s portfolio) in combination with a long futures contract on another index (to synthetically “buy” exposure to that index). The Funds also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral (e.g., foreign currency forwards; see “Currency Risk” above), that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will

         
        35

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures. Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
 
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund’s forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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.
 
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. During the year ended February 28, 2011, the Fund used forward currency contracts to manage against anticipated currency exchange rate changes. The Fund had no forward currency contracts outstanding at the end of the period.
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is marked to market

         
36
       

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
daily and an appropriate payable or receivable for the change in value (“variation margin”) is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because regular trading on many foreign exchanges closes prior to the close of the NYSE, closing prices for these foreign futures contracts (including foreign index futures) do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures contracts using fair value prices, which are based on local closing prices, adjusted by a factor, supplied by a third party vendor using that vendor’s proprietary models. The Fund had no futures contracts outstanding at the end of the period.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
 
When an option contract is closed, 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 at the time it was closed. Realized gains

         
        37

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral. Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.

         
38
       

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated

         
        39

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. During the year ended February 28, 2011, the Fund held rights and warrants as a result of a corporate action. Rights and warrants held by the Fund at the end of the period are listed in the Fund’s Schedule of Investments.
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of
February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Assets:
                                               
Investments, at value (rights and warrants)
  $      —     $      —     $      —     $      0 *   $      —     $      0  
                                                 
Total
  $ —     $ —     $ —     $ 0     $ —     $ 0  
                                                 
 
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Investments (rights and warrants)
  $      —     $      —     $      —     $ (18,392 )   $      —     $ (18,392 )
Foreign Currency Contracts
    —     $ (1,720 )     —       —       —     $ (1,720 )
                                                 
Total
  $ —     $ (1,720 )   $ —     $ (18,392 )   $ —     $ (20,112 )
                                                 
Change in Unrealized Appreciation (Depreciation) on:
                                               
Investments (rights and warrants)
  $ —     $ —     $ —     $ (3,008 )   $ —     $ (3,008 )
                                                 
Total
  $ —     $ —     $ —     $ (3,008 )   $ —     $ (3,008 )
                                                 
 
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
            * Represents the interest in securities that have no value as of February 28, 2011.

         
40
       

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The volume of derivative activity, based on absolute values (Forward currency contracts, rights and warrants) outstanding at each month-end, was as follows for the year ended February 28, 2011.
 
                 
    Forward
    
    Currency
   Rights/
    Contracts   Warrants
 
Average amount outstanding
  $ 2,401     $ 15,275  
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.65% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares.
 
Holders of Class M shares of the Fund pay GMO an administration fee for support services provided to Class M shareholders. That fee is paid monthly at the annual rate of 0.20% of the average daily net assets of Class M shares. Pursuant to a Rule 12b-1 distribution and service plan adopted by the Fund, holders of Class M shares of the Fund may pay a fee, at the annual rate of up to 1.00% of average daily net assets of Class M shares, for any activities or expenses primarily intended to result in the sale of Class M shares of the Fund and/or for the provision of services to Class M shareholders. The Trustees currently limit payments on Class M shares to 0.25% of the Fund’s average daily net assets of Class M shares.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 1.00% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means administration fees and distribution (12b-1) fees (Class M Shares only), shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund’s Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund’s Expense Reimbursement Amount. These contractual expense limitations will continue through at

         
        41

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $5,358 and $1,761, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
The Fund incurs fees and expenses indirectly as a shareholder of the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
             
Indirect Net
 		           
Expenses
            
(excluding
            
shareholder service
     Indirect
      
fees and interest
     Shareholder
     Total Indirect
expense)     Service Fees     Expenses
< 0.001%
    0.000%     < 0.001%
             
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 aggregated $294,646,589 and $296,289,732, respectively.
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 44.33% of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund’s outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.

         
42
       

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, 0.16% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and 2.85% of the Fund’s shares were held by accounts for which the Manager had investment discretion.
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    3,527,850     $ 35,095,642       4,133,669     $ 35,599,651  
Shares issued to shareholders in reinvestment of distributions
    168,351       1,906,554       226,027       2,048,239  
Shares repurchased
    (2,462,544 )     (26,251,379 )     (3,185,221 )     (25,529,867 )
                                 
Net increase (decrease)
    1,233,657     $ 10,750,817       1,174,475     $ 12,118,023  
                                 
                                 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class M:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    218,838     $ 2,332,605       367,766     $ 2,886,620  
Shares issued to shareholders in reinvestment of distributions
    30,131       337,720       48,468       435,225  
Shares repurchased
    (1,202,896 )     (13,327,442 )     (1,142,455 )     (7,969,366 )
                                 
Net increase (decrease)
    (953,927 )   $ (10,657,117 )     (726,221 )   $ (4,647,521 )
                                 
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                 
    Value,
               Distributions
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   period
 
GMO U.S. Treasury Fund
  $ 1,299,863     $ 10,800,887     $ 12,100,735     $ 766     $ 105     $ 14  
                                                 
Totals
  $ 1,299,863     $ 10,800,887     $ 12,100,735     $ 766     $ 105     $ 14  
                                                 

         
        43

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Emerging Countries Fund:
 
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 Countries Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
44
       

 

GMO Emerging Countries Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, distribution (12b-1) and/or administration fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
This example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs

         
        45

 

 
GMO Emerging Countries Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    1.14 %   $ 1,000.00     $ 1,189.10     $ 6.19  
2) Hypothetical
    1.14 %   $ 1,000.00     $ 1,019.14     $ 5.71  
                                 
Class M
                               
                                 
1) Actual
    1.44 %   $ 1,000.00     $ 1,187.10     $ 7.81  
2) Hypothetical
    1.44 %   $ 1,000.00     $ 1,017.65     $ 7.20  
                                 
 
            * Expenses are calculated using each Class’s annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
46
       

 

GMO Emerging Countries Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
During the year ended February 28, 2011, the Fund paid foreign taxes of $1,102,627 and recognized foreign source income of $6,188,654.
 
For taxable, non-corporate shareholders, 100.00% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 represents qualified dividend income subject to the 15% rate category.

         
        47

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
48        

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee; President
and Chief Executive Officer
of the Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
        49

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
50        

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money
Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        51

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO Emerging Country Debt Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
The Class III shares of GMO Emerging Country Debt Fund returned +22.2% for the fiscal year ended February 28, 2011, outperforming the Fund’s benchmark during the fiscal year by 12.4%.
 
The J.P. Morgan Emerging Markets Bond Index Global (EMBIG) gained 9.8% during the same period. EMBIG spreads over U.S. Treasuries tightened 7 basis points to 304 basis points, while the yield on the 10-year U.S. Treasury bond fell by 18 basis points to 3.4%.
 
The EMBIG’s biggest gainers of the fiscal year were Belize (+47.0%), Argentina (+40.6%), and Jamaica (+23.6%). The worst performing countries for the fiscal year were Egypt (-0.9%), Tunisia (+1.9%), and Vietnam (+4.6%).
 
Market selection added 252 basis points of positive relative performance. Overweighting Argentina, Ukraine, and Belize and underweighting Mexico made positive contributions. The Fund’s Ivory Coast overweight detracted from relative performance.
 
Security selection added 829 basis points of positive relative performance. The largest contribution came from Argentina defaulted bonds, judgments, and performing euro-denominated issues, after hedging the currency back to dollars. Quasi-sovereign bonds in Russia, Mexico, and Ukraine outperformed the EMBIG. The 2040 Turkey bond held in the Fund outperformed the Turkey bonds in the EMBIG. On the other hand, in Venezuela the Fund’s holdings were concentrated in three bonds that underperformed. Non-index restructured Congo bonds outperformed the EMBIG, as did Nigeria oil warrants. Asset-backed securities, which averaged 7% of the portfolio over the fiscal year, added 163 basis points to relative performance.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO Emerging Country Debt Fund Class III Shares and the J.P. Morgan EMBIG
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Each performance figure assumes a purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of .50% on the purchase and 0.50% on the redemption. Transaction fees are retained by the Fund to cover trading costs. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. All information is unaudited. Performance for classes may vary due to different fees.
 
 
* J.P. Morgan EMBIG + represents the J.P. Morgan EMBI + prior to December 31, 1999 and the J.P. Morgan EMBIG thereafter. The Manager changed the benchmark due to the belief that the EMBIG is more diversified and representative of the universe of emerging country debt.

 

GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary*   % of Total Net Assets  
Debt Obligations
    105.3 %
Loan Participations
    7.0  
Loan Assignments
    2.0  
Short-Term Investments
    1.1  
Rights and Warrants
    0.6  
Options Purchased
    0.3  
Promissory Notes
    0.1  
Written Options
    (0.0 )
Futures Contracts
    (0.1 )
Forward Currency Contracts
    (1.3 )
Swap Agreements
    (1.5 )
Reverse Repurchase Agreements
    (15.7 )
Other
    2.2  
         
      100.0 %
         
 
         
Country / Region Summary**   % of Investments  
Argentina
    9.7 %
Philippines
    8.9  
Turkey
    8.5  
Mexico
    7.8  
Russia
    5.5  
Brazil
    5.0  
Venezuela
    4.8  
Colombia
    4.8  
Indonesia
    4.7  
Dominican Republic
    3.4  
Congo
    3.0  
Ukraine
    2.9  
Uruguay
    2.8  
Iraq
    2.5  
Peru
    2.5  
United States
    2.1  
United Kingdom
    1.8  
Vietnam
    1.6  
Italy
    1.4  
Pakistan
    1.4  
El Salvador
    1.4  
Ivory Coast
    1.3  
Tunisia
    1.2  
South Africa
    1.1  
Austria
    0.9  
Serbia
    0.8  
South Korea
    0.8  
Belize
    0.7  
Trinidad and Tobago
    0.7  
Greece
    0.6  

         
        1

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2011 (Unaudited)
 
         
Country / Region Summary**   % of Investments  
Angola
    0.6 %
Sri Lanka
    0.6  
Qatar
    0.4  
Bosnia
    0.4  
Gabon
    0.4  
Croatia
    0.4  
Lithuania
    0.4  
Nigeria
    0.4  
Barbados
    0.3  
St. Lucia
    0.3  
Chile
    0.3  
Bahamas
    0.2  
Egypt
    0.2  
Grenada
    0.2  
Jamaica
    0.2  
Ecuador
    0.1  
Malaysia
    0.1  
Kazakhstan
    0.1  
Senegal
    0.1  
Georgia
    0.0
India
    0.0
Ghana
    0.0
Bulgaria
    0.0
Albania
    0.0
Israel
    0.0
Panama
    (0.1 )
Lebanon
    (0.1 )
Hungary
    (0.1 )
         
      100.0 %
         
 
* The table above incorporates aggregate indirect asset class exposure associated with investments in the funds of GMO Trust (“underlying funds”).
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative financial instruments. The table excludes exposure through certain currency linked derivatives such as forward currency contracts and currency options. The table is based on duration adjusted exposures, taking into account the market value of securities and the notional amounts of swaps and other derivative financial instruments, if any. For example, U.S. Asset-backed securities represent a relatively small percentage due to their short duration, even though they represent a large percentage of market value (directly or indirectly). Duration is based on the Manager’s models. The greater the duration of a bond, the greater its contribution to the concentration percentage. Credit default swap exposures (both positive and negative) are factored into the duration-adjusted exposure using a reference security and applying the same methodology to that security.
Ù Rounds to 0.0%.

         
2
       

 

GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value     Description   Value ($)  
            DEBT OBLIGATIONS — 101.0%        
                     
            Albania — 0.2%        
            Foreign Government Obligations        
USD
    9,639,573     Republic of Albania Par Bond, Zero Coupon, due 08/31/25 (a)     3,855,829  
                     
                     
            Argentina — 14.0%        
            Foreign Government Obligations — 12.3%        
USD
    9,000,000     Province of Buenos Aires, Reg S, Step Up, 4.00%, due 05/15/35     4,005,000  
EUR
    3,000,000     Republic of Argentina, Step Up, 2.26%, due 12/31/38     1,345,451  
USD
    1,094,707     Republic of Argentina Discount Bond, 8.28%, due 12/31/33     758,084  
EUR
    34,940,138     Republic of Argentina Discount Bond, 7.82%, due 12/31/33     34,474,182  
DEM
    3,830,000     Republic of Argentina Discount Bond, Series DM, 6 mo. DEM LIBOR + .81%, due 03/31/49 (b)     1,756,485  
EUR
    307,220,524     Republic of Argentina GDP Linked, due 12/15/35 (c)     53,417,565  
USD
    76,331,990     Republic of Argentina GDP Linked, due 12/15/35 (c)     10,953,641  
ARS
    28,000,000     Republic of Argentina GDP Linked, due 12/31/38 (c) (d)     850,919  
ARS
    28,000,000     Republic of Argentina Global Par Bond, Step Up, 1.18%, due 12/31/38 (d)     3,433,260  
EUR
    197,000,000     Republic of Argentina Par Bond, Step Up, 2.26%, due 12/31/38     96,370,870  
                     
                  207,365,457  
                     
                     
            Judgments — 1.7%        
USD
    32,000,000     Republic of Argentina Discount Bond, Series L-GL, 6 mo. LIBOR + .81%, 1.44%, due 03/31/23 (b) (d) (e)     18,720,000  
USD
    15,000,000     Republic of Argentina Global Par Bond, Series L-GP, Step Up, 6.00%, due 03/31/23 (b) (d) (e)     9,450,000  
                     
                  28,170,000  
                     
            Total Argentina     235,535,457  
                     
                     
            Bahamas — 0.1%        
            Foreign Government Obligations        
USD
    2,500,000     Commonwealth of Bahamas, Reg S, 6.95%, due 11/20/29     2,531,250  
                     
                     
            Barbados — 0.3%        
            Foreign Government Obligations        
USD
    4,800,000     Government of Barbados, 144A, 7.00%, due 08/04/22     4,800,000  
                     

         
    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, 2011
 
                     
 
 		           
 
 		           
Par Value     Description   Value ($)  
                     
            Belize — 0.6%        
            Foreign Government Obligations        
USD
    12,925,000     Government of Belize, Reg S, Step Up, 6.00%, due 02/20/29     10,986,250  
                     
                     
            Bosnia & Herzegovina — 0.6%        
            Foreign Government Obligations        
DEM
    19,185,440     Bosnia & Herzegovina, Series A, Reg S 6 mo. DEM LIBOR + .81%, 2.06%, due 12/11/17     10,186,160  
                     
                     
            Brazil — 4.7%        
            Corporate Debt — 0.6%        
USD
    9,000,000     Petrobras International Finance Co., 6.88%, due 01/20/40     9,247,500  
                     
                     
            Foreign Government Agency — 0.5%        
USD
    9,000,000     Banco Nacional de Desenvolvimento Economico e Social, Reg S, 5.50%, due 07/12/20     9,045,000  
                     
                     
            Foreign Government Obligations — 3.6%        
USD
    197,732     Brazilian Government International Exit Bonds, Odd Lot, 6.00%, due 09/15/13     192,788  
USD
    5,050,237     Brazilian Government International Exit Bonds, 6.00%, due 09/15/13     5,151,242  
USD
    42,000,000     Republic of Brazil, 8.25%, due 01/20/34 (f)     55,020,000  
                     
                  60,364,030  
                     
            Total Brazil     78,656,530  
                     
                     
            Chile — 0.1%        
            Foreign Government Agency        
USD
    1,700,000     Empresa Nacional del Petroleo, 144A, 5.25%, due 08/10/20     1,671,950  
                     
                     
            Colombia — 1.5%        
            Foreign Government Agency — 0.5%        
USD
    8,000,000     Ecopetrol SA, 7.63%, due 07/23/19     9,220,000  
                     

         
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, 2011
 
                     
 
 		           
 
 		           
Par Value     Description   Value ($)  
                     
            Foreign Government Obligations — 1.0%        
USD
    8,000,000     Republic of Colombia, 8.70%, due 02/15/16     9,440,000  
USD
    3,800,000     Republic of Colombia, 11.85%, due 03/09/28     6,650,000  
                     
                  16,090,000  
                     
            Total Colombia     25,310,000  
                     
                     
            Congo Republic (Brazzaville) — 3.8%        
            Foreign Government Obligations        
USD
    108,440,600     Republic of Congo, Reg S, Series INTL, Step Up, 3.00%, due 06/30/29     64,522,157  
                     
                     
            Dominican Republic — 4.0%        
            Asset-Backed Securities — 1.5%        
USD
    26,490,064     Autopistas Del Nordeste Ltd., Reg S, 9.39%, due 04/15/24     24,900,660  
                     
                     
            Foreign Government Obligations — 2.5%        
USD
    8,000,000     Dominican Republic, Reg S, 8.63%, due 04/20/27     8,560,000  
USD
    42,557,000     Dominican Republic Discount Bond, 6 mo. LIBOR + .81%, 1.31%, due 08/30/24     34,896,740  
                     
                  43,456,740  
                     
            Total Dominican Republic     68,357,400  
                     
                     
            Ecuador — 0.3%        
            Foreign Government Obligations        
USD
    13,587,000     Republic of Ecuador, Step Up, Reg S, 10.00%, due 08/15/30 (b)     4,076,100  
USD
    1,572,548     Republic of Ecuador PDI (Global Bearer Capitalization Bond), PIK, 6 mo. LIBOR + .81%, 1.31%, due 02/27/15 (d)     358,541  
                     
            Total Ecuador     4,434,641  
                     
                     
            Egypt — 0.2%        
            Corporate Debt — 0.0%        
USD
    390,552     Petroleum Export Ltd., Reg S, 5.27%, due 06/15/11     390,552  
                     
                     
            Foreign Government Agency — 0.2%        
USD
    3,000,000     African Export-Import Bank, 8.75%, due 11/13/14     3,300,000  
                     
            Total Egypt     3,690,552  
                     

         
    See accompanying notes to the financial statements.   5

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value     Description   Value ($)  
                     
            El Salvador — 1.1%        
            Foreign Government Obligations        
USD
    19,000,000     El Salvador Government International Bond, 144A, 7.63%, due 02/01/41     18,905,000  
                     
                     
            Gabon — 0.5%        
            Foreign Government Obligations        
USD
    7,000,000     Gabonese Republic, Reg S, 8.20%, due 12/12/17     7,700,000  
                     
                     
            Grenada — 0.2%        
            Foreign Government Obligations        
USD
    4,350,000     Republic of Grenada, Reg S, Step Up, 2.50%, due 09/15/25     2,610,000  
                     
                     
            Indonesia — 2.7%        
            Foreign Government Agency        
USD
    10,600,000     Majapahit Holding BV, 144A, 7.75%, due 01/20/20     11,872,000  
USD
    31,000,000     Majapahit Holding BV, Reg S, 7.88%, due 06/29/37     33,867,500  
                     
            Total Indonesia     45,739,500  
                     
                     
            Iraq — 0.8%        
            Foreign Government Obligations        
USD
    15,000,000     Republic of Iraq, Reg S, 5.80%, due 01/15/28 (f)     13,125,000  
                     
                     
            Ivory Coast — 1.5%        
            Foreign Government Obligation        
USD
    65,439,000     Ivory Coast Government International Bond, Reg S, Step Up, 2.50%, due 12/31/32 (b)     24,539,625  
                     
                     
            Lithuania — 0.3%        
            Foreign Government Obligations        
USD
    1,000,000     Republic of Lithuania, 144A, 5.13%, due 09/14/17     976,500  
USD
    4,000,000     Republic of Lithuania, Reg S, 7.38%, due 02/11/20     4,365,000  
                     
            Total Lithuania     5,341,500  
                     
                     
            Malaysia — 0.9%        
            Asset-Backed Securities        
MYR
    50,000,000     Transshipment Megahub Berhad, Series F, 6.70%, due 11/02/12     14,922,144  
                     

         
6
  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, 2011
 
                     
 
 		           
 
 		           
Par Value     Description   Value ($)  
                     
            Mexico — 8.7%        
            Foreign Government Agency — 4.3%        
EUR
    25,000,000     Pemex Project Funding Master Trust, Reg S, 6.38%, due 08/05/16     37,217,248  
EUR
    26,500,000     Pemex Project Funding Master Trust, Reg S, 5.50%, due 02/24/25     35,244,886  
                     
                  72,462,134  
                     
                     
            Foreign Government Obligations — 4.4%        
GBP
    29,994,000     United Mexican States, GMTN, 6.75%, due 02/06/24     52,172,891  
USD
    25,000,000     United Mexican States, 5.75%, due 10/12/10     22,375,000  
                     
                  74,547,891  
                     
            Total Mexico     147,010,025  
                     
                     
            Nigeria — 0.4%        
            Foreign Government Obligations        
USD
    6,100,000     Nigeria Government International Bond, 144A, 6.75%, due 01/28/21     5,991,603  
                     
                     
            Pakistan — 0.8%        
            Foreign Government Obligations        
USD
    20,000,000     Islamic Republic of Pakistan, Reg S, 7.88%, due 03/31/36     14,200,000  
                     
                     
            Peru — 2.1%        
            Foreign Government Obligations        
USD
    12,452,000     Peru Enhanced Pass-Through Finance Ltd., Reg S, Zero Coupon, due 06/02/25     5,976,960  
USD
    25,000,000     Peru Par Bond, Series 30 Yr., Step Up, 3.00%, due 03/07/27     21,500,000  
USD
    3,784,333     Peru Trust, Series 97-I-P, Class A3, Zero Coupon, due 12/31/15 (d) (g)     567,650  
USD
    1,293,846     Peru Trust, Series 1998 I-P, Zero Coupon, due 03/10/16 (d) (g)     194,077  
USD
    1,356,611     Peru Trust II, Series 98-A LB, Zero Coupon, due 02/28/16 (d) (g)     203,492  
USD
    8,000,000     Republic of Peru, Series 30 Yr., 5.63%, due 11/18/50     7,440,000  
                     
            Total Peru     35,882,179  
                     
                     
            Philippines — 8.2%        
            Foreign Government Agency — 5.3%        
USD
    8,500,000     National Power Corp., Global Bond, 8.40%, due 12/15/16     10,263,750  
USD
    55,450,000     National Power Corp., Global Bond, 9.63%, due 05/15/28     72,362,250  

         
    See accompanying notes to the financial statements.   7

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value     Description   Value ($)  
            Foreign Government Agency — continued        
USD
    6,296,000     Power Sector Assets & Liabilities Management Corp., 144A, 7.39%, due 12/02/24     7,224,660  
                     
                  89,850,660  
                     
                     
            Foreign Government Obligations — 2.9%        
USD
    35,651,000     Central Bank of Philippines, Series A, 8.60%, due 06/15/27     43,494,220  
USD
    5,000,000     Republic of Philippine, 6.50%, due 01/20/20     5,693,750  
                     
                  49,187,970  
                     
            Total Philippines     139,038,630  
                     
                     
            Qatar — 0.5%        
            Foreign Government Agency        
USD
    4,000,000     Qatari Diar Finance QSC, 144A, 5.00%, due 07/21/20     3,904,000  
USD
    3,500,000     Qtel International Finance Ltd., Reg S, 7.88%, due 06/10/19     4,051,250  
                     
            Total Qatar     7,955,250  
                     
                     
            Russia — 6.1%        
            Corporate Debt — 5.2%        
USD
    36,200,000     Gaz Capital SA, Reg S, 9.25%, due 04/23/19 (f)     44,435,500  
USD
    8,000,000     Sberbank Capital SA, EMTN, 6.48%, due 05/15/13     8,570,400  
USD
    14,900,000     Transcapital Ltd. (Transneft), Reg S, 8.70%, due 08/07/18     18,178,000  
USD
    7,600,000     VTB Capital SA, 144A, 6.55%, due 10/13/20 (f)     7,584,800  
USD
    9,000,000     VTB Capital SA, Reg S, 6.25%, due 06/30/35     9,414,000  
                     
                  88,182,700  
                     
                     
            Foreign Government Agency — 0.9%        
USD
    15,000,000     RSHB Capital SA, Reg S, 6.30%, due 05/15/17     15,484,500  
                     
            Total Russia     103,667,200  
                     
                     
            Saint Lucia — 0.5%        
            Corporate Debt        
USD
    8,000,000     First Citizens St Lucia Ltd, 144A, 4.90%, due 02/09/16     8,020,000  
                     

         
8
  See accompanying notes to the financial statements.    

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value     Description   Value ($)  
                     
            Senegal — 0.3%        
            Foreign Government Obligations        
USD
    5,000,000     Republic of Senegal, 8.75%, due 12/22/14     4,900,000  
                     
                     
            Serbia — 0.8%        
            Foreign Government Obligations        
USD
    13,968,292     Republic of Serbia, Reg S, Step Up, 6.75%, due 11/01/24     13,968,292  
                     
                     
            South Africa — 0.8%        
            Foreign Government Agency — 0.3%        
ZAR
    163,000,000     Eskom Holdings Ltd., Zero Coupon, due 12/31/32     1,950,849  
ZAR
    20,000,000     Transnet Ltd., 13.50%, due 04/18/28     3,362,011  
                     
                  5,312,860  
                     
                     
            Foreign Government Obligations — 0.5%        
USD
    8,500,000     South Africa Government International Bond, 5.50%, due 03/09/20     8,925,000  
                     
            Total South Africa     14,237,860  
                     
                     
            South Korea — 1.3%        
            Foreign Government Agency — 1.0%        
USD
    8,000,000     Export-Import Bank of Korea, 5.13%, due 06/29/20     8,040,000  
USD
    4,000,000     Korea Gas Corp., Reg S, 6.00%, due 07/15/14     4,367,965  
USD
    4,000,000     Korea Southern Power Co., Reg S, 5.38%, due 04/18/13     4,248,400  
                     
                  16,656,365  
                     
                     
            Foreign Government Obligations — 0.3%        
USD
    5,000,000     Republic of Korea, 5.75%, due 04/16/14     5,451,877  
                     
            Total South Korea     22,108,242  
                     
                     
            Sri Lanka — 0.7%        
            Foreign Government Obligations        
USD
    5,000,000     Republic of Sri Lanka, Reg S, 8.25%, due 10/24/12     5,362,500  
USD
    1,000,000     Republic of Sri Lanka, Reg S, 7.40%, due 01/22/15     1,085,000  
USD
    5,000,000     Sri Lanka Government International Bond, Reg. S, 6.25%, due 10/04/20     4,925,000  
                     
            Total Sri Lanka     11,372,500  
                     

         
    See accompanying notes to the financial statements.   9

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value     Description   Value ($)  
                     
            Trinidad And Tobago — 0.8%        
            Foreign Government Agency        
USD
    10,500,000     Petroleum Company of Trinidad and Tobago Ltd., Reg S, 9.75%, due 08/14/19     12,771,150  
USD
    1,437,500     Petroleum Company of Trinidad and Tobago Ltd., Reg. S, 6.00%, due 05/08/22     1,460,859  
                     
            Total Trinidad And Tobago     14,232,009  
                     
                     
            Tunisia — 0.3%        
            Foreign Government Agency        
JPY
    360,000,000     Banque Centrale De Tunisie, Series 6BR, 4.35%, due 08/15/17     4,576,737  
                     
                     
            Turkey — 4.1%        
            Foreign Government Obligations        
USD
    41,000,000     Republic of Turkey, 6.75%, due 05/30/40 (f)     41,153,750  
USD
    30,000,000     Republic of Turkey, 6.00%, due 01/14/41 (f)     27,262,500  
                     
            Total Turkey     68,416,250  
                     
                     
            Ukraine — 0.9%        
            Foreign Government Agency — 0.4%        
USD
    7,000,000     Credit Suisse First Boston, the EXIM of Ukraine, 6.80%, due 10/04/12     6,860,000  
                     
                     
            Foreign Government Obligations — 0.5%        
USD
    8,000,000     Ukraine Government International Bond, 144A, 7.95%, due 02/23/21     8,040,000  
                     
            Total Ukraine     14,900,000  
                     
                     
            United States — 15.5%        
            Asset-Backed Securities — 3.5%        
USD
    3,624,908     Aircraft Finance Trust, Series 99-1A, Class A1, 144A, 1 mo. LIBOR + .48%, 0.75%, due 05/15/24     2,138,696  
USD
    176,231     Chevy Chase Mortgage Funding Corp., Series 03-4A, Class A1, 144A, AMBAC, 1 mo. LIBOR + .34%, 0.60%, due 10/25/34     123,361  
USD
    1,306,484     CNL Commercial Mortgage Loan Trust, Series 03-2A, Class A1, 144A, AMBAC, 1 mo. LIBOR + .44%, 0.70%, due 10/25/30     940,669  
USD
    20,051,989     Countrywide Home Equity Loan Trust, Series 05-F, Class 2A, AMBAC, 1 mo. LIBOR + .24%, 0.51%, due 12/15/35     9,023,395  
USD
    13,934,693     Countrywide Home Equity Loan Trust, Series 05-H, Class 2A, FGIC, 1 mo. LIBOR + .24%, 0.51%, due 12/15/35     4,877,142  

         
10
  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, 2011
 
                     
 
 		           
 
 		           
Par Value     Description   Value ($)  
            Asset-Backed Securities — continued        
USD
    8,989,617     Countrywide Home Equity Loan Trust, Series 06-D, Class 2A, XL, 1 mo. LIBOR + .20%, 0.47%, due 05/15/36     4,045,328  
USD
    4,184,623     First Franklin Mortgage Loan Asset Backed Certificates, Series 05-FF10, Class A6M, 1 mo. LIBOR + .35%, 0.61%, due 11/25/35     1,240,741  
USD
    2,299,389     GSAMP Trust, Series 05-HE6, Class A2B, 1 mo. LIBOR + .19%, 0.45%, due 11/25/35     2,219,830  
USD
    9,250,000     Home Equity Asset Trust, Series 07-1, Class 2A4, 1 mo. LIBOR + .23%, 0.49%, due 05/25/37     581,455  
USD
    8,861,314     IXIS Real Estate Capital Trust, Series 06-HE2, Class A3, 1 mo. LIBOR + .16%, 0.42%, due 08/25/36     3,260,255  
USD
    13,000,000     Master Asset-Backed Securities Trust, Series 06-NC3, Class A4, 1 mo. LIBOR + .16%, 0.42%, due 10/25/36     4,940,000  
USD
    7,488,492     Morgan Stanley ABS Capital I, Series 06-NC3, Class A2C, 1 mo. LIBOR + .17%, 0.43%, due 03/25/36     6,346,497  
USD
    15,000,000     Morgan Stanley IXIS Real Estate Capital Trust, Series 06-2, Class A3, 1 mo. LIBOR + .15%, 0.41%, due 11/25/36     5,737,500  
USD
    15,200,000     Morgan Stanley IXIS Real Estate Capital Trust, Series 06-2, Class A4, 1 mo. LIBOR + .22%, 0.48%, due 11/25/36     5,280,936  
USD
    12,868,000     Option One Mortgage Loan Trust, Series 06-3, Class 2A4, 1 mo. LIBOR + .22%, 0.48%, due 02/25/37     5,340,220  
USD
    8,000,000     Wamu Asset-Backed Certificates, Series 07-HE2, Class 2A4, 1 mo. LIBOR + .36%, 0.62%, due 04/25/37     3,040,000  
                     
                  59,136,025  
                     
                     
            U.S. Government — 12.0%        
USD
    50,000,000     U.S. Treasury Bond, 5.25%, due 02/15/29 (f)     56,593,750  
USD
    36,896,175     U.S. Treasury Inflation Indexed Note, 2.38%, due 04/15/11 (c) (h)     37,210,383  
USD
    58,414,504     U.S. Treasury Inflation Indexed Note, 2.00%, due 04/15/12 (c) (h)     61,006,648  
USD
    30,000,000     U.S. Treasury Strip Coupon Bond, due 05/15/23 (f)     18,212,760  
USD
    50,000,000     U.S. Treasury Strip Coupon Bond, due 11/15/23 (f)     29,482,350  
                     
                  202,505,891  
                     
            Total United States     261,641,916  
                     

         
    See accompanying notes to the financial statements.   11

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value     Description   Value ($)  
                     
            Uruguay — 3.7%        
            Foreign Government Obligations        
USD
    29,851,571     Republic of Uruguay, 7.63%, due 03/21/36     35,075,596  
JPY
    988,800,000     Republica Oriental de Uruguay, Series 3BR, Step Up, 2.50%, due 03/14/11 (d)     12,083,132  
EUR
    10,000,000     Republica Oriental de Uruguay, 6.88%, due 01/19/16     15,179,448  
                     
            Total Uruguay     62,338,176  
                     
                     
            Venezuela — 4.9%        
            Corporate Debt — 0.7%        
USD
    20,000,000     Electricidad de Caracas Finance BV, 8.50%, due 04/10/18     11,000,000  
                     
                     
            Foreign Government Obligations — 4.2%        
USD
    94,500,000     Republic of Venezuela, Reg S, 7.75%, due 10/13/19 (f)     62,370,000  
USD
    6,000,000     Republic of Venezuela, Reg S, 9.00%, due 05/07/23     3,990,000  
USD
    8,100,000     Republic of Venezuela, Reg S, 8.25%, due 10/13/24     5,074,650  
                     
                  71,434,650  
                     
            Total Venezuela     82,434,650  
                     
                     
            Vietnam — 1.2%        
            Foreign Government Obligations        
USD
    2,000,000     Socialist Republic of Vietnam, Reg S, 6.75%, due 01/29/20     1,990,000  
USD
    19,750,000     Socialist Republic of Vietnam, Series 30 Yr., Step Up, 4.00%, due 03/12/28     14,812,500  
USD
    4,000,000     Socialist Republic of Vietnam, Series 30 Yr., 6 mo. LIBOR + .81%, 1.31%, due 03/13/28     3,080,000  
                     
            Total Vietnam     19,882,500  
                     
                     
            TOTAL DEBT OBLIGATIONS (COST $1,704,965,845)     1,704,194,964  
                     
                     
            LOAN ASSIGNMENTS — 2.0%        
                     
            Angola — 0.2%        
USD
    2,300,000     Angolan Ministry of Finance Loan Agreement, 6 mo. LIBOR + 5.50%, 5.96%, due 03/07/13     2,127,500  
USD
    2,300,000     Angolan Ministry of Finance Loan Agreement, 6 mo. LIBOR + 5.50%, 5.96%, due 07/08/13     2,104,500  
                     
            Total Angola     4,232,000  
                     

         
12
  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, 2011
 
                     
 
 		           
 
 		           
Par Value     Description   Value ($)  
                     
            Dominican Republic — 0.2%        
USD
    3,600,150     Dominican Republic, 6 mo. LIBOR + 1.75%, 2.22%, due 08/15/15     2,942,043  
                     
                     
            Indonesia — 1.1%        
USD
    3,369,170     Republic of Indonesia Loan Agreement, dated June 14, 1995, 6 mo. LIBOR + .88%, 1.25%, due 12/14/19     3,032,253  
USD
    3,369,170     Republic of Indonesia Loan Agreement, dated June 14, 1995, 6 mo. LIBOR + .88%, 1.25%, due 12/14/19     3,032,253  
USD
    4,493,660     Republic of Indonesia Loan Agreement, dated June 14, 1995, 6 mo. LIBOR + .88%, 1.25%, due 12/14/19     4,044,294  
USD
    2,448,420     Republic of Indonesia Loan Agreement, dated September 29, 1994, 6 mo. LIBOR + .88%, 1.38%, due 12/01/19     2,215,820  
JPY
    76,680,000     Republic of Indonesia Loan Agreement, 6 mo. JPY LIBOR + .88%, 1.21%, due 03/28/13     881,110  
USD
    1,562,000     Republic of Indonesia Loan Agreement, 6 mo. LIBOR +.88%, 1.25%, due 03/28/13     1,468,280  
EUR
    1,919,585     Republic of Indonesia, Indonesia Paris Club Debt, 4.00%, due 06/01/21 (i)     1,986,698  
USD
    1,284,665     Republic of Indonesia Loan Agreement, dated September 29, 1994, 7.24%, due 12/01/19     1,162,622  
                     
            Total Indonesia     17,823,330  
                     
                     
            Vietnam — 0.5%        
USD
    16,000,000     Vietnam Shipbuilding Industry Group Loan Agreement, 6 mo. LIBOR + 1.50%, 1.96%, due 06/26/15 (b)(d)     8,282,879  
                     
                     
            TOTAL LOAN ASSIGNMENTS (COST $37,128,195)     33,280,252  
                     
                     
            LOAN PARTICIPATIONS — 6.9%        
                     
            Egypt — 0.2%        
CHF
    4,011,082     Paris Club Loan Agreement (Participation with Standard Chartered Bank), due 01/03/24 (i)     3,483,757  
                     
                     
            Indonesia — 1.9%        
USD
    414,667     Republic of Indonesia Loan Agreement (Participation with Citibank), 6 mo. LIBOR +.88%, 1.25%, due 12/14/19     373,200  
USD
    553,066     Republic of Indonesia Loan Agreement (Participation with Citibank), 6 mo. LIBOR +.88%, 1.25%, due 12/14/19     497,759  

         
    See accompanying notes to the financial statements.   13

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value     Description   Value ($)  
            Indonesia — continued        
USD
    414,667     Republic of Indonesia Loan Agreement (Participation with Citibank), 6 mo. LIBOR +.88%, 1.25%, due 12/14/19     373,200  
USD
    6,792,453     Republic of Indonesia Loan Agreement (Participation with Morgan Stanley), 6 mo. LIBOR + .88%, 1.25%, due 12/14/19     6,113,208  
JPY
    453,333,344     Republic of Indonesia Loan Agreement (Participation with Deutsche Bank), 6 mo. JPY LIBOR +.88%, 1.21%, due 03/28/13     5,209,135  
USD
    12,544,608     Republic of Indonesia Loan Agreement (Participation with Deutsche Bank), 3 mo. LIBOR + 1.25%, 1.56%, due 02/12/13     11,541,040  
USD
    8,995,747     Republic of Indonesia Loan Agreement (Participation with Deutsche Bank), 6 mo. LIBOR +.88%, 1.34%, due 09/29/19     8,141,151  
                     
            Total Indonesia     32,248,693  
                     
                     
            Iraq — 2.8%        
JPY
    4,926,689,255     Republic of Iraq Paris Club Loan Agreement (Participation with Deutsche Bank), due 01/01/28     42,335,755  
JPY
    643,739,681     Republic of Iraq Paris Club Loan, T Chatani (Participation with Deutsche Bank), due 01/01/28     5,434,170  
                     
            Total Iraq     47,769,925  
                     
                     
            Russia — 0.6%        
EUR
    57,042,402     Russian Foreign Trade Obligations (Participation with GML International Ltd), (b) (d)     10,529,770  
                     
                     
            Vietnam — 1.4%        
JPY
    2,233,115,801     Socialist Republic of Vietnam Loan Agreement (Participation with Deutsche Bank), 6 mo. JPY LIBOR + .60%, 1.04%, due 09/01/17     23,339,820  
                     
                     
            TOTAL LOAN PARTICIPATIONS (COST $97,576,291)     117,371,965  
                     
                     
            PROMISSORY NOTES — 0.1%        
                     
            Dominican Republic — 0.1%        
USD
    817,249     Dominican Republic Promissory Notes, 0.00%, due 09/15/11     740,427  
                     

         
14
  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, 2011
 
                     
Par Value /
 		           
Principal Amount /
 		           
Shares     Description   Value ($)  
                     
            Ghana — 0.0%        
USD
    3,312,500     Republic of Ghana Promissory Notes, 0.00% (b) (j)     331,250  
                     
                     
            TOTAL PROMISSORY NOTES (Cost $4,087,508)     1,071,677  
                     
                     
            OPTIONS PURCHASED — 0.3%        
                     
            Options on Interest Rate Swaps — 0.3%        
ILS
    200,000,000     ILS Swaption Call, Expires 02/16/12, Strike 4.38%     225,040  
ILS
    200,000,000     ILS Swaption Put, Expires 02/16/12, Strike 4.38%     238,780  
KRW
    50,000,000,000     KRW Swaption Call, Expires 03/21/11, Strike 5.64%     2,917,689  
KRW
    50,000,000,000     KRW Swaption Put, Expires 03/21/11, Strike 5.64%     —  
ZAR
    800,000,000     ZAR Swaption Call, Expires 02/14/12, Strike 7.24%     609,781  
ZAR
    800,000,000     ZAR Swaption Put, Expires 02/14/12, Strike 7.24%     638,277  
                     
                     
            TOTAL OPTIONS PURCHASED (COST $3,584,841)     4,629,567  
                     
                     
            MUTUAL FUNDS — 4.5%        
                     
            United States — 4.5%        
            Affiliated Issuers        
      3,976,082     GMO Short-Duration Collateral Fund     41,271,731  
      21,409     GMO Special Purpose Holding Fund (k)     10,705  
      1     GMO U.S. Treasury Fund     31  
      1,515,449     GMO World Opportunity Overlay Fund     34,370,376  
                     
            Total United States     75,652,843  
                     
                     
            TOTAL MUTUAL FUNDS (COST $78,413,255)     75,652,843  
                     
                     
            RIGHTS AND WARRANTS — 0.6%        
                     
            Nigeria — 0.3%        
      25,000     Central Bank of Nigeria Oil Warrants, Expires 11/15/20 *     4,500,000  
                     

         
    See accompanying notes to the financial statements.   15

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Venezuela — 0.3%        
      205,145     Republic of Venezuela Oil Warrants, Expires 04/15/20 *     5,692,774  
      6,660     Republic of Venezuela Oil Warrants, Expires 04/15/20 *     184,815  
                     
            Total Venezuela     5,877,589  
                     
                     
            Uruguay — 0.0%        
      4,000,000     Banco Central Del Uruguay Value Recovery Rights, VRRB, Expires 01/02/21 (d) *     —  
                     
                     
            TOTAL RIGHTS AND WARRANTS (COST $0)     10,377,589  
                     
                     
            SHORT-TERM INVESTMENTS — 0.7%        
                     
            Money Market Funds — 0.7%        
      12,447,878     State Street Institutional Treasury Plus Money Market Fund-Institutional Class     12,447,878  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $12,447,878)     12,447,878  
                     
                     
            TOTAL INVESTMENTS — 116.1%
(Cost $1,938,203,813) 		    1,959,026,735  
            Other Assets and Liabilities (net) — (16.1%)     (272,047,946 )
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 1,686,978,789  
                     

         
16
  See accompanying notes to the financial statements.    

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
A summary of outstanding financial instruments at February 28, 2011 is as follows:
 
Forward Currency Contracts
 
                                     
                    Net Unrealized
Settlement
 		                  Appreciation
Date   Counterparty   Deliver/Receive   Units of Currency   Value   (Depreciation)
 
Buys †
                                   
3/08/11
    Deutsche Bank AG     EUR     3,000,000     $ 4,139,539     $ 94,698  
                                 
Sales #
                                   
3/08/11
    Deutsche Bank AG     EUR     318,187,000     $ 439,049,126     $ (19,707,295 )
3/15/11
    Deutsche Bank AG     JPY     5,500,000,000       67,238,316       (1,084,840 )
4/05/11
    Deutsche Bank AG     GBP     30,000,000       48,756,058       (1,056,058 )
                                 
                        $ 555,043,500     $ (21,848,193 )
                                 
 
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
 
Reverse Repurchase Agreements
 
                     
Face Value   Description   Market Value
 
USD
    13,662,917     JPMorgan Chase Bank, N.A., 0.25%, dated 12/08/10, to be repurchased on demand at face value plus accrued interest. (l)   $ (13,670,602 )
                     
USD
    27,750,000     Barclays Bank PLC, 0.23%, dated 02/10/11, to be repurchased on demand at face value plus accrued interest with a stated maturity date of 03/14/11.     (27,752,659 )
                     
USD
    36,015,188     JPMorgan Chase Bank, N.A., 0.75%, dated 02/04/11, to be repurchased on demand at face value plus accrued interest. (l)     (36,031,695 )
                     
USD
    28,400,000     Barclays Bank PLC, 0.60%, dated 02/04/11, to be repurchased on demand at face value plus accrued interest. (l)     (28,410,413 )
                     
USD
    17,137,500     Barclays Bank PLC, 0.23%, dated 02/09/11, to be repurchased on demand at face value plus accrued interest with a stated maturity date of 03/11/11.     (17,139,690 )

         
    See accompanying notes to the financial statements.   17

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Reverse Repurchase Agreements — continued
 
                     
Face Value   Description   Market Value
 
                     
USD
    53,777,500     Barclays Bank PLC, 0.25%, dated 02/10/11, to be repurchased on demand at face value plus accrued interest with a stated maturity date of 03/14/11.   $ (53,783,102 )
                     
USD
    20,594,375     Barclays Bank PLC, 0.75%, dated 02/14/11, to be repurchased on demand at face value plus accrued interest. (l)     (20,599,952 )
                     
USD
    31,225,868     Barclays Bank PLC, 0.70%, dated 02/14/11, to be repurchased on demand at face value plus accrued interest. (l)     (31,233,761 )
                     
USD
    30,958,125     JPMorgan Chase Bank, N.A., 0.75%, dated 02/15/11, to be repurchased on demand at face value plus accrued interest. (l)     (30,965,865 )
                     
USD
    3,066,740     Barclays Bank PLC, 0.45%, dated 02/17/11, to be repurchased on demand at face value plus accrued interest. (l)     (3,067,162 )
                     
                     
                $ (262,654,901 )
                     
         
Average balance outstanding
  $ (275,566,386 )
Average interest rate
    0.35 %
Maximum balance outstanding
  $ (371,226,354 )
 
Average balance outstanding was calculated based on daily face value balances outstanding during the period that the Fund has entered into reverse repurchase agreements.

         
18
  See accompanying notes to the financial statements.    

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Swap Agreements
 
Credit Default Swaps
 
                                                     
                            Maximum
 		   
                            Potential
 		   
                            Amount of
 		   
                            Future
 		   
                            Payments
 		   
                        Implied
 		      by the Fund
 		   
Notional
 		  Expiration
 		      Receive
 		  Annual
 		  Credit
 		  Deliverable
 		  Under the
 		  Market
Amount   Date   Counterparty   (Pay)Ù   Premium   Spread (1)   on Default   Contract (2)   Value
 
  10,000,000     USD   3/20/2011   JPMorgan
Chase Bank,
N.A. 		  (Pay)   5.00%   1.79%   Government of Ukraine       N/A         $ (115,049 )
  8,000,000     USD   3/20/2011   UBS AG   (Pay)   3.55%   5.47%   Republic of Iraq       N/A           (118,485 )
  5,000,000     USD   3/20/2011   JPMorgan
Chase Bank,
N.A. 		  (Pay)   5.00%   1.79%   Government of Ukraine       N/A           (57,524 )
  8,000,000     USD   3/20/2011   Citibank N.A.   (Pay)   3.70%   3.64%   Republic of Iraq       N/A           (132,626 )
  5,000,000     USD   4/26/2011   Deutsche
Bank AG 		  Receive   4.66%   4.31%   Government of Ukraine     5,000,000     USD     83,641  
  4,000,000     USD   5/20/2011   JPMorgan
Chase Bank,
N.A. 		  (Pay)   5.00%   5.25%   Republic of Jamaica       N/A           (1,139 )
  10,000,000     USD   6/20/2011   Deutsche
Bank AG 		  (Pay)   1.89%   4.86%   Islamic Republic of Pakistan       N/A           54,544  
  6,000,000     USD   6/20/2011   JPMorgan
Chase Bank,
N.A. 		  Receive   3.75%   4.31%   Republic of Georgia     6,000,000     USD     33,293  
  9,000,000     USD   7/17/2011   UBS AG   Receive   5.05%   2.05%   Government of Ukraine     9,000,000     USD     155,249  
  5,000,000     USD   7/25/2011   Deutsche
Bank AG 		  Receive   4.68%   4.34%   Government of Ukraine     5,000,000     USD     28,897  
  7,000,000     USD   8/5/2011   Deutsche
Bank AG 		  Receive   5.00%   4.35%   Government of Ukraine     7,000,000     USD     40,214  
  20,000,000     USD   8/20/2011   Deutsche
Bank AG 		  (Pay)   0.57%   0.48%   United Mexican States       N/A           (10,353 )

         
    See accompanying notes to the financial statements.   19

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Credit Default Swaps — continued
 
                                                     
                            Maximum
 		   
                            Potential
 		   
                            Amount of
 		   
                            Future
 		   
                            Payments
 		   
                        Implied
 		      by the Fund
 		   
Notional
 		  Expiration
 		      Receive
 		  Annual
 		  Credit
 		  Deliverable
 		  Under the
 		  Market
Amount   Date   Counterparty   (Pay)Ù   Premium   Spread (1)   on Default   Contract (2)   Value
 
  620,000,000     MXN   8/20/2011   Deutsche
Bank AG 		  Receive   0.40%   0.25%   United Mexican States     620,000,000     MXN   $ 40,480  
  3,000,000     USD   8/25/2011   Deutsche
Bank AG 		  Receive   3.60%   27.15%   Deutsche Bank Loan to Ukrtelekom     3,000,000     USD     (319,211 )
  7,000,000     USD   10/20/2011   JPMorgan
Chase Bank,
N.A. 		  (Pay)   2.75%   3.53%   Republic of Argentina       N/A           (34,891 )
  45,000,000     USD   10/20/2011   Goldman Sachs
International 		  (Pay)   12.35%   3.53%   Republic of Argentina       N/A           (4,563,291 )
  5,000,000     USD   10/25/2011   Deutsche
Bank AG 		  Receive   4.70%   4.38%   Government of Ukraine     5,000,000     USD     92,771  
  8,000,000     USD   11/20/2011   JPMorgan
Chase Bank,
N.A. 		  (Pay)   2.16%   3.71%   Republic of Argentina       N/A           43,032  
  3,541,760     USD   12/20/2011   Deutsche
Bank AG 		  Receive   1.60%   1.84%   Stemcor UK Ltd.     3,541,760     USD     20,218  
  4,100,000,000     KZT   1/20/2012   Deutsche
Bank AG 		  Receive   0.32%   0.40%   Republic of Kazakhstan     4,100,000,000     KZT     (12,482 )
  8,500,000     EUR   1/20/2012   Deutsche
Bank AG 		  (Pay)   0.42%   0.54%   Republic of Kazakhstan       N/A           7,211  
  3,000,000     USD   2/25/2012   Deutsche
Bank AG 		  Receive   3.68%   29.91%   Deutsche Bank Loan to Ukrtelekom     3,000,000     USD     (656,564 )
  5,000,000     USD   7/30/2012   JPMorgan
Chase Bank,
N.A. 		  Receive   3.05%   0.48%   Republic of Chile     5,000,000     USD     195,016  
  5,000,000     USD   8/20/2012   JPMorgan
Chase Bank,
N.A. 		  Receive   3.50%   5.52%   Republic of Jamaica     5,000,000     USD     (139,821 )

         
20
  See accompanying notes to the financial statements.    

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Credit Default Swaps — continued
 
                                                     
                            Maximum
 		   
                            Potential
 		   
                            Amount of
 		   
                            Future
 		   
                            Payments
 		   
                        Implied
 		      by the Fund
 		   
Notional
 		  Expiration
 		      Receive
 		  Annual
 		  Credit
 		  Deliverable
 		  Under the
 		  Market
Amount   Date   Counterparty   (Pay)Ù   Premium   Spread (1)   on Default   Contract (2)   Value
 
  3,000,000     USD   8/28/2012   Deutsche
Bank AG 		  Receive   3.75%   28.15%   Deutsche Bank Loan to Ukrtelekom     3,000,000     USD   $ (840,199 )
  10,000,000     USD   9/20/2012   JPMorgan
Chase Bank,
N.A. 		  (Pay)   1.25%   1.23%   Gazprom OAO       N/A           (59,571 )
  2,000,000     USD   9/20/2012   Goldman Sachs
International 		  (Pay)   9.20%   5.16%   Republic of Argentina       N/A           (204,347 )
  85,000,000     PEN   9/20/2012   JPMorgan
Chase Bank,
N.A. 		  Receive   0.92%   0.61%   Republic of Peru     85,000,000     PEN     271,213  
  15,000,000     USD   9/20/2012   JPMorgan
Chase Bank, N.A. 		  (Pay)   1.15%   0.73%   Republic of Peru       N/A           (176,534 )
  10,000,000     USD   10/4/2012   JPMorgan
Chase Bank, N.A. 		  Receive   2.95%   0.49%   Republic of Chile     10,000,000     USD     514,658  
  4,000,000     USD   10/20/2012   UBS AG   (Pay)   4.13%   11.86%   Petroleos de Venezuela       N/A           375,959  
  4,000,000     USD   10/20/2012   UBS AG   (Pay)   3.90%   11.86%   Petroleos de Venezuela       N/A           392,275  
  42,000,000     USD   12/20/2012   Morgan Stanley
Capital
Services Inc. 		  (Pay)   1.20%   0.10%   Reference security within CDX Index       N/A           (936,058 )
  125,384,851     USD   12/20/2012   Morgan Stanley
Capital
Services Inc. 		  Receive   0.71%   0.07%   Reference security within CDX Index     125,384,851     USD     1,624,739  
  20,000,000     USD   3/20/2013   Deutsche
Bank AG 		  (Pay)   1.48%   0.72%   United Mexican States       N/A           (443,754 )
  22,000,000     USD   6/20/2013   Deutsche
Bank AG 		  (Pay)   5.79%   5.86%   Republic of Argentina       N/A           (212,961 )

         
    See accompanying notes to the financial statements.   21

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Credit Default Swaps — continued
 
                                                     
                            Maximum
 		   
                            Potential
 		   
                            Amount of
 		   
                            Future
 		   
                            Payments
 		   
                        Implied
 		      by the Fund
 		   
Notional
 		  Expiration
 		      Receive
 		  Annual
 		  Credit
 		  Deliverable
 		  Under the
 		  Market
Amount   Date   Counterparty   (Pay)Ù   Premium   Spread (1)   on Default   Contract (2)   Value
 
  116,613,459     RUB   6/21/2013   Deutsche
Bank AG 		  Receive   2.35%   6.39%   VTB Leasing     116,613,459     RUB   $ (24,305 )
  19,092,581     USD   6/24/2013   JPMorgan
Chase Bank,
N.A. 		  Receive   1.37%   2.56%   VTB Leasing     19,092,581     USD     (157,987 )
  277,250,000     PEN   8/20/2013   JPMorgan
Chase Bank,
N.A. 		  Receive   0.96%   0.72%   Republic of Peru     277,250,000     PEN     599,056  
  50,000,000     USD   8/20/2013   JPMorgan
Chase Bank,
N.A. 		  (Pay)   1.20%   0.85%   Republic of Peru       N/A           (443,046 )
  130,000,000     USD   10/20/2013   Deutsche
Bank AG 		  Receive   3.30%   0.87%   Republic of Brazil     130,000,000     USD     9,820,839  
  12,225,000,000     JPY   10/20/2013   Deutsche
Bank AG 		  (Pay)   3.20%   0.79%   Republic of Brazil       N/A           (10,990,623 )
  7,335,000,000     JPY   10/20/2013   Deutsche
Bank AG 		  (Pay)   3.95%   0.79%   Republic of Brazil       N/A           (8,547,721 )
  80,000,000     USD   10/20/2013   Deutsche
Bank AG 		  Receive   4.05%   0.87%   Republic of Brazil     80,000,000     USD     7,828,879  
  10,000,000     USD   12/24/2013   JPMorgan
Chase Bank,
N.A. 		  Receive   3.80%   1.28%   Republic of Turkey     10,000,000     USD     766,660  
  10,000,000     USD   3/20/2014   Deutsche
Bank AG 		  (Pay)   1.85%   1.55%   Republic of Italy       N/A           (123,359 )
  14,000,000     USD   3/20/2014   Deutsche
Bank AG 		  (Pay)   2.80%   11.16%   Hellenic Republic of Greece       N/A           2,659,727  
  14,000,000     USD   3/20/2014   Deutsche
Bank AG 		  (Pay)   1.68%   1.55%   Republic of Italy       N/A           (98,262 )
  14,000,000     USD   3/20/2014   Deutsche
Bank AG 		  (Pay)   1.45%   0.44%   United Kingdom Government       N/A           (464,631 )

         
22
  See accompanying notes to the financial statements.    

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Credit Default Swaps — continued
 
                                                     
                            Maximum
 		   
                            Potential
 		   
                            Amount of
 		   
                            Future
 		   
                            Payments
 		   
                        Implied
 		      by the Fund
 		   
Notional
 		  Expiration
 		      Receive
 		  Annual
 		  Credit
 		  Deliverable
 		  Under the
 		  Market
Amount   Date   Counterparty   (Pay)Ù   Premium   Spread (1)   on Default   Contract (2)   Value
 
  39,000,000     USD   3/20/2014   Deutsche
Bank AG 		  (Pay)   2.39%   11.16%   Hellenic Republic of Greece       N/A         $ 7,814,304  
  39,000,000     USD   3/20/2014   Deutsche
Bank AG 		  (Pay)   1.28%   0.44%   United Kingdom Government       N/A           (1,081,433 )
  39,000,000     USD   3/20/2014   Deutsche
Bank AG 		  (Pay)   1.49%   0.61%   Republic of Austria       N/A           (1,140,674 )
  28,000,000     USD   3/20/2014   Deutsche
Bank AG 		  (Pay)   1.70%   1.55%   Republic of Italy       N/A           (214,039 )
  2,000,000     USD   8/24/2014   Deutsche
Bank AG 		  (Pay)   4.25%   3.38%   Lebanese Republic       N/A           (55,602 )
  15,000,000     USD   9/20/2014   Deutsche
Bank AG 		  (Pay)   4.03%   1.47%   Sberbank       N/A           (1,568,710 )
  15,000,000     USD   9/20/2014   Deutsche
Bank AG 		  Receive   3.77%   1.15%   Russian Federation     15,000,000     USD     1,610,369  
  5,000,000     USD   3/20/2015   JPMorgan
Chase Bank,
N.A. 		  Receive   5.00%   4.51%   Government of Ukraine     5,000,000     USD     136,711  
  8,000,000     USD   3/20/2015   JPMorgan
Chase Bank,
N.A. 		  Receive   5.00%   4.51%   Government of Ukraine     8,000,000     USD     218,737  
  575,500,000     EUR   3/20/2015   Deutsche
Bank AG 		  (Pay)   3.72%   10.87%   Venezuela Eurobond       N/A           157,390,557  
  765,000,000     USD   3/20/2015   Deutsche
Bank AG 		  Receive   3.80%   10.97%   Bolivarian Republic of Venezuela     765,000,000     USD     (154,610,674 )
  25,000,000     USD   3/20/2015   JPMorgan
Chase Bank,
N.A. 		  Receive   5.00%   4.51%   Government of Ukraine     25,000,000     USD     683,552  
  412,500,000     USD   4/20/2015   Deutsche
Bank AG 		  Receive   4.40%   10.96%   Bolivarian Republic of Venezuela     412,500,000     USD     (77,329,942 )

         
    See accompanying notes to the financial statements.   23

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Credit Default Swaps — continued
 
                                                     
                            Maximum
 		   
                            Potential
 		   
                            Amount of
 		   
                            Future
 		   
                            Payments
 		   
                        Implied
 		      by the Fund
 		   
Notional
 		  Expiration
 		      Receive
 		  Annual
 		  Credit
 		  Deliverable
 		  Under the
 		  Market
Amount   Date   Counterparty   (Pay)Ù   Premium   Spread (1)   on Default   Contract (2)   Value
 
  300,000,000     EUR   4/20/2015   Deutsche
Bank AG 		  (Pay)   4.32%   10.87%   Bolivarian Republic of Venezuela       N/A         $ 76,064,428  
  40,000,000     USD   6/20/2015   Barclays
Bank PLC 		  (Pay)   5.00%   N/A   CDX 13 Emerging Sovereign       N/A           (4,908,889 )
  30,000,000     USD   6/20/2015   Barclays
Bank PLC 		  (Pay)   5.00%   N/A   CDX 13 Emerging Sovereign       N/A           (3,681,667 )
  11,000,000     USD   6/20/2015   Deutsche
Bank AG 		  (Pay)   5.00%   N/A   CDX 13 Emerging Sovereign       N/A           (1,349,944 )
  15,000,000     USD   9/20/2015   Barclays
Bank PLC 		  (Pay)   1.00%   1.15%   Republic of Colombia       N/A           67,144  
  56,950,000,000     COP   11/20/2015   Citibank N.A.   Receive   1.81%   0.86%   Republic of Colombia     56,950,000,000     COP     1,329,847  
  15,000,000     USD   2/20/2016   Citibank N.A.   (Pay)   2.16%   1.20%   Republic of Colombia       N/A           (678,835 )
  56,700,000,000     COP   2/20/2016   Citibank N.A.   Receive   1.46%   0.88%   Republic of Colombia     56,700,000,000     COP     763,716  
  25,000,000     USD   4/20/2016   Citibank N.A.   (Pay)   1.90%   1.22%   Republic of Colombia       N/A           (992,695 )
  114,800,000,000     COP   4/20/2016   Citibank N.A.   Receive   1.33%   0.89%   Republic of Colombia     114,800,000,000     COP     1,481,820  
  20,166,667     EUR   6/17/2016   Deutsche
Bank AG 		  Receive   5.60%   9.59%   Republic of Angola     20,166,667     EUR     406,010  
  20,000,000     USD   8/20/2016   Deutsche
Bank AG 		  (Pay)   0.87%   1.20%   United Mexican States       N/A           334,792  
  620,000,000     MXN   8/20/2016   Deutsche
Bank AG 		  Receive   0.61%   0.73%   United Mexican States     620,000,000     MXN     (269,604 )

         
24
  See accompanying notes to the financial statements.    

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Credit Default Swaps — continued
 
                                                     
                            Maximum
 		   
                            Potential
 		   
                            Amount of
 		   
                            Future
 		   
                            Payments
 		   
                        Implied
 		      by the Fund
 		   
Notional
 		  Expiration
 		      Receive
 		  Annual
 		  Credit
 		  Deliverable
 		  Under the
 		  Market
Amount   Date   Counterparty   (Pay)Ù   Premium   Spread (1)   on Default   Contract (2)   Value
 
  97,680,000,000     COP   8/20/2016   Citibank N.A.   Receive   1.51%   0.91%   Republic of Colombia     97,680,000,000     COP   $ 1,469,879  
  20,000,000     USD   8/20/2016   Citibank N.A.   (Pay)   2.15%   1.25%   Republic of Colombia       N/A           (918,732 )
  32,500,000     USD   2/20/2017   Deutsche
Bank AG 		  Receive   2.43%   10.85%   Bolivarian Republic of Venezuela     32,500,000     USD     (10,609,994 )
  2,500,000     USD   5/20/2017   Deutsche
Bank AG 		  (Pay)   1.05%   1.22%   Republic of Peru       N/A           16,215  
  32,000,000     PEN   5/20/2017   Deutsche
Bank AG 		  Receive   0.79%   0.96%   Republic of Peru     32,000,000     PEN     (84,376 )
  4,500,000     USD   7/20/2017   JPMorgan
Chase Bank,
N.A. 		  Receive   3.30%   6.82%   Republic of Jamaica     4,500,000     USD     (727,649 )
  35,000,000     USD   7/20/2017   UBS AG   Receive   2.26%   1.90%   Republic of Turkey     35,000,000     USD     799,529  
  15,000,000     USD   9/20/2017   JPMorgan
Chase Bank,
N.A. 		  Receive   1.77%   1.63%   Republic of Philippines     15,000,000     USD     167,726  
  10,000,000     USD   12/20/2018   Deutsche
Bank AG 		  Receive   0.44%   0.68%   United Kingdom Government     10,000,000     USD     (154,153 )
  10,000,000     USD   3/20/2019   Deutsche
Bank AG 		  Receive   2.61%   9.72%   Hellenic Republic of Greece     10,000,000     USD     (2,961,516 )
  10,000,000     USD   3/20/2019   Deutsche
Bank AG 		  Receive   1.62%   1.84%   Republic of Italy     10,000,000     USD     (116,623 )
  10,000,000     USD   3/20/2019   Deutsche
Bank AG 		  Receive   1.35%   0.68%   United Kingdom Government     10,000,000     USD     502,081  
  30,000,000     USD   3/20/2019   Deutsche
Bank AG 		  Receive   2.25%   9.72%   Hellenic Republic of Greece     30,000,000     USD     (9,363,001 )

         
    See accompanying notes to the financial statements.   25

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Credit Default Swaps — continued
 
                                                     
                            Maximum
 		   
                            Potential
 		   
                            Amount of
 		   
                            Future
 		   
                            Payments
 		   
                        Implied
 		      by the Fund
 		   
Notional
 		  Expiration
 		      Receive
 		  Annual
 		  Credit
 		  Deliverable
 		  Under the
 		  Market
Amount   Date   Counterparty   (Pay)Ù   Premium   Spread (1)   on Default   Contract (2)   Value
 
  30,000,000     USD   3/20/2019   Deutsche
Bank AG 		  Receive   1.46%   0.92%   Republic of Austria     30,000,000     USD   $ 1,219,781  
  20,000,000     USD   3/20/2019   Deutsche
Bank AG 		  Receive   1.66%   1.84%   Republic of Italy     20,000,000     USD     (178,935 )
  10,000,000     USD   3/20/2019   Deutsche
Bank AG 		  Receive   1.70%   1.84%   Republic of Italy     10,000,000     USD     (62,312 )
  30,000,000     USD   3/20/2019   Deutsche
Bank AG 		  Receive   1.25%   0.68%   United Kingdom Government     30,000,000     USD     1,287,548  
  6,000,000     USD   3/20/2020   Barclays
Bank PLC 		  Receive   1.00%   2.99%   Republic of Croatia     6,000,000     USD     (781,219 )
  20,000,000     USD   8/15/2031   Goldman Sachs
International 		  (Pay)   1.84%   1.56%   United Mexican States       N/A           (703,353 )
                                                     
                                                $ (25,016,048 )
                                                     
Premiums to (Pay) Receive
  $ 255,706  
         
 
Ù Receive - Fund receives premium and sells credit protection. If a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.
(Pay) - Fund pays premium and buys credit protection. If a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) receive from the seller of protection an amount equal to the notional amount of the swap and deliver the referenced obligation or underlying securities comprising the referenced index or (ii) receive a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.
(1) Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on the reference security, as of February 28, 2011, serve as an indicator of the current status of the payment/performance risk and reflect the likelihood or risk of default for the reference entity. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection. Wider (i.e. higher) credit spreads represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

         
26
  See accompanying notes to the financial statements.    

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
(2) The maximum potential amount the Fund could be required to pay as a seller of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.
 
Interest Rate Swaps
 
                                     
Notional
 		  Expiration
 		      Receive
 		  Fixed
 		      Market
Amount   Date   Counterparty   (Pay)#   Rate   Variable Rate   Value
 
  43,000,000     PEN   2/16/2012   JPMorgan Chase Bank, N.A.   (Pay)   1.41%   6 month LIBOR   $ 11,868  
  46,800,000     PEN   4/21/2014   JPMorgan Chase Bank, N.A.   Receive   5.03%   6 month LIBOR     816,296  
  51,000,000     BRL   1/2/2013   JPMorgan Chase Bank, N.A.   Receive   13.80%   Floating Rate CDI     553,699  
                                     
                                $ 1,381,863  
                                     
Premiums to (Pay) Receive
  $  —  
         
 
# Receive - Fund receives fixed rate and pays variable rate.
(Pay) - Fund pays fixed rate and receives variable rate.
 
Total Return Swaps
 
                                 
Notional
 		  Expiration
 		              Market
Amount   Date   Counterparty   Fund Pays   Fund Receives   Value
 
  20,000,000     USD   3/29/2011   JPMorgan
Chase Bank, N.A. 		  0.90%   Return on Petreleos
de Venezuela 2022 Bonds 		  $ (26,291 )
  15,124,058     USD   12/19/2011   JPMorgan
Chase Bank, N.A. 		  CER Index + 1.24%   3 month
LIBOR 		    (563,165 )
  9,329,864     USD   12/19/2011   JPMorgan
Chase Bank, N.A. 		  3 month
LIBOR + 0.35% 		  Return on Prestamos
Garantizados 		    1,160,495  
  15,278,115     USD   12/19/2011   JPMorgan
Chase Bank, N.A. 		  3 month
LIBOR + 0.35% 		  Return on Prestamos
Garantizados 		    146,974  
  9,329,864     USD   12/19/2011   JPMorgan
Chase Bank, N.A. 		  CER Index + 3.59%   3 month
LIBOR 		    (534,137 )
                                 
                            $ 183,876  
                                 
Premiums to (Pay) Receive
  $  —  
         
 
As of February 28, 2011, for forward currency contracts, futures contracts, swap agreements, written options, and reverse repurchase agreements, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.

         
    See accompanying notes to the financial statements.   27

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Notes to Schedule of Investments:
 
144A - Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors.
AMBAC - Insured as to the payment of principal and interest by AMBAC Assurance Corporation.
CER - Coeficiente de Estabilizacion de Referencia
DEM LIBOR - London Interbank Offered Rate denominated in Deutsche Marks
EMTN - Euromarket Medium Term Note
FGIC - Insured as to the payment of principal and interest by Financial Guaranty Insurance Corporation.
GDP - Gross Domestic Product
GMTN - Global Medium Term Note
JPY LIBOR - London Interbank Offered Rate denominated in Japanese Yen
LIBOR - London Interbank Offered Rate
PDI - Past Due Interest
PIK - Payment In Kind
USD LIBOR - London Interbank Offered Rate denominated in United States Dollars.
VRRB - Variable Rate Reduction Bond
XL - Insured as to the payment of principal and interest by XL Capital Assurance.
Reg S - Security exempt from registration under Regulation S of the Securities Act of 1933, which exempts from registration securities offered and sold outside the United States. Security may not be offered or sold in the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933.
The rates shown on variable rate notes are the current interest rates at February 28, 2011, which are subject to change based on the terms of the security.
* Non-income producing security.
(a) Security is backed by the U.S. Government.
(b) Security is in default.
(c) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
(d) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust.
(e) Security represents a judgment against the Government of Argentina (“Argentina”) relating to Argentina’s failure to make payments on sovereign debt held by the Fund. See “Other Matters” for additional information.
(f) All or a portion of this security has been pledged to cover collateral requirements on reverse repurchase agreements (Note 2).
(g) Peru Trust securities are currently in default. See “Other Matters” for additional information.

         
28
  See accompanying notes to the financial statements.    

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
(h) All or a portion of this security has been pledged to cover margin requirements on futures contracts, collateral requirements on swap contracts, forward currency contracts, and written options, if any, (Note 4).
(i) Non-performing. Borrower not currently paying interest.
(j) Republic of Ghana promissory notes are currently in default. See “Other Matters” for additional information.
(k) Underlying investment represents interests in defaulted claims.
(l) Reverse Repurchase Agreements have an open maturity date and can be closed on demand.
 
Currency Abbreviations:
 
ARS - Argentine Peso
BRL - Brazilian Real
CHF - Swiss Franc
COP - Colombian Peso
DEM - Deutsche Mark
EUR - Euro
GBP - British Pound
ILS - Israeli Shekel
JPY - Japanese Yen
KRW - South Korean Won
KZT - Kazakhstan Tenge
MXN - Mexican Peso
MYR - Malaysian Ringgit
PEN - Peruvian Sol
RUB - Russian Ruble
USD - United States Dollar
ZAR - South African Rand

         
    See accompanying notes to the financial statements.   29

 

GMO Emerging Country Debt Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $1,859,790,558) (Note 2)
  $ 1,883,373,892  
Investments in affiliated issuers, at value (cost $78,413,255) (Notes 2 and 10)
    75,652,843  
Cash
    2,400,000  
Foreign currency, at value (cost $2,294,523) (Note 2)
    1,688,516  
Receivable for investments sold
    4,591,866  
Receivable for Fund shares sold
    13,791  
Dividends and interest receivable
    25,223,257  
Unrealized appreciation on open forward currency contracts (Note 4)
    94,698  
Receivable for collateral on open swaps contracts (Note 4)
    420,000  
Receivable for open swap contracts (Note 4)
    282,102,649  
Interest receivable for open swap contracts
    1,730,054  
Receivable for closed swap contracts (Note 4)
    224,296  
Miscellaneous receivable
    1,033,895  
         
Total assets
    2,278,549,757  
         
         
Liabilities:
       
Payable for investments purchased
    365,006  
Payable to affiliate for (Note 5):
       
Management fee
    477,476  
Shareholder service fee
    157,828  
Trustees and Trust Officers or agents unaffiliated with the Manager
    4,814  
Unrealized depreciation on open forward currency contracts (Note 4)
    21,848,193  
Payable for open swap contracts (Note 4)
    305,552,958  
Payable for reverse repurchase agreements (Note 2)
    262,654,901  
Accrued expenses
    509,792  
         
Total liabilities
    591,570,968  
         
Net assets
  $ 1,686,978,789  
         

         
30
  See accompanying notes to the financial statements.    

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011 — (Continued)
 
         
Net assets consist of:
       
Paid-in capital
  $ 1,863,476,949  
Undistributed net investment income
    13,256,431  
Accumulated net realized loss
    (166,190,008 )
Net unrealized depreciation
    (23,564,583 )
         
    $ 1,686,978,789  
         
Net assets attributable to:
       
Class III shares
  $ 564,569,785  
         
Class IV shares
  $ 1,122,409,004  
         
Shares outstanding:
       
Class III
    62,068,588  
         
Class IV
    123,531,697  
         
Net asset value per share:
       
Class III
  $ 9.10  
         
Class IV
  $ 9.09  
         

         
    See accompanying notes to the financial statements.   31

 

GMO Emerging Country Debt Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Interest
  $ 223,498,794  
Dividends from unaffiliated issuers
    773,896  
Dividends from affiliated issuers (Note 10)
    732,474  
         
Total investment income
    225,005,164  
         
Expenses:
       
Management fee (Note 5)
    6,607,898  
Shareholder service fee – Class III (Note 5)
    814,015  
Shareholder service fee – Class IV (Note 5)
    1,345,293  
Interest expense (Note 2)
    1,425,052  
Custodian, fund accounting agent and transfer agent fees
    1,195,574  
Legal fees
    195,328  
Audit and tax fees
    140,346  
Trustees fees and related expenses (Note 5)
    65,204  
Registration fees
    19,894  
Miscellaneous
    44,826  
         
Total expenses
    11,853,430  
Expense reductions (Note 2)
    (725 )
         
Net expenses
    11,852,705  
         
Net investment income (loss)
    213,152,459  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in unaffiliated issuers
    (54,642,483 )
Investments in affiliated issuers
    (45 )
Realized gains distributions from affiliated issuers (Note 10)
    814  
Swap contracts
    20,526,690  
Foreign currency, forward contracts and foreign currency related transactions
    6,837,181  
         
Net realized gain (loss)
    (27,277,843 )
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in unaffiliated issuers
    197,602,017  
Investments in affiliated issuers
    5,728,119  
Swap contracts
    7,489,061  
Foreign currency, forward contracts and foreign currency related transactions
    (21,996,232 )
         
Net unrealized gain (loss)
    188,822,965  
         
Net realized and unrealized gain (loss)
    161,545,122  
         
Net increase (decrease) in net assets resulting from operations
  $ 374,697,581  
         

         
32
  See accompanying notes to the financial statements.    

 

GMO Emerging Country Debt Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 213,152,459     $ 141,926,626  
Net realized gain (loss)
    (27,277,843 )     39,683,769  
Change in net unrealized appreciation (depreciation)
    188,822,965       699,945,322  
                 
                 
Net increase (decrease) in net assets from operations
    374,697,581       881,555,717  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (64,721,761 )     (43,904,905 )
Class IV
    (173,315,562 )     (108,329,496 )
                 
Total distributions from net investment income
    (238,037,323 )     (152,234,401 )
                 
Net share transactions (Note 9):
               
Class III
    (84,189,171 )     (160,150,869 )
Class IV
    (258,259,432 )     (517,798,203 )
                 
Increase (decrease) in net assets resulting from net share transactions
    (342,448,603 )     (677,949,072 )
                 
Purchase premiums and redemption fees (Notes 2 and 9):
               
Class III
    972,178       3,690,433  
Class IV
    2,233,723       8,047,100  
                 
Increase in net assets resulting from purchase premiums and redemption fees
    3,205,901       11,737,533  
                 
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees
    (339,242,702 )     (666,211,539 )
                 
                 
Total increase (decrease) in net assets
    (202,582,444 )     63,109,777  
                 
Net assets:
               
Beginning of period
    1,889,561,233       1,826,451,456  
                 
End of period (including undistributed net investment income of $13,256,431 and distributions in excess of net investment income of $6,303,560)
  $ 1,686,978,789     $ 1,889,561,233  
                 

         
    See accompanying notes to the financial statements.   33

 

GMO Emerging Country Debt Fund
(A Series of GMO Trust)


Statement of Cash Flows — Year Ended February 28, 2011
 
         
Cash flows from operating activities:
       
Net increase (decrease) in net assets resulting from operations
  $ 374,697,581  
Adjustments to reconcile net increase (decrease) in net assets resulting from operations
       
to net cash provided by (used in) operating activities:
       
Net change in unrealized (appreciation) depreciation
    (188,822,965 )
Net realized (gain) loss †
    27,277,843  
Net amortization of discount and premium
    (29,050,970 )
Investments purchased
    (515,368,082 )
Proceeds from sale of investments
    920,942,382  
Short term investments, net
    55,453,001  
Realized gain distributions from affiliated issuers
    814  
Other proceeds (cost):
       
Swap contracts
    36,116,166  
Forward currency contracts
    7,079,526  
Foreign currency and foreign currency related transactions
    976,714  
Changes in assets and liabilities:
       
(Increase) decrease in receivable for collateral on open swap contracts
    (420,000 )
(Increase) decrease in dividends and interest receivable
    6,183,423  
(Increase) decrease in interest receivable for open swap contracts
    (326,274 )
(Increase) decrease in miscellaneous receivable
    (766,529 )
Increase (decrease) in payable to affiliate for:
       
Management fee
    (47,821 )
Shareholder service fee payable
    (13,360 )
Trustee and Chief Compliance Officer of GMO Trust fees
    1,174  
Increase (decrease) in miscellaneous payable
    (18,719,604 )
Increase (decrease) in accrued expenses
    (285,581 )
         
Net cash provided by (used in) operating activities
    674,907,438  
         
Cash flows from financing activities:*
       
Proceeds from shares sold
    137,896,952  
Shares repurchased
    (660,708,909 )
Purchase premiums and redemption fees
    3,205,901  
Cash distributions paid
    (111,388,945 )
Increase (decrease) in payable for reverse repurchase agreements
    (41,871,404 )
         
Net cash provided by (used in) financing activities
    (672,866,405 )
         
Net increase in cash
    2,041,033  
Cash and cash equivalents, beginning of period
    2,047,483  
         
Cash and cash equivalents, end of period
  $ 4,088,516  
         
Supplemental disclosure of cash flow information:
       
† Noncash operating activities not included herein consists of realized loss of $74,994,266 related to sovereign debt restructuring.
* Reinvestment of dividends and distributions
  $ 126,648,378  
ˆ Interest paid on reverse repurchase agreements and to Lehman Brothers in connection with the termination of derivative contracts in 2008 was $1,452,073 for the year ended February 28, 2011.

         
34
  See accompanying notes to the financial statements.    

 

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,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 8.47     $ 5.85     $ 10.06     $ 10.73     $ 11.30  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    1.03 (a)     0.52       0.54       0.68       0.86  
Net realized and unrealized gain (loss)
    0.81       2.70       (3.77 )     (0.13 )     0.30  
                                         
                                         
Total from investment operations
    1.84       3.22       (3.23 )     0.55       1.16  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (1.21 )     (0.60 )     (0.77 )     (0.76 )     (0.94 )
From net realized gains
    —       —       (0.21 )     (0.46 )     (0.79 )
                                         
                                         
Total distributions
    (1.21 )     (0.60 )     (0.98 )     (1.22 )     (1.73 )
                                         
                                         
Net asset value, end of period
  $ 9.10     $ 8.47     $ 5.85     $ 10.06     $ 10.73  
                                         
                                         
Total Return(b)
    22.23 %     55.95 %     (32.75 )%     5.07 %     10.98 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 564,570     $ 602,065     $ 535,194     $ 734,921     $ 876,598  
Net operating expenses to average daily net assets(c)
    0.59 %(d)     0.58 %(d)     0.59 %(d)     0.57 %(d)     0.57 %
Interest expense to average daily net assets(e)
    0.08 %     0.11 %     0.23 %     0.74 %     0.48 %
Total net expenses to average daily net assets
    0.67 %(d)     0.69 %(d)     0.82 %(d)     1.31 %(d)     1.05 %
Net investment income (loss) to average daily net assets
    11.09 %(f)     6.98 %     6.36 %     6.36 %     7.91 %
Portfolio turnover rate
    21 %     36 %     38 %     53 %     83 %
Purchase premiums and redemption fees consisted of the following per share amounts (Note 2):†
  $ 0.02     $ 0.05     $ 0.00 (g)   $ 0.01     $ 0.01  
 
(a) Includes income per share of $0.40 as a result of the Fund’s participation in sovereign debt exchanges during the period. Excluding this income, the Fund’s net investment income per share would have been $0.63.
(b) Calculation excludes purchase premiums and redemption fees which are borne by the shareholder and assumes the effect of reinvested distributions.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(d) The net expense ratio does not include the effect of expense reductions (Note 2).
(e) Interest expense incurred as a result of entering into reverse repurchase agreements and/or payables owed to Lehman Brothers in connection with the termination of derivative contracts in 2008 is included in the Fund’s net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income.
(f) Includes income of 4.33% of average daily net assets as a result of the Fund’s participation in sovereign debt exchanges. Excluding this income, the Fund’s net investment income to average daily net assets would have been 6.76%.
(g) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.

         
    See accompanying notes to the financial statements.   35

 

GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class IV share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 8.47     $ 5.85     $ 10.06     $ 10.73     $ 11.30  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    1.05 (a)     0.53       0.53       0.69       0.87  
Net realized and unrealized gain (loss)
    0.78       2.69       (3.76 )     (0.13 )     0.29  
                                         
                                         
Total from investment operations
    1.83       3.22       (3.23 )     0.56       1.16  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (1.21 )     (0.60 )     (0.77 )     (0.77 )     (0.94 )
From net realized gains
    —       —       (0.21 )     (0.46 )     (0.79 )
                                         
                                         
Total distributions
    (1.21 )     (0.60 )     (0.98 )     (1.23 )     (1.73 )
                                         
                                         
Net asset value, end of period
  $ 9.09     $ 8.47     $ 5.85     $ 10.06     $ 10.73  
                                         
                                         
Total Return(b)
    22.19 %     56.02 %     (32.66 )%     5.13 %     11.06 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 1,122,409     $ 1,287,496     $ 1,291,258     $ 2,114,181     $ 1,996,230  
Net operating expenses to average daily net assets(c)
    0.54 %(d)     0.53 %(d)     0.54 %(d)     0.53 %(d)     0.52 %
Interest expense to average daily net assets(e)
    0.07 %     0.11 %     0.23 %     0.74 %     0.48 %
Total net expenses to average daily net assets
    0.61 %(d)     0.64 %(d)     0.77 %(d)     1.27 %(d)     1.00 %
Net investment income (loss) to average daily net assets
    11.37 %(f)     7.03 %     6.46 %     6.45 %     7.97 %
Portfolio turnover rate
    21 %     36 %     38 %     53 %     83 %
Purchase premiums and redemption fees consisted of the following per share amounts (Note 2):†
  $ 0.02     $ 0.04     $ 0.00 (g)   $ 0.00 (g)   $ 0.01  
 
(a) Includes income per share of $0.41 as a result of the Fund’s participation in sovereign debt exchanges during the period. Excluding this income, the Fund’s net investment income per share would have been $0.64.
(b) Calculation excludes purchase premiums and redemption fees which are borne by the shareholder and assumes the effect of reinvested distributions.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(d) The net expense ratio does not include the effect of expense reductions (Note 2).
(e) Interest expense incurred as a result of entering into reverse repurchase agreements and/or payables owed to Lehman Brothers in connection with the termination of derivative contracts in 2008 is included in the Fund’s net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income.
(f) Includes income of 4.43% of average daily net assets as a result of the Fund’s participation in sovereign debt exchanges. Excluding this income, the Fund’s net investment income to average daily net assets would have been 6.94%.
(g) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.

         
36
  See accompanying notes to the financial statements.    

 

GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO Emerging Country Debt Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund seeks total return in excess of that of its benchmark, the J.P. Morgan Emerging Markets Bond Index Global (“EMBIG”). The Fund invests primarily in sovereign debt of emerging countries, although it also may invest in debt of entities related to, but not guaranteed by emerging countries, or of entities wholly unrelated to emerging countries. Under normal circumstances, the Fund invests directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the “underlying funds” or derivatives) at least 80% of its assets in debt investments tied economically to emerging countries. The term “emerging countries” means the world’s less developed countries. The Fund typically gains its investment exposure by purchasing debt of sovereign issuers of emerging countries or by using derivatives, typically credit default swaps. The Fund also invests in asset-backed securities (including through GMO Short-Duration Collateral Fund (“SDCF”) and GMO World Opportunity Overlay Fund (“Overlay Fund”)). The Fund invests a substantial portion of its assets in below investment grade securities (also known as “junk bonds”). Generally, at least 75% of the Fund’s assets are denominated in, or hedged into, U.S. dollars. In pursuing its investment objective, the Fund also typically uses exchange-traded and over-the-counter (“OTC”) derivatives, including options, swap contracts (in addition to credit default swaps), currency forwards, reverse repurchase agreements, and futures. The Fund’s performance is likely to be more volatile than that of its benchmark.
 
The Manager emphasizes a “bottom-up” approach to examining and selecting investments and uses analytical techniques to identify inefficiencies in the pricing of emerging country debt investments and to identify investments the Manager believes are undervalued. The Manager also determines country allocations based on its outlook for a country. In addition, the Fund may invest in unaffiliated money market funds.
 
The Fund is not limited in its use of derivatives or in the absolute face value of its derivatives positions, and, as a result, the Fund may be leveraged in relation to its assets. The Manager normally seeks to cause the Fund’s estimated interest rate duration to approximate that of its benchmark. The Fund, if deemed prudent by the Manager, will take temporary defensive measures until the Manager has determined that normal conditions have returned or that it is otherwise prudent to resume investing in accordance with the Fund’s normal investment strategies. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.

         
        37

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Throughout the year ended February 28, 2011, the Fund had two classes of shares outstanding: Class III and Class IV. Each class of shares bears a different shareholder service fee.
 
The financial statements of the series of the underlying funds should be read in conjunction with the Fund’s financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect). As of February 28, 2011, shares of SDCF, GMO Special Purpose Holding Fund (“SPHF”) and Overlay Fund were not publicly available for direct purchase.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the OTC market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of February 28, 2011, the total value of securities held directly and indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 3.9% of net assets. The Fund and the underlying funds classify such securities (as defined below) as Level 3. During the year ended February 28, 2011, the Manager has evaluated the Fund’s OTC derivatives contracts and determined that no reduction in value was warranted on account of the creditworthiness of a counterparty. See Note 4 for a further discussion on valuation of derivative financial instruments.
 
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate

         
38
       

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. Although alternative prices are available for securities held by the Fund and the underlying funds, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by the Fund and the underlying funds. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fund and the underlying funds. As of February 28, 2011, the total value of securities held directly and indirectly for which no alternative pricing source was available represented 17.2% of the net assets of the Fund.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include most recent bid prices, interest rates, prepayment speeds, credit risk, yield curves and similar data. The Fund also used third party valuation services (which use industry models and market data from pricing vendors) to value certain credit default swaps.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund utilized a number of fair value techniques on Level 3 investments, including the following: The Fund valued certain debt securities using indicative bids received from primary pricing sources. In some cases, bids received

         
        39

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
from primary pricing sources or prices calculated by using industry models are adjusted by a specified discount for liquidity or other considerations (including the Argentine judgment described in Other Matters below). In addition, the Fund valued certain sovereign debt securities using comparable securities issued by the sovereign adjusted by a specified spread. The Fund valued certain other debt securities by using an estimated specified spread above the LIBOR Rate. The Fund deemed certain defaulted securities to be worthless. The Fund also used third party valuation services to value certain credit default swaps using unobservable inputs.
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Debt Obligations
                               
Asset-Backed Securities
  $ —     $ 2,138,696     $ 96,820,133     $ 98,958,829  
Corporate Debt
    —       108,820,752       8,020,000       116,840,752  
Foreign Government Agency
    —       164,941,299       137,425,666       302,366,965  
Foreign Government Obligations
    —       431,944,272       523,408,255       955,352,527  
Judgments
    —       —       28,170,000       28,170,000  
U.S. Government
    56,593,750       145,912,141       —       202,505,891  
                                 
TOTAL DEBT OBLIGATIONS
    56,593,750       853,757,160       793,844,054       1,704,194,964  
                                 
Loan Assignments
    —       —       33,280,252       33,280,252  
Loan Participations
    —       —       117,371,965       117,371,965  
Promissory Notes
    —       —       1,071,677       1,071,677  
Options Purchased
    —       4,629,567       —       4,629,567  
Mutual Funds
    75,642,138       10,705       —       75,652,843  
Rights and Warrants
    —       —       10,377,589       10,377,589  
Short-Term Investments
    12,447,878       —       —       12,447,878  
                                 
Total Investments
    144,683,766       858,397,432       955,945,537       1,959,026,735  
                                 

         
40
       

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
  
  ASSET VALUATION INPUTS — continued
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Derivatives*
                               
Forward Currency Contracts
                               
Foreign Currency Risk
  $ —     $ 94,698     $ —     $ 94,698  
Swap Agreements
                               
Credit Risk
    —       45,958,332       233,454,985       279,413,317  
Interest Rate Risk
    —       1,381,863       1,307,469       2,689,332  
                                 
Total
  $ 144,683,766     $ 905,832,325     $ 1,190,707,991     $ 2,241,224,082  
                                 
 
LIABILITY VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Liabilities
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Derivatives*
                               
Forward Currency Contracts
                               
Foreign Currency Risk
  $      —     $ (21,848,193 )   $ —     $ (21,848,193 )
Swap Agreements
                               
Credit Risk
    —       (60,050,299 )     (244,379,066 )     (304,429,365 )
Interest Rate Risk
    —       (26,291 )     —       (26,291 )
Other Risk
    —       —       (1,097,302 )     (1,097,302 )
                                 
Total
  $ —     $ (81,924,783 )   $ (245,476,368 )   $ (327,401,151 )
                                 
 
The risks referenced above are not intended to be inclusive of all risks. Please see the Investment Risks and Derivative Financial Instruments sections below for a further discussion of risks.
 
* Because the tables above are based on market values or unrealized appreciation (depreciation) rather than the notional amounts of derivatives, the uncertainties surrounding the valuation inputs for a derivative are likely to be more significant to the Fund’s net asset value than the uncertainties surrounding inputs for a non-derivative security with the same market value.
 
The underlying funds held at period end are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the

         
        41

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
underlying funds’ portfolio valuation notes in their financial statements. The aggregate net values of the Fund’s investments (both direct and indirect) in securities and other financial instruments using Level 3 inputs were 59.1% and (0.6)% of total net assets, respectively.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
The following is a reconciliation of investments and derivatives, if any, in which significant unobservable inputs (Level 3) were used in determining value:
 
                                                                           
 
                                      Net
                                      Change in
                                      Unrealized
                                      Appreciation
                                      (Depreciation)
                                      from
                                      Investments
    Balances
               Change in
           Balances
     Still Held
    as of
   Net
   Accrued
   Total
   Unrealized
   Transfers
   Transfers
   as of
     as of
    February 28,
   Purchases/
   Discounts/
   Realized
   Appreciation
   into
   out of
   February 28,
     February 28,
    2010   (Sales)   Premiums   Gain/(Loss)   (Depreciation)   Level 3*   Level 3*   2011     2011
Debt Obligations
                                                                         
Asset-Backed Securities
  $ 81,621,005     $ (15,211,842 )   $ 526,209     $ (5,362,691 )   $ 37,386,148     $ —     $ (2,138,696 )**   $ 96,820,133       $ 26,407,092  
Corporate Debt
    —       8,000,000       —       —       20,000       —       —       8,020,000         20,000  
Foreign Government Agency
    242,132,837       (91,719,259 )     1,531,393       (2,884,514 )     9,457,209       —       (21,092,000 )**     137,425,666         11,578,448  
Foreign Government Obligations
    642,295,330       (227,927,007 )     12,523,322       37,601,836       83,366,313       —       (24,451,539 )**     523,408,255         63,239,679  
Judgments
    51,451,439       (43,483,029 )     667,227       (17,760,029 )     37,294,392       —       —       28,170,000         6,902,483  
                                                                           
Total Debt Obligations
    1,017,500,611       (370,341,137 )     15,248,151       11,594,602       167,524,062       —       (47,682,235 )     793,844,054         108,147,702  
                                                                           
Loan Assignments
    35,331,584       (3,295,493 )     993,329       832,968       (582,136 )     —       —       33,280,252         (645,917 )
Loan Participations
    112,982,826       (3,970,381 )     1,991,380       2,212,416       4,155,724       —       —       117,371,965         4,800,763  
Promissory Notes
    1,653,559       (817,249 )     115,257       —       120,110       —       —       1,071,677         80,818  
Rights and Warrants
    8,618,130       (2,732,730 )     —       2,732,730       (1,115,541 )     2,875,000       —       10,377,589         1,783,854  
                                                                           
Total Investments
    1,176,086,710       (381,156,990 )     18,348,117       17,372,716       170,102,219       2,875,000       (47,682,235 )     955,945,537         114,167,220  
                                                                           
Derivatives Swap Agreements
    (33,379,332 )     10,620,641       —       (10,620,641 )     8,573,452       —       14,091,966 **     (10,713,914 )       9,682,596  
                                                                           
Total
  $ 1,142,707,378     $ (370,536,349 )   $ 18,348,117     $ 6,752,075     $ 178,675,671     $ 2,875,000     $ (33,590,269 )   $ 945,231,623       $ 123,849,816  
                                                                           
 
            * The Fund accounts for investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the value at the end of the period.
            ** Financial assets transferred between Level 2 and Level 3 were due to a change in observable and/or unobservable inputs.

         
42
       

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 pm. Income and expenses denominated in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.
 
Loan agreements
The Fund may invest in loans to corporate, governmental, or other borrowers. The Fund’s investments in loans may be in the form of participations in loans or assignments of all or a portion of loans. A loan is often administered by a bank or other financial institution that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, (i) the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the party from whom the Fund has purchased the participation and only upon receipt by that party of payments from the borrower and (ii) the Fund generally has no right to enforce compliance by the borrower with the terms of the loan agreement or to vote on matters arising under the loan agreement. Thus, the Fund may be subject to credit risk both of the party from whom it purchased the loan participation and the borrower and the Fund may have minimal control over the terms of any loan modification. When the Fund purchases assignments of loans, it acquires direct rights against the borrower. Loan agreements outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Repurchase agreements
The Fund may enter into repurchase agreements. Under a repurchase agreement 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 it acquired under the repurchase agreement. The value of the securities acquired is required by contract to be marked to market daily and additional collateral is required to be transferred so that the market value is at least equal to the amount owed to the Fund by the seller. If the seller of a repurchase agreement defaults or enters into insolvency proceedings and/or the value of the securities subject to the repurchase agreement is insufficient, the Fund’s recovery of cash from the seller may be delayed and the Fund may incur a loss equal to the difference between the cash it paid and the value of the securities. The Fund had no repurchase agreements outstanding at the end of the period.

         
        43

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at an agreed upon price and date. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which generally causes the Fund’s portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the event of a buyer’s bankruptcy or insolvency, the Fund’s use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund’s right to repurchase the securities. As of February 28, 2011, the Fund had received $262,588,213 from reverse repurchase agreements relating to securities with a market value, plus accrued interest, of $266,552,316. Reverse repurchase agreements outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Inflation-indexed bonds
The Fund may invest in inflation indexed bonds. Inflation indexed bonds are fixed income securities whose principal value is adjusted periodically according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that reflects inflation in the principal value of the bond. Most other issuers pay out any inflation related accruals as part of a semiannual coupon.
 
The value of inflation indexed bonds is expected to change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates (i.e., stated interest rates) and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates (i.e. nominal interest rate minus inflation) might decline, leading to an increase in value of inflation indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation indexed bonds. There can be no assurance, however, that the value of inflation indexed bonds will be directly correlated to changes in nominal interest rates, and short term increases in inflation may lead to a decline in their value. Coupon payments received by the Fund from inflation indexed bonds are included in the Fund’s gross income for the period in which they accrue. In addition, any increase or decrease in the principal amount of an inflation indexed bond will increase or decrease taxable ordinary income to the Fund, even though principal is not paid until maturity. Inflation-indexed bonds outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Taxes and distributions
The Fund intends to qualify each tax 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

         
44
       

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country’s tax treaty with the United States. The foreign withholding rates applicable to a Fund’s investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Taxes related to capital gains realized during the year ended February 28, 2011, if any, are reflected as part of Net realized gain (loss) in the Statement of Operations. Changes in tax liabilities related to capital gain taxes on unrealized investment gains, if any, are reflected as part of Change in net unrealized appreciation (depreciation) in the Statement of Operations. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards, derivative contract transactions, differing treatment for defaulted bonds, foreign currency transactions, partnership interest tax allocations, losses on wash sale transactions, differing tax treatment for amortization and accretion on debt securities, and post-October capital losses.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 238,037,323     $ 152,234,401  
                 
Total distributions
  $ 238,037,323     $ 152,234,401  
                 

         
        45

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 21,321,273  
         
Other Tax Attributes:
       
Capital loss carryforwards
  $ (158,725,516 )
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 1,946,010,854     $ 192,172,970     $ (179,157,089 )   $ 13,015,881      
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 28, 2017
  $ (92,251,262 )
February 28, 2019
    (66,474,254 )
         
Total
  $ (158,725,516 )
         
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.

         
46
       

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (Note 5).
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
Purchases and redemptions of Fund shares
For the year ended February 28, 2011, the premium on cash purchases and fee on cash redemptions of Fund shares were each 0.50% of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by the Fund and are allocated pro rata among the classes to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. Such fees are recorded as a component of the Fund’s net share transactions. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of the Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund’s shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of

         
        47

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
the Fund’s shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder’s securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of the Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
 
Other matters
In December 2005, the Fund entered into litigation against the Government of Argentina (“Argentina”) relating to Argentina’s failure to make payments on sovereign debt held by the Fund. A judgment was awarded in the Fund’s favor on September 24, 2007; however, the Fund’s ability to collect on this judgment remains uncertain, and the Fund is not able to transfer or sell the judgment without court consent. In late May 2010, Argentina commenced a public debt exchange in which certain defaulted debts, including legal judgments on those debts, were eligible to be exchanged for currently performing Argentina Bonds. The eligible portion of the Fund’s judgment was tendered in the debt exchange and the Fund received new bonds in June 2010. In late December 2010, Argentina commenced its second public debt exchange for the year in which certain defaulted debts, including legal judgments on those debts, were eligible to be exchanged for a combination of currently performing Argentina bonds, GDP-linked securities, and cash. The Fund’s judgment and other defaulted Argentine debts were tendered and accepted in the debt exchange and the Fund anticipates receiving the new securities and cash in 2011, subject to certain conditions of the exchange being satisfied. The Fund’s judgment, which continues to be valued according to the Fund’s valuation policy, represented 1.7% of the net assets of the Fund as of February 28, 2011.
 
Peru Trust, Series 1998 I-P; Peru Trust, Series 97-I-P; and Peru Trust II, Series 98-A LB (the “Peru Trusts”) held by the Fund are currently in default. The Peru Trusts hold obligations of Istituto per i Servizi Assicurativi e il Credito all’Espotazione (“SACE”), the Italian Agency for Insurance of Export Credits. The obligations are payable only to the extent SACE recovers amounts from the Government of Peru (“Peru”) in relation to certain export insurance policies. Peru fully paid all of its obligations to SACE on August 24, 2009; however, payments to the Peru Trusts by SACE remain outstanding. Litigation between the Peru Trusts and SACE is pending in Italy with respect to the outstanding payments. The Peru Trusts’ ability to recover such payments, and the Fund’s corresponding ability to receive payment with respect to its investment in the Peru Trusts, remains uncertain. The Peru Trusts, which continue to be valued according to the Fund’s valuation policy, represented less than 0.1% of the net assets of the Fund as of February 28, 2011. Costs associated with this action are borne by the Fund.
 
In July 2008, the Fund entered into litigation against GNPA Limited (“GNPA”) (an entity wholly owned by the government of Ghana) seeking payment on an unconditional promissory note issued by GNPA. A judgment was awarded in the Fund’s favor in February 2010; however, the Fund’s ability to collect on this judgment remains uncertain. The defaulted promissory note, which continues to be valued according to the

         
48
       

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Fund’s valuation policy, represented less than 0.1% of the net assets of the Fund as of February 28, 2011. Costs associated with this action are borne by the Fund.
 
In connection with the Fund’s purchase of Venezuelan bonds between 2000 and 2002, the Fund acquired warrants which (along with related payments on those warrants) have not been received in custody. The Fund’s trading counterparties have acknowledged their delivery obligations but have not necessarily accepted legal liability for payment. Because there can be no assurance that the Fund will receive the warrants (or related payments), the Fund values the warrants at fair value using methods determined in good faith by or at the discretion of the Trustees of GMO Trust. The value of any possible recovery is carried at $1,033,826, representing less than 0.1% of the net assets of the Fund on February 28, 2011, and is included in Miscellaneous receivables on the Statement of Assets and Liabilities.
 
SPHF, an investment of the Fund, has litigation pending against various entities related to the 2002 fraud and related default of securities previously held by SPHF. The outcome of the lawsuits against the remaining defendants is not known and any potential recoveries are not reflected in the net asset value of SPHF. For the year ended February 28, 2011, the Fund received no distributions from SPHF in connection with the defaulted securities or the related litigation.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Fixed Income Securities — Typically, the value of the Fund’s fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
 
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could

         
        49

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
adversely affect the value of the Fund’s investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund’s investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
 
• Credit and Counterparty Risk — The Fund runs the risk that the issuer or guarantor of a fixed income security, the counterparty to an over-the-counter derivatives contract, a borrower of the Fund’s securities or the obligor of an obligation underlying an asset-backed security will be unable or unwilling to make timely principal, interest, or settlement payments or otherwise honor its obligations. This risk is particularly pronounced for the Fund because it invests primarily in sovereign debt of emerging countries, which is typically below investment grade. Below investment grade bonds have speculative characteristics, and changes in economic conditions or other circumstances are more likely to impair the capacity of issuers to make principal and interest payments than is the case with issuers of investment grade bonds. This risk is also particularly pronounced for the Fund because it typically uses over-the-counter derivatives, including swap contracts with longer-term maturities, and may have significant exposure to a single counterparty. The risk of counterparty default is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. Because the Fund typically invests in securities that are of lesser quality than those in its benchmark, in rapidly declining markets, the percentage decline in the value of the Fund is likely to exceed that of its benchmark.
 
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind. These risks are particularly pronounced for the Fund because it invests primarily in sovereign debt of emerging countries, which is not widely traded and which may be subject to purchase and sale restrictions. In addition, because the Fund typically invests in securities that are less liquid than those in its benchmark, in rapidly declining markets the percentage decline in the Fund’s investments is likely to exceed that of its benchmark.
 
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund’s foreign currency holdings and investments denominated in foreign currencies.
 
• Leveraging Risk — The Fund’s use of reverse repurchase agreements and other derivatives and securities lending may cause its portfolio to be leveraged. Leverage increases the Fund’s portfolio losses when the value of its investments decline.
 
Other principal risks of an investment in the Fund include Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Focused Investment Risk (increased risk from the Fund’s focus on investments in a limited number of countries, regions, sectors or companies); Management and Operational Risk (risk that the Manager’s strategies and

         
50
       

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
 
The most significant market risk for Funds investing in fixed income securities is that the securities in which they invest experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund because it invests in asset-backed securities. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as “collateralized debt obligations” or “collateralized loan obligations”) and by the fees earned by service providers. Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. Many asset-backed securities owned (directly or indirectly) by the Fund that were once rated investment grade are now rated below investment grade as of the date of this report.
 
The existence of insurance on an asset-backed security does not guarantee that principal and/or interest will be paid because the insurer could default on its obligations. In recent years, a significant number of asset-backed security insurers have defaulted on their obligations.
 
With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and

         
        51

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.
 
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and a Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.
 
The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution’s business may have a material impact on multiple investments.
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps or other derivatives on an index, a single security or a basket of securities to gain investment exposures (e.g., by selling protection under a credit default swap). The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). For example, the Fund may use credit default swaps to take a short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.

         
52
       

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund’s exposure to the credit of an issuer through the debt instrument, but adjust the Fund’s interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed versus variable rates and shorter duration versus longer duration exposure. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral (e.g., foreign currency forwards; see “Currency Risk” above), that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a

         
        53

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
 
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund’s forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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.
 
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. During the year ended February 28, 2011, the Fund used forward currency contracts to adjust exposure to foreign currencies and otherwise adjust currency exchange rate risk. Forward currency contracts outstanding at the end of the period are listed in the Fund’s Schedule of Investments.

         
54
       

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. The Fund had no futures contracts outstanding at the end of the period.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. During the year ended February 28, 2011, the Fund used purchased option contracts to adjust interest rate exposure. Option contracts purchased by the Fund and outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to

         
        55

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.

         
56
       

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the

         
        57

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
year ended February 28, 2011, the Fund used swap agreements to adjust interest rate exposure, adjust exposure to certain markets, achieve exposure to a reference entity’s credit, and/or provide a measure of protection against default loss. Swap agreements outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. During the year ended February 28, 2011, the Fund held rights and warrants to adjust exposure to certain markets. Additionally, the Fund owns warrants linked to the price of oil. Rights and warrants held by the Fund at the end of the period are listed in the Fund’s Schedule of Investments.
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of
February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Assets:
                                               
Investments, at value (purchased options, rights and warrants)
  $ 4,629,567     $ —     $ —     $      —     $ 10,377,589     $ 15,007,156  
Unrealized appreciation on forward currency contracts
    —       94,698       —       —       —       94,698  
Unrealized appreciation on swap agreements
    2,689,332       —       279,413,317       —       —       282,102,649  
                                                 
Total
  $ 7,318,899     $ 94,698     $ 279,413,317     $ —     $ 10,377,589     $ 297,204,503  
                                                 
Liabilities:
                                               
Unrealized depreciation on forward currency contracts
  $ —     $ (21,848,193 )   $ —     $ —     $ —     $ (21,848,193 )
Unrealized depreciation on swap agreements
    (26,291 )     —       (304,429,365 )     —       (1,097,302 )     (305,552,958 )
                                                 
Total
  $ (26,291 )   $ (21,848,193 )   $ (304,429,365 )   $ —     $ (1,097,302 )   $ (327,401,151 )
                                                 

         
58
       

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended
February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Investments (purchased options, rights and warrants)
  $ (2,316,000 )   $ —     $ —     $      —     $ 2,732,730     $ 416,730  
Forward currency contracts
    —       7,079,526       —       —       —       7,079,526  
Swap contracts
    11,495,536       —       (13,598,642 )     —       22,629,796       20,526,690  
                                                 
Total
  $ 9,179,536     $ 7,079,526     $ (13,598,642 )   $ —     $ 25,362,526     $ 28,022,946  
                                                 
Change in Unrealized Appreciation (Depreciation) on:
                                               
Investments (purchased options, rights and warrants)
  $ 2,877,896     $ —     $ —     $ —     $ (1,115,541 )   $ 1,762,355  
Forward currency contracts
    —       (23,215,291 )     —       —       —       (23,215,291 )
Swap agreements
    (3,581,017 )     —       14,851,994       —       (3,781,916 )     7,489,061  
                                                 
Total
  $ (703,121 )   $ (23,215,291 )   $ 14,851,994     $ —     $ (4,897,457 )   $ (13,963,875 )
                                                 
 
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
 
The volume of derivative activity, based on absolute values (forward currency contracts and rights and warrants), principal amounts (options), or notional amounts (swap agreements) outstanding at each month-end, was as follows for the year ended February 28, 2011.
 
                                 
    Forward
            
    currency
           Rights/
    contracts   Swap agreements   Options   Warrants
 
Average amount outstanding
  $ 528,666,387     $ 5,103,338,286     $ 115,163,925     $ 10,942,060  
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.35% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on

         
        59

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
average daily net assets of each class at the annual rate of 0.15% for Class III shares and 0.10% for Class IV shares. The Manager has contractually agreed through at least June 30, 2011 to waive the Fund’s shareholder service fee to the extent that the aggregate of any direct and indirect shareholder service fees borne by a class of shares of the Fund exceeds 0.15% for Class III shares and 0.10% for Class VI shares; provided, however, that the amount of this waiver will not exceed the respective Class’s shareholder service fee.
 
The Manager has contractually agreed to reimburse the Fund for an amount equal to the fees and expenses incurred indirectly by the Fund through its investment in other GMO Funds (excluded those Funds’ Excluded Fund Fees and Expenses). “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). This expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ending February 28, 2011 was $65,204 and $13,956, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
                   
Indirect Net
 		                 
Expenses
                  
(excluding
                  
shareholder service
     Indirect
            
fees and interest
     Shareholder
     Indirect Interest
     Total Indirect
expense)     Service Fees     Expense     Expenses
< 0.001%
    0.000%     0.001%     0.001%
                   

         
60
       

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 were as follows:
 
                 
    Purchases   Sales
 
U.S. Government securities
  $ 84,168,522     $ 125,317,597  
Investments (non-U.S. Government securities)
    364,661,206       771,078,911  
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 32.95% of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund’s outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
 
As of February 28, 2011, 0.15% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and 19.17% of the Fund’s shares were held by accounts for which the Manager had investment discretion.

         
        61

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    9,633,356     $ 87,460,313       14,683,913     $ 118,494,974  
Shares issued to shareholders in reinvestment of distributions
    3,884,543       35,087,915       3,120,928       24,355,278  
Shares repurchased
    (22,497,488 )     (206,737,399 )     (38,246,442 )     (303,001,121 )
Purchase premiums
    —       123,522       —       43,155  
Redemption fees
    —       848,656       —       3,647,278  
                                 
Net increase (decrease)
    (8,979,589 )   $ (83,216,993 )     (20,441,601 )   $ (156,460,436 )
                                 
                                 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class IV:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    5,013,942     $ 48,450,430       26,441,299     $ 211,558,176  
Shares issued to shareholders in reinvestment of distributions
    10,139,974       91,560,463       2,362,819       18,939,047  
Shares repurchased
    (43,685,884 )     (398,270,325 )     (97,617,668 )     (748,295,426 )
Purchase premiums
    —       308,772       —       87,391  
Redemption fees
    —       1,924,951       —       7,959,709  
                                 
Net increase (decrease)
    (28,531,968 )   $ (256,025,709 )     (68,813,550 )   $ (509,751,103 )
                                 

         
62
       

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                         
    Value,
               Distributions
   Return
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   of
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   Capital   period
 
GMO Short-Duration Collateral Fund
  $ 59,561,708     $ —     $ —     $ 727,226     $ —     $ 21,927,801     $ 41,271,731  
GMO Special Purpose Holding Fund
    11,775       —       —       —       —       —       10,705  
GMO U.S. Treasury Fund
    114,662       72,006,024       72,120,655       5,248       814       —       31  
GMO World Opportunity Overlay Fund
    32,279,057       —       —       —       —       —       34,370,376  
                                                         
Totals
  $ 91,967,202     $ 72,006,024     $ 72,120,655     $ 732,474     $ 814     $ 21,927,801     $ 75,652,843  
                                                         

         
        63

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Emerging Country Debt Fund:
 
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operation, of changes in net assets and of cash flows, and the financial highlights present fairly, in all material respects, the financial position of GMO Emerging Country Debt Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, its cash flows and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian, brokers, and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
64
       

 

GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
        65

 

 
GMO Emerging Country Debt Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.63 %   $ 1,000.00     $ 1,045.00     $ 3.19  
2) Hypothetical
    0.63 %   $ 1,000.00     $ 1,021.67     $ 3.16  
                                 
Class IV
                               
                                 
1) Actual
    0.58 %   $ 1,000.00     $ 1,045.50     $ 2.94  
2) Hypothetical
    0.58 %   $ 1,000.00     $ 1,021.92     $ 2.91  
                                 
 
            * Expenses are calculated using each Class’s annualized net expense ratio (including interest expense and indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
66
       

 

GMO Emerging Country Debt Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
Of the ordinary income distributions made by the Fund during the fiscal year ended February 28, 2011, 2.78% is derived from investments in U.S. Government and Agency Obligations. All or a portion of the distributions from this income may be exempt from taxation at the state level. Consult your tax advisor for state specific information.

         
        67

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
   Position(s)
   Length of
   During Past
   Complex
     Other Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
68        

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
   Position(s)
   Length of
   During Past
   Complex
     Other Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
   Position(s)
   Length of
  During Past
   Complex
     Other Directorships
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee; President and
Chief Executive
Officer of the Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
        69

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance Officer   Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
70        

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money
Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        71

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO Emerging Markets Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Emerging Markets Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
The Class III shares of GMO Emerging Markets Fund returned +25.8% for the fiscal year ended February 28, 2011, as compared with +22.1% for the S&P/IFCI (Investable) Composite Index.
 
Country selection added 2.1% to relative returns during the fiscal year. The Fund’s underweights in China and India, along with its overweights in Russia, Thailand, and Turkey contributed to relative performance. The Fund’s overweight in Egypt and underweight in South Africa detracted from relative performance.
 
Stock selection added 1.5% to relative returns during the fiscal year. In particular, the Fund’s stock selections in Korea and Taiwan added to relative performance.
 
Because some of the securities and instruments held directly or indirectly by the Fund had positive fair value adjustments during the fiscal year (and the performance of indices are not fair valued), the Fund’s absolute and relative performance is better than it otherwise would have been.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice.

 

 
Comparison of Change in Value of a $50,000,000 Investment in
GMO Emerging Markets Fund Class III Shares and the S&P/IFCI Composite Index
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Each performance figure assumes a purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of .80% on the purchase and .80% on the redemption. Transaction fees are retained by the Fund to cover trading costs. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. All information is unaudited. Performance for classes may vary due to different fees.
 
 
* For the period from January 9, 1998 to August 12, 2009, no Class II shares were outstanding. Performance for that period is that of Class III shares, which have been adjusted downward to reflect Class II’s higher gross expenses (Class II’s expenses during these periods were calculated by adjusting Class III’s gross expenses during such periods upward by the current differential between the gross shareholder service fees for Class II and Class III shares).
** For the period from October 26, 2004 to February 11, 2005, no Class V shares were outstanding. Performance for that period is that of Class IV shares, which have higher expenses. Therefore, the performance shown is lower than it would have been if Class V shares had been outstanding.

 

GMO Emerging Markets Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary   % of Total Net Assets  
Common Stocks
    87.1 %
Preferred Stocks
    8.6  
Investment Funds
    1.4  
Short-Term Investments
    1.2  
Mutual Funds
    0.9  
Debt Obligations
    0.3  
Rights and Warrants
    0.0 Ù
Swap Agreements
    0.0 Ù
Other
    0.5  
         
      100.0 %
         
 
         
Country Summary*   % of Investments  
South Korea
    19.2 %
Russia
    15.7  
China
    14.3  
Brazil
    13.2  
Taiwan
    11.2  
Thailand
    3.8  
South Africa
    3.4  
Turkey
    3.4  
Indonesia
    2.9  
India
    2.2  
Hungary
    1.9  
Mexico
    1.8  
Poland
    1.6  
Czech Republic
    1.5  
Egypt
    1.2  
Malaysia
    1.1  
Philippines
    0.6  
Chile
    0.4  
Kazakhstan
    0.2  
Morocco
    0.2  
Sri Lanka
    0.1  
United States
    0.1  
Argentina
    0.0 Ù
         
      100.0 %
         
 
* The table above shows country exposure in the Fund. The table excludes short-term investments. The table includes exposure through derivative financial instruments, if any. The table excludes exposure through forward currency contracts. The table takes into account the market value of securities and options and the notional amounts of swap agreements and other derivative financial instruments, if any.

         
        1

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2011 (Unaudited)
 
         
Industry Group Summary   % of Equity Investments**  
Energy
    22.9 %
Banks
    18.8  
Materials
    14.9  
Telecommunication Services
    12.3  
Semiconductors & Semiconductor Equipment
    6.5  
Capital Goods
    4.9  
Technology Hardware & Equipment
    4.2  
Automobiles & Components
    3.1  
Utilities
    2.6  
Diversified Financials
    1.3  
Software & Services
    1.0  
Real Estate
    1.0  
Insurance
    1.0  
Transportation
    0.9  
Retailing
    0.8  
Food, Beverage & Tobacco
    0.8  
Pharmaceuticals, Biotechnology & Life Sciences
    0.7  
Consumer Services
    0.5  
Food & Staples Retailing
    0.4  
Health Care Equipment & Services
    0.3  
Consumer Durables & Apparel
    0.3  
Media
    0.3  
Household & Personal Products
    0.3  
Miscellaneous
    0.1  
Commercial & Professional Services
    0.1  
         
      100.0 %
         
 
** Equity investments may consist of common stocks, preferred stocks and rights and warrants. This table excludes exposure to derivative contracts and ETFs, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
Ù Rounds to 0.0%.

         
2
       

 

GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            COMMON STOCKS — 87.1%        
                     
            Argentina — 0.0%        
      84,710     Petrobras Energia SA ADR     1,949,177  
                     
                     
            Brazil — 6.3%        
      461,500     Arezzo Industria e Comercio SA *     5,935,870  
      3,921,210     Banco Bradesco ADR     76,777,292  
      8,802,400     Banco do Brasil SA     157,393,557  
      1,733,520     Banco Santander Brasil SA ADR     21,114,274  
      1,815,800     BR Malls Participacoes SA     17,298,011  
      501,065     Brasil Telecom SA ADR     11,549,548  
      192,780     Centrais Eletricas Brasileiras SA ADR     3,485,462  
      197,470     Centrais Eletricas Brasileiras SA Sponsored ADR     2,819,872  
      202,410     Cia de Saneamento Basico do Estado de Sao Paulo ADR     10,108,355  
      553,700     Cia de Saneamento de Minas Gerais-Copasa MG     9,650,980  
      41,100     Cia Paranaense de Energia Sponsored ADR     1,048,872  
      531,800     Cia Siderurgica Nacional SA Sponsored ADR     8,652,386  
      199,100     Companhia Energetica de Minas Gerais Sponsored ADR     3,356,826  
      1,040,302     Companhia Saneamento Basico Sao Paulo     25,491,713  
      925,392     Electrobras (Centro)     13,070,508  
      1,581,000     Gerdau SA     16,201,497  
      845,260     Gerdau SA Sponsored ADR     11,411,010  
      6,047,950     Itau Unibanco Holding SA ADR     134,385,449  
      903,100     Light SA     14,818,265  
      267,300     Lojas Renner SA     8,193,473  
      728,600     LPS Brasil Consultoria de Imoveis SA     16,465,537  
      317,700     Natura Cosmeticos SA     8,059,933  
      2,581,190     Petroleo Brasileiro SA (Petrobras) ADR     102,808,798  
      684,400     Porto Seguro SA     10,900,709  
      521,800     Tractebel Energia SA     8,154,105  
      1,723,800     Vale SA     58,330,292  
      24,700     Vale SA Sponsored ADR     845,481  
                     
            Total Brazil     758,328,075  
                     

         
    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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Chile — 0.4%        
      88,200     Administradora de Fondos de Pensiones Provida SA     432,798  
      43,710     AFP Provida SA     3,195,201  
      11,883,666     Banco de Chile     1,633,270  
      52,570     Banco Santander Chile SA ADR     4,371,195  
      552,521     Cencosud SA     3,762,043  
      50,300     Embotelladora Andina SA ADR Class A     1,083,965  
      25,500     Embotelladora Andina SA ADR Class B     678,810  
      2,302,997     Empresa Nacional de Electricidad SA     4,017,480  
      50,090     Empresa Nacional de Electricidad SA Sponsored ADR     2,614,197  
      599,604     Empresa National de Telecomunicaciones SA     10,244,364  
      214,750     Enersis SA Sponsored ADR     4,361,573  
      41,648,168     Madeco SA     2,450,665  
      1,376,814     Quinenco SA     4,745,140  
                     
            Total Chile     43,590,701  
                     
                     
            China — 13.7%        
      7,372,000     Agile Property Holdings Ltd     9,355,379  
      87,673,000     Agricultural Bank of China Ltd Class H *     43,644,808  
      209,359,000     Bank of China Ltd Class H     110,471,819  
      28,893,000     Bank of Communications Co Ltd Class H     28,054,710  
      32,817,000     China CITIC Bank Class H     21,638,467  
      8,661,700     China Coal Energy Co Class H     12,437,260  
      16,113,700     China Communication Services Corp Ltd Class H     10,347,958  
      146,297,000     China Construction Bank Class H     128,354,917  
      20,348,000     China Gas Holdings Ltd     7,668,468  
      2,993,500     China Merchants Bank Co Ltd Class H     7,213,064  
      19,695,500     China Minsheng Banking Corp Ltd     17,226,514  
      29,015,942     China Mobile Ltd     273,291,240  
      524,300     China Mobile Ltd Sponsored ADR     24,783,661  
      4,319,400     China Oilfield Services Ltd Class H     8,667,979  
      71,200     China Petroleum & Chemical Corp ADR     7,305,120  
      148,693,351     China Petroleum & Chemical Corp Class H     150,912,238  
      1,663,000     China Shenhua Energy Co Ltd Class H     6,933,859  
      61,039,000     China Shipping Container Lines Co Ltd Class H *     26,744,824  

         
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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            China — continued        
      5,060,000     China State Construction International Holdings Ltd     4,659,399  
      102,544,000     China Telecom Corp Ltd Class H     60,853,899  
      10,815,000     China Ting Group Holding Ltd     1,645,340  
      24,847,900     China Unicom Hong Kong Ltd     41,672,982  
      1,005,000     China Unicom Hong Kong Ltd ADR     16,773,450  
      8,684,400     Citic Pacific Ltd     22,826,302  
      28,533,000     CNOOC Ltd     65,072,427  
      41,520     CNOOC Ltd ADR     9,480,677  
      31,093,000     Evergrande Real Estate Group Ltd     14,734,513  
      20,485,000     GOME Electrical Appliances Holdings Ltd *     7,011,975  
      13,009,000     Haitian International Holdings Ltd     14,574,082  
      1,038,500     Hengan International Group Co Ltd     7,745,703  
      11,983,000     Hopson Development Holdings Ltd *     13,321,122  
      208,550,000     Industrial and Commercial Bank of China Ltd Class H     160,674,091  
      20,614,900     Jiangxi Copper Co Ltd Class H     65,494,278  
      2,185,200     Lianhua Supermarket Holdings Co Ltd     9,837,452  
      5,436,500     Longfor Properties Co Ltd     7,693,332  
      4,986,700     Minth Group Ltd     7,572,481  
      15,870,000     NVC Lighting Holdings Ltd     7,799,380  
      6,356,172     Peace Mark Holdings Ltd * (a) (b)     —  
      341,700     Perfect World Co Ltd ADR *     7,250,874  
      65,100     PetroChina Co Ltd ADR     8,875,083  
      70,384,301     PetroChina Co Ltd Class H     96,046,338  
      6,311,789     Pico Far East Holdings Ltd     1,276,176  
      3,846,000     Ping An Insurance (Group) Co of China Ltd Class H     39,690,824  
      5,121,600     Weichai Power Co Ltd Class H     34,351,391  
      5,278,000     Yangzijiang Shipbuilding Holdings Ltd     7,457,763  
      51,800     Yanzhou Coal Mining Co Ltd ADR     1,554,000  
      2,839,400     Yanzhou Coal Mining Co Ltd Class H     8,530,192  
      3,802,500     Zhongsheng Group Holdings Ltd *     7,308,835  
                     
            Total China     1,646,836,646  
                     

         
    See accompanying notes to the financial statements.   5

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Czech Republic — 1.4%        
      2,002,300     CEZ AS     91,897,880  
      182,400     Komercni Banka AS     43,897,920  
      220,730     Pegas Nonwovens SA     5,478,276  
      11,510     Philip Morris CR AS     5,989,903  
      910,860     Telefonica 02 Czech Republic AS     20,647,504  
      437,486     Unipetrol AS *     4,336,382  
                     
            Total Czech Republic     172,247,865  
                     
                     
            Egypt — 1.1%        
      1,021,536     Alexandria Mineral Oils Co (a)     7,522,708  
      9,183,853     Arab Cotton Ginning (a)     4,245,057  
      7,993,954     Commercial International Bank (a)     44,033,917  
      2,110,052     EFG-Hermes Holding SAE (a)     8,304,815  
      298,778     Egyptian Co for Mobile Services (a)     5,972,923  
      750,341     ElSwedy Electric Co * (a)     5,150,618  
      535,564     Orascom Construction Industries (a)     17,818,981  
      14,778,308     Orascom Telecom Holding SAE * (a)     8,163,065  
      3,879,429     Sidi Kerir Petrochemicals Co (a)     7,463,834  
      6,143,593     South Valley Cement (a)     3,494,684  
      8,037,411     Talaat Moustafa Group * (a)     7,876,417  
      7,296,800     Telecom Egypt (a)     18,344,187  
                     
            Total Egypt     138,391,206  
                     
                     
            Hungary — 1.8%        
      77,192     Egis Gyogyszergyar Nyrt     8,084,630  
      6,069,116     Magyar Telekom Nyrt     17,021,492  
      207,378     MOL Hungarian Oil and Gas Nyrt *     25,109,721  
      4,593,366     OTP Bank Nyrt *     137,535,444  
      169,058     Richter Gedeon Nyrt     32,659,547  
                     
            Total Hungary     220,410,834  
                     
                     
            India — 2.1%        
      2,682,855     Aurobindo Pharma Ltd     10,211,822  
      4,224,009     Bharti Airtel Ltd     31,006,458  

         
6
  See accompanying notes to the financial statements.    

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            India — continued        
      200,873     Emami Ltd     1,574,147  
      354,759     Grasim Industries Ltd (a)     18,458,572  
      3,327,976     Hindalco Industries Ltd     14,921,749  
      2,356,649     HSIL Ltd     6,552,525  
      1,273,886     Indraprastha Gas Ltd     8,175,863  
      139,537     Infosys Technologies Ltd     9,279,245  
      555,590     Infosys Technologies Ltd Sponsored ADR     37,057,853  
      1,213,294     Ipca Laboratories Ltd     7,304,594  
      1,062,452     Kiri Dyes & Chemicals Ltd (c)     7,389,591  
      743,381     Mphasis Ltd     7,153,243  
      1,768,272     Reliance Communications Ltd     3,369,304  
      1,352,472     Rural Electrification Corp Ltd (a)     7,066,268  
      3,936,030     Sesa Goa Ltd     23,071,956  
      3,667,677     Shree Renuka Sugars Ltd     5,780,220  
      1,773,770     Tata Consultancy Services Ltd     43,628,054  
      596,277     Torrent Pharmaceuticals Ltd     6,996,644  
      1,233,033     Welspun Gujarat Stahl Ltd     5,218,640  
                     
            Total India     254,216,748  
                     
                     
            Indonesia — 2.8%        
      28,163,500     Adaro Energy Tbk PT     7,878,508  
      17,357,500     Astra International Tbk PT     103,022,915  
      49,712,500     Bakrie Telecom Tbk PT *     1,673,809  
      54,574,702     Bank Mandiri Tbk PT     36,066,999  
      56,604,000     Bank Negara Indonesia (Persero) Tbk PT     22,893,949  
      71,793,000     Bank Pembangunan Daerah Jawa Barat Dan Banten Tbk PT *     9,312,356  
      49,323,500     Bank Rakyat Tbk PT     26,435,328  
      9,547,500     Charoen Pokphand Indonesia Tbk PT     1,645,094  
      40,343,000     Delta Dunia Makmur Tbk PT *     5,344,207  
      14,699,000     Gajah Tunggal Tbk PT     3,442,161  
      34,436,000     Global Mediacom Tbk PT     3,480,514  
      15,917,000     Indah Kiat Pulp and Paper Corp Tbk PT *     2,793,785  
      5,935,500     Indosat Tbk PT     3,430,921  
      27,840,500     Kalbe Farma Tbk PT     9,281,960  

         
    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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Indonesia — continued        
      9,385,100     Matahari Putra Prima Tbk PT     1,880,338  
      39,446,000     Media Nusantara Citra Tbk PT     4,967,630  
      3,473,000     Tambang Batubara Bukit Asam Tbk PT     7,928,952  
      58,285,500     Telekomunikasi Indonesia Tbk PT     49,447,119  
      346,300     Telekomunikasi Indonesia Tbk PT Sponsored ADR     11,839,997  
      7,954,100     United Tractors Tbk PT     21,046,156  
                     
            Total Indonesia     333,812,698  
                     
                     
            Kazakhstan — 0.2%        
      830,764     KazMunaiGas Exploration Production GDR     19,107,572  
                     
                     
            Malaysia — 1.0%        
      23,513,600     AirAsia Berhad *     19,460,219  
      8,328,800     AMMB Holdings Berhad     16,999,647  
      3,226,800     Genting Berhad     10,586,452  
      2,205,800     HAP Seng Consolidated Berhad     4,679,941  
      5,637,584     Kulim Malaysia Berhad     6,396,234  
      15,743,003     Lion Industries Corp Berhad     9,891,787  
      4,148,700     Petronas Chemicals Group Berhad *     8,568,041  
      16,140,900     Scomi Group Berhad *     1,755,879  
      3,667,333     Shangri-La Hotels Berhad     3,180,995  
      5,057,100     Sime Darby Berhad     14,863,541  
      182,169     Sunway City Berhad     245,430  
      2,525,700     Tenaga Nasional Berhad     5,224,501  
      6,370,400     UMW Holdings Berhad     15,226,492  
      19,349,600     Zelan Berhad *     3,153,493  
                     
            Total Malaysia     120,232,652  
                     
                     
            Mexico — 1.8%        
      10,638,900     America Movil SAB de CV Class L     30,529,973  
      1,632,200     America Movil SAB de CV Class L ADR     93,720,924  
      3,240,400     Grupo Financiero Banorte SAB de CV Class O     14,699,273  

         
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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Mexico — continued        
      2,464,100     Grupo Televisa SA-Series CPO *     11,668,463  
      3,429,420     Telefonos de Mexico SAB de CV Class L Sponsored ADR     62,038,208  
                     
            Total Mexico     212,656,841  
                     
                     
            Morocco — 0.2%        
      59,664     Attijariwafa Bank     3,085,817  
      840,975     Maroc Telecom     16,537,566  
                     
            Total Morocco     19,623,383  
                     
                     
            Philippines — 0.6%        
      6,527,400     Aboitiz Power Corp     4,345,488  
      100,938,500     Lopez Holding Corp *     11,163,742  
      5,763,412     Metropolitan Bank & Trust Co     7,627,252  
      462,060     Philippine Long Distance Telephone Co     22,855,308  
      68,500     Philippine Long Distance Telephone Co Sponsored ADR     3,403,080  
      2,321,144     Robinsons Land Corp     626,460  
      2,654,760     Security Bank Corp     4,752,904  
      11,834,700     Universal Robina Corp     9,112,293  
      74,352,800     Vista Land & Lifescapes Inc     3,946,892  
                     
            Total Philippines     67,833,419  
                     
                     
            Poland — 1.3%        
      690,546     Asseco Poland SA     12,336,112  
      270,213     Grupa Lotos SA *     3,794,793  
      2,265,067     KGHM Polska Miedz SA     138,798,078  
                     
            Total Poland     154,928,983  
                     
                     
            Russia — 13.8%        
      932,752     Dalsvyaz OJSC Class S (a)     4,522,399  
      785,389     Gazprom Neft Class S (a)     4,245,556  
      20,277,549     Gazprom OAO Sponsored ADR     596,846,944  
      5,334,985     Lukoil OAO ADR     377,766,831  
      1,130,516     Magnit OJSC Sponsored GDR (Registered Shares)     32,129,986  
      1,174,110     Magnitogorsk Iron & Steel Works Sponsored GDR (Registered Shares)     17,001,611  

         
    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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Russia — continued        
      245,770     Mechel Sponsored ADR     7,478,781  
      4,119,891     MMC Norilsk Nickel JSC ADR (a)     99,465,708  
      1,440,260     Mobile Telesystems Sponsored ADR     27,120,096  
      802,892     NovaTek OAO Sponsored GDR (Registered Shares)     104,400,279  
      205,972     Novolipetsk Steel GDR (Registered Shares)     9,464,513  
      1,570,649     OAO Tatneft Sponsored GDR (Registered Shares)     65,656,755  
      13,917,690     Rosneft OJSC GDR (Registered Shares)     131,470,063  
      135,000     Russia Petroleum Class S * (a)     1,350  
      4,931,316     Sberbank Class S (a)     17,429,140  
      147,486     Sistema JSFC Sponsored GDR (Registered Shares)     3,765,453  
      12,194,229     Surgutneftegas OJSC Class S (a)     14,043,313  
      7,649,274     Surgutneftegas Sponsored ADR     89,011,259  
      1,702,606     TNK-BP Holding Class S (a)     5,146,539  
      18,287,800     United Co RUSAL Plc *     30,997,337  
      478,205     Uralkali Sponsored GDR     19,544,238  
      118,817,768     Uralsvyazinform Class S (a)     6,390,851  
                     
            Total Russia     1,663,899,002  
                     
                     
            South Africa — 3.2%        
      588,565     Absa Group Ltd     10,962,803  
      1,127,653     African Bank Investments Ltd     5,794,556  
      318,998     AngloGold Ashanti Ltd     15,570,174  
      889,459     ArcelorMittal South Africa Ltd     11,516,450  
      5,183,866     Aveng Ltd     27,240,470  
      1,277,976     Barloworld Ltd     13,276,041  
      9,729,329     Blue Label Telecoms Ltd     8,004,152  
      284,582     Exxaro Resources Ltd     6,231,812  
      7,304,488     FirstRand Ltd     20,545,529  
      713,465     Foschini Ltd     8,053,560  
      437,178     Gold Fields Ltd     7,831,017  
      5,472,718     Grindrod Ltd     12,069,975  
      4,607,900     Growthpoint Properties Ltd     11,255,406  
      497,378     Impala Platinum Holdings Ltd     14,686,665  
      3,410,663     MTN Group Ltd     60,236,427  

         
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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            South Africa — continued        
      2,129,516     Sanlam Ltd     8,266,417  
      1,529,282     Sasol Ltd     83,740,514  
      119,400     Sasol Ltd Sponsored ADR     6,551,478  
      3,212,700     Telkom South Africa Ltd     16,356,210  
      758,497     Vodacom Group (Pty) Ltd     8,166,673  
      1,836,872     Wilson Bayly Holmes-Ovcon Ltd     30,568,720  
                     
            Total South Africa     386,925,049  
                     
                     
            South Korea — 17.4%        
      105,639     Boryung Pharmaceutical Co Ltd     2,375,171  
      2,040,765     Busan Bank     24,619,004  
      1,179,312     Daegu Bank     15,977,154  
      1,155,510     Daehan Pulp Co Ltd *     4,723,594  
      145,299     Daelim Industrial Co Ltd     12,678,072  
      9,715     Daesun Shipbuilding & Engineering Co Ltd *     193,875  
      234,050     Daewoo Securities Co Ltd     4,810,856  
      293,600     Dongbu Insurance Co Ltd     11,968,812  
      202,240     Dongkuk Steel Mill Co Ltd     6,422,040  
      30,549     Doosan Corp     3,399,076  
      289,126     Edu Ark Co Ltd * (a)     —  
      552,472     Finetex EnE Inc *     1,176,265  
      672,321     GS Holdings Corp     41,662,182  
      2,035,829     Hana Financial Group Inc     81,552,411  
      1,042,929     Hanwha Chemical Corp     31,226,894  
      1,013,738     Hanwha Corp     40,116,475  
      133,365     Honam Petrochemical Corp     36,958,094  
      1,180,580     Hynix Semiconductor Inc *     29,720,296  
      266,576     Hyosung Corp     18,503,952  
      320,594     Hyundai Development Co     8,724,179  
      388,113     Hyundai Heavy Industries Co Ltd     150,242,376  
      162,222     Hyundai Mipo Dockyard     24,962,340  
      351,856     Hyundai Mobis     82,069,566  
      421,565     Hyundai Motor Co     66,741,777  
      276,992     Hyundai Steel Co     31,956,959  

         
    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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            South Korea — continued        
      3,487,842     In the F Co Ltd * (c)     2,759,050  
      2,199,624     Industrial Bank of Korea     33,115,828  
      1,741,815     Kangwon Land Inc     38,765,396  
      1,295,828     KB Financial Group Inc     63,497,743  
      31,140     KCC Corp     8,677,957  
      844,213     Kia Motors Corp     43,146,331  
      113,270     Kolon Corp     2,753,620  
      275,540     Kolon Industries Inc     19,187,256  
      2,859,158     Korea Exchange Bank     23,233,865  
      569,041     Korea Investment Holdings Co Ltd     21,198,473  
      230,661     Korea Kumho Petrochemical Co Ltd     27,561,909  
      110,469     Korea Zinc Co Ltd     32,901,200  
      404,190     KP Chemical Corp     8,213,302  
      498,586     KT Corp     17,367,439  
      393,600     KT Corp Sponsored ADR *     7,789,344  
      748,164     KT&G Corp     38,012,225  
      457,720     Kumho Tire Co Inc *     6,554,669  
      57,729     LG Chem Ltd     19,100,766  
      558,452     LG Corp     38,484,484  
      2,616,772     LG Uplus Corp     13,181,295  
      68,026     Lotte Shopping Co Ltd     23,719,791  
      292,189     Maeil Dairy Industry     3,979,825  
      106,839     OCI Company Ltd     35,364,738  
      353,918     POSCO     144,944,126  
      90,800     POSCO ADR     9,359,664  
      587,530     Pumyang Construction Co Ltd * (c)     2,075,101  
      90,824     S-Oil Corp     8,669,202  
      119,733     Samsung C&T Corp     7,165,736  
      73,688     Samsung Fire & Marine Insurance Co Ltd     14,632,560  
      650,496     Samsung Heavy Industries Co Ltd     21,055,248  
      226,109     Samsung Life Insurance Co Ltd     21,418,151  
      371,571     Samsung Securities Co Ltd     25,051,052  
      385,062     Samsung Electronics Co Ltd     315,808,632  
      188,181     SFA Engineering Corp     10,927,748  

         
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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            South Korea — continued        
      1,715,390     Shinhan Financial Group Co Ltd     71,907,827  
      103,718     SK Energy Co Ltd     16,218,965  
      358,270     SK Telecom Co Ltd     51,777,394  
      922,200     SK Telecom Co Ltd ADR     16,221,498  
      368,038     SK Holdings Co Ltd     43,378,362  
      212,690     STX Shipping Co Ltd     5,186,898  
      2,659,030     Woori Finance Holdings Co Ltd     32,373,894  
      724,490     Woori Investment & Securities Co Ltd     13,183,092  
      715,252     Youngone Corp     7,637,812  
                     
            Total South Korea     2,100,340,888  
                     
                     
            Sri Lanka — 0.1%        
      20,990,000     Anilana Hotel & Properties (d)     1,894,404  
      3,538,430     Hatton National Bank Plc     12,712,561  
      173,368     Lanka Walltile Ltd     280,958  
                     
            Total Sri Lanka     14,887,923  
                     
                     
            Taiwan — 10.8%        
      3,151,156     Asustek Computer Inc     28,749,952  
      4,760,229     Catcher Technology Co Ltd     20,040,234  
      32,415,000     China Petrochemical Development Corp. *     37,203,411  
      46,749,621     China Steel Corp     52,948,558  
      44,805,660     Chinatrust Financial Holding Co Ltd     35,312,764  
      35,684,329     Chunghwa Telecom Co Ltd     106,083,335  
      378,300     Chunghwa Telecom Co Ltd ADR     11,163,633  
      44,233,311     Compal Electronics Inc     52,129,205  
      5,641,219     Compeq Manufacturing Co Ltd *     3,409,447  
      2,917,000     Delta Electronics Inc     12,195,525  
      12,603,163     E.Sun Financial Holdings Co Ltd     7,771,980  
      5,819,000     Eva Airways Corp *     5,283,290  
      21,763,462     Evergreen Marine Corp *     19,295,081  
      17,511,126     Far Eastone Telecommunications Co Ltd     25,073,643  
      19,919,016     First Financial Holding Co Ltd     16,288,130  
      2,253,415     Formosa Petrochemical Corp     6,822,028  

         
    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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Taiwan — continued        
      2,046,223     Gintech Energy Corp     6,500,791  
      13,095,920     Hon Hai Precision Industry Co Ltd     48,593,362  
      4,020,751     HTC Corp     145,231,935  
      433,000     Largan Precision Co Ltd     11,903,369  
      11,527,223     Lite-On Technology Corp     14,459,449  
      31,121,000     Macronix International Co Ltd     22,746,345  
      39,551,000     Mega Financial Holding Co Ltd     28,708,900  
      31,050,697     Nan Ya Plastics Corp     90,106,954  
      10,253,871     Nanya Technology Corp *     5,525,705  
      6,350,297     Novatek Microelectronics Corp Ltd     19,575,616  
      7,421,438     Pegatron Corp *     8,837,438  
      5,996,681     Powertech Technology Inc     21,038,356  
      26,339,290     Quanta Computer Inc     51,824,553  
      39,801,355     Taishin Financial Holding Co Ltd *     20,776,476  
      10,492,547     Taiwan Glass Industrial Corp     12,821,565  
      7,930,640     Taiwan Mobile Co Ltd     17,764,690  
      437,500     Taiwan Semiconductor Manufacturing Co Ltd Sponsored ADR     5,376,875  
      85,012,697     Taiwan Semiconductor Manufacturing Co Ltd     202,563,337  
      602,844     TPK Holding Co Ltd *     16,577,349  
      48,326,000     United Microelectronics Corp     25,141,509  
      4,755,000     Wintek Corp *     9,249,325  
      21,110,687     Wistron Corp     37,860,991  
      4,969,708     WPG Holdings Co Ltd     8,619,741  
      23,439,530     Yang Ming Marine Transport *     19,922,435  
      2,678,419     Yungtay Engineering Co Ltd     3,529,970  
                     
            Total Taiwan     1,295,027,252  
                     
                     
            Thailand — 3.7%        
      11,089,390     Advanced Info Service Pcl (Foreign Registered) (a)     28,942,385  
      58,520,940     Asian Property Development Pcl (Foreign Registered) (a)     11,951,203  
      62,000     Bangkok Bank Pcl (Foreign Registered) (a)     325,718  
      4,496,610     Bangkok Bank Pcl NVDR     23,623,039  
      10,595,586     Bangkok Dusit Medical Service Pcl (Foreign Registered) (a)     17,131,030  
      330,440     Banpu Pcl (Foreign Registered) (a)     7,896,195  

         
14
  See accompanying notes to the financial statements.    

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Thailand — continued        
      1,210,800     Electricity Generating Pcl NVDR     3,944,564  
      139,045,400     G Steel Pcl (Foreign Reigstered) * (a)     3,204,352  
      1,478,800     Glow Energy Pcl (Foreign Registered) (a)     1,970,927  
      3,218,236     Home Product Center Pcl (Foreign Registered) (a)     901,889  
      3,766,120     Kasikornbank Pcl (Foreign Registered) (a)     14,968,536  
      32,861,600     Krung Thai Bank Pcl (Foreign Registered) (a)     17,701,036  
      3,290,800     PTT Chemical Pcl (Foreign Registered) (a)     15,615,354  
      1,499,200     PTT Exploration & Production Pcl (Foreign Registered) (a)     8,988,861  
      12,322,370     PTT Pcl (Foreign Registered) (a)     136,838,687  
      13,608,150     Robinson Department Store Pcl (Foreign Registered) (a)     9,710,424  
      12,625,000     Saha Pathana International Holding Pcl (Foreign Registered) (a)     7,693,545  
      3,661,928     Siam Cement Pcl (Foreign Registered) (a)     39,921,994  
      714,400     Siam Cement Pcl NVDR     7,317,728  
      3,924,880     Siam Commercial Bank Pcl (Foreign Registered) (a)     13,139,537  
      20,948,200     Sri Trang Agro-Industry Pcl (Foreign Registered) (a)     19,173,981  
      3,108,050     Star Block Co Ltd (Foreign Registered) * (a) (b) (c)     —  
      13,112,920     Thai Oil Pcl (Foreign Registered) (a)     31,924,753  
      2,965,200     Thai Tap Water Supply Pcl (Foreign Registered) (a)     601,283  
      9,432,200     Thanachart Capital Pcl (Foreign Registered) (a)     9,218,481  
      9,943,988     Thoresen Thai Agencies Pcl (Foreign Registered) * (a)     5,954,592  
      14,133,900     TPI Polene Pcl (Foreign Registered) (a)     5,123,255  
                     
            Total Thailand     443,783,349  
                     
                     
            Turkey — 3.2%        
      2,110,367     Akbank TAS     9,879,299  
      5,017,739     Aksigorta AS     5,998,953  
      2,917,306     Asya Katilim Bankasi AS     4,707,179  
      8,845,323     Dogus Otomotiv Servis ve Ticaret AS *     29,736,529  
      4,844,601     Haci Omer Sabanci Holding AS     19,458,493  
      42,150     Medya Holding AS (a) (b)     —  
      356,218     Tekfen Holding AS     1,193,944  
      1,452,977     Tupras-Turkiye Petrol Rafineriler AS     36,276,420  
      14,310,425     Turk Telekomunikasyon AS     63,891,556  
      9,277,946     Turkcell Iletisim Hizmet AS     52,212,433  

         
    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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Turkey — continued        
      15,826,542     Turkiye Garanti Bankasi     70,132,889  
      10,242,200     Turkiye IS Bankasi Class C     31,920,820  
      5,326,645     Turkiye Vakiflar Bankasi TAO Class D     12,896,888  
      2,605,739     Turkiye Halk Bankasi AS     18,976,697  
      12,335,269     Yapi ve Kredi Bankasi AS *     34,413,267  
                     
            Total Turkey     391,695,367  
                     
                     
            United States — 0.2%        
      2,643,564     MedQuist Holdings, Inc. * (c) (d)     24,003,561  
                     
                     
            TOTAL COMMON STOCKS (COST $9,290,004,420)     10,484,729,191  
                     
                     
            PREFERRED STOCKS — 8.6%        
                     
            Brazil — 6.3%        
      1,763,400     AES Tiete SA 10.36%     24,376,848  
      74,875     Banco Bradesco SA *     1,454,028  
      4,518,696     Banco Bradesco SA 0.55%     86,908,446  
      1,872,000     Banco do Estado do Rio Grande do Sul SA Class B 1.79%     20,477,461  
      895,500     Bradespar SA 0.08%     23,240,588  
      2,311,300     Brasil Telecom SA 4.38%     17,434,076  
      595,400     Braskem SA, Class A *     7,257,310  
      1,459,800     Centrais Eletricas Brasileiras SA Class B 5.69%     26,549,794  
      585,180     Cia Energetica de Minas Gerais 2.44%     9,724,863  
      288,400     Companhia de Transmissao de Energia Eletrica Paulista 1.45%     8,836,778  
      183,600     Companhia Paranaense de Energia Class B 0.18%     4,612,622  
      233,800     Eletropaulo Metropolitana SA 5.93%     4,510,747  
      1,007,000     Gerdau SA 1.12%     13,309,250  
      7,480,241     Itausa-Investimentos Itau SA 0.47%     54,579,953  
      1,464,900     Metalurgica Gerdau SA 1.42%     22,750,941  
      2,380,104     Petroleo Brasileiro SA (Petrobras) 0.46%     40,884,344  
      3,771,060     Petroleo Brasileiro SA Sponsored ADR 0.42%     132,628,180  
      718,500     Tele Norte Leste Participacoes ADR 4.29%     11,345,115  
      385,600     Ultrapar Participacoes SA 2.66%     6,069,758  
      4,408,800     Usinas Siderrurgicas de Minas Gerais SA Class A 2.69%     50,346,917  

         
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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Brazil — continued        
      870,708     Vale SA Class A 2.62%     25,956,916  
      5,594,210     Vale SA Sponsored ADR 2.53%     167,658,474  
                     
            Total Brazil     760,913,409  
                     
                     
            Chile — 0.1%        
      610,080     Embotelladora Andina SA A Shares 2.08%     2,288,521  
      1,408,034     Embotelladora Andina SA B Shares 1.86%     6,243,463  
                     
            Total Chile     8,531,984  
                     
                     
            Russia — 1.2%        
      101,841,264     Surgutneftegaz Class S 5.91% (a)     60,306,323  
      12,100     Surgutneftegaz Sponsored ADR 8.95%     71,511  
      3,208,560     TNK BP Holding 19.92%     8,599,903  
      52,027     Transneft 0.57% (a)     73,724,245  
                     
            Total Russia     142,701,982  
                     
                     
            South Korea — 1.0%        
      234,913     Hyundai Motor Co 2.55%     13,124,003  
      191,465     Samsung Electronics Co Ltd (Non Voting) 1.66%     103,332,186  
                     
            Total South Korea     116,456,189  
                     
                     
            TOTAL PREFERRED STOCKS (COST $883,512,663)     1,028,603,564  
                     
                     
            INVESTMENT FUNDS — 1.4%        
                     
            China — 0.1%        
      245,374     Martin Currie China A Share Fund Ltd Class S * (a) (d)     2,156,590  
      25,045     Martin Currie China A Share Fund Ltd Class S * (a) (d)     1,556,571  
      199,464     Martin Currie China A Share Fund Ltd Class B * (a) (d)     9,058,474  
                     
            Total China     12,771,635  
                     
                     
            India — 0.1%        
      12,146     Fire Capital Mauritius Private Fund * (a) (d)     9,957,950  
      1,371,900     TDA India Technology Fund II LP * (a) (d)     1,666,366  
                     
            Total India     11,624,316  
                     

         
    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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Poland — 0.0%        
      1,749,150     The Emerging European Fund II LP * (a) (d)     252,509  
                     
                     
            Russia — 0.1%        
      9,500,000     NCH Eagle Fund LP * (a) (d)     9,571,269  
      2,769     Steep Rock Russia Fund LP * (a) (d)     744,040  
                     
            Total Russia     10,315,309  
                     
                     
            Ukraine — 0.0%        
      16,667     Societe Generale Thalmann Ukraine Fund * (a) (d) (e)     4,000  
                     
                     
            United States — 1.1%        
      2,859,940     Vanguard Emerging Markets ETF     132,729,816  
                     
                     
            TOTAL INVESTMENT FUNDS (COST $161,439,056)     167,697,585  
                     
                     
            DEBT OBLIGATIONS — 0.3%        
                     
            Poland — 0.2%        
PLN
    100,677,888     TRI Media Secured Term Note, 4.56% , due 02/07/13 (a) (d)     27,902,437  
                     
                     
            United States — 0.1%        
      7,722,858     U.S. Treasury Inflation Indexed Note, 2.00% , due 04/15/12 (f)     8,066,162  
                     
                     
            TOTAL DEBT OBLIGATIONS (COST $37,510,040)     35,968,599  
                     
                     
            RIGHTS AND WARRANTS — 0.0%        
                     
            Malaysia — 0.0%        
      704,698     Kulim Malaysia Berhad, Warrants, Expires 02/27/16 *     —  
      3,887,206     Sunway City Warrants, Expires 10/04/17 *     1,312,513  
                     
            Total Malaysia     1,312,513  
                     
                     
            TOTAL RIGHTS AND WARRANTS (COST $166,440)     1,312,513  
                     

         
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, 2011
 
                     
 
 		           
Share /
 		           
Par Value     Description   Value ($)  
                     
            MUTUAL FUNDS — 0.9%        
                     
            United States — 0.9%        
            Affiliated Issuers        
      8,064     GMO Special Purpose Holding Fund (g)     4,032  
      4,400,288     GMO U.S. Treasury Fund     110,007,196  
                     
                     
            TOTAL MUTUAL FUNDS (COST $110,007,196)     110,011,228  
                     
                     
            SHORT-TERM INVESTMENTS — 1.2%        
                     
            Time Deposits — 1.2%        
EUR
    9     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.12%, due 03/01/11     12  
HKD
    4,892,624     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.01%, due 03/01/11     628,226  
USD
    73,265     Citibank (New York) Time Deposit, 0.03%, due 03/01/11     73,265  
USD
    65,000,000     Commerzbank (Grand Cayman) Time Deposit, 0.16%, due 03/01/11     65,000,000  
USD
    16,700,000     HSBC Bank (USA) Time Deposit, 0.16%, due 03/01/11     16,700,000  
USD
    65,000,000     Societe Generale (Grand Cayman) Time Deposit, 0.15%, due 03/01/11     65,000,000  
                     
            Total Time Deposits     147,401,503  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $147,401,503)     147,401,503  
                     
                     
            TOTAL INVESTMENTS — 99.5%
(Cost $10,630,041,318) 		    11,975,724,183  
            Other Assets and Liabilities (net) — 0.5%     60,716,711  
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 12,036,440,894  
                     

         
    See accompanying notes to the financial statements.   19

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Additional information on each restricted security is as follows:
 
                             
            Value as a
 		   
            Percentage
 		   
    Acquisition
 		  Acquisition
 		  of Fund’s
 		  Value as of
Issuer Description   Date   Cost   Net Assets   February 28, 2011
 
Anilana Hotel & Properties   2/10/11   $ 1,890,309       0.02%     $ 1,894,404  
Fire Capital Mauritius Private Fund **   9/06/06-10/26/09     12,180,554       0.08%       9,957,950  
Martin Currie China A Share Fund Ltd Class B   1/20/06     2,159,084       0.08%       9,058,474  
Martin Currie China A Share Fund Ltd Class S   10/14/08     —       0.01%       1,556,571  
Martin Currie China A Share Fund Ltd Class S   04/23/10     2,453,738       0.02%       2,156,590  
MedQuist Holdings, Inc.    2/4/11     17,013,436       0.20%       24,003,561  
NCH Eagle Fund LP   1/08/03     9,500,000       0.08%       9,571,269  
Societe Generale Thalmann Ukraine Fund   7/15/97     199,943       0.00%       4,000  
Steep Rock Russia Fund LP   12/22/06-5/13/09     2,250,000       0.01%       744,040  
TDA India Technology Fund II LP   2/23/00-3/23/04     787,800       0.01%       1,666,366  
TRI Media Secured Term Note   8/7/09     29,505,475       0.23%       27,902,437  
The Emerging European Fund II LP   12/05/97-6/24/02     471,720       0.00%       252,509  
                             
                        $ 88,768,171  
                             
 
** GMO Emerging Markets Fund has committed an additional $7,724,246 to this investment.

         
20
  See accompanying notes to the financial statements.    

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
A summary of outstanding financial instruments at February 28, 2011 is as follows:
 
Swap Agreements
 
Total Return Swaps
 
                                 
Notional
 		  Expiration
 		              Market
Amount   Date   Counterparty   Fund Pays   Fund Receives   Value
 
  19,617,382     USD   5/9/2011   Morgan Stanley
Capital Services Inc. 		  Depreciation of
Total Return on
Asustek 		  Appreciation of
Total Return on
Asustek Computer Inc. 		  $ 267,780  
                                 
                    Computer Inc. +
(Daily Fed Funds
Rate -2.50%) 		  Premiums to (Pay) Receive   $ —  
                                 
 
As of February 28, 2011, for futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
 
Notes to Schedule of Investments:
 
144A - Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors.
ADR - American Depositary Receipt
CPO - Ordinary Participation Certificate (Certificado de Participacion Ordinares), representing a bundle of shares of the multiple series of one issuer that trade together as a unit.
ETF - Exchange-Traded Fund
Foreign Registered - Shares issued to foreign investors in markets that have foreign ownership limits.
GDR - Global Depository Receipt
NVDR - Non-Voting Depository Receipt
* Non-income producing security.
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
(b) Bankrupt issuer.
(c) Affiliated company (Note 10).
(d) Private placement securities are restricted as to resale.

         
    See accompanying notes to the financial statements.   21

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
(e) The security is currently in full liquidation.
(f) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
(g) Underlying investment represents interests in defaulted claims.
 
Currency Abbreviations:
 
EUR - Euro
HKD - Hong Kong Dollar
PLN - Polish Zloty
USD - United States Dollar

         
22
  See accompanying notes to the financial statements.    

 

GMO Emerging Markets Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $10,483,433,024) (Note 2)
  $ 11,829,485,652  
Investments in affiliated issuers, at value (cost $146,608,294) (Notes 2 and 10)
    146,238,531  
Foreign currency, at value (cost $30,291,177) (Note 2)
    30,296,700  
Receivable for investments sold
    87,515,585  
Receivable for Fund shares sold
    4,426,304  
Dividends and interest receivable
    34,248,584  
Foreign taxes receivable
    5,780,404  
Receivable for open swap contracts (Note 4)
    267,780  
Receivable for collateral on open swap contracts (Note 4)
    790,000  
Receivable for expenses reimbursed by Manager (Note 5)
    255,261  
Miscellaneous receivable
    445,090  
         
Total assets
    12,139,749,891  
         
         
Liabilities:
       
Payable for investments purchased
    84,648,723  
Payable for Fund shares repurchased
    4,171,296  
Payable to affiliate for (Note 5):
       
Management fee
    6,939,574  
Shareholder service fee
    984,663  
Trustees and Trust Officers or agents unaffiliated with the Manager
    29,858  
Payable for foreign currency purchased
    138,030  
Miscellaneous payable
    1,451,453  
Accrued expenses
    4,945,400  
         
Total liabilities
    103,308,997  
         
Net assets
  $ 12,036,440,894  
         

         
    See accompanying notes to the financial statements.   23

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011 — (Continued)
 
         
Net assets consist of:
       
Paid-in capital
  $ 10,041,508,070  
Distributions in excess of net investment income
    (8,314,382 )
Accumulated net realized gain
    656,383,346  
Net unrealized appreciation
    1,346,863,860  
         
    $ 12,036,440,894  
         
Net assets attributable to:
       
Class II shares
  $ 2,304,696,958  
         
Class III shares
  $ 1,445,915,987  
         
Class IV shares
  $ 1,649,840,135  
         
Class V shares
  $ 835,560,814  
         
Class VI shares
  $ 5,800,427,000  
         
Shares outstanding:
       
Class II
    159,351,532  
         
Class III
    99,758,428  
         
Class IV
    114,559,852  
         
Class V
    58,085,148  
         
Class VI
    402,528,677  
         
Net asset value per share:
       
Class II
  $ 14.46  
         
Class III
  $ 14.49  
         
Class IV
  $ 14.40  
         
Class V
  $ 14.39  
         
Class VI
  $ 14.41  
         

         
24
  See accompanying notes to the financial statements.    

 

GMO Emerging Markets Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends (net of withholding taxes of $31,990,661)
  $ 237,254,118  
Interest
    2,523,558  
Dividends from affiliated issuers
    80,886  
         
Total investment income
    239,858,562  
         
Expenses:
       
Management fee (Note 5)
    81,259,560  
Shareholder service fee – Class II (Note 5)
    5,153,968  
Shareholder service fee – Class III (Note 5)
    1,790,242  
Shareholder service fee – Class IV (Note 5)
    1,736,187  
Shareholder service fee – Class V (Note 5)
    545,499  
Shareholder service fee – Class VI (Note 5)
    2,751,719  
Custodian and fund accounting agent fees
    13,006,514  
Legal fees
    513,434  
Trustees fees and related expenses (Note 5)
    238,050  
Audit and tax fees
    215,540  
Transfer agent fees
    80,889  
Registration fees
    63,808  
Miscellaneous
    186,449  
         
Total expenses
    107,541,859  
Fees and expenses reimbursed by Manager (Note 5)
    (3,372,015 )
Expense reductions (Note 2)
    (2,857 )
         
Net expenses
    104,166,987  
         
Net investment income (loss)
    135,691,575  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in unaffiliated issuers (net of foreign capital gains tax of $14,969,194)
    2,204,644,406  
Investments in affiliated issuers
    407,542  
Realized gains distributions from affiliated issuers (Note 10)
    1,560  
Swap contracts
    5,910,778  
Foreign currency, forward contracts and foreign currency related transactions (net of foreign capital gains tax of $1,000,465) (Note 2)
    (18,596,508 )
         
Net realized gain (loss)
    2,192,367,778  
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in unaffiliated issuers (Note 2)
    110,155,913  
Investments in affiliated issuers
    13,847,551  
Swap contracts
    267,780  
Foreign currency, forward contracts and foreign currency related transactions
    569,905  
         
Net unrealized gain (loss)
    124,841,149  
         
Net realized and unrealized gain (loss)
    2,317,208,927  
         
Net increase (decrease) in net assets resulting from operations
  $ 2,452,900,502  
         

         
    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
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 135,691,575     $ 127,258,284  
Net realized gain (loss)
    2,192,367,778       699,055,720  
Change in net unrealized appreciation (depreciation)
    124,841,149       4,125,061,699  
                 
                 
Net increase (decrease) in net assets from operations
    2,452,900,502       4,951,375,703  
                 
Distributions to shareholders from:
               
Net investment income
               
Class II
    (26,310,221 )     (37,234,403 )
Class III
    (16,761,896 )     (21,375,610 )
Class IV
    (20,469,482 )     (31,476,321 )
Class V
    (11,647,728 )     (12,760,543 )
Class VI
    (73,874,148 )     (64,099,216 )
                 
Total distributions from net investment income
    (149,063,475 )     (166,946,093 )
                 
Net share transactions (Note 9):
               
Class II
    (480,292,752 )     2,023,770,932  
Class III
    183,233,985       (2,964,843,372 )
Class IV
    (356,113,252 )     (767,368,513 )
Class V
    353,353,208       (1,016,877,255 )
Class VI
    893,190,677       1,371,471,389  
                 
Increase (decrease) in net assets resulting from net share transactions
    593,371,866       (1,353,846,819 )
                 
Purchase premiums and redemption fees (Notes 2 and 9):
               
Class II
    3,097,265       3,293,784  
Class III
    258,900       3,740,402  
Class IV
    1,255,191       2,859,788  
Class V
    288,218       679,896  
Class VI
    9,777,792       6,691,676  
                 
Increase in net assets resulting from purchase premiums and redemption fees
    14,677,366       17,265,546  
                 
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees
    608,049,232       (1,336,581,273 )
                 
                 
Total increase (decrease) in net assets
    2,911,886,259       3,447,848,337  
                 
Net assets:
               
Beginning of period
    9,124,554,635       5,676,706,298  
                 
End of period (including distributions in excess of net investment income of $8,314,382 and $5,731,435, respectively)
  $ 12,036,440,894     $ 9,124,554,635  
                 

         
26
  See accompanying notes to the financial statements.    

 

GMO Emerging Markets Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class II share outstanding throughout the period)
 
                 
        Period from
        August 12,
        2009
    Year Ended
 		  through
    February 28,
 		  February 28,
    2011   2010
Net asset value, beginning of period
  $ 11.63     $ 10.62  
                 
Income (loss) from investment operations:
               
Net investment income (loss)†
    0.16       0.02  
Net realized and unrealized gain (loss)
    2.84       1.18  
                 
Total from investment operations
    3.00       1.20  
                 
Less distributions to shareholders:
               
From net investment income
    (0.17 )     (0.19 )
                 
Total distributions
    (0.17 )     (0.19 )
                 
                 
Net asset value, end of period
  $ 14.46     $ 11.63  
                 
                 
Total Return(a)
    25.77 %     11.21 %**
                 
Ratios/Supplemental Data:
               
Net assets, end of period (000’s)
  $ 2,304,697     $ 2,265,637  
Net expenses to average daily net assets(b)
    1.07 %(c)     1.07 %*
Net investment income (loss) to average daily net assets
    1.21 %     0.30 %*
Portfolio turnover rate
    114 %     126 %**††
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.03 %     0.03 %*
Purchase premiums and redemption fees consisted of the following per share amounts (Note 2):†
  $ 0.02     $ 0.02  
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the six months ended August 31, 2009.
* Annualized.
** Not annualized.

         
    See accompanying notes to the financial statements.   27

 

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,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 11.66     $ 6.30     $ 20.48     $ 20.67     $ 22.49  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.16       0.21       0.23       0.25       0.41  
Net realized and unrealized gain (loss)
    2.85       5.34       (10.65 )     5.94       3.00  
                                         
                                         
Total from investment operations
    3.01       5.55       (10.42 )     6.19       3.41  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.18 )     (0.19 )     (0.13 )     (0.31 )     (0.54 )
From net realized gains
    —       —       (3.63 )     (6.07 )     (4.69 )
                                         
                                         
Total distributions
    (0.18 )     (0.19 )     (3.76 )     (6.38 )     (5.23 )
                                         
                                         
Net asset value, end of period
  $ 14.49     $ 11.66     $ 6.30     $ 20.48     $ 20.67  
                                         
                                         
Total Return(a)
    25.80 %     88.05 %     (58.62 )%     28.38 %     17.05 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 1,445,916     $ 1,014,490     $ 2,309,057     $ 3,402,343     $ 4,276,782  
Net expenses to average daily net assets
    1.02 %(b)(c)     1.06 %(b)     1.10 %(d)     1.09 %(d)     1.07 %
Net investment income (loss) to average daily net assets
    1.17 %     2.25 %     1.77 %     1.04 %     1.87 %
Portfolio turnover rate
    114 %     126 %     99 %     60 %     44 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.01 %     0.01 %     0.01 %     0.00 %(e)     0.01 %
Purchase premiums and redemption fees consisted of the following per share amounts (Note 2):†
  $ 0.00 (f)   $ 0.02     $ 0.04     $ 0.04     $ 0.02  
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(d) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
(e) Ratio is less than 0.01%.
(f) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.

         
28
  See accompanying notes to the financial statements.    

 

GMO Emerging Markets Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class IV share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 11.58     $ 6.27     $ 20.40     $ 20.62     $ 22.45  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.17       0.16       0.25       0.23       0.42  
Net realized and unrealized gain (loss)
    2.83       5.36       (10.62 )     5.95       2.99  
                                         
                                         
Total from investment operations
    3.00       5.52       (10.37 )     6.18       3.41  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.18 )     (0.21 )     (0.13 )     (0.33 )     (0.55 )
From net realized gains
    —       —       (3.63 )     (6.07 )     (4.69 )
                                         
                                         
Total distributions
    (0.18 )     (0.21 )     (3.76 )     (6.40 )     (5.24 )
                                         
                                         
Net asset value, end of period
  $ 14.40     $ 11.58     $ 6.27     $ 20.40     $ 20.62  
                                         
                                         
Total Return(a)
    25.93 %     88.05 %     (58.59 )%     28.38 %     17.10 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 1,649,840     $ 1,639,961     $ 1,345,811     $ 3,021,319     $ 2,599,002  
Net expenses to average daily net assets
    0.97 %(b)(d)     0.99 %(b)     1.06 %(c)     1.05 %(c)     1.03 %
Net investment income (loss) to average daily net assets
    1.29 %     1.54 %     1.86 %     0.98 %     1.94 %
Portfolio turnover rate
    114 %     126 %     99 %     60 %     44 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.01 %     0.01 %     0.01 %     0.00 %(e)     0.01 %
Purchase premiums and redemption fees consisted of the following per share amounts (Note 2):†
  $ 0.01     $ 0.02     $ 0.04     $ 0.02     $ 0.02  
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(e) Ratio is less than 0.01%.
† Calculated using average shares outstanding throughout the period.

         
    See accompanying notes to the financial statements.   29

 

GMO Emerging Markets Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class V share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 11.57     $ 6.26     $ 20.39     $ 20.61     $ 22.44  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.15       0.20       0.22       0.23       0.43  
Net realized and unrealized gain (loss)
    2.86       5.32       (10.58 )     5.96       2.98  
                                         
                                         
Total from investment operations
    3.01       5.52       (10.36 )     6.19       3.41  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.19 )     (0.21 )     (0.14 )     (0.34 )     (0.55 )
From net realized gains
    —       —       (3.63 )     (6.07 )     (4.69 )
                                         
                                         
Total distributions
    (0.19 )     (0.21 )     (3.77 )     (6.41 )     (5.24 )
                                         
                                         
Net asset value, end of period
  $ 14.39     $ 11.57     $ 6.26     $ 20.39     $ 20.61  
                                         
                                         
Total Return(a)
    26.03 %     88.21 %     (58.59 )%     28.43 %     17.11 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 835,561     $ 367,836     $ 795,586     $ 1,190,887     $ 679,988  
Net expenses to average daily net assets
    0.93 %(b)(d)     0.98 %(b)     1.03 %(c)     1.03 %(c)     1.01 %
Net investment income (loss) to average daily net assets
    1.15 %     2.12 %     1.81 %     0.98 %     1.97 %
Portfolio turnover rate
    114 %     126 %     99 %     60 %     44 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.04 %     0.03 %     0.01 %     0.00 %(e)     0.01 %
Purchase premiums and redemption fees consisted of the following per share amounts (Note 2):†
  $ 0.01     $ 0.01     $ 0.05     $ 0.05     $ 0.03  
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(e) Ratio is less than 0.01%.
† Calculated using average shares outstanding throughout the period.

         
30
  See accompanying notes to the financial statements.    

 

GMO Emerging Markets Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class VI share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 11.59     $ 6.27     $ 20.42     $ 20.63     $ 22.45  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.17       0.13       0.23       0.25       0.42  
Net realized and unrealized gain (loss)
    2.84       5.41       (10.61 )     5.95       3.01  
                                         
                                         
Total from investment operations
    3.01       5.54       (10.38 )     6.20       3.43  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.19 )     (0.22 )     (0.14 )     (0.34 )     (0.56 )
From net realized gains
    —       —       (3.63 )     (6.07 )     (4.69 )
                                         
                                         
Total distributions
    (0.19 )     (0.22 )     (3.77 )     (6.41 )     (5.25 )
                                         
                                         
Net asset value, end of period
  $ 14.41     $ 11.59     $ 6.27     $ 20.42     $ 20.63  
                                         
                                         
Total Return(a)
    26.01 %     88.34 %     (58.61 )%     28.49 %     17.20 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 5,800,427     $ 3,836,631     $ 1,226,252     $ 5,902,406     $ 5,116,565  
Net expenses to average daily net assets
    0.89 %(b)(d)     0.91 %(b)     1.00 %(c)     1.00 %(c)     0.98 %
Net investment income (loss) to average daily net assets
    1.29 %     1.18 %     1.83 %     1.05 %     1.93 %
Portfolio turnover rate
    114 %     126 %     99 %     60 %     44 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.04 %     0.04 %     0.01 %     0.00 %(e)     0.01 %
Purchase premiums and redemption fees consisted of the following per share amounts (Note 2):†
  $ 0.03     $ 0.02     $ 0.07     $ 0.03     $ 0.02  
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(e) Ratio is less than 0.01%.
† Calculated using average shares outstanding throughout the period.

         
    See accompanying notes to the financial statements.   31

 

GMO Emerging Markets Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO Emerging Markets Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund seeks total return in excess of that of its benchmark, the S&P/IFCI Composite Index. The Fund typically makes equity investments directly and indirectly (e.g., through the GMO funds in which the Fund invests, collectively referred to as the “underlying funds,” or derivatives) in companies tied economically to emerging markets. “Emerging markets” include all markets that are not considered to be “developed markets” by the MSCI World Index or MSCI EAFE Index. The term “equity investments” refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts. Under normal circumstances, the Fund invests directly and indirectly at least 80% of its assets in investments tied economically to emerging markets.
 
The Manager uses proprietary quantitative techniques and fundamental analysis to evaluate and select countries, sectors, and equity investments. The Manager evaluates and selects countries, sectors, and equity investments based on value, momentum, and quality models (that take into account various factors including, but not limited to, historical profitability, earnings stability and low debt to equity ratios), and also evaluates countries and sectors based on macroeconomic models (that take into account various factors including, but not limited to, currency valuations, inflation, and current account deficits). The models used by the Manager may change over time.
 
In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the-counter (“OTC”) derivatives (including options, futures, warrants, swap contracts, and reverse repurchase agreements) and exchange-traded funds (“ETFs”) (i) as a substitute for direct investment; (ii) in an attempt to reduce investment exposures (which may result in a reduction below zero); (iii) to effect transactions intended as substitutes for securities lending; and/or (iv) in an attempt to adjust elements of its investment and/or foreign currency exposure. The Fund’s foreign currency exposure may differ from the currency exposure represented by its equity investments. In addition, the Fund may take active overweighted and underweighted positions in particular currencies relative to its benchmark. In addition, the Fund may lend its portfolio securities.
 
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.

         
32
       

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Throughout the year ended February 28, 2011, the Fund had five classes of shares outstanding: Class II, Class III, Class IV, Class V and Class VI. Each class of shares bears a different shareholder service fee.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the OTC market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of February 28, 2011, the total value of securities held directly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 7.7% of net assets. The Fund classifies such securities (as defined below) as Level 3. Additionally, because many foreign equity securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices adjusted by a factor supplied by a third party vendor using that vendor’s proprietary models. As of February 28, 2011, 71.4% of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified as using Level 2 inputs in the table below. See Note 4 for a further discussion on valuation of derivative financial instruments.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation

         
        33

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include: fair value adjustments applied to local closing prices of foreign securities and derivatives due to market events that have occurred since the local market close but before the Fund’s daily NAV calculation.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund utilized a number of fair value techniques on Level 3 investments, including the following: Certain of the Fund’s securities in Thailand and India were valued at the local price as adjusted by applying a premium or discount when the holdings exceed foreign ownership limitations. The Fund values certain Russian securities using a price from a secondary exchange. The Fund valued various third-party investment funds based on valuations provided by fund sponsors and adjusted the values for liquidity considerations as well as the timing of the receipt of information. The Fund valued certain equity securities based on the last traded exchange price adjusted for the movement in a securities index. The Fund valued Egyptian securities based on movements in related GDRs as no observable market prices were available on February 28, 2011, due to the continued suspension of trading and political unrest in Egypt. The Fund deemed certain bankrupt and delisted securities to be near worthless.

         
34
       

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Common Stocks
                               
Argentina
  $ 1,949,177     $ —     $ —     $ 1,949,177  
Brazil
    758,328,075       —       —       758,328,075  
Chile
    43,590,701       —       —       43,590,701  
China
    76,022,865       1,570,813,781       0 *     1,646,836,646  
Czech Republic
    —       172,247,865       —       172,247,865  
Egypt
    —       —       138,391,206       138,391,206  
Hungary
    —       220,410,834       —       220,410,834  
India
    37,057,853       191,634,055       25,524,840       254,216,748  
Indonesia
    11,839,997       321,972,701       —       333,812,698  
Kazakhstan
    —       19,107,572       —       19,107,572  
Malaysia
    8,568,041       111,664,611       —       120,232,652  
Mexico
    212,656,841       —       —       212,656,841  
Morocco
    —       19,623,383       —       19,623,383  
Philippines
    3,403,080       64,430,339       —       67,833,419  
Poland
    —       154,928,983       —       154,928,983  
Russia
    34,598,877       1,478,055,269       151,244,856       1,663,899,002  
South Africa
    6,551,478       380,373,571       —       386,925,049  
South Korea
    33,370,506       2,066,970,382       0 *     2,100,340,888  
Sri Lanka
    —       12,993,519       1,894,404       14,887,923  
Taiwan
    33,117,857       1,261,909,395       —       1,295,027,252  
Thailand
    —       34,885,331       408,898,018       443,783,349  
Turkey
    —       391,695,367       0 *     391,695,367  
United States
    24,003,561       —       —       24,003,561  
                                 
TOTAL COMMON STOCKS
    1,285,058,909       8,473,716,958       725,953,324       10,484,729,191  
                                 
Preferred Stocks
                               
Brazil
    760,913,409       —       —       760,913,409  
Chile
    8,531,984       —       —       8,531,984  
Russia
    8,599,903       71,511       134,030,568       142,701,982  
South Korea
    —       116,456,189       —       116,456,189  
                                 
TOTAL PREFERRED STOCKS
    778,045,296       116,527,700       134,030,568       1,028,603,564  
                                 

         
        35

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
  
  ASSET VALUATION INPUTS — continued
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Investment Funds
                               
China
  $ —     $ —     $ 12,771,635     $ 12,771,635  
India
    —       —       11,624,316       11,624,316  
Poland
    —       —       252,509       252,509  
Russia
    —       —       10,315,309       10,315,309  
Ukraine
    —       —       4,000       4,000  
United States
    132,729,816       —       —       132,729,816  
                                 
TOTAL INVESTMENT FUNDS
    132,729,816       —       34,967,769       167,697,585  
                                 
Debt Obligations
                               
Poland
    —       —       27,902,437       27,902,437  
United States
    —       8,066,162       —       8,066,162  
                                 
TOTAL DEBT OBLIGATIONS
    —       8,066,162       27,902,437       35,968,599  
                                 
Rights and Warrants
                               
Malaysia
    —       1,312,513       —       1,312,513  
                                 
TOTAL RIGHTS AND WARRANTS
    —       1,312,513       —       1,312,513  
                                 
Mutual Funds
                               
United States
    110,007,196       4,032       —       110,011,228  
                                 
TOTAL MUTUAL FUNDS
    110,007,196       4,032       —       110,011,228  
                                 
Short-Term Investments
    147,401,503       —       —       147,401,503  
                                 
Total Investments
    2,453,242,720       8,599,627,365       922,854,098       11,975,724,183  
                                 
Derivatives **
                               
Swap Agreements
                               
Equity Risk
    —       267,780       —       267,780  
                                 
Total Derivatives
    —       267,780       —       267,780  
                                 
Total
  $ 2,453,242,720     $ 8,599,895,145     $ 922,854,098     $ 11,975,991,963  
                                 
 
            * Represents the investment in securities that have no value at February 28, 2011.
 
The risks referenced above are not intended to be inclusive of all risks. Please see the Investment Risks and Derivative Financial Instruments sections below for a further discussion of risks.

         
36
       

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
            ** Because the tables above are based on market values or unrealized appreciation (depreciation) rather than the notional amounts of derivatives, the uncertainties surrounding the valuation inputs for a derivative are likely to be more significant to the Fund’s net asset value than the uncertainties surrounding inputs for a non-derivative security with the same market value.
 
The underlying funds held at period end are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements. The aggregate net values of the Fund’s investments (both direct and indirect) in securities using Level 3 inputs were 7.7% of total net assets.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
The following is a reconciliation of investments and derivatives, if any, in which significant unobservable inputs (Level 3) were used in determining value:
 
                                                                                   
 
                                      Net
    
                                      Change in
    
                                      Unrealized
    
                                      Appreciation
    
                                      (Depreciation)
    
                                      from
    
                                      Investments
    
    Balances
              Change in
           Balances
     Still Held
    
    as of
   Net
  Accrued
   Total
   Unrealized
           as of
     as of
   
    February 28,
   Purchases/
   Discounts/
   Realized
   Appreciation
   Transfer into
   Transfer out of
   February 28,
     February
    
    2010   (Sales)   Premiums   Gain/(Loss)   (Depreciation)   Level 3*   Level 3*   2011     28, 2011    
Common Stocks
                                                                                 
China
  $ 8,189     $ —     $   —     $ —     $ (8,189 )   $ —     $ —     $ —       $ —          
Egypt
    —       41,633,049       —       (153,184 )     (48,830,608 )     145,741,949 **     —       138,391,206         (48,830,608 )        
India
    —       (45,425,714 )     —       36,531,185       (4,821,843 )     39,241,212 **     —       25,524,840         728,714          
Russia
    —       (178,394,869 )     —       84,101,179       5,864,973       239,673,573 **     —       151,244,856         5,864,973          
South Korea
    —       (1,097,976 )     —       1,097,976       —       —       —       —         —          
Sri Lanka
    —       1,890,309       —       —       4,095       —       —       1,894,404         4,095          
Thailand
    493,561,819       (302,147,800 )     —       198,691,640       49,733,126       —       (30,940,767 )**     408,898,018         46,262,785          
Turkey
    273       —       —       —       (273 )     —       —       —         —          
                                                                                   
Total Common Stock
    493,570,281       (483,543,001 )     —       320,268,796       1,941,281       424,656,734       (30,940,767 )     725,953,324         4,029,959          
                                                                                   
Preferred Stocks
                                                                                 
Russia
    —       27,835,850       —       (8,178,221 )     43,974,326       70,398,613       —       134,030,568         43,974,325          
                                                                                   
Total Preferred Stocks
    —       27,835,850       —       (8,178,221 )     43,974,326       70,398,613       —       134,030,568         43,974,325          
                                                                                   
Private Equity Securities
                                                                                 
Russia
    2,610       —       —       (1,673,054 )     1,670,444       —       —       —         —          
                                                                                   
Total Private Equity Securities
    2,610       —       —       (1,673,054 )     1,670,444       —       —       —         —          
                                                                                   

         
        37

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
                                                                                   
 
                                      Net
    
                                      Change in
    
                                      Unrealized
    
                                      Appreciation
    
                                      (Depreciation)
    
                                      from
    
                                      Investments
    
    Balances
              Change in
           Balances
     Still Held
    
    as of
   Net
  Accrued
   Total
   Unrealized
           as of
     as of
   
    February 28,
   Purchases/
   Discounts/
   Realized
   Appreciation
   Transfer into
   Transfer out of
   February 28,
     February
    
    2010   (Sales)   Premiums   Gain/(Loss)   (Depreciation)   Level 3*   Level 3*   2011     28, 2011    
Investment Fund
                                                                                 
China
  $ 11,891,906     $ —     $ —     $ 1,901,894     $ (1,022,165 )   $ —     $ —     $ 12,771,635       $ (1,022,165 )        
India
    10,728,924       (94,191 )     —       31,742       957,841       —       —       11,624,316         900,974          
Poland
    393,802       —       —       —       (141,293 )     —       —       252,509         (141,293 )        
Russia
    9,266,776       —       —       —       1,048,533       —       —       10,315,309         1,048,532          
Ukraine
    4,000       —       —       —       —       —       —       4,000         —          
                                                                                   
Total Investment Fund
    32,285,408       (94,191 )     —       1,933,636       842,916       —       —       34,967,769         786,048          
                                                                                   
Debt Obligations
                                                                                 
Poland
    26,303,383       —       —       —       1,599,054       —       —       27,902,437         1,599,053          
                                                                                   
Total
  $ 552,161,682     $ (455,801,342 )   $ —     $ 312,351,157     $ 50,028,021     $ 495,055,347     $ (30,940,767 )   $ 922,854,098       $ 50,389,385          
                                                                                   
 
            * The Fund accounts for investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the value at the end of the period.
            ** Financial assets transferred between Level 2 and Level 3 were due to a change in observable and/or unobservable inputs.
 
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 pm. Income and expenses denominated in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country’s tax treaty with the United

         
38
       

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
States. The foreign withholding rates applicable to a Fund’s investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if paid by the shareholders of the Fund.
 
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Taxes related to capital gains realized during the year ended February 28, 2011, if any, are reflected as part of net realized gain (loss) in the Statement of Operations. Changes in tax liabilities related to capital gain taxes on unrealized investment gains, if any, are reflected as part of change in net unrealized appreciation (depreciation) in the Statement of Operations. Transaction-based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to losses on wash sale transactions, partnership interest tax allocation, redemption in-kind transactions, foreign currency transactions, capital loss carryforwards, derivative contract transactions and passive foreign investment company transactions, adjustment for securities exchange, and differing treatment of foreign capital gains tax.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 149,063,475     $ 166,946,093  
                 
Total distributions
  $ 149,063,475     $ 166,946,093  
                 

         
        39

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 987,006  
Undistributed net long-term capital gain
  $ 868,374,435  
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 10,849,781,616     $ 1,258,533,026     $ (132,590,459 )   $ 1,125,942,567      
 
For the year ended February 28, 2011, the Fund had net realized gains attributed to redemption in-kind transactions of $20,517,990.
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on

         
40
       

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, 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 among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class’s operations. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (Note 5).
 
Brown Brothers Harriman & Co. (“BBH”) serves as the Fund’s custodian and fund accounting agent. State Street Bank and Trust Company (“State Street”) serves as the Fund’s transfer agent. BBH’s and State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
Purchases and redemptions of Fund shares
For the year ended February 28, 2011, the premium on cash purchases and fee on cash redemptions of Fund shares were each 0.80% of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by the Fund and are allocated pro rate among the classes to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. Such fees are recorded as a component of the Fund’s net share transactions. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of the Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund’s shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund’s shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder’s securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash

         
        41

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
component. However, when a substantial portion of the Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
 
Other matters
GMO Special Purpose Holding Fund (“SPHF”), an investment of the Fund, has litigation pending against various entities related to the 2002 fraud and related default of securities previously held by SPHF. The outcome of the lawsuits against the remaining defendants is not known and any potential recoveries are not reflected in the net asset value of SPHF. For the year ended February 28, 2011, the Fund received no distributions from SPHF in connection with the defaulted securities or the related litigation.
 
In addition, Indian regulators have alleged that the Fund violated certain conditions under which it was granted permission to operate in India and have restricted the Fund’s locally held assets pending resolution of the dispute. Although these locally held assets remain the property of the Fund, a portion of the assets are not permitted to be withdrawn from the Fund’s local custodial account located in India. The amount of restricted assets is small relative to the size of the Fund, representing approximately 0.1% of the Fund’s net assets as of February 28, 2011. The effect of this claim on the value of the restricted assets, and all matters relating to the Fund’s response to these allegations are subject to the supervision and control of the Trust’s Board of Trustees. The Fund’s costs in respect of this matter are being borne by the Fund.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund’s investments.
 
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund may be subject to foreign taxes on capital gains or other income payable on foreign securities, on

         
42
       

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund’s investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund’s investments in companies tied economically to emerging markets, the economies of which tend to be more volatile than the economies of developed markets.
 
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund’s foreign currency holdings and investments denominated in foreign currencies.
 
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind. These risks are particularly pronounced for the Fund because it typically makes equity investments in companies tied economically to emerging markets and may make investments in companies with smaller market capitalizations. In addition, the Fund may buy securities that are less liquid than those in its benchmark.
 
• Market Disruption and Geopolitical Risk — Geopolitical events may disrupt securities markets and adversely affect global economies and markets. Those events as well as other changes in foreign and domestic economic and political conditions could adversely affect the value of the Fund’s investments.
 
• Smaller Company Risk — The securities of small- and mid-cap companies often are less widely held and trade less frequently and in lesser quantities, and their market prices often fluctuate more, than the securities of companies with larger market capitalizations. The Fund may buy securities that have smaller market capitalizations than those in its benchmark.
 
Other principal risks of an investment in the Fund include Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund’s securities); Focused Investment Risk (increased risk from the Fund’s focus on investments in a limited number of countries and geographic regions); Market Risk — Value Securities (risk that the price of the Fund’s investments will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Fund of Funds Risk (risk that the underlying funds (including exchange-traded funds (ETFs)) in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities lending);

         
        43

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by “equitizing” its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically “sell” a portion of the Fund’s portfolio) in combination with a long futures contract on another index (to synthetically “buy” exposure to that index). The Funds also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives

         
44
       

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral (e.g., foreign currency forwards; see “Currency Risk” above), that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is

         
        45

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
 
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund’s forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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.
 
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. The Fund had no forward currency contracts outstanding at the end of the period.
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because regular trading on many foreign exchanges closes prior to the close of the NYSE, closing prices for foreign

         
46
       

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
futures contracts on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures contracts using fair value prices, which are based on local closing prices adjusted by a factor and supplied by a third party vendor using that vendor’s proprietary models. The Fund had no futures contracts outstanding at the end of the period.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.

         
        47

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.

         
48
       

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the year ended February 28, 2011, the Fund used swap agreements to as a substitute for direct investment in securities. Swap agreements outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. During the year ended February 28, 2011, the Fund held

         
        49

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
rights and warrants received as a result of a corporate action. Rights and warrants held by the Fund at the end of the period are listed in the Fund’s Schedule of Investments.
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of
February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Assets:
                                               
Investments, at value (rights and warrants)
  $      —     $      —     $      —     $ 1,312,513     $      —     $ 1,312,513  
Unrealized appreciation on swap agreements
    —       —       —       267,780       —       267,780  
                                                 
Total
  $ —     $ —     $ —     $ 1,580,293     $ —     $ 1,580,293  
                                                 
 
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Investments (rights and warrants)
  $      —     $      —     $      —     $ 7,782,613     $      —     $ 7,782,613  
Swap agreements
    —       —       —       5,910,778       —       5,910,778  
                                                 
Total
  $ —     $ —     $ —     $ 13,693,391     $ —     $ 13,693,391  
                                                 
Change in Unrealized Appreciation (Depreciation) on:
                                               
Investments (rights and warrants)
  $ —     $ —     $ —     $ 876,539     $ —     $ 876,539  
Swap agreements
    —       —       —       267,780       —       267,780  
                                                 
Total
  $ —     $ —     $ —     $ 1,144,319     $ —     $ 1,144,319  
                                                 
 
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.

         
50
       

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The volume of derivative activity, based on absolute values (rights and warrants), or notional amounts (swap agreements) outstanding at each month-end, was as follows for the year ended February 28, 2011:
 
                 
    Rights and
   Swap
    Warrants   agreements
 
Average amount outstanding
  $ 1,595,439     $ 18,321,052  
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. Effective August 12, 2009, that fee is paid monthly at the annual rate of 0.75% of average daily net assets. Before August 12, 2009, the management fee was paid monthly at the annual rate of 0.81% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets of each class at the annual rate of 0.22% for Class II shares, 0.15% for Class III shares, 0.105% for Class IV shares, 0.085% for Class V shares, and 0.055% for Class VI shares.
 
The Manager has contractually agreed to reimburse each class of the Fund to the extent the class’s total annual operating expenses exceed the following amounts of the class’s average daily net assets: 0.95% for Class II shares, 0.90% for Class III shares, 0.85% for Class IV shares, 0.80% for Class V shares, and 0.77% for Class VI shares (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes) and custodial fees. In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund’s Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund’s Expense Reimbursement Amount. These contractual expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.

         
        51

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $238,050 and $77,345, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
             
Indirect Net
 		           
Expenses
            
(excluding
     Indirect
      
shareholder service
     Shareholder
     Total Indirect
fees)     Service Fees     Expenses
< 0.001%
    0.000%     < 0.001%
             
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 were as follows:
 
                 
    Purchases   Sales
 
U.S. Government securities
  $ 55,480,811     $ 56,747,089  
Investments (non-U.S. Government securities)
    12,572,833,030       11,989,525,442  
 
Proceeds from sales of securities for in-kind transactions for the year ended February 28, 2011 were $107,511,332.
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, the Fund had no shareholders who individually held more than 10% of the Fund’s outstanding shares.

         
52
       

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, 0.64% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and 30.67% of the Fund’s shares were held by accounts for which the Manager had investment discretion.
 
9. Share transactions
 
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
 
                                 
    Year Ended
   Period from August 12, 2009
    February 28, 2011   (commencement of operations) through February 28, 2010
Class II:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    35,785,616     $ 476,705,333       252,778,370     $ 2,699,405,042  
Shares issued to shareholders in reinvestment of distributions
    1,426,944       20,374,803       2,489,345       29,548,519  
Shares repurchased
    (72,671,205 )     (977,372,888 )     (60,457,538 )     (705,182,629 )
Purchase premiums
    —       1,395,146       —       289,458  
Redemption fees
    —       1,702,119       —       3,004,326  
                                 
Net increase (decrease)
    (35,458,645 )   $ (477,195,487 )     194,810,177     $ 2,027,064,716  
                                 
                                 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    36,731,569     $ 521,804,130       60,688,925     $ 590,315,924  
Shares issued to shareholders in reinvestment of distributions
    857,777       12,272,522       1,384,598       14,933,224  
Shares repurchased
    (24,854,916 )     (350,842,667 )     (341,523,485 )     (3,570,092,520 )
Purchase premiums
    —       57,963       —       1,656,883  
Redemption fees
    —       200,937       —       2,083,519  
                                 
Net increase (decrease)
    12,734,430     $ 183,492,885       (279,449,962 )   $ (2,961,102,970 )
                                 
                                 
                                 

         
        53

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class IV:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    39,797,973     $ 552,034,103       83,789,833     $ 867,186,010  
Shares issued to shareholders in reinvestment of distributions
    1,038,348       14,761,210       2,234,977       25,614,765  
Shares repurchased
    (67,863,219 )     (922,908,565 )     (159,036,163 )     (1,660,169,288 )
Purchase premiums
    —       833,956       —       317,143  
Redemption fees
    —       421,235       —       2,542,645  
                                 
Net increase (decrease)
    (27,026,898 )   $ (354,858,061 )     (73,011,353 )   $ (764,508,725 )
                                 
                                 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class V:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    33,763,871     $ 458,262,225       43,715,876     $ 473,416,600  
Shares issued to shareholders in reinvestment of distributions
    574,362       8,154,351       631,224       6,813,766  
Shares repurchased
    (8,048,145 )     (113,063,368 )     (139,632,569 )     (1,497,107,621 )
Purchase premiums
    —       216,469       —       150,000  
Redemption fees
    —       71,749       —       529,896  
                                 
Net increase (decrease)
    26,290,088     $ 353,641,426       (95,285,469 )   $ (1,016,197,359 )
                                 
                                 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class VI:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    119,556,582     $ 1,519,036,550       201,482,771     $ 2,104,241,700  
Shares issued to shareholders in reinvestment of distributions
    5,127,052       72,881,409       5,401,782       62,732,344  
Shares repurchased
    (53,233,430 )     (698,727,282 )     (71,261,109 )     (795,502,655 )
Purchase premium fees
    —       7,210,034       —       661,775  
Redemption fees
    —       2,567,758       —       6,029,901  
                                 
Net increase (decrease)
    71,450,204     $ 902,968,469       135,623,444     $ 1,378,163,065  
                                 

         
54
       

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
            * During the year ended February 28, 2010, the following transfers occurred from Class III to Class II:
 
                 
Date of Transfer
  Shares Transferred   Amount Transferred
 
8/12/2009
    239,139,436     $ 2,539,820,792  
10/30/2009
    (14,087,438 )   $ (161,582,914 )
2/5/2010
    (3,803,675 )   $ (42,905,458 )
2/24/2010
    3,378,830     $ 39,329,578  
 
10. Investments in affiliated companies and other funds of the Trust
 
An affiliated company is a company in which the Fund has or had ownership of at least 5% of the voting securities. A summary of the Fund’s transactions involving companies that are or were affiliates during the year ended February 28, 2011 is set forth below:
 
                                         
    Value,
               Value,
    beginning of
       Sales
   Dividend
   end of
Affiliate   period   Purchases   Proceeds   Income   period
 
Banco de Chile *
  $ —     $ 9,425,877     $ 8,136,679     $ —     $ 1,633,270  
Boryung Pharmaceutical Co Ltd *
    4,294,391       —       3,995,288       44,401       2,375,171  
CBAY Systems Holdings Ltd *
    12,969,456       —       17,013,436       —       —  
Daehan Pulp Co Ltd *
    5,372,382       —       652,584       —       4,723,594  
Dimerco Express Taiwan Corp *
    3,800,682       —       4,148,450       —       —  
In the F Co Ltd
    2,849,143       609,899       92,045       —       2,759,050  
Kiri Dyes & Chemicals Ltd
    —       12,393,232       —       —       7,389,591  
MedQuist Holdings, Inc. 
    —       17,013,436       —       —       24,003,561  
Pumyang Construction
    4,299,731       —       1,327,595       —       2,075,101  
Star Block Co Ltd (Foreign Registered)
    940       —       —       —       —  
                                         
Totals
  $ 33,586,725     $ 39,442,444     $ 35,366,077     $ 44,401     $ 44,959,338  
                                         
 
            * No longer an affiliate as of February 28, 2011.
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                 
    Value,
               Distributions
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   period
 
GMO Special Purpose Holding Fund
  $ 4,435     $ —     $ —     $ —     $ —     $ 4,032  
GMO U.S. Treasury Fund
    74,488,836       590,531,668       555,013,308       36,485       1,560       110,007,196  
                                                 
Totals
  $ 74,493,271     $ 590,531,668     $ 555,013,308     $ 36,485     $ 1,560     $ 110,011,228  
                                                 

         
        55

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Emerging Markets Fund:
 
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 (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
56
       

 

GMO Emerging Markets Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
        57

 

 
GMO Emerging Markets Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class II
                               
                                 
1) Actual
    1.08 %   $ 1,000.00     $ 1,183.40     $ 5.85  
2) Hypothetical
    1.08 %   $ 1,000.00     $ 1,019.44     $ 5.41  
                                 
Class III
                               
                                 
1) Actual
    1.03 %   $ 1,000.00     $ 1,183.90     $ 5.58  
2) Hypothetical
    1.03 %   $ 1,000.00     $ 1,019.69     $ 5.16  
                                 
Class IV
                               
                                 
1) Actual
    0.98 %   $ 1,000.00     $ 1,184.60     $ 5.31  
2) Hypothetical
    0.98 %   $ 1,000.00     $ 1,019.93     $ 4.91  
                                 
Class V
                               
                                 
1) Actual
    0.93 %   $ 1,000.00     $ 1,185.50     $ 5.04  
2) Hypothetical
    0.93 %   $ 1,000.00     $ 1,020.18     $ 4.66  
                                 
Class VI
                               
                                 
1) Actual
    0.90 %   $ 1,000.00     $ 1,185.40     $ 4.88  
2) Hypothetical
    0.90 %   $ 1,000.00     $ 1,020.33     $ 4.51  
                                 
 
            * Expenses are calculated using each Class’s annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
58
       

 

GMO Emerging Markets Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
During the year ended February 28, 2011, the Fund paid foreign taxes of $46,989,090 and recognized foreign source income of $269,325,665.
 
For taxable, non-corporate shareholders, 90.71% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 represents qualified dividend income subject to the 15% rate category.

         
        59

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
60        

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee; President and Chief
Executive Officer of the Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
        61

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
62
       

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        63

 

 
GMO Flexible Equities Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a private placement memorandum, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The private placement memorandum can be obtained by calling 1-617-346-7646 (collect).
 

 

GMO Flexible Equities Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Quantitative Equity Division while the overall management and strategic direction of the Fund’s portfolio is the responsibility of the Asset Allocation Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
The Class III shares of GMO Flexible Equities Fund returned +7.1% for the fiscal year ended February 28, 2011, as compared with +21.7% for the Fund’s benchmark, the MSCI World Index.
 
Two factors contributed to the Fund’s underperformance. The Fund invested exclusively in Japan equity markets, which underperformed the MSCI World Index by almost 4%. In addition, the Fund hedged the currency, which further detracted from performance due to the rise in the Japanese yen. The currency hedge detracted roughly 9% from performance versus the unhedged index.
 
Because some of the securities and instruments held directly or indirectly by the Fund had positive fair value adjustments during the fiscal year (and the performance of indices are not fair valued), the Fund’s absolute and relative performance is better than it otherwise would have been.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO Flexible Equities Fund Class III Shares and the MSCI World Index
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited. Performance for classes may vary due to different fees.
 
 
MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.

 

GMO Flexible Equities Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary   % of Total Net Assets  
Common Stocks
    96.5 %
Short-Term Investments
    3.6  
Forward Currency Contracts
    (0.1 )
Swap Agreements
    (3.9 )
Other
    3.9  
         
      100.0 %
         
 
         
Country Summary *   % of Investments  
Japan
    100.0 %
         
      100.0 %
         
 
         
Industry Group Summary   % of Equity Investments**  
Telecommunication Services
    18.1 %
Retailing
    15.7  
Capital Goods
    9.6  
Food & Staples Retailing
    9.4  
Banks
    9.2  
Real Estate
    6.6  
Materials
    3.9  
Utilities
    3.6  
Food, Beverage & Tobacco
    3.3  
Health Care Equipment & Services
    3.0  
Diversified Financials
    2.9  
Software & Services
    2.7  
Commercial & Professional Services
    2.6  
Consumer Durables & Apparel
    2.3  
Consumer Services
    2.0  
Transportation
    1.9  
Insurance
    1.6  
Household & Personal Products
    0.9  
Media
    0.7  
         
      100.0 %
         
* The table above shows country exposure in the Fund. The table excludes short-term investments. The table includes exposure through derivative financial instruments, if any. The table excludes exposure through forward currency contracts. The table takes into account the market value of securities and options and the notional amounts of swap agreements and other derivative financial instruments, if any.
** Equity investments may consist of common stocks and other stock-related securities, such as preferred stocks. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.

         
        1

 

GMO Flexible Equities Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            COMMON STOCKS — 96.5%        
                     
            Japan — 96.5%        
      669     Accordia Golf Co Ltd     561,692  
      1,701     Advance Residence Investment Corp (REIT)     3,544,736  
      471,600     Aeon Co Ltd     5,950,265  
      67,100     Alfresa Holdings Corp     2,602,845  
      38,600     Alpen Co Ltd     785,636  
      36,700     AOKI Holdings Inc     656,043  
      19,300     Aoyama Trading Co Ltd     337,654  
      6,000     Arc Land Sakamoto Co Ltd     74,547  
      41,000     Arcs Co Ltd     658,262  
      17,600     Arnest One Corp     222,570  
      7,800     Asatsu–DK Inc     224,233  
      124,850     Belluna Co Ltd     921,850  
      267,500     Best Denki Co Ltd *     797,452  
      2,593     BIC Camera Inc     1,085,081  
      50,200     Cawachi Ltd     1,081,024  
      104,500     Century Tokyo Leasing Corp     1,998,614  
      471,000     Chiba Bank Ltd     3,231,915  
      23,600     Chiyoda Integre Co Ltd     369,769  
      22,300     Chubu Electric Power Co Inc     588,594  
      44,000     Chuetsu Pulp & Paper Co Ltd     82,875  
      67,000     Circle K Sunkus Co Ltd     1,131,989  
      25,600     Coca–Cola Central Japan Co Ltd     349,713  
      58,400     Cocokara fine Holdings Inc     1,365,134  
      40,800     COMSYS Holdings Corp     416,449  
      5,000     Cosmos Pharmaceutical Corp     211,228  
      178,700     CSK Holdings Corp *     651,228  
      2,990     Dai-ichi Life Insurance Co Ltd (The)     5,407,977  
      11,500     Daidoh Ltd     111,817  
      421,400     Daiei Inc *     1,718,045  
      84,000     Daiichikosho Co Ltd     1,638,762  
      168,000     Daio Paper Corp     1,244,030  
      118,300     Daito Trust Construction Co Ltd (REIT)     9,693,911  
      45     DA Office Investment Corp (REIT)     161,895  

         
2
  See accompanying notes to the financial statements.    

 

 
GMO Flexible Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Japan — continued        
      190,600     DCM Japan Holdings Co Ltd     1,167,377  
      33,512     Dena Co Ltd     1,300,659  
      168     Digital Garage Inc *     738,094  
      12,700     Don Quijote Co Ltd     444,045  
      22,600     Doshisha Co Ltd     519,504  
      64,600     DTS Corp     738,679  
      197,200     Edion Corp     2,045,616  
      49,000     Electric Power Development Co Ltd     1,548,102  
      21,600     Fast Retailing Co Ltd     3,391,302  
      352,000     Fuji Electric Holdings Co Ltd     1,194,967  
      19,900     Fuji Soft Inc     343,220  
      60,300     Fuyo General Lease Co Ltd     2,248,476  
      933     Geo Corp     1,235,659  
      33     Global One Real Estate Investment Co Ltd (REIT)     307,523  
      82,000     Gunze Ltd     352,519  
      14,700     H.I.S. Co Ltd     385,260  
      62,000     H2O Retailing Corp     470,043  
      9,000     Hajime Construction Co Ltd     301,195  
      44     Hankyu Reit Inc (REIT)     227,631  
      514,500     Haseko Corp *     481,169  
      68,000     Heiwado Co Ltd     870,039  
      48,600     Hikari Tsushin Inc     1,190,602  
      80,000     Hitachi Cable Ltd     230,930  
      12,900     Hogy Medical Co Ltd     612,566  
      46,000     Hokuetsu Paper MillsLtd     267,505  
      10,300     Hokuto Corp     238,649  
      42,330     Honeys Co Ltd     579,805  
      143,000     Isetan Mitsukoshi Holdings Ltd     1,732,472  
      159,200     IT Holdings Corp     1,823,273  
      14,800     Itochu Techno-Solutions Corp     525,303  
      20,100     Itoki Corp     53,349  
      59,600     Ito En Ltd     1,058,563  
      146,675     Izumiya Co Ltd     688,300  
      138,600     Izumi Co Ltd     2,038,691  

         
    See accompanying notes to the financial statements.   3

 

 
GMO Flexible Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Japan — continued        
      255     Japan Prime Realty Investment Corp (REIT)     710,753  
      24     Japan Excellent Inc (REIT)     141,999  
      1,670     Japan Retail Fund Investment Corp (REIT)     2,874,385  
      129,489     Joshin Denki Co Ltd     1,351,919  
      165,000     J–Oil Mills Inc     517,736  
      88,000     J Front Retailing Co Ltd     460,909  
      101,340     K’s Holdings Corp     3,422,515  
      1,061,000     Kajima Corp     2,844,167  
      113,800     Kao Corp     3,073,834  
      66,600     Kasumi Co Ltd     371,806  
      37,900     Kato Sangyo Co Ltd     668,375  
      3,129     KDDI Corp     20,319,921  
      75,400     Keiyo Co Ltd     397,255  
      160     Kenedix Realty Investment Corp (REIT)     758,380  
      131,600     Kohnan Shoji Co Ltd     1,806,147  
      139,400     Kojima Co Ltd     983,474  
      253,000     Krosaki Harima Corp     1,139,704  
      391,000     Kurabo Industries Ltd     781,959  
      91,000     Kyodo Printing Co Ltd     212,244  
      34,800     Kyoritsu Maintenance Co Ltd     587,909  
      120,000     Kyowa Exeo Corp     1,148,893  
      75,000     Kyudenko Corp     479,432  
      45,000     Lawson Inc     2,215,874  
      76     M3 Inc     402,523  
      306,000     Maeda Corp     992,944  
      49,000     Maeda Road Construction Co Ltd     416,972  
      238,300     Marudai Food Co Ltd     791,161  
      99,074     Maruetsu Inc (The)     399,413  
      1,043,000     Maruha Nichiro Holdings Inc     1,958,684  
      35,000     Maruzen Showa Unyu Co Ltd     120,668  
      19,900     Matsuda Sangyo Co Ltd     355,017  
      24,000     Matsumotokiyoshi Holdings Co Ltd     538,809  
      195,300     Medipal Holdings Corp     1,853,494  
      23,000     Megane TOP Co Ltd     230,041  

         
4
  See accompanying notes to the financial statements.    

 

 
GMO Flexible Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Japan — continued        
      372     MID REIT Inc (REIT)     1,043,009  
      56,400     Mikuni Coca–Cola Bottling Co Ltd     506,169  
      12,100     Ministop Co Ltd     209,537  
      125,900     Mirait Holdings Corp *     954,196  
      802,392     Mitsubishi Paper Mills Ltd *     1,016,847  
      33,590     Mitsubishi UFJ Lease & Finance Co Ltd     1,492,452  
      39,000     Mitsui Home Co Ltd     223,957  
      7,771,300     Mizuho Financial Group Inc     16,019,196  
      56     Mori Hills REIT Investment Corp (REIT)     193,759  
      347,000     Morinaga Milk Industry Co Ltd     1,464,249  
      18,850     Moshi Moshi Hotline Inc     418,225  
      21,200     NEC Fielding Ltd     263,830  
      41,800     NEC Networks & System Integration Corp     567,410  
      210     Net One Systems Co Ltd     338,208  
      306,000     Nichias Corp     1,902,614  
      41,200     Nichiha Corp     409,963  
      368,200     Nichirei Corp     1,735,093  
      22,300     Nihon Kohden Corp     490,062  
      209,000     Nihon Yamamura Glass Co Ltd     616,248  
      120,000     Nippon Corp     846,938  
      37,000     Nippon Road Co Ltd (The)     93,470  
      76,000     Nippon Densetsu Kogyo Co Ltd     733,020  
      245,000     Nippon Express Co Ltd     1,058,848  
      104,000     Nippon Flour Mills Co Ltd     518,545  
      29,000     Nippon Konpo Unyu Soko Co Ltd     335,985  
      149,800     Nippon Paper Group Inc     4,120,192  
      292,200     Nippon Suisan Kaisha Ltd     997,056  
      397,100     Nippon Telegraph & Telephone Corp     19,425,291  
      87,100     Nishimatsuya Chain Co Ltd     795,713  
      1,317,984     Nishimatsu Construction Co Ltd     1,845,573  
      76,500     Nissen Holdings Co Ltd     506,607  
      38,000     Nisshin Oillio Group Ltd (The)     197,996  
      95,000     Nissin Corp     270,339  
      18,900     Nitori Co Ltd     1,673,401  

         
    See accompanying notes to the financial statements.   5

 

 
GMO Flexible Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Japan — continued        
      118     Nomura Real Estate Office Fund (REIT)     801,469  
      17,600     Nomura Research Institute Ltd     413,088  
      10,530     NTT Docomo Inc     19,781,401  
      574,000     Obayashi Corp     2,582,187  
      2,690     Obic Co Ltd     542,878  
      108,000     OJI Paper Co Ltd     537,628  
      34,000     Okamura Corp     210,001  
      117     Okinawa Cellular Telephone Co     260,988  
      25,300     Okinawa Electric Power Co     1,265,776  
      38,000     Okuwa Co Ltd     419,090  
      34,540     ORIX Corp     3,889,955  
      1,230,132     Osaka Gas Co Ltd     4,684,462  
      1,885     PGM Holdings KK     1,240,556  
      66,400     Parco Co Ltd     662,582  
      25,300     Park24 Co Ltd     293,997  
      329     Pasona Group Inc     287,707  
      1,165,500     Penta Ocean Construction Co Ltd     1,963,078  
      23,100     Point Inc     1,110,690  
      153     Premier Investment Corp (REIT)     745,109  
      140,000     Prima Meat Packers Ltd     195,810  
      193,000     Rengo Co Ltd     1,262,909  
      76,900     Right On Co Ltd *     451,351  
      449,000     Round One Corp     2,951,427  
      13,500     Ryohin Keikaku Co Ltd     642,113  
      23,800     Ryoshoku Ltd     540,041  
      18,200     Saint Marc Holdings Co Ltd     828,785  
      41,000     Sanki Engineering     262,979  
      675,000     Sankyo–Tateyama Holdings Inc *     930,733  
      446,418     Sankyu Inc     2,116,018  
      248,159     Sanwa Holdings Corp     884,742  
      102,000     Sanyo Shokai Ltd     381,145  
      4,900     San–A Co Ltd     190,944  
      105,900     Secom Co Ltd     5,346,331  
      188,000     Seiko Holdings Corp *     740,863  

         
6
  See accompanying notes to the financial statements.    

 

 
GMO Flexible Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Japan — continued        
      150,000     Seino Holdings Co Ltd     1,144,953  
      43,200     Seiren Co Ltd     325,042  
      279,516     Senko Co Ltd     950,108  
      32,200     Senshukai Co Ltd     207,432  
      266,500     Seven & I Holdings Co Ltd     7,438,875  
      38,400     Shimachu Co Ltd     883,527  
      7,900     Shimamura Co Ltd     765,251  
      330,000     Shimizu Corp     1,419,012  
      99,488     Ship Healthcare Holdings Inc     1,302,924  
      80,500     Shizuoka Gas Co Ltd     477,330  
      53,000     Showa Sangyo Co Ltd     163,053  
      1,261     SKY Perfect JSAT Holdings Inc     499,105  
      110,300     Sumitomo Forestry Co Ltd     1,004,617  
      293,500     Sumitomo Mitsui Financial Group Inc     11,106,539  
      145,000     Sumitomo Osaka Cement Co Ltd     378,282  
      18,000     Sundrug Co Ltd     538,465  
      30,000     Suzuken Co Ltd     857,781  
      525,000     SWCC Showa Holdings Co Ltd *     593,704  
      1,492,000     Taiheiyo Cement Co Ltd *     2,219,728  
      349,400     Taihei Kogyo Co Ltd     1,654,367  
      1,801,836     Taisei Corp     4,273,997  
      39,000     Takashimaya Co Ltd     320,829  
      15,600     Terumo Corp     856,695  
      449,098     TOA Corp     562,058  
      83,300     Toho Holdings Co Ltd     1,041,351  
      40,090     Token Corp     1,611,154  
      771,000     Tokyo Gas Co Ltd     3,446,803  
      81     Tokyu REIT Inc (REIT)     556,733  
      72,490     Tokyu Construction Co Ltd     217,938  
      17,700     Toppan Forms Co Ltd     173,389  
      54,000     Toppan Printing Co Ltd     496,824  
      16,400     Touei Housing Corp     261,832  
      1,254,000     Toyo Construction Co Ltd     755,919  
      20,900     Tsuruha Holdings Inc     1,028,991  

         
    See accompanying notes to the financial statements.   7

 

 
GMO Flexible Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
Shares /
 		           
Par Value     Description   Value ($)  
            Japan — continued        
      688     T–Gaia Corp     1,361,004  
      187,000     Uchida Yoko Co Ltd     646,555  
      8,600     United Arrows Ltd     148,776  
      1,015,000     Unitika Ltd *     973,528  
      373,500     UNY Co Ltd     3,727,513  
      29,120     USS Co Ltd     2,362,980  
      79,400     Valor Co Ltd     815,386  
      30,500     Xebio Co Ltd     700,120  
      6,720     Yahoo Japan Corp     2,533,483  
      101,710     Yamada Denki Co Ltd     7,769,492  
      42,000     Yokohama Reito Co Ltd     301,977  
      33,000     Yonekyu Corp     289,069  
      37,000     Yurtec Corp     163,278  
      12,700     Yusen Logistics Co Ltd     205,039  
                     
            Total Japan     330,793,877  
                     
                     
            TOTAL COMMON STOCKS (COST $283,905,078)     330,793,877  
                     
                     
            SHORT-TERM INVESTMENTS — 3.7%        
                     
            Time Deposits — 3.7%        
USD
    2,180,372     Bank of America (Charlotte) Time Deposit, 0.03%, due 03/01/11     2,180,372  
JPY
    23,674,994     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.01%, due 03/01/11     289,408  
USD
    5,000,000     Citibank (New York) Time Deposit, 0.03%, due 03/01/11     5,000,000  
USD
    5,000,000     HSBC Bank (New York) Time Deposit, 0.03%, due 03/01/11     5,000,000  
                     
            Total Time Deposits     12,469,780  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $12,469,780)     12,469,780  
                     
                     
            TOTAL INVESTMENTS — 100.2%
(Cost $296,374,858) 		    343,263,657  
            Other Assets and Liabilities (net) — (0.2%)     (536,914 )
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 342,726,743  
                     

         
8
  See accompanying notes to the financial statements.    

 

 
GMO Flexible Equities Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
A summary of outstanding financial instruments at February 28, 2011 is as follows:
 
Forward Currency Contracts
 
                                     
                    Net Unrealized
Settlement
 		                  Appreciation
Date   Counterparty   Deliver/Receive   Units of Currency   Value   (Depreciation)
 
Buys †
                                   
3/08/11
    Barclays Bank PLC     JPY     1,829,706,806     $ 22,367,261     $ 35,309  
3/08/11
    Deutsche Bank AG     JPY     8,110,450,000       99,146,241       153,808  
3/08/11
    Bank of New York Mellon     JPY     2,144,308,639       26,213,112       37,513  
                                 
                        $ 147,726,614     $ 226,630  
                                 
Sales #
                                   
3/08/11
    Barclays Bank PLC     JPY     1,829,706,806     $ 22,367,261     $ (30,609 )
3/08/11
    Bank of New York Mellon     JPY     2,144,308,639       26,213,113       (193,182 )
3/08/11
    Deutsche Bank AG     JPY     8,110,450,000       99,146,241       (135,681 )
4/08/11
    Deutsche Bank AG     JPY     8,110,450,000       99,168,344       (157,180 )
4/08/11
    Bank of New York Mellon     JPY     1,030,898,738       12,605,037       (20,056 )
4/08/11
    Barclays Bank PLC     JPY     1,419,831,806       17,360,611       (27,516 )
                                 
                        $ 276,860,607     $ (564,224 )
                                 
 
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
 
Swap Agreements
 
Forward Cross Currency Swaps
                                         
            Expiration
 		      Receive/
 		          Market
Deliver   Receive   Date   Counterparty   (Pay)#   Fixed Rate   Variable Rate   Value
 
  11,331,250,000     JPY   125,000,000 USD   6/27/2011   Morgan Stanley
Capital Services Inc. 		  (Pay)   0.00%   3 Month USD
BBA LIBOR - 0.20% 		  $ (13,535,498 )
                                         
Premiums to (Pay) Receive
  $ —  
         
 
# Receive - Fund receives fixed rate and sells variable rate.
(Pay) - Fund pays fixed rate and receives variable rate.

         
    See accompanying notes to the financial statements.   9

 

 
GMO Flexible Equities Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
As of February 28, 2011, for futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
 
Notes to Schedule of Investments:
 
BBA - British Banks Association
REIT - Real Estate Investment Trust
USD LIBOR - London Interbank Offered Rate denominated in United States Dollars.
* Non-income producing security.
 
Currency Abbreviations:
 
JPY - Japanese Yen
USD - United States Dollar

         
10
  See accompanying notes to the financial statements.    

 

GMO Flexible Equities Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments, at value (cost $296,374,858) (Note 2)
  $ 343,263,657  
Receivable for investments sold
    482,230  
Dividends receivable
    986,298  
Unrealized appreciation on open forward currency contracts (Note 4)
    226,630  
Receivable for collateral on open swap contracts (Note 4)
    12,780,000  
Receivable for expenses reimbursed by Manager (Note 5)
    27,132  
         
Total assets
    357,765,947  
         
         
Liabilities:
       
Payable for investments purchased
    516,364  
Payable for Fund shares repurchased
    111,764  
Payable to affiliate for (Note 5):
       
Management fee
    143,496  
Shareholder service fee
    16,467  
Trustees and Trust Officers or agents unaffiliated with the Manager
    798  
Unrealized depreciation on open forward currency contracts (Note 4)
    564,224  
Payable for open swap contracts (Note 4)
    13,535,498  
Accrued expenses
    150,593  
         
Total liabilities
    15,039,204  
         
Net assets
  $ 342,726,743  
         
Net assets consist of:
       
Paid-in capital
  $ 341,671,263  
Distributions in excess of net investment income
    (11,645,306 )
Accumulated net realized loss
    (20,323,151 )
Net unrealized appreciation
    33,023,937  
         
    $ 342,726,743  
         
Net assets attributable to:
       
Class III shares
  $ 29,258,746  
         
Class VI shares
  $ 313,467,997  
         
Shares outstanding:
       
Class III
    1,491,878  
         
Class VI
    15,979,127  
         
Net asset value per share:
       
Class III
  $ 19.61  
         
Class VI
  $ 19.62  
         

         
    See accompanying notes to the financial statements.   11

 

GMO Flexible Equities Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends (net of withholding taxes of $617,704)
  $ 8,207,991  
         
Total investment income
    8,207,991  
         
Expenses:
       
Management fee (Note 5)
    2,008,166  
Shareholder service fee – Class III (Note 5)
    52,372  
Shareholder service fee – Class VI (Note 5)
    181,614  
Custodian and fund accounting agent fees
    206,274  
Audit and tax fees
    93,253  
Transfer agent fees
    42,923  
Registration fees
    29,873  
Legal fees
    14,067  
Trustees fees and related expenses (Note 5)
    8,033  
Miscellaneous
    44,097  
         
Total expenses
    2,680,672  
Fees and expenses reimbursed by Manager (Note 5)
    (419,570 )
Expense reductions (Note 2)
    (8 )
         
Net expenses
    2,261,094  
         
Net investment income (loss)
    5,946,897  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments
    23,121,921  
Futures contracts
    1,588,002  
Swap contracts
    (13,944,424 )
Foreign currency, forward contracts and foreign currency related transactions
    (18,993,579 )
         
Net realized gain (loss)
    (8,228,080 )
         
Change in net unrealized appreciation (depreciation) on:
       
Investments
    22,618,865  
Futures contracts
    31,123  
Swap contracts
    (13,535,498 )
Foreign currency, forward contracts and foreign currency related transactions
    10,405,515  
         
Net unrealized gain (loss)
    19,520,005  
         
Net realized and unrealized gain (loss)
    11,291,925  
         
Net increase (decrease) in net assets resulting from operations
  $ 17,238,822  
         

         
12
  See accompanying notes to the financial statements.    

 

GMO Flexible Equities Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 5,946,897     $ 5,680,813  
Net realized gain (loss)
    (8,228,080 )     (20,119,555 )
Change in net unrealized appreciation (depreciation)
    19,520,005       104,950,270  
                 
                 
Net increase (decrease) in net assets from operations
    17,238,822       90,511,528  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (368,554 )     (1,059,417 )
Class VI
    (3,931,813 )     (8,942,217 )
                 
Total distributions from net investment income
    (4,300,367 )     (10,001,634 )
                 
Net share transactions (Note 9):
               
Class III
    (13,406,608 )     (12,149,564 )
Class VI
    (48,692,864 )     (30,326,228 )
                 
Increase (decrease) in net assets resulting from net share transactions
    (62,099,472 )     (42,475,792 )
                 
Total increase (decrease) in net assets
    (49,161,017 )     38,034,102  
Net assets:
               
Beginning of period
    391,887,760       353,853,658  
                 
End of period (including distributions in excess of net investment income of $11,645,306 and $253,635, respectively)
  $ 342,726,743     $ 391,887,760  
                 

         
    See accompanying notes to the financial statements.   13

 

GMO Flexible Equities Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                         
            Period from
            December 12,
            2008
            (commencement of
            operations) through
    Year Ended February 28,   February 28,
    2011   2010   2009
 
Net asset value, beginning of period
  $ 18.55     $ 15.39     $ 20.00  
                         
                         
Income (loss) from investment operations:
                       
Net investment income (loss)†
    0.29       0.23       0.02  
Net realized and unrealized gain (loss)
    1.01       3.40       (4.63 )
                         
                         
Total from investment operations
    1.30       3.63       (4.61 )
                         
                         
Less distributions to shareholders:
                       
From net investment income
    (0.24 )     (0.47 )     (0.00 )(a)
                         
                         
Total distributions
    (0.24 )     (0.47 )     (0.00 )
                         
Net asset value, end of period
  $ 19.61     $ 18.55     $ 15.39  
                         
Total Return(b)
    7.08 %     23.62 %     (23.04 )%**
                         
Ratios/Supplemental Data:
                       
Net assets, end of period (000’s)
  $ 29,259     $ 41,753     $ 43,788  
Net expenses to average daily net assets
    0.70 %(c)     0.70 %(c)     0.70 %*
Net investment income (loss) to average daily net assets
    1.57 %     1.26 %     0.56 %*
Portfolio turnover rate
    71 %     58 %     7 %**
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.11 %     0.11 %     0.26 %*
 
(a) Distributions from net investment income were less than $0.01 per share.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(c) The net expense ratio does not include the effect of expense reductions (Note 2).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.

         
14
  See accompanying notes to the financial statements.    

 

GMO Flexible Equities Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class VI share outstanding throughout each period)
 
                         
            Period from
            December 12,
            2008
            (commencement of
            operations) through
    Year Ended February 28,   February 28,
    2011   2010   2009
 
Net asset value, beginning of period
  $ 18.56     $ 15.39     $ 20.00  
                         
                         
Income (loss) from investment operations:
                       
Net investment income (loss)†
    0.30       0.25       0.03  
Net realized and unrealized gain (loss)
    1.02       3.41       (4.64 )
                         
                         
Total from investment operations
    1.32       3.66       (4.61 )
                         
                         
Less distributions to shareholders:
                       
From net investment income
    (0.26 )     (0.49 )     (0.00 )(a)
                         
                         
Total distributions
    (0.26 )     (0.49 )     (0.00 )
                         
Net asset value, end of period
  $ 19.62     $ 18.56     $ 15.39  
                         
Total Return(b)
    7.18 %     23.81 %     (23.04 )%**
                         
Ratios/Supplemental Data:
                       
Net assets, end of period (000’s)
  $ 313,468     $ 350,135     $ 310,066  
Net expenses to average daily net assets
    0.61 %(c)     0.61 %(c)     0.61 %*
Net investment income (loss) to average daily net assets
    1.64 %     1.36 %     0.69 %*
Portfolio turnover rate
    71 %     58 %     7 %**
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.11 %     0.11 %     0.26 %*
 
(a) Distributions from net investment income were less than $0.01 per share.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(c) The net expense ratio does not include the effect of expense reductions (Note 2).
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.

         
    See accompanying notes to the financial statements.   15

 

GMO Flexible Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO Flexible Equities Fund (the “Fund”), which commenced operations on December 12, 2008, is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund seeks total return in excess of that of its benchmark, the MSCI World Index. The Fund may invest directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the “underlying funds” or derivatives) in equity investments traded in any of the world’s securities markets. Under normal circumstances, the Fund invests directly and indirectly at least 80% of its assets in equity investments. The term “equity investments” refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts. The Fund is permitted to make equity investments of all types, including equity investments issued by foreign and/or U.S. companies, growth and/or value style equities, and equity investments of companies of any market capitalization. In addition, the Fund is not limited to how much it may invest in any market or type of equity investment, and may invest all its assets in a limited number of equity investments of companies in a single country and/or capitalization range. The Fund could experience material losses from a single investment. As of February 28, 2011, substantially all of the Fund’s assets were invested in equity investments tied economically to Japan.
 
In pursuing its investment objective, the Fund is permitted to (but is not obligated to) use a wide variety of exchange-traded and over-the-counter (“OTC”) derivatives, including options, futures, swap contracts, and reverse repurchase agreements, (i) as a substitute for direct investment; (ii) in an attempt to reduce investment exposures (which may result in a reduction below zero); (iii) to effect transactions intended as substitutes for securities lending; and/or (iv) in an attempt to adjust elements of its investment and/or foreign currency exposure. The Fund’s foreign currency exposure may differ significantly from the currency exposure represented by its equity investments. For investment and hedging purposes, the Fund also may make short sales of securities, including short sales of securities the Fund does not own. In addition, the Fund may take active overweighted and underweighted positions in particular currencies relative to its benchmark. In addition, the Fund may lend its portfolio securities. The Fund may identify and measure its performance against one or more secondary benchmarks from time to time. The Fund does not seek to control risk relative to the MSCI World Index or any other benchmark.
 
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund may, from time to time, take temporary defensive

         
16
       

 

 
GMO Flexible Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
 
The Fund is not intended to serve as a standalone investment product and is available for investment only by other GMO Funds and other GMO asset allocation clients.
 
Throughout the year ended February 28, 2011, the Fund had two classes of shares outstanding: Class III and Class VI. Each class of shares bears a different shareholder service fee.
 
The Fund currently limits subscriptions.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the OTC market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. Additionally, because many foreign equity securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices adjusted by a factor supplied by a third party vendor using that vendor’s proprietary models. As of February 28, 2011, 96.2% of the net assets of the Fund were valued using fair value prices based on those adjustments and are

         
        17

 

 
GMO Flexible Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
classified as using Level 2 inputs in the table below. See note 4 for a further discussion on valuation of derivative financial instruments.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include: fair value adjustments applied to local closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund’s daily NAV calculation.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant.

         
18
       

 

 
GMO Flexible Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Common Stocks
Japan
  $ 954,196     $ 329,839,681     $      —     $ 330,793,877  
                                 
TOTAL COMMON STOCKS
    954,196       329,839,681       —       330,793,877  
                                 
Short-Term Investments
    12,469,780       —       —       12,469,780  
                                 
Total Investments
    13,423,976       329,839,681       —       343,263,657  
                                 
Derivatives*
                               
Forward Currency Contracts
                               
Foreign Currency Risk
    —       226,630       —       226,630  
                                 
Total
  $ 13,423,976     $ 330,066,311     $ —     $ 343,490,287  
                                 
 
LIABILITY VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Liabilities
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Derivatives*
                               
Forward Currency Contracts
                               
Foreign Currency Risk
  $      —     $ (564,224 )   $      —     $ (564,224 )
                                 
Swap Agreements
                               
Foreign Currency Risk
    —       (13,535,498 )     —       (13,535,498 )
                                 
Total
  $ —     $ (14,099,722 )   $ —     $ (14,099,722 )
                                 
 
The risks referenced above are not intended to be inclusive of all risks. Please see the Investment Risks and Derivative Financial Instruments sections below for a further discussion of risks.
 
*   Because the tables above are based on market values or unrealized appreciation (depreciation) rather than the notional amounts of derivatives, the uncertainties surrounding the valuation inputs for a derivative are likely to be more significant to the Fund’s net asset value than the uncertainties surrounding inputs for a non-derivative security with the same market value.

         
        19

 

 
GMO Flexible Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
The following is a reconciliation of investments and derivatives, if any, in which significant unobservable inputs (Level 3) were used in determining value:
 
                                                                           
 
                                      Net Change in
                                      Unrealized
                                      Appreciation
                                      (Depreciation)
    Balances
               Change in
           Balances
     from Investments
    as of
   Net
  Accrued
   Total
   Unrealized
       Transfer
   as of
     still held as of
    February 28,
   Purchases/
   Discounts/
   Realized
   Appreciation
   Transfer into
   out of
   February 28,
     February 28,
    2010   Sales   Premiums   Gain/(Loss)   (Depreciation)   Level 3*   Level 3*   2011     2011
Common Stocks Japan
  $ 2,146,388     $ (1,956,344 )**   $      —     $      —     $ (190,044 )   $      —     $      —     $      —       $      —  
                                                                           
Total
    2,146,388     $ (1,956,344 )   $ —     $ —     $ (190,044 )   $ —     $ —     $ —       $ —    
                                                                           
            * The Fund accounts for investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the value at the end of the period.
            ** Sale transaction occurred as a result of a corporate action.
 
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 pm. Income and expenses denominated in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country’s tax treaty with the United States. The foreign withholding rates applicable to a Fund’s investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.

         
20
       

 

 
GMO Flexible Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if paid by the shareholders of the Fund.
 
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Taxes related to capital gains realized during the year ended February 28, 2011, if any, are reflected as part of Net realized gain (loss) in the Statement of Operations. Changes in tax liabilities related to capital gain taxes on unrealized investment gains, if any, are reflected as part of Change in net unrealized appreciation (depreciation) in the Statement of Operations. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards, derivative contract transactions, foreign currency transactions, losses on wash sale transactions, passive foreign foreign investment company transactions, post-October capital losses and post-October currency losses.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 4,300,367     $ 10,001,634  
                 
Total distributions
  $ 4,300,367     $ 10,001,634  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.

         
        21

 

 
GMO Flexible Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, certain tax attributes consisted of the following:
 
         
Capital loss carryforwards
  $ (17,168,605 )
Post-October capital loss deferral
  $ (1,050,378 )
Post-October currency loss deferral
  $ (5,820,846 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 28, 2018
  $ (17,168,605 )
         
Total
  $ (17,168,605 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 304,641,079     $ 42,419,483     $ (3,796,905 )   $ 38,622,578      
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the periods ended February 28, 2009 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on

         
22
       

 

 
GMO Flexible Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, 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 among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class’s operations. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (See Note 5).
 
Brown Brothers Harriman & Co. (“BBH”) serves as the Fund’s custodian and fund accounting agent. State Street Bank and Trust Company (“State Street”) serves as the Fund’s transfer agent. BBH’s and State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Management and Operational Risk — The Fund runs the risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations. In addition, while each GMO Fund is exposed to some level of management and operational risk, this risk may be particularly pronounced for this Fund because it does not seek to control risk relative to a particular securities market index or benchmark. This risk is also pronounced for this Fund because the risks created by its derivative positions and other investments may cause it to incur significant losses.

         
        23

 

 
GMO Flexible Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Declines in stock market prices generally are likely to reduce the market value of the Fund’s equity investments.
 
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund’s investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund’s investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
 
• Focused Investment Risk — Focusing investments in countries, regions, sectors, or companies with high positive correlations to one another creates additional risk. As of the date of this Prospectus, this risk was particularly pronounced for the Fund because it had invested substantially all of its assets in equity investments tied economically to Japan. This risk may be particularly pronounced for the Fund because it may invest a significant portion of its assets in a particular geographic region or foreign country or in the securities of a limited number of issuers. A decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund invested in the securities of a larger number of issuers.
 
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund’s foreign currency holdings and investments denominated in foreign currencies.
 
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
 
• Smaller Company Risk — The securities of small- and mid-cap companies often are less widely held and trade less frequently and in lesser quantities, and their market prices often fluctuate more, than the securities of companies with larger market capitalizations.
 
• Large Shareholder Risk — To the extent that shares of the Fund are held by large shareholders (e.g., institutional investors, asset allocation funds, or other GMO Funds), the Fund is subject to the risk that

         
24
       

 

 
GMO Flexible Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
these shareholders will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis.
 
Other principal risks of an investment in the Fund include Market Disruption and Geopolitical Risk (the risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities lending); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund’s securities); Short Sales Risk (risk that the Fund’s loss on a short sale of securities that the Fund does not own is unlimited); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by “equitizing” its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically “sell” a portion of the Fund’s portfolio) in combination with a long futures contract on another index (to

         
        25

 

 
GMO Flexible Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
synthetically “buy” exposure to that index). The Funds also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral (e.g., foreign currency forwards; see “Currency Risk” above), that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to

         
26
       

 

 
GMO Flexible Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
 
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund’s forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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.
 
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. During the year ended February 28, 2011, the Fund used forward currency contracts to manage against anticipated currency exchange rate changes and adjust exposure to foreign currencies. Forward currency contracts outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is marked to market daily and an appropriate payable or receivable for the change in value (“variation margin”) is recorded by

         
        27

 

 
GMO Flexible Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because regular trading on many foreign exchanges closes prior to the close of the NYSE, closing prices for these foreign futures contracts including foreign index futures do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures contracts using fair value prices, which are based on adjustments to local closing prices, and supplied by a third party vendor based on that vendor’s proprietary models. During the year ended February 28, 2011, the Fund used futures contracts to maintain the diversity and liquidity of the portfolio. The Fund had no futures contracts outstanding at the end of the period.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a

         
28
       

 

 
GMO Flexible Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.

         
        29

 

 
GMO Flexible Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
The Fund may also enter into swaps to modify its exposure to particular currencies using currency swaps. For instance, the Fund may enter into a currency swap between the U.S. Dollar and the Japanese Yen in order to increase or decrease its exposure to each such currency.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publicly traded markets. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the year ended February 28, 2011, the Fund used swap agreements to manage against anticipated currency exchange rate changes and adjust exposure to foreign currencies. Swap agreements outstanding at the end of the period are listed in the Fund’s Schedule of Investments.

         
30
       

 

 
GMO Flexible Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
Fair values of derivative instruments on the Statement of Assets and Liabilities as of
February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Assets:
                                               
Unrealized appreciation on forward currency contracts
  $      —     $ 226,630     $      —     $      —     $      —     $ 226,630  
                                                 
Total
  $ —     $ 226,630     $ —     $ —     $ —     $ 226,630  
                                                 
Liabilities:
                                               
Unrealized depreciation on forward currency contracts
  $ —     $ (564,224 )   $ —     $ —     $ —     $ (564,224 )
Unrealized depreciation on swap agreements
    —       (13,535,498 )     —       —       —       (13,535,498 )
                                                 
Total
  $ —     $ (14,099,722 )   $ —     $ —     $ —     $ (14,099,722 )
                                                 

         
        31

 

 
GMO Flexible Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
  
  Fair values of derivative instruments on the Statement of Assets and Liabilities as of
  February 28, 2011Ù: — continued
 
 
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Forward currency contracts
  $      —     $ (13,355,496 )   $      —     $      —     $      —     $ (13,355,496 )
Futures contracts
    —       —       —       1,588,002       —       1,588,002  
                                                 
Total
  $ —     $ (13,355,496 )   $ —     $ 1,588,002     $ —     $ (11,767,494 )
                                                 
Change in Unrealized Appreciation (Depreciation) on:
                                               
Forward currency contracts
  $ —     $ 10,417,436     $ —     $ —     $ —     $ 10,417,436  
Futures contracts
    —       —       —       31,123       —       31,123  
Swap contracts
    —       (13,535,498 )     —       —       —       (13,535,498 )
                                                 
Total
  $ —     $ (3,118,062 )   $ —     $ 31,123     $ —     $ (3,086,939 )
                                                 
 
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
 
The volume of derivative activity, based on absolute values (forward currency contracts and futures contracts), or notional amounts (swap agreements) outstanding at each month-end, was as follows for the year ended February 28, 2011:
 
                         
    Forward
        
    currency
   Futures
   Swaps
    contracts   contracts   agreements
 
Average amount outstanding
  $ 374,011,167     $ 5,291,549     $ 155,512,059  
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.55% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets of each class at the annual rate of 0.15% for Class III shares and 0.055% for Class VI shares.

         
32
       

 

 
GMO Flexible Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.55% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund’s Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund’s Expense Reimbursement Amount. These contractual expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ending February 28, 2011 was $8,033 and $2,769, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 aggregated $248,856,417 and $343,909,749, respectively.
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 61.96% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund’s outstanding shares. On that date, no other shareholders owned

         
        33

 

 
GMO Flexible Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
more than 10% of the outstanding shares of the Fund. Two of the shareholders are other funds of the Trust.
 
As of February 28, 2011, none of the Fund was held by senior management of the Manager and GMO Trust officers and all of the Fund’s shares were held by accounts for which the Manager had investment discretion.
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    7,751     $ 142,996       254,146     $ 4,481,202  
Shares issued to shareholders in reinvestment of distributions
    14,175       264,359       37,554       691,738  
Shares repurchased
    (780,526 )     (13,813,963 )     (886,624 )     (17,322,504 )
                                 
Net increase (decrease)
    (758,600 )   $ (13,406,608 )     (594,924 )   $ (12,149,564 )
                                 
                                 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class VI:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    1,434,560     $ 26,560,917       2,572,598     $ 44,263,613  
Shares issued to shareholders in reinvestment of distributions
    210,711       3,929,770       485,176       8,941,790  
Shares repurchased
    (4,531,143 )     (79,183,551 )     (4,335,164 )     (83,531,631 )
                                 
Net increase (decrease)
    (2,885,872 )   $ (48,692,864 )     (1,277,390 )   $ (30,326,228 )
                                 

         
34
       

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Flexible Equities Fund:
 
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 (a series of GMO Trust) and the financial highlights present fairly, in all material respects, the financial position of GMO Flexible Equities Fund (the “Fund”) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for the each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
        35

 

GMO Flexible Equities Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
36
       

 

 
GMO Flexible Equities Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.71 %   $ 1,000.00     $ 1,163.60     $ 3.81  
2) Hypothetical
    0.71 %   $ 1,000.00     $ 1,021.27     $ 3.56  
                                 
Class VI
                               
                                 
1) Actual
    0.61 %   $ 1,000.00     $ 1,164.70     $ 3.27  
2) Hypothetical
    0.61 %   $ 1,000.00     $ 1,021.77     $ 3.06  
                                 
 
            * Expenses are calculated using each Class’s annualized net expense ratio for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
        37

 

GMO Flexible Equities Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
During the year ended February 28, 2011, the Fund paid foreign taxes of $617,704 and recognized foreign source income of $8,825,695.
 
For taxable, non-corporate shareholders, 92.67% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 represents qualified dividend income subject to the 15% rate category.

         
38
       

 

Trustees and Officers (Unaudited)
 
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
   Position(s)
   Length of
   During Past
   Complex
     Other Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005;
Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000. 		  Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman
Professor of Financial Management,
Harvard Business
School (since 1989). 		    63     Trustee of State Street Navigator
Securities Lending
Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
        39

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
   Position(s)
   Length of
   During Past
   Complex
     Other Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier
Corporation (a book publisher and
manufacturer)
(January 2008 – present); Chief Financial Officer,
Wellington
Management
Company, LLP (an
investment adviser)
(March 1986 –
December 2007). 		    63     Director of Courier
Corporation (a book publisher and
manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
    
            Principal
   Portfolios in
    
            Occupation(s)
   Fund
   Other
Name and
   Position(s)
   Length of
   During Past
   Complex
   Directorships
Date of Birth   Held with Trust   Time Served   Five Years   Overseen   Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee; President
and Chief Executive
Officer of the Trust 		  Trustee since March 2010; President and
Chief Executive
Officer since March 2009. 		  General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
40        

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        41

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money
Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
42        

 

 
GMO Foreign Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO Foreign Fund
(A Series of GMO Trust)
 
Portfolio Managers
 
Day-to-day management of the Fund’s portfolio is the responsibility of the International Active Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
The Class III shares of GMO Foreign Fund returned +18.8% for the fiscal year ended February 28, 2011, as compared with +20.0% for the MSCI EAFE Index.
 
Stock selection added 0.6% to relative performance for the fiscal year. Stock selection in Japan, Finland, Germany, and the emerging markets added to relative performance. Stock selection in the United Kingdom and Italy subtracted from relative performance.
 
Country selection detracted from relative performance by 1.8%. The largest negative contribution to country selection came from an underweight position in Sweden. An overweight position in Italy also hurt performance.
 
Because some of the securities and instruments held directly or indirectly by the Fund had positive fair value adjustments during the fiscal year (and the performance of indices are not fair valued), the Fund’s absolute and relative performance is better than it otherwise would have been.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice.

 

 
Comparison of Change in Value of a $35,000,000 Investment in
GMO Foreign Fund Class III Shares and the MSCI EAFE Index
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited. Performance for classes may vary due to different fees.
 
 
MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.

 

GMO Foreign Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary   % of Total Net Assets  
Common Stocks
    97.4 %
Short-Term Investments
    1.1  
Preferred Stocks
    1.0  
Rights and Warrants
    0.0 Ù
Other
    0.5  
         
      100.0 %
         
 
Ù Rounds to 0.0%.
 
         
Country Summary   % of Investments*  
United Kingdom
    23.6 %
Japan
    20.9  
France
    9.9  
Germany
    8.4  
Italy
    7.4  
Switzerland
    4.9  
Australia
    2.6  
Netherlands
    2.5  
Norway
    2.3  
Sweden
    2.3  
Finland
    2.1  
Hong Kong
    1.7  
South Korea
    1.6  
Spain
    1.2  
Brazil
    1.1  
Russia
    1.0  
Denmark
    0.9  
Singapore
    0.8  
China
    0.6  
Austria
    0.5  
Belgium
    0.5  
Ireland
    0.5  
Mexico
    0.5  
Taiwan
    0.5  
India
    0.4  
Greece
    0.3  
Indonesia
    0.3  
Israel
    0.2  
Malaysia
    0.2  
Philippines
    0.2  

         
        1

 

 
GMO Foreign Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2011 (Unaudited)
 
         
Country Summary   % of Investments*  
Thailand
    0.1 %
New Zealand
    0.0 Ù
         
      100.0 %
         
 
Ù Rounds to 0.0%.
* The table above shows country exposure in the Fund. The table excludes short-term investments. The table includes exposure through derivative financial instruments, if any. The table excludes exposure through forward currency contracts. The table takes into account the market value of securities and options and the notional amounts of swap agreements and other derivative financial instruments, if any.
 
         
Industry Group Summary   % of Equity Investments**  
Energy
    13.7 %
Banks
    11.3  
Capital Goods
    9.8  
Materials
    9.7  
Automobiles & Components
    7.6  
Telecommunication Services
    6.5  
Pharmaceuticals, Biotechnology & Life Sciences
    6.1  
Food, Beverage & Tobacco
    5.1  
Technology Hardware & Equipment
    4.4  
Utilities
    4.4  
Insurance
    3.7  
Food & Staples Retailing
    3.1  
Real Estate
    2.7  
Media
    1.6  
Diversified Financials
    1.6  
Transportation
    1.6  
Consumer Services
    1.5  
Consumer Durables & Apparel
    1.3  
Retailing
    1.1  
Software & Services
    1.1  
Commercial & Professional Services
    0.8  
Household & Personal Products
    0.7  
Health Care Equipment & Services
    0.4  
Semiconductors & Semiconductor Equipment
    0.2  
         
      100.0 %
         
 
** Equity investments may consist of common stocks and other stock-related securities, such as preferred stocks. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.

         
2
       

 

GMO Foreign Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            COMMON STOCKS — 97.4%        
                     
            Australia — 2.6%        
      558,922     Amcor Ltd     3,961,787  
      541,713     Aristocrat Leisure Ltd     1,758,869  
      3,395,747     Asciano Group *     6,082,395  
      689,970     BlueScope Steel Ltd     1,478,682  
      58,389     Commonwealth Bank of Australia     3,173,882  
      358,407     Crown Ltd     3,060,292  
      401,570     CSR Ltd     1,422,828  
      2,738,328     Dexus Property Group (REIT)     2,395,541  
      1,356,170     Fairfax Media Ltd     1,812,926  
      1,669,008     Incitec Pivot Ltd     7,530,424  
      63,630     Macquarie Group Ltd     2,473,384  
      891,795     Myer Holdings Ltd     2,989,163  
      56,455     Rio Tinto Ltd     4,929,407  
      468,103     Santos Ltd     6,874,747  
      2,196,882     Telstra Corp Ltd     6,255,529  
      42,305     Westfield Retail Trust (REIT)     115,004  
      529,257     Westpac Banking Corp     12,773,832  
                     
            Total Australia     69,088,692  
                     
                     
            Austria — 0.5%        
      87,434     OMV AG     3,715,507  
      159,780     Telekom Austria AG     2,281,838  
      353,190     Wienerberger AG *     7,308,259  
                     
            Total Austria     13,305,604  
                     
                     
            Belgium — 0.5%        
      161,400     KBC Groep NV *     6,749,726  
      130,500     Umicore SA     6,579,584  
                     
            Total Belgium     13,329,310  
                     
                     
            Brazil — 0.6%        
      40,700     Cia Hering     607,393  
      122,200     Localiza Rent A Car SA     1,725,989  

         
    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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Brazil — continued        
      102,000     M Dias Branco SA     2,206,996  
      154,800     Multiplus SA     2,674,901  
      826,000     PDG Realty SA Empreendimentos e Participacoes     4,512,766  
      273,600     Sonae Sierra Brasil SA *     3,716,408  
      143,400     Sul America SA     1,641,886  
                     
            Total Brazil     17,086,339  
                     
                     
            China — 0.6%        
      1,680,500     China Mobile Ltd     15,828,055  
                     
                     
            Denmark — 0.9%        
      428,990     H Lundbeck A/S     9,801,597  
      56,200     Novo-Nordisk A/S Class B     7,083,578  
      113,590     Pandora A/S *     6,622,404  
                     
            Total Denmark     23,507,579  
                     
                     
            Finland — 2.1%        
      231,450     KCI Konecranes Oyj     10,377,275  
      386,235     Nokian Renkaat Oyj     15,681,499  
      604,486     Nokia Oyj     5,211,673  
      327,700     Sampo Oyj Class A     10,142,510  
      544,035     UPM – Kymmene Oyj     10,803,491  
      116,840     YIT Oyj     3,362,687  
                     
            Total Finland     55,579,135  
                     
                     
            France — 9.8%        
      59,060     Accor SA     2,778,673  
      132,346     Air France – KLM *     2,164,681  
      266,410     ArcelorMittal     9,784,295  
      618,981     AXA     13,004,191  
      301,516     BNP Paribas     23,531,879  
      140,543     Bouygues SA     6,491,924  
      241,320     Carrefour SA     11,851,490  
      52,943     Christian Dior SA     7,631,052  
      107,950     Compagnie de Saint-Gobain     6,447,737  

         
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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            France — continued        
      93,478     Compagnie Generale des Etablissements Michelin-Class B     7,619,097  
      155,449     Electricite de France     6,931,252  
      194,800     European Aeronautic Defense and Space Co NV *     5,634,860  
      279,697     GDF Suez     11,344,640  
      75,457     L’Oreal SA     8,779,621  
      36,555     Lafarge SA     2,220,668  
      91,863     Pernod-Ricard SA     8,463,746  
      113,283     Publicis Groupe SA     6,461,829  
      149,378     Renault SA *     9,160,245  
      283,298     Sanofi-Aventis     19,589,468  
      68,534     Schneider Electric SA     11,351,495  
      79,793     Societe BIC SA     6,819,423  
      145,789     Societe Generale     10,251,257  
      56,184     Sodexo     3,866,679  
      50,442     Technip SA     4,985,152  
      677,747     Total SA     41,545,905  
      512,556     Vivendi SA     14,608,278  
                     
            Total France     263,319,537  
                     
                     
            Germany — 8.1%        
      165,839     Allianz SE (Registered)     23,948,842  
      30,801     Axel Springer AG     5,018,916  
      61,509     BASF AG     5,128,620  
      263,701     Bayer AG     20,492,033  
      155,390     Continental AG *     13,166,534  
      377,865     Daimler AG (Registered) *     26,703,395  
      226,780     Deutsche Lufthansa AG (Registered) *     4,646,117  
      284,128     Deutsche Bank AG (Registered)     18,323,519  
      95,520     Deutsche Boerse AG     7,344,850  
      861,894     Deutsche Telekom AG (Registered)     11,598,809  
      600,865     E.ON AG     19,735,303  
      107,810     HeidelbergCement AG     7,571,761  
      440,330     Heidelberger Druckmaschinen AG *     2,164,506  
      138,720     K+S AG     10,723,504  

         
    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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Germany — continued        
      26,590     MAN SE     3,388,825  
      376,523     SAP AG     22,752,788  
      99,803     Siemens AG (Registered)     13,493,854  
      38,400     ThyssenKrupp AG     1,602,540  
                     
            Total Germany     217,804,716  
                     
                     
            Greece — 0.3%        
      548,176     National Bank of Greece SA *     5,096,389  
      162,112     OPAP SA     3,384,780  
                     
            Total Greece     8,481,169  
                     
                     
            Hong Kong — 1.6%        
      1,305,000     Cheung Kong Holdings Ltd     20,420,790  
      1,350,622     Great Eagle Holdings Ltd     4,509,764  
      1,629,000     Hutchison Whampoa Ltd     19,238,316  
                     
            Total Hong Kong     44,168,870  
                     
                     
            India — 0.4%        
      624,526     Hindalco Industries Ltd     2,800,206  
      1,152,930     Housing Development & Infrastructure Ltd *     4,057,472  
      2,080,827     Indiabulls Real Estate Ltd *     4,802,060  
                     
            Total India     11,659,738  
                     
                     
            Indonesia — 0.3%        
      5,226,462     Bank Mandiri Tbk PT     3,454,033  
      1,538,000     Tambang Batubara Bukit Asam Tbk PT     3,511,295  
                     
            Total Indonesia     6,965,328  
                     
                     
            Ireland — 0.4%        
      516,539     C&C Group Plc     2,517,944  
      320,141     CRH Plc     7,403,399  
      65,609     DCC Plc     2,105,768  
                     
            Total Ireland     12,027,111  
                     

         
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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Israel — 0.2%        
      103,960     Teva Pharmaceutical Industries Ltd Sponsored ADR     5,208,396  
                     
                     
            Italy — 7.2%        
      423,655     Assicurazioni Generali SPA     9,587,359  
      653,573     Autogrill SPA *     9,248,634  
      2,118,140     Enel Green Power SPA *     5,004,052  
      3,758,827     Enel SPA     22,399,890  
      1,864,606     ENI SPA     45,463,891  
      339,262     Fiat Industrial SPA *     4,737,826  
      72,320     Fondiaria – Sai SPA-Di RISP     424,439  
      4,282,903     Intesa San Paolo     14,452,594  
      1,958,358     Intesa Sanpaolo SPA-Di RISP     5,737,793  
      426,567     Italcementi SPA-Di RISP     2,165,947  
      377,986     Lottomatica SPA     5,347,040  
      1,629,307     Mediaset SPA     10,489,313  
      476,150     Mediobanca SPA     5,040,921  
      278,521     Prysmian SPA     5,884,745  
      2,300,966     Saras SPA *     5,921,610  
      360,869     Telecom Italia SPA     563,397  
      6,580,058     Telecom Italia SPA-Di RISP     8,709,072  
      10,781,323     UniCredit SPA     27,738,286  
      604,444     Unione di Banche Italiane ScpA     6,108,575  
                     
            Total Italy     195,025,384  
                     
                     
            Japan — 20.5%        
      1,236,000     Aeon Co Ltd     15,594,843  
      439,000     Aisin Seiki Co Ltd     16,813,899  
      558,600     Alps Electric Co Ltd     7,529,594  
      1,212,000     Asahi Glass Co Ltd     16,946,525  
      1,472,000     Asahi Kasei Corp     10,207,755  
      280,100     Astellas Pharma Inc     11,013,835  
      350,000     Canon Inc     16,925,789  
      1,260,000     Chiba Bank Ltd     8,645,888  
      3,257,000     Chuo Mitsui Trust Holdings Inc     13,910,686  

         
    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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Japan — continued        
      112,800     Daito Trust Construction Co Ltd     9,243,222  
      1,223,000     Ebara Corp *     7,156,140  
      521,200     FujiFilm Holdings Corp     18,350,441  
      5,414,000     Hitachi Ltd     32,951,883  
      1,079,500     Honda Motor Co Ltd     47,111,729  
      1,231,700     Itochu Corp     12,808,544  
      443,000     JSR Corp     9,527,729  
      443,500     JS Group Corp     10,801,523  
      2,969,100     JX Holdings Inc     20,915,754  
      396,700     Kansai Electric Power Co Inc (The)     10,418,506  
      750,000     Kirin Holdings Co Ltd     10,738,227  
      283,100     Lawson Inc     13,940,308  
      877,000     Minebea Co Ltd     5,217,273  
      175,000     Miraca Holdings Inc     6,770,561  
      2,131,000     Mitsubishi Electric Corp     25,321,535  
      609,000     Mitsui & Co Ltd     11,132,497  
      2,198,000     Mitsui OSK Lines Ltd     14,615,606  
      19,100     Nintendo Co Ltd     5,617,029  
      331,000     Nissan Chemical Industries Ltd     3,864,894  
      2,861,800     Nissan Motor Co Ltd     29,405,285  
      52,000     Nitori Co Ltd     4,604,065  
      1,024,000     NSK Ltd     9,798,147  
      14,076     NTT Docomo Inc     26,442,830  
      358     ORIX JREIT Inc (REIT)     2,065,211  
      361,400     Otsuka Holdings Co Ltd *     9,043,283  
      1,112,000     Sekisui Chemical Co Ltd     8,786,465  
      95,300     Shimamura Co Ltd     9,231,442  
      307,700     Stanley Electric Co Ltd     5,667,067  
      670,100     Sumitomo Electric Industries Ltd     9,833,519  
      744,100     Sumitomo Mitsui Financial Group Inc     28,158,008  
      363,000     Sumitomo Realty & Development Co Ltd     9,789,526  
      1,469,000     Teijin Ltd     7,119,609  
                     
            Total Japan     554,036,672  
                     

         
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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Malaysia — 0.2%        
      2,219,500     Petronas Chemicals Group Bhd *     4,583,790  
                     
                     
            Mexico — 0.5%        
      76,900     Grupo Aeroportuario del Sureste SAB de CV ADR     4,204,892  
      235,200     Ternium SA-ADR     8,476,608  
                     
                  12,681,500  
                     
                     
            Netherlands — 2.4%        
      943,500     Aegon NV *     7,262,468  
      14,075     APERAM *     582,004  
      145,800     ASML Holding NV     6,350,440  
      145,722     Dockwise Ltd *     4,126,138  
      77,715     Fugro NV     6,537,388  
      194,129     Imtech NV     7,013,529  
      671,443     ING Groep NV *     8,422,936  
      527,132     Koninklijke KPN NV     8,534,295  
      561,278     Unilever NV     16,929,238  
                     
            Total Netherlands     65,758,436  
                     
                     
            New Zealand — 0.0%        
      118,286     Sky Network Television Ltd     480,032  
                     
                     
            Norway — 2.3%        
      445,620     Aker Solutions ASA     9,445,155  
      1,681,202     BW Offshore Ltd *     4,275,416  
      482,352     DnB NOR ASA     7,465,495  
      1,024,510     Norsk Hydro ASA     8,452,523  
      692,430     Orkla ASA     6,309,080  
      813,397     ProSafe ASA     6,132,508  
      576,000     Telenor ASA     9,556,165  
      199,690     Yara International ASA     10,602,764  
                     
            Total Norway     62,239,106  
                     

         
    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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Philippines — 0.2%        
      9,950,000     Alliance Global Group Inc     2,621,967  
      994,890     Cebu Air Inc *     1,869,271  
                     
            Total Philippines     4,491,238  
                     
                     
            Russia — 1.0%        
      309,300     Gazprom OAO Sponsored ADR     9,103,899  
      253,450     Lukoil OAO ADR     17,946,630  
                     
            Total Russia     27,050,529  
                     
                     
            Singapore — 0.8%        
      375,000     DBS Group Holdings Ltd     4,189,838  
      4,026,000     Global Logistic Properties Ltd *     6,014,625  
      823,000     Keppel Corp Ltd     7,313,304  
      289,300     Singapore Airlines Ltd     3,106,518  
                     
            Total Singapore     20,624,285  
                     
                     
            South Korea — 1.3%        
      58,000     Doosan Heavy Industries and Construction Co     3,560,456  
      19,210     Hyundai Mobis     4,480,686  
      16,900     LG Chem Ltd     5,591,695  
      208,430     LG Display Co Ltd     6,630,881  
      45,400     LG Electronics Inc     4,481,792  
      291,400     SK Telecom Co Ltd ADR     5,125,726  
      34,520     SK Holdings Co Ltd     4,068,659  
                     
            Total South Korea     33,939,895  
                     
                     
            Spain — 1.2%        
      1,043,221     Banco Santander SA     12,843,867  
      266,190     Enagas     5,700,332  
      111,531     Red Electrica de Espana     5,993,883  
      252,698     Repsol YPF SA     8,482,817  
                     
            Total Spain     33,020,899  
                     

         
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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Sweden — 2.3%        
      157,350     Autoliv Inc SDR     11,777,428  
      1,160,660     Ericsson LM B Shares     14,907,509  
      768,650     Nordea Bank AB     8,744,082  
      496,440     Svenska Cellulosa AB Class B     8,204,414  
      983,090     Swedbank AB Class A *     17,322,124  
                     
            Total Sweden     60,955,557  
                     
                     
            Switzerland — 4.8%        
      111,630     Adecco SA     7,526,936  
      47,152     Energiedienst Holding AG (Registered)     2,676,128  
      400,980     Novartis AG (Registered)     22,533,726  
      284,130     Roche Holding AG (Non Voting)     42,858,869  
      65,316     Sulzer AG     10,142,800  
      19,808     Swisscom AG (Registered)     8,745,495  
      59,532     Syngenta AG (Registered)     19,997,406  
      56,639     Zurich Financial Services AG     16,452,693  
                     
            Total Switzerland     130,934,053  
                     
                     
            Taiwan — 0.5%        
      610,800     Asustek Computer Inc     5,572,707  
      466,960     Hon Hai Precision Industry Co Ltd     1,732,689  
      131,490     HTC Corp     4,749,498  
      2,121,574     Pegatron Corp *     2,526,367  
                     
            Total Taiwan     14,581,261  
                     
                     
            Thailand — 0.1%        
      357,200     PTT Pcl (Foreign Registered) (a)     3,966,670  
                     
                     
            United Kingdom — 23.2%        
      230,875     AMEC Plc     4,369,224  
      427,494     Anglo American Plc     23,188,895  
      235,054     AstraZeneca Plc     11,501,736  
      902,775     Aviva Plc     6,852,471  
      3,534,326     Barclays Plc     18,341,870  
      914,782     BG Group Plc     22,275,515  

         
    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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            United Kingdom — continued        
      335,230     Bodycote Plc     1,664,741  
      6,915,162     BP Plc     55,747,752  
      1,001,608     British American Tobacco Plc     40,128,436  
      4,148,500     BT Group Plc     12,322,012  
      1,216,807     Centrica Plc     6,728,800  
      535,978     Compass Group Plc     4,822,818  
      913,136     Diageo Plc     17,852,359  
      303,707     Experian Plc     3,851,507  
      4,428,098     HSBC Holdings Plc     48,767,355  
      621,137     Imperial Tobacco Group Plc     19,932,487  
      899,931     Inchcape Plc *     5,680,121  
      757,551     International Power Plc     4,118,395  
      60,477     Johnson Matthey Plc     1,824,571  
      365,116     John Wood Group Plc     3,915,394  
      347,528     Land Securities Group Plc (REIT)     4,331,260  
      2,331,181     Legal & General Group Plc     4,503,668  
      430,605     Marks & Spencer Group Plc     2,424,534  
      1,052,320     National Express Group Plc *     4,246,576  
      548,002     National Grid Plc     5,092,322  
      124,058     Next Plc     3,984,888  
      499,297     Prudential Plc     5,775,713  
      176,540     Reckitt Benckiser Group Plc     9,101,666  
      232,712     Reed Elsevier Plc     2,077,792  
      381,385     Rio Tinto Plc     26,855,858  
      196,505     Rolls – Royce Group Plc *     1,972,335  
      1,779,431     Royal Bank of Scotland Group Plc *     1,305,261  
      1,192,607     Royal Dutch Shell Plc A Shares (London)     42,901,462  
      902,834     Royal Dutch Shell Plc B Shares (London)     32,274,802  
      227,343     SABMiller Plc     7,658,763  
      51,102     Schroders Plc     1,487,848  
      311,180     Scottish & Southern Energy Plc     6,267,099  
      137,333     Severn Trent Plc     3,321,923  
      100,358     Shire Plc     2,842,173  
      74,807     Smiths Group Plc     1,626,215  

         
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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            United Kingdom — continued        
      227,764     Smith & Nephew Plc     2,638,282  
      415,280     Standard Chartered Plc     10,983,674  
      2,961,255     Tesco Plc     19,450,292  
      102,837     Travis Perkins Plc     1,663,854  
      240,019     Ultra Electronics Holdings Plc     6,703,539  
      269,346     Unilever Plc     7,985,790  
      17,268,581     Vodafone Group Plc     49,027,146  
      213,700     Whitbread Plc     6,191,508  
      3,151,982     WM Morrison Supermarkets Plc     14,185,709  
      166,838     WPP Plc     2,296,089  
      881,488     Xstrata Plc     20,160,615  
                     
            Total United Kingdom     625,225,115  
                     
                     
            TOTAL COMMON STOCKS (COST $2,301,867,187)     2,626,954,001  
                     
                     
            PREFERRED STOCKS — 1.0%        
                     
            Brazil — 0.4%        
      144,500     Cia Brasileira de Distribuicao Grupo Pao de Acucar Sponsored ADR 0.49%     5,449,095  
      180,400     Vivo Participacoes SA 1.53%     6,473,062  
                     
            Total Brazil     11,922,157  
                     
                     
            Germany — 0.2%        
      52,550     Porsche Automobil Holding SE 0.17%     4,186,480  
                     
                     
            Italy — 0.1%        
      117,030     Fiat Industrial SPA *     1,082,020  
      111,820     Fiat SPA 5.97%     827,656  
                     
            Total Italy     1,909,676  
                     

         
    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, 2011
 
                     
 
 		           
Shares /
 		           
Par Value     Description   Value ($)  
                     
            South Korea — 0.3%        
      73,210     Hyundai Motor Co 2.55%     4,090,060  
      22,500     LG Chem Ltd 2.87%     2,825,923  
      54,440     LG Electronics Inc 0.60%     2,003,085  
                     
            Total South Korea     8,919,068  
                     
                     
            TOTAL PREFERRED STOCKS (COST $21,265,442)     26,937,381  
                     
                     
            RIGHTS AND WARRANTS — 0.0%        
                     
            Italy — 0.0%        
      528,734     Mediobanca SPA Warrants, Expires 03/18/11 *     1,532  
      497,700     Unione di Banche Italiane SCPA Warrants, Expires 06/30/11 *     1,305  
                     
            Total Italy     2,837  
                     
                     
            TOTAL RIGHTS AND WARRANTS (COST $23,255)     2,837  
                     
                     
            SHORT-TERM INVESTMENTS — 1.1%        
                     
            Time Deposits — 1.1%        
AUD
    66,976     Brown Brothers Harriman (Grand Cayman) Time Deposit, 3.84%, due 03/01/11     68,192  
GBP
    1,130,055     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.09%, due 03/01/11     1,837,075  
JPY
    16,420,880     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.01%, due 03/01/11     200,732  
NOK
    544     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.97%, due 03/01/11     97  
SGD
    70,382     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.01%, due 03/01/11     55,340  
EUR
    4,036,535     Citibank (New York) Time Deposit, 0.12%, due 03/01/11     5,570,216  
USD
    96,180     Citibank (New York) Time Deposit, 0.03%, due 03/01/11     96,180  
USD
    22,400,000     Commerzbank (Grand Cayman) Time Deposit, 0.16%, due 03/01/11     22,400,000  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $30,227,832)     30,227,832  
                     
                     
            TOTAL INVESTMENTS — 99.5%
(Cost $2,353,383,716) 		    2,684,122,051  
            Other Assets and Liabilities (net) — 0.5%     13,094,727  
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 2,697,216,778  
                     

         
14
  See accompanying notes to the financial statements.    

 

 
GMO Foreign Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Notes to Schedule of Investments:
 
ADR - American Depositary Receipt
REIT - Real Estate Investment Trust
SDR - Swedish Depository Receipt
* Non-income producing security.
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
 
Currency Abbreviations:
 
AUD - Australian Dollar
EUR - Euro
GBP - British Pound
JPY - Japanese Yen
NOK - Norwegian Krone
SGD - Singapore Dollar
USD - United States Dollar

         
    See accompanying notes to the financial statements.   15

 

GMO Foreign Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments, at value (cost $2,353,383,716) (Note 2)
  $ 2,684,122,051  
Foreign currency, at value (cost $5,192,551) (Note 2)
    5,242,698  
Receivable for investments sold
    24,897,430  
Receivable for Fund shares sold
    90,857  
Dividends and interest receivable
    5,881,316  
Foreign taxes receivable
    493,071  
Receivable for expenses reimbursed by Manager (Note 5)
    128,128  
Miscellaneous receivable
    609,914  
         
Total assets
    2,721,465,465  
         
         
Liabilities:
       
Payable for investments purchased
    1,883,835  
Payable for Fund shares repurchased
    20,131,416  
Payable to affiliate for (Note 5):
       
Management fee
    1,253,621  
Shareholder service fee
    291,911  
Administration fee – Class M
    763  
Trustees and Trust Officers or agents unaffiliated with the Manager
    6,578  
Payable for 12b-1 fee – Class M
    1,988  
Payable for foreign currency purchased
    85,071  
Accrued expenses
    593,504  
         
Total liabilities
    24,248,687  
         
Net assets
  $ 2,697,216,778  
         

         
16
  See accompanying notes to the financial statements.    

 

 
GMO Foreign Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011 — (Continued)
 
         
Net assets consist of:
       
Paid-in capital
  $ 3,008,334,003  
Accumulated undistributed net investment income
    25,682,623  
Accumulated net realized loss
    (667,600,625 )
Net unrealized appreciation
    330,800,777  
         
    $ 2,697,216,778  
         
Net assets attributable to:
       
Class II shares
  $ 417,684,824  
         
Class III shares
  $ 1,440,951,758  
         
Class IV shares
  $ 833,582,044  
         
Class M shares
  $ 4,998,152  
         
Shares outstanding:
       
Class II
    32,423,527  
         
Class III
    111,304,884  
         
Class IV
    62,888,335  
         
Class M
    386,271  
         
Net asset value per share:
       
Class II
  $ 12.88  
         
Class III
  $ 12.95  
         
Class IV
  $ 13.25  
         
Class M
  $ 12.94  
         

         
    See accompanying notes to the financial statements.   17

 

GMO Foreign Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends (net of withholding taxes of $8,414,611)
  $ 81,119,947  
Interest
    109,526  
         
Total investment income
    81,229,473  
         
Expenses:
       
Management fee (Note 5)
    17,190,364  
Shareholder service fee – Class II (Note 5)
    1,014,874  
Shareholder service fee – Class III (Note 5)
    2,239,220  
Shareholder service fee – Class IV (Note 5)
    815,452  
12b-1 fee – Class M (Note 5)
    12,206  
Administration fee – Class M (Note 5)
    9,764  
Custodian and fund accounting agent fees
    1,313,999  
Legal fees
    110,381  
Audit and tax fees
    96,992  
Trustees fees and related expenses (Note 5)
    70,536  
Transfer agent fees
    70,041  
Registration fees
    36,590  
Miscellaneous
    93,208  
         
Total expenses
    23,073,627  
Fees and expenses reimbursed by Manager (Note 5)
    (1,694,649 )
Expense reductions (Note 2)
    (646 )
         
Net expenses
    21,378,332  
         
Net investment income (loss)
    59,851,141  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments (net of foreign capital gains tax of $2,372) (Note 2)
    120,314,028  
Foreign currency, forward contracts and foreign currency related transactions (net of foreign transaction taxes of $507,321) (Note 2)
    (11,126,583 )
         
Net realized gain (loss)
    109,187,445  
         
Change in net unrealized appreciation (depreciation) on:
       
Investments
    313,370,362  
Foreign currency, forward contracts and foreign currency related transactions
    325,416  
         
Net unrealized gain (loss)
    313,695,778  
         
Net realized and unrealized gain (loss)
    422,883,223  
         
Net increase (decrease) in net assets resulting from operations
  $ 482,734,364  
         

         
18
  See accompanying notes to the financial statements.    

 

GMO Foreign Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 59,851,141     $ 84,982,160  
Net realized gain (loss)
    109,187,445       (429,351,370 )
Change in net unrealized appreciation (depreciation)
    313,695,778       1,596,286,890  
                 
                 
Net increase (decrease) in net assets from operations
    482,734,364       1,251,917,680  
                 
Distributions to shareholders from:
               
Net investment income
               
Class II
    (9,334,792 )     (30,762,111 )
Class III
    (29,522,934 )     (94,821,520 )
Class IV
    (18,540,322 )     (18,767,306 )
Class M
    (84,450 )     (201,387 )
                 
Total distributions from net investment income
    (57,482,498 )     (144,552,324 )
                 
Net share transactions (Note 9):
               
Class II
    (192,336,087 )     (438,363,474 )
Class III
    (375,917,665 )     (1,239,331,675 )
Class IV
    (157,627,171 )     411,299,489  
Class M
    (542,998 )     (456,251 )
                 
Increase (decrease) in net assets resulting from net share transactions
    (726,423,921 )     (1,266,851,911 )
                 
                 
Total increase (decrease) in net assets
    (301,172,055 )     (159,486,555 )
                 
Net assets:
               
Beginning of period
    2,998,388,833       3,157,875,388  
                 
End of period (including accumulated undistributed net investment income of $25,682,623 and $23,999,199, respectively)
  $ 2,697,216,778     $ 2,998,388,833  
                 

         
    See accompanying notes to the financial statements.   19

 

GMO Foreign Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class II share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 11.07     $ 8.03     $ 16.52     $ 18.56     $ 16.70  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.24       0.26       0.45       0.40       0.38  
Net realized and unrealized gain (loss)
    1.79       3.24       (7.95 )     (0.36 )     3.06  
                                         
                                         
Total from investment operations
    2.03       3.50       (7.50 )     0.04       3.44  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.22 )     (0.46 )     (0.33 )     (0.44 )     (0.43 )
From net realized gains
    —       —       (0.66 )     (1.64 )     (1.15 )
                                         
                                         
Total distributions
    (0.22 )     (0.46 )     (0.99 )     (2.08 )     (1.58 )
                                         
                                         
Net asset value, end of period
  $ 12.88     $ 11.07     $ 8.03     $ 16.52     $ 18.56  
                                         
                                         
Total Return(a)
    18.71 %     43.95 %     (47.49 )%     (0.78 )%     21.21 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 417,685     $ 545,336     $ 765,201     $ 848,359     $ 1,018,021  
Net expenses to average daily net assets
    0.82 %(b)     0.82 %(b)     0.82 %(c)     0.82 %(c)     0.82 %
Net investment income (loss) to average daily net assets
    2.09 %     2.53 %     3.42 %     2.10 %     2.17 %
Portfolio turnover rate
    55 %     59 %     39 %     29 %     23 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.06 %     0.05 %     0.05 %     0.05 %     0.05 %
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† Calculated using average shares outstanding throughout the period.

         
20
  See accompanying notes to the financial statements.    

 

GMO Foreign Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 11.13     $ 8.07     $ 16.59     $ 18.64     $ 16.76  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.24       0.28       0.47       0.41       0.38  
Net realized and unrealized gain (loss)
    1.81       3.25       (7.99 )     (0.36 )     3.09  
                                         
                                         
Total from investment operations
    2.05       3.53       (7.52 )     0.05       3.47  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.23 )     (0.47 )     (0.34 )     (0.46 )     (0.44 )
From net realized gains
    —       —       (0.66 )     (1.64 )     (1.15 )
                                         
                                         
Total distributions
    (0.23 )     (0.47 )     (1.00 )     (2.10 )     (1.59 )
                                         
                                         
Net asset value, end of period
  $ 12.95     $ 11.13     $ 8.07     $ 16.59     $ 18.64  
                                         
                                         
Total Return(a)
    18.80 %     44.10 %     (47.42 )%     (0.75 )%     21.36 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 1,440,952     $ 1,591,717     $ 2,054,885     $ 4,078,545     $ 4,556,742  
Net expenses to average daily net assets
    0.75 %(b)     0.75 %(b)     0.75 %(c)     0.75 %(c)     0.75 %
Net investment income (loss) to average daily net assets
    2.08 %     2.65 %     3.51 %     2.16 %     2.11 %
Portfolio turnover rate
    55 %     59 %     39 %     29 %     23 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.06 %     0.05 %     0.05 %     0.05 %     0.05 %
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† Calculated using average shares outstanding throughout the period.

         
    See accompanying notes to the financial statements.   21

 

GMO Foreign Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class IV share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 11.39     $ 8.07     $ 16.59     $ 18.64     $ 16.77  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.25       0.22       0.51       0.40       0.36  
Net realized and unrealized gain (loss)
    1.85       3.35       (8.02 )     (0.34 )     3.11  
                                         
                                         
Total from investment operations
    2.10       3.57       (7.51 )     0.06       3.47  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.24 )     (0.25 )     (0.35 )     (0.47 )     (0.45 )
From net realized gains
    —       —       (0.66 )     (1.64 )     (1.15 )
                                         
                                         
Total distributions
    (0.24 )     (0.25 )     (1.01 )     (2.11 )     (1.60 )
                                         
                                         
Net asset value, end of period
  $ 13.25     $ 11.39     $ 8.07     $ 16.59     $ 18.64  
                                         
                                         
Total Return(a)
    18.80 %     44.05 %     (47.39 )%     (0.68 )%     21.36 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 833,582     $ 856,553     $ 334,003     $ 3,571,516     $ 3,424,024  
Net expenses to average daily net assets
    0.69 %(b)     0.69 %(b)     0.69 %(c)     0.69 %(c)     0.69 %
Net investment income (loss) to average daily net assets
    2.10 %     1.92 %     3.70 %     2.08 %     2.04 %
Portfolio turnover rate
    55 %     59 %     39 %     29 %     23 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.06 %     0.05 %     0.05 %     0.05 %     0.05 %
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† Calculated using average shares outstanding throughout the period.

         
22
  See accompanying notes to the financial statements.    

 

GMO Foreign Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class M share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 11.12     $ 8.07     $ 16.58     $ 18.63     $ 16.75  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.20       0.22       0.41       0.35       0.30  
Net realized and unrealized gain (loss)
    1.82       3.27       (7.96 )     (0.36 )     3.12  
                                         
                                         
Total from investment operations
    2.02       3.49       (7.55 )     (0.01 )     3.42  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.20 )     (0.44 )     (0.30 )     (0.40 )     (0.39 )
From net realized gains
    —       —       (0.66 )     (1.64 )     (1.15 )
                                         
                                         
Total distributions
    (0.20 )     (0.44 )     (0.96 )     (2.04 )     (1.54 )
                                         
                                         
Net asset value, end of period
  $ 12.94     $ 11.12     $ 8.07     $ 16.58     $ 18.63  
                                         
                                         
Total Return(a)
    18.47 %     43.60 %     (47.58 )%     (1.05 )%     21.04 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 4,998     $ 4,783     $ 3,786     $ 7,375     $ 8,258  
Net expenses to average daily net assets
    1.05 %(b)     1.05 %(b)     1.05 %(c)     1.05 %(c)     1.05 %
Net investment income (loss) to average daily net assets
    1.72 %     2.05 %     3.11 %     1.81 %     1.69 %
Portfolio turnover rate
    55 %     59 %     39 %     29 %     23 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.06 %     0.05 %     0.05 %     0.05 %     0.05 %
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† Calculated using average shares outstanding throughout the period.

         
    See accompanying notes to the financial statements.   23

 

GMO Foreign Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO Foreign Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund seeks total return in excess of that of its benchmark, the MSCI EAFE Index (Europe, Australasia, and Far East). The Fund typically makes equity investments directly and indirectly (e.g., through underlying funds or derivatives) in companies tied economically to non-U.S. countries, including companies that issue equity investments included in the MSCI international developed country universe (the universe of securities from which the MSCI EAFE Index, a developed markets index, is constructed) and companies whose equity investments are traded in the securities markets of the world’s non-developed countries (“emerging countries”). The term “equity investments” refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts. Under normal circumstances, the Fund invests directly and indirectly at least 80% of its assets in investments tied economically to countries outside the U.S.
 
The Fund’s country selections relative to its benchmark are determined by a cumulative quantitative value score for each country together with the Manager’s evaluation of the country’s fundamentals. The Fund typically overweights or underweights (sometimes to a significant extent) its investment exposures in particular countries relative to the Fund’s benchmark. The Manager selects stocks using fundamental analysis that is informed by a disciplined quantitative screening process. The Manager separates companies with valuations it believes are deservedly low from those it believes represent investment opportunities. The Manager analyzes companies for financial, operational and managerial strength and compares them to their global, regional and local industry peers. As part of the investment process, the Manager frequently meets with management and/or visits companies.
 
The Fund normally does not take temporary defensive positions but may hold up to 10% of its total assets in cash and cash equivalents to manage cash inflows and outflows as a result of shareholder purchases and redemptions. To the extent the Fund takes temporary defensive positions or holds cash or cash equivalents to manage shareholder purchases or redemptions, it may not achieve its investment objective. The Fund typically makes investments tied economically to emerging countries, but these investments generally represent 10% or less of the Fund’s total assets.
 
In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the-counter (“OTC”) derivatives, including, without limitation, futures and options. In addition, the Fund may lend its portfolio securities. The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund.

         
24
       

 

 
GMO Foreign Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Throughout the year ended February 28, 2011, the Fund had four classes of shares outstanding: Class II, Class III, Class IV, and Class M. Class M shares bear an administration fee and a 12b-1 fee while classes II, III, and IV bear a shareholder service fee (See Note 5). The principal economic difference among the classes of shares is the type and level of fees they bear.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the OTC market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of February 28, 2011, the total value of securities held directly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 0.2% of net assets. The Fund classifies such securities (as defined below) as Level 3. Additionally, because many foreign equity securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices adjusted by a factor supplied by a third party vendor using that vendor’s proprietary models. As of February 28, 2011, 94.8% of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified as using Level 2 inputs in the table below. See Note 4 for a further discussion on valuation of derivative financial instruments.

         
        25

 

 
GMO Foreign Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include: fair value adjustments applied to local closing prices of foreign securities and derivatives due to market events that have occurred since the local market close but before the Fund’s daily NAV calculation.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund utilized a number of fair value techniques on Level 3 investments, including the following: Certain of the Fund’s securities in Thailand were valued at the local price as adjusted by applying a premium or discount when the holdings exceed foreign ownership limitations.

         
26
       

 

 
GMO Foreign Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Common Stocks
                               
Australia
  $ 1,537,832     $ 67,550,860     $ —     $ 69,088,692  
Austria
    —       13,305,604       —       13,305,604  
Belgium
    —       13,329,310       —       13,329,310  
Brazil
    17,086,339       —       —       17,086,339  
China
    —       15,828,055       —       15,828,055  
Denmark
    6,622,404       16,885,175       —       23,507,579  
Finland
    —       55,579,135       —       55,579,135  
France
    —       263,319,537       —       263,319,537  
Germany
    —       217,804,716       —       217,804,716  
Greece
    —       8,481,169       —       8,481,169  
Hong Kong
    —       44,168,870       —       44,168,870  
India
    —       11,659,738       —       11,659,738  
Indonesia
    —       6,965,328       —       6,965,328  
Ireland
    —       12,027,111       —       12,027,111  
Israel
    5,208,396       —       —       5,208,396  
Italy
    9,741,878       185,283,506       —       195,025,384  
Japan
    9,043,283       544,993,389       —       554,036,672  
Malaysia
    4,583,790       —       —       4,583,790  
Mexico
    12,681,500       —       —       12,681,500  
Netherlands
    582,004       65,176,432       —       65,758,436  
New Zealand
    —       480,032       —       480,032  
Norway
    —       62,239,106       —       62,239,106  
Philippines
    1,869,271       2,621,967       —       4,491,238  
Russia
    —       27,050,529       —       27,050,529  
Singapore
    6,014,625       14,609,660       —       20,624,285  
South Korea
    5,125,726       28,814,169       —       33,939,895  
Spain
    —       33,020,899       —       33,020,899  
Sweden
    —       60,955,557       —       60,955,557  
Switzerland
    —       130,934,053       —       130,934,053  
Taiwan
    —       14,581,261       —       14,581,261  

         
        27

 

 
GMO Foreign Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
  
  ASSET VALUATION INPUTS — continued
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Thailand
  $ —     $ —     $ 3,966,670     $ 3,966,670  
United Kingdom
    —       625,225,115       —       625,225,115  
                                 
TOTAL COMMON STOCKS
    80,097,048       2,542,890,283       3,966,670       2,626,954,001  
                                 
Preferred Stocks
                               
Brazil
    11,922,157       —       —       11,922,157  
Germany
    —       4,186,480       —       4,186,480  
Italy
    1,082,020       827,656       —       1,909,676  
South Korea
    —       8,919,068       —       8,919,068  
                                 
TOTAL PREFERRED STOCKS
    13,004,177       13,933,204       —       26,937,381  
                                 
Rights and Warrants
                               
Italy
    —       2,837       —       2,837  
                                 
TOTAL RIGHTS AND WARRANTS
    —       2,837       —       2,837  
                                 
Short-Term Investments
    30,227,832       —       —       30,227,832  
                                 
Total Investments
    123,329,057       2,556,826,324       3,966,670       2,684,122,051  
                                 
Total
  $ 123,329,057     $ 2,556,826,324     $ 3,966,670     $ 2,684,122,051  
                                 
 
The aggregate net value of the Fund’s direct investments in securities using Level 3 inputs was 0.2% of total net assets.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.

         
28
       

 

 
GMO Foreign Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a reconciliation of investments and derivatives, if any, in which significant unobservable inputs (Level 3) were used in determining value:
 
                                                                           
 
                                      Net Change in
                                      Unrealized
                                      Appreciation
                                      (Depreciation)
                                      from
    Balances
               Change in
           Balances
     Investments
    as of
   Net
   Accrued
   Total
   Unrealized
   Transfers
   Transfers
   as of
     Still Held as
    February 28,
   Purchases/
   Discounts/
   Realized
   Appreciation
   into
   out of
   February 28,
     of February
    2010   (Sales)   Premiums   Gain/(Loss)   (Depreciation)   Level 3*   Level 3*   2011     28, 2011
Common Stocks
                                                                         
Canada
  $ 2,092     $ —     $      —     $ (565,598 )   $ 563,506     $      —     $      —     $ —       $ —  
Thailand
    6,963,258       (4,215,953 )     —       573,375       645,990       —       —       3,966,670         908,125  
                                                                           
Total
  $ 6,965,350     $ (4,215,953 )   $ —     $ 7,777     $ 1,209,496     $ —     $ —     $ 3,966,670       $ 908,125  
                                                                           
            * The Fund accounts for investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the value at the end of the period.
 
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 pm. Income and expenses denominated in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country’s tax treaty with the United States. The foreign withholding rates applicable to a Fund’s investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.

         
        29

 

 
GMO Foreign Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if paid by the shareholders of the Fund.
 
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Taxes related to capital gains realized during the year ended February 28, 2011, if any, are reflected as part of Net realized gain (loss) in the Statement of Operations. Changes in tax liabilities related to capital gain taxes on unrealized investment gains, if any, are reflected as part of Change in net unrealized appreciation (depreciation) in the Statement of Operations. Transaction-based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to passive foreign investment company transactions, foreign currency transactions, capital loss carryforwards, losses on wash sale transactions, and post-October capital losses.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 57,482,498     $ 144,552,324  
                 
Total distributions
  $ 57,482,498     $ 144,552,324  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.

         
30
       

 

 
GMO Foreign Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 26,817,537  
         
Other Tax Attributes:
       
Capital loss carryforwards
  $ (623,935,004 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 28, 2017
  $ (27,534,492 )
February 28, 2018
    (596,400,512 )
         
Total
  $ (623,935,004 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 2,397,403,101     $ 442,661,196     $ (155,942,246 )   $ 286,718,950      
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the

         
        31

 

 
GMO Foreign Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, 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 among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service, 12b-1 and administration fees, which are directly attributable to a class of shares, are charged to that class’s operations.
 
Brown Brothers Harriman & Co. (“BBH”) serves as the Fund’s custodian and fund accounting agent. State Street Bank and Trust Company (“State Street”) serves as the Fund’s transfer agent. BBH’s and State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund’s investments.
 
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund may be subject to foreign taxes on capital gains or other income payable on foreign securities, on

         
32
       

 

 
GMO Foreign Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund’s investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund’s investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
 
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund’s foreign currency holdings and investments denominated in foreign currencies.
 
• Market Risk — Value Securities — The Fund purchases some equity investments at prices below what the Manager believes to be their fundamental value. The Fund runs the risk that the prices of these investments will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value.
 
• Credit and Counterparty Risk — The Fund runs the risk that the counterparty to an over-the-counter derivatives contract or a borrower of the Fund’s securities will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations.
 
Other principal risks of an investment in the Fund include Liquidity Risk (difficulty in selling Fund investments at desirable prices and/or increased likelihood of honoring redemption requests in-kind); Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments); and Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk).

         
        33

 

 
GMO Foreign Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by “equitizing” its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically “sell” a portion of the Fund’s portfolio) in combination with a long futures contract on another index (to synthetically “buy” exposure to that index). The Funds also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may

         
34
       

 

 
GMO Foreign Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral (e.g., foreign currency forwards; see “Currency Risk” above), that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.

         
        35

 

 
GMO Foreign Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund’s forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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.
 
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. During the year ended February 28, 2011, the Fund used forward currency contracts to manage against anticipated currency exchange rate changes. The Fund had no forward currency contracts outstanding at the end of the period.
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because regular trading on many foreign exchanges closes prior to the close of the NYSE, closing prices for these foreign futures contracts (including foreign index futures) do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures contracts using fair value prices, which are based on local closing prices adjusted by a factor, supplied by a third party vendor using that vendor’s proprietary models. The Fund had no futures contracts outstanding at the end of the period.

         
36
       

 

 
GMO Foreign Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an

         
        37

 

 
GMO Foreign Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A

         
38
       

 

 
GMO Foreign Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. During the year ended February 28, 2011, the Fund held rights and warrants received as a result of a corporate action. Rights and warrants held by the Fund at the end of the period are listed in the Fund’s Schedule of Investments.

         
        39

 

 
GMO Foreign Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of
February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Assets:
                                               
Investments, at value (rights and warrants)
  $      —     $      —     $      —     $ 2,837     $      —     $ 2,837  
                                                 
Total
  $ —     $ —     $ —     $ 2,837     $ —     $ 2,837  
                                                 
 
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended
February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Investments, at value (rights and warrants)
  $      —     $      —     $      —     $ (447,830 )   $      —     $ (447,830 )
Forward Currency Contracts
    —       (11,392,212 )     —       —       —       (11,392,212 )
                                                 
Total
  $ —     $ (11,392,212 )   $ —     $ (447,830 )   $ —     $ (11,840,042 )
                                                 
Change in Unrealized Appreciation (Depreciation) on:
                                               
Investments, at value (rights and warrants)
  $ —     $ —     $ —     $ (83,806 )   $ —     $ (83,806 )
                                                 
Total
  $ —     $ —     $ —     $ (83,806 )   $ —     $ (83,806 )
                                                 
 
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
 
The volume of derivative activity, based on absolute values (forward currency contracts and rights and warrants), outstanding at each month-end, was as follows for the period ended February 28, 2011:
 
                 
    Forward
    
    currency
   Rights/
    contracts   Warrants
 
Average amount outstanding
  $ 108,438,290     $ 236,911  

         
40
       

 

 
GMO Foreign Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.60% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets of each class at the annual rate of 0.22% for Class II shares, 0.15% for Class III shares, and 0.09% for Class IV shares.
 
Holders of Class M shares of the Fund pay GMO an administration fee for support services provided to Class M shareholders. That fee is paid monthly at the annual rate of 0.20% of the average daily net assets of Class M shares. Pursuant to a Rule 12b-1 distribution and service plan adopted by the Fund, holders of Class M shares of the Fund may pay a fee, at the annual rate of up to 1.00% of average daily net assets of Class M shares for any activities or expenses primarily intended to result in the sale of Class M shares of the Fund and/or for the provision of services to Class M shareholders. The Trustees currently limit payments on Class M shares to 0.25% of the Fund’s average daily net assets of Class M shares.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.60% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means administration fees and distribution (12b-1) fees (Class M Shares only), shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund’s Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund’s Expense Reimbursement Amount. These contractual expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ending February 28, 2011 was $70,536 and $21,482, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.

         
        41

 

 
GMO Foreign Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 aggregated $1,503,999,705 and $2,230,927,072, respectively.
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 11.59% of the outstanding shares of the Fund were held by one shareholder. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
 
As of February 28, 2011, 0.03% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and 0.12% of the Fund’s shares were held by accounts for which the Manager had investment discretion.
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class II:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    2,838,451     $ 34,424,315       5,284,392     $ 58,775,053  
Shares issued to shareholders in reinvestment of distributions
    649,257       7,108,816       2,299,833       23,931,435  
Shares repurchased
    (20,329,864 )     (233,869,218 )     (53,617,185 )     (521,069,962 )
                                 
Net increase (decrease)
    (16,842,156 )   $ (192,336,087 )     (46,032,960 )   $ (438,363,474 )
                                 
                                 
                                 

         
42
       

 

 
GMO Foreign Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    25,890,828     $ 303,138,416       32,110,911     $ 364,181,334  
Shares issued to shareholders in reinvestment of distributions
    2,091,780       23,299,140       6,905,503       72,795,801  
Shares repurchased
    (59,750,915 )     (702,355,221 )     (150,666,345 )     (1,676,308,810 )
                                 
Net increase (decrease)
    (31,768,307 )   $ (375,917,665 )     (111,649,931 )   $ (1,239,331,675 )
                                 
                                 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class IV:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    6,200,712     $ 74,850,982       89,288,679     $ 1,007,203,382  
Shares issued to shareholders in reinvestment of distributions
    1,010,637       11,523,940       939,270       11,365,163  
Shares repurchased
    (19,553,615 )     (244,002,093 )     (56,397,183 )     (607,269,056 )
                                 
Net increase (decrease)
    (12,342,266 )   $ (157,627,171 )     33,830,766     $ 411,299,489  
                                 
                                 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class M:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    36,890     $ 421,605       47,202     $ 490,290  
Shares issued to shareholders in reinvestment of distributions
    7,636       84,450       18,984       201,387  
Shares repurchased
    (88,341 )     (1,049,053 )     (105,440 )     (1,147,928 )
                                 
Net increase (decrease)
    (43,815 )   $ (542,998 )     (39,254 )   $ (456,251 )
                                 

         
        43

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Foreign Fund:
 
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 (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
44
       

 

GMO Foreign Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, distribution (12b-1) and/or administration fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $35,000,000 account value divided by $1,000 = 35,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
        45

 

 
GMO Foreign Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class II
                               
                                 
1) Actual
    0.82 %   $ 1,000.00     $ 1,239.20     $ 4.55  
2) Hypothetical
    0.82 %   $ 1,000.00     $ 1,020.73     $ 4.11  
                                 
Class III
                               
                                 
1) Actual
    0.75 %   $ 1,000.00     $ 1,239.80     $ 4.17  
2) Hypothetical
    0.75 %   $ 1,000.00     $ 1,021.08     $ 3.76  
                                 
Class IV
                               
                                 
1) Actual
    0.69 %   $ 1,000.00     $ 1,239.50     $ 3.83  
2) Hypothetical
    0.69 %   $ 1,000.00     $ 1,021.37     $ 3.46  
                                 
Class M
                               
                                 
1) Actual
    1.05 %   $ 1,000.00     $ 1,238.20     $ 5.83  
2) Hypothetical
    1.05 %   $ 1,000.00     $ 1,019.59     $ 5.26  
                                 
 
            * Expenses are calculated using each Class’s annualized net expense ratio for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
46
       

 

GMO Foreign Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
During the year ended February 28, 2011, the Fund paid foreign taxes of $8,414,332 and recognized foreign source income of $89,600,933.
 
For taxable, non-corporate shareholders, 83.05% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 represents qualified dividend income subject to the 15% rate category.

         
        47

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with the
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
48        

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with the
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     
Name and
   Position(s)
   Length of
   During Past
   Complex
     Other
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Directorships Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee;
President and
Chief Executive
Officer of the
Trust 		  Trustee since
March 2010;
President and Chief Executive
Officer since
March 2009. 		  General Counsel,
Grantham, Mayo, Van
Otterloo & Co. LLC
(October 2005 – present); Partner, Ropes
& Gray LLP (prior to October 2005). 		    63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
        49

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
50        

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money
Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        51

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO Foreign Small Companies Fund
(A Series of GMO Trust)
 
Portfolio Managers
 
Day-to-day management of the Fund’s portfolio is the responsibility of the International Active Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
The Class III shares of GMO Foreign Small Companies Fund returned +33.7% for the fiscal year ended February 28, 2011, as compared with +30.3% for the S&P Developed ex-U.S. Small Cap Index.
 
Stock selection added 7.4% to relative performance for the fiscal year. Stock selection in Germany, Belgium, Switzerland, Hong Kong, and the emerging markets added to relative performance. Stock selection in Australia detracted from relative performance.
 
Country selection detracted from relative performance by 4.1% for the fiscal year. The largest negative impacts from country selection came from an underweight position in Canada and an overweight position in Italy, which subtracted 1.5% and 0.9%, respectively, from relative performance.
 
Because some of the securities and instruments held directly or indirectly by the Fund had positive fair value adjustments during the fiscal year (and the performance of indices are not fair valued), the Fund’s absolute and relative performance is better than it otherwise would have been.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO Foreign Small Companies Fund Class III Shares and the
S&P Developed ex-U.S. Small Cap Index
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Each performance figure assumes a purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of .50% on the purchase and .50% on the redemption. Transaction fees are retained by the Fund to cover trading costs. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The Fund commenced operations on June 30, 2000 subsequent to a transaction involving, in essence, the reorganization of the GMO Small Cap Active Pool of the Common Fund for Non-Profit Organizations (the “GMO Pool”) as the GMO Foreign Small Companies Fund. All information relating to the time periods prior to June 30, 2000 relates to the GMO Pool. All information is unaudited. Performance for classes may vary due to different fees.
 
 
* For the period from March 16, 2009 to August 12, 2009, no Class IV shares were outstanding. Performance for that period is that of Class III shares, which have higher expenses. Therefore, the performance shown is lower than it would have been if Class IV shares had been outstanding.

 

GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary   % of Total Net Assets  
Common Stocks
    96.2 %
Short-Term Investments
    2.4  
Preferred Stocks
    0.8  
Rights and Warrants
    0.1  
Other
    0.5  
         
      100.0 %
         
 
         
Country Summary*   % of Investments  
Japan
    21.9 %
United Kingdom
    18.7  
Italy
    7.5  
Germany
    4.9  
South Korea
    4.9  
France
    4.5  
Brazil
    4.3  
Netherlands
    3.7  
Switzerland
    3.7  
Australia
    3.6  
Canada
    3.3  
Finland
    1.9  
Norway
    1.9  
Belgium
    1.8  
Hong Kong
    1.8  
Sweden
    1.3  
Singapore
    1.2  
Spain
    1.2  
Greece
    1.0  
Ireland
    1.0  
Denmark
    0.9  
Mexico
    0.9  
Philippines
    0.8  
China
    0.5  
New Zealand
    0.5  
Austria
    0.4  
Chile
    0.4  
India
    0.4  
Indonesia
    0.3  
Russia
    0.3  
Taiwan
    0.3  
Thailand
    0.2  
         
      100.0 %
         
 
* The table above shows country exposure in the Fund. The table excludes short-term investments. The table includes exposure through derivative financial instruments, if any. The table excludes exposure through forward currency contracts, if any. The table takes into account the market value of securities and options and the notional amounts of swap agreements and other derivative instruments, if any.

         
        1

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2011 (Unaudited)
 
         
Industry Group Summary   % of Equity Investments**  
Capital Goods
    19.2 %
Materials
    8.2  
Energy
    7.4  
Automobiles & Components
    7.0  
Consumer Durables & Apparel
    5.7  
Retailing
    5.1  
Media
    4.6  
Technology Hardware & Equipment
    4.4  
Diversified Financials
    4.0  
Commercial & Professional Services
    4.0  
Real Estate
    3.6  
Banks
    3.5  
Transportation
    3.3  
Food, Beverage & Tobacco
    3.3  
Consumer Services
    3.2  
Health Care Equipment & Services
    3.0  
Pharmaceuticals, Biotechnology & Life Sciences
    2.3  
Insurance
    1.8  
Food & Staples Retailing
    1.8  
Software & Services
    1.6  
Telecommunication Services
    1.4  
Utilities
    1.2  
Household & Personal Products
    0.4  
         
      100.0 %
         
 
** Equity investments may consist of common stocks and other stock-related securities, such as preferred stocks. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.

         
2
       

 

GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            COMMON STOCKS — 96.2%        
                     
            Australia — 3.5%        
      141,856     Aquarius Platinum Ltd     948,730  
      107,203     Aristocrat Leisure Ltd     348,074  
      1,084,753     Asciano Group *     1,942,988  
      122,263     Billabong International Ltd     1,060,390  
      2,219,240     Dexus Property Group (REIT)     1,941,433  
      791,018     Fairfax Media Ltd     1,057,431  
      330,685     Iress Market Technology Ltd     3,032,097  
      1,286,430     Pacific Brands Ltd *     1,166,315  
      837,100     PanAust Ltd *     697,248  
      329,780     Primary Health Care Ltd     1,091,895  
      91,900     Sonic Healthcare Ltd     1,059,457  
      2,169,320     Ten Network Holdings Ltd     2,924,924  
      158,224     Toll Holdings Ltd     973,030  
      166,269     West Australian Newspapers Holdings Ltd     954,178  
                     
            Total Australia     19,198,190  
                     
                     
            Austria — 0.4%        
      16,047     Flughafen Wien AG     1,078,570  
      58,311     Wienerberger AG *     1,206,580  
                     
            Total Austria     2,285,150  
                     
                     
            Belgium — 1.7%        
      34,448     CMB Cie Maritime Belge SA     1,037,742  
      32,020     Compagnie d’Entreprises CFE     2,392,860  
      25,100     Mobistar SA     1,604,452  
      111,200     Nyrstar     1,510,174  
      42,850     SA D’Ieteren NV     2,902,142  
                     
            Total Belgium     9,447,370  
                     
                     
            Brazil — 3.7%        
      163,800     Aliansce Shopping Centers SA     1,200,097  
      217,300     Autometal SA *     2,013,923  
      434,500     Brasil Brokers Participacoes SA     2,023,906  

         
    See accompanying notes to the financial statements.   3

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Brazil — continued        
      635,000     Cia Hering     9,476,530  
      403,600     Even Construtora e Incorporadora SA     1,819,329  
      213,900     Iochpe-Maxion SA     2,643,217  
      110,200     Profarma-Distribuidora de Produtos Farmaceuticos SA     1,003,444  
                     
            Total Brazil     20,180,446  
                     
                     
            Canada — 3.2%        
      73,300     Corus Entertainment Inc Class B     1,656,804  
      171,600     Flint Energy Services Ltd *     3,426,525  
      400,000     Galleon Energy Inc Class A *     1,638,619  
      634,250     Gran Colombia Gold Corp *     1,253,420  
      172,300     Karnalyte Resources Inc     2,021,738  
      650,000     Orleans Energy Ltd *     1,378,210  
      189,300     Precision Drilling Corp *     2,230,956  
      175,500     Trilogy Energy Corp     3,647,105  
                     
            Total Canada     17,253,377  
                     
                     
            Chile — 0.3%        
      1,438,500     Administradora de Fondos de Pensiones Provida SA     1,859,152  
                     
                     
            China — 0.5%        
      3,877,000     361 Degrees International Ltd     2,632,345  
                     
                     
            Denmark — 0.9%        
      116,190     H Lundbeck A/S     2,654,718  
      1,242,950     Ossur hf *     2,065,853  
                     
            Total Denmark     4,720,571  
                     
                     
            Finland — 1.8%        
      90,284     KCI Konecranes Oyj     4,047,966  
      403,739     Oriola-KD Oyj Class B     1,983,590  
      49,700     Rautaruukki Oyj     1,154,540  

         
4
  See accompanying notes to the financial statements.    

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Finland — continued        
      124,300     Talvivaara Mining Co Plc *     1,120,405  
      60,714     YIT Oyj     1,747,366  
                     
            Total Finland     10,053,867  
                     
                     
            France — 4.4%        
      117,141     Boursorama *     1,357,201  
      112,439     Faurecia *     4,378,454  
      28,000     Neopost SA     2,655,407  
      76,642     Renault SA *     4,699,885  
      52,105     Societe BIC SA     4,453,098  
      29,783     Technip SA     2,943,436  
      21,874     Virbac SA     3,336,227  
                     
            Total France     23,823,708  
                     
                     
            Germany — 4.8%        
      3,664     Axel Springer AG     597,036  
      40,694     Bauer AG     1,998,649  
      52,386     Cat Oil AG     529,218  
      32,050     Continental AG *     2,715,667  
      110,590     Deutsche Lufthansa AG (Registered) *     2,265,694  
      75,000     Deutsche Wohnen AG *     1,127,962  
      22,690     Deutsche Boerse AG     1,744,709  
      70,828     Francotyp-Postalia Holdings AG *     341,430  
      38,661     Gerresheimer AG *     1,719,394  
      31,000     HeidelbergCement AG     2,177,206  
      316,557     Heidelberger Druckmaschinen AG *     1,556,082  
      13,293     MAN SE     1,694,158  
      278,879     Praktiker Bau-Und Heimwerkermaerkte Holding AG     3,395,343  
      132,299     Tognum AG     3,321,778  
      11,440     Wincor Nixdorf AG     958,707  
                     
            Total Germany     26,143,033  
                     

         
    See accompanying notes to the financial statements.   5

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Greece — 0.9%        
      880,890     Alapis Holding Industrial and Commercial SA     607,877  
      273,350     Ellaktor SA     1,295,850  
      57,121     Folli Follie SA *     1,158,715  
      109,095     Intralot SA     375,968  
      78,511     Metka SA     1,119,484  
      67,611     Mytilineos Holdings SA *     484,583  
                     
            Total Greece     5,042,477  
                     
                     
            Hong Kong — 1.7%        
      455,700     Dah Sing Financial Group     2,915,688  
      5,955,900     PCCW Ltd     2,594,425  
      1,200,000     Yue Yuen Industrial Holdings     3,785,973  
                     
            Total Hong Kong     9,296,086  
                     
                     
            India — 0.4%        
      38,250     Corporation Bank     467,096  
      302,200     Housing Development & Infrastructure Ltd *     1,063,523  
      254,100     Rolta India Ltd     792,929  
                     
            Total India     2,323,548  
                     
                     
            Indonesia — 0.3%        
      4,011,000     Borneo Lumbung Energi & Metal Tbk PT *     682,027  
      316,500     Tambang Batubara Bukit Asam Tbk PT     722,578  
                     
            Total Indonesia     1,404,605  
                     
                     
            Ireland — 0.9%        
      277,116     C&C Group Plc     1,350,842  
      70,299     DCC Plc     2,256,297  
      116,610     Smurfit Kappa Group Plc *     1,448,776  
                     
            Total Ireland     5,055,915  
                     
                     
            Italy — 7.3%        
      130,637     Arnoldo Mondadori Editore SPA *     460,328  
      459,850     Astaldi SPA     3,552,664  
      389,323     Autogrill SPA *     5,509,264  

         
6
  See accompanying notes to the financial statements.    

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Italy — continued        
      90,256     Benetton Group SPA     589,782  
      72,754     Brembo SPA     828,303  
      91,859     Buzzi Unicem SPA     1,299,066  
      359,716     Credito Emiliano SPA     2,488,045  
      58,226     ERG SPA     816,054  
      284,815     Fondiaria — Sai SPA-Di RISP     1,671,550  
      548,588     Grouppo Editoriale L’Espresso *     1,423,388  
      282,698     Italcementi SPA-Di RISP     1,435,434  
      186,181     Lottomatica SPA     2,633,741  
      585,450     Maire Tecnimont SPA     2,400,707  
      486,749     Mediaset SPA     3,133,641  
      237,548     Mediolanum SPA     1,227,715  
      1,664,200     Prelios SPA *     1,245,782  
      157,581     Prysmian SPA     3,329,458  
      1,012,390     Saras SPA *     2,605,418  
      5,751     Trevi Finanziaria SPA     75,665  
      290,128     Unione di Banche Italiane ScpA     2,932,064  
                     
            Total Italy     39,658,069  
                     
                     
            Japan — 21.3%        
      344,000     Air Water Inc     4,565,101  
      315,400     Alps Electric Co Ltd     4,251,403  
      1,253,000     Aozora Bank Ltd     2,817,413  
      193,900     Avex Group Holding Inc     2,858,640  
      113,800     Century Tokyo Leasing Corp     2,176,482  
      143,300     Cosmos Pharmaceutical Corp     6,053,791  
      575,000     Denki Kagaku Kogyo K K     3,098,282  
      315,000     Fuji Oil Co Ltd     4,499,229  
      127,100     Hitachi Chemical Co Ltd     2,954,293  
      255,400     Hitachi Transport System Ltd     4,110,627  
      115,800     IRISO ELECTRONICS Co Ltd     2,204,457  
      216,000     Izumi Co Ltd     3,177,180  
      434,000     Japan Aviation Electronics Industry Ltd     3,672,060  
      94,440     K’s Holdings Corp     3,189,484  

         
    See accompanying notes to the financial statements.   7

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Japan — continued        
      169,000     Keihin Corp     3,747,494  
      767     Kenedix Realty Investment Corp (REIT)     3,635,483  
      87,100     Kintetsu World Express Inc     2,723,159  
      59,500     Kyowa Exeo Corp     569,659  
      79,680     Mitsubishi UFJ Lease & Finance Co Ltd     3,540,298  
      333,000     Nabtesco Corp     7,939,222  
      506,000     NHK Spring Co Ltd     5,946,252  
      260,500     Nihon Kohden Corp     5,724,720  
      420,000     Nissin Electric Co Ltd     3,073,274  
      23,050     Obic Co Ltd     4,651,796  
      451,000     Rengo Co Ltd     2,951,151  
      133,900     Saizeriya Co Ltd     2,553,762  
      696,000     Sumitomo Bakelite Co Ltd     4,619,041  
      170,800     Sumitomo Rubber Industries     1,851,961  
      159,500     Takata Corp     5,085,496  
      637,000     Tsubakimoto Chain Co     3,965,204  
      1,235,000     Ube Industries Ltd     4,012,699  
                     
            Total Japan     116,219,113  
                     
                     
            Mexico — 0.9%        
      1,671,500     Genomma Lab Internacional SA Class B *     3,698,638  
      315,400     Grupo Continental SAB de CV     1,085,430  
                     
            Total Mexico     4,784,068  
                     
                     
            Netherlands — 3.6%        
      110,330     AerCap Holdings NV *     1,497,178  
      36,511     CSM     1,298,279  
      83,265     Dockwise Ltd *     2,357,660  
      36,068     Fugro NV     3,034,041  
      122,582     Imtech NV     4,428,665  
      42,707     Koninklijke Ten Cate NV     1,551,082  
      31,312     Nutreco Holding NV     2,317,014  

         
8
  See accompanying notes to the financial statements.    

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Netherlands — continued        
      244,664     Spyker Cars NV *     1,746,625  
      73,187     USG People NV *     1,496,473  
                     
            Total Netherlands     19,727,017  
                     
                     
            New Zealand — 0.5%        
      889,740     Fisher & Paykel Appliances Holdings Ltd *     383,965  
      143,175     Pumpkin Patch Ltd     148,152  
      943,299     Sky City Entertainment Group Ltd     2,316,439  
                     
            Total New Zealand     2,848,556  
                     
                     
            Norway — 1.8%        
      719,962     BW Offshore Ltd *     1,830,915  
      304,480     BWG Homes ASA *     1,193,779  
      38,750     Fred Olsen Energy ASA     1,630,958  
      44,780     Kongsberg Gruppen ASA     1,188,747  
      190,980     ProSafe ASA     1,439,870  
      249,063     SpareBank 1 SR Bank     2,648,270  
                     
            Total Norway     9,932,539  
                     
                     
            Philippines — 0.8%        
      12,352,000     Alliance Global Group Inc     3,254,929  
      308,600     Cebu Air Inc *     579,820  
      6,000,000     Pepsi-Cola Products Philippines Inc     298,121  
                     
            Total Philippines     4,132,870  
                     
                     
            Russia — 0.3%        
      83,711     Cherkizovo Group GDR (Registered) *     1,716,913  
                     
                     
            Singapore — 1.2%        
      1,710,000     Chemoil Energy Ltd *     566,437  
      475,000     ComfortDelgro Corp Ltd     581,270  
      3,725,000     First Ship Lease Trust     1,232,545  
      2,087,640     Mapletree Logistics Trust (REIT)     1,482,953  

         
    See accompanying notes to the financial statements.   9

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Singapore — continued        
      654,000     MobileOne Ltd     1,222,855  
      975,000     Petra Foods Ltd     1,240,131  
                     
            Total Singapore     6,326,191  
                     
                     
            South Korea — 4.4%        
      102,270     Busan Bank     1,233,746  
      23,000     CrucialTec Co Ltd *     1,003,704  
      144,400     Daegu Bank     1,956,311  
      10,750     Daelim Industrial Co Ltd     937,992  
      37,410     Daishin Securities Co Ltd     517,917  
      26,780     Doosan Corp     2,979,713  
      442,142     Kortek Corp     2,859,284  
      16,320     Mando Corp     2,133,725  
      10,467     Nong Shim Co Ltd     1,918,657  
      35,140     S1 Corp     1,561,959  
      17,730     Sindoh Co Ltd     792,086  
      24,400     SK Holdings Co Ltd     2,875,877  
      81,600     Tong Yang Life Insurance Co Ltd     917,225  
      79,520     Youngone Holding Co Ltd     2,156,002  
                     
            Total South Korea     23,844,198  
                     
                     
            Spain — 1.2%        
      123,100     Banco Espanol de Credito SA     1,097,720  
      2,241     Construcciones y Auxiliar de Ferrocarriles SA     1,234,444  
      127,110     Enagas     2,722,000  
      27,814     Red Electrica de Espana     1,494,776  
                     
            Total Spain     6,548,940  
                     
                     
            Sweden — 1.2%        
      29,000     Autoliv Inc SDR     2,170,609  
      42,066     Elekta AB Class B     1,604,565  
      50,700     Getinge AB Class B     1,238,322  
      1,227,088     Trigon Agri A/S *     1,724,124  
                     
            Total Sweden     6,737,620  
                     

         
10
  See accompanying notes to the financial statements.    

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Switzerland — 3.6%        
      5,600     Alpiq Holding AG (Registered)     2,277,450  
      4,300     Forbo Holdings AG (Registered)     2,863,905  
      7,870     Kaba Holding AG Class B (Registered)     3,395,186  
      22,354     Sulzer AG     3,471,311  
      26,200     Swiss Life Holding AG *     4,330,627  
      9,705     Valora Holding AG     3,495,701  
                     
            Total Switzerland     19,834,180  
                     
                     
            Taiwan — 0.3%        
      634,561     Altek Corp     866,845  
      434,500     Coretronic Corp     702,227  
                     
            Total Taiwan     1,569,072  
                     
                     
            Thailand — 0.2%        
      13,445,500     Quality Houses Pcl (Foreign Registered) (a)     921,051  
                     
                     
            United Kingdom — 18.2%        
      333,554     Aquarius Platinum Ltd     2,186,432  
      240,650     Babcock International Group Plc     2,195,106  
      117,260     Berkeley Group Holdings Plc (Unit Shares) *     1,972,608  
      609,615     Bodycote Plc     3,027,327  
      827,980     Centaur Media Plc     904,587  
      179,990     Charles Taylor Consulting Plc     468,126  
      960,760     Chaucer Holdings Plc     964,253  
      55,940     Chemring Group Plc     2,982,065  
      1,608,050     Collins Stewart Plc     2,358,345  
      1,821,517     Debenhams Plc *     1,858,006  
      885,510     Diploma Plc     3,953,424  
      364,170     Euromoney Institutional Investor Plc     4,133,780  
      1,085,120     F&C Asset Management Plc     1,523,234  
      538,023     Fenner Plc     2,785,642  
      643,290     Filtrona Plc     3,135,187  
      431,420     Great Portland Estates Plc (REIT)     2,719,287  
      303,370     Homeserve Plc     2,230,213  

         
    See accompanying notes to the financial statements.   11

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            United Kingdom — continued        
      279,670     IMI Plc     4,042,228  
      499,547     Inchcape Plc *     3,153,005  
      966,580     ITE Group Plc     3,707,916  
      302,896     James Fisher & Sons Plc     2,580,665  
      147,400     JD Wetherspoon Plc     1,054,208  
      360,737     John Wood Group Plc     3,868,435  
      744,210     Jupiter Fund Management Plc *     3,969,938  
      1,920,280     KCOM Group Plc     1,987,382  
      100,492     Kier Group Plc     2,213,865  
      678,874     Lupus Capital Plc *     1,491,628  
      944,900     Metric Property Investments Plc *     1,704,355  
      449,429     N Brown Group     1,957,435  
      585,840     National Express Group Plc *     2,364,123  
      41,713     Next Plc     1,339,871  
      327,426     PZ Cussons Plc     1,854,380  
      484,842     Restaurant Group Plc     2,214,893  
      738,621     RPS Group Plc     2,393,397  
      1,243,190     Senior Plc     3,030,338  
      531,217     Severfield-Rowen Plc     1,985,271  
      80,268     Travis Perkins Plc     1,298,699  
      101,595     Ultra Electronics Holdings Plc     2,837,467  
      174,073     United Business Media Ltd     2,017,356  
      842,022     Wilmington Group Plc     2,238,962  
      478,229     WSP Group Plc     2,796,633  
      58,938     XP Power Ltd     1,717,429  
                     
            Total United Kingdom     99,217,501  
                     
                     
            TOTAL COMMON STOCKS (COST $422,387,829)     524,737,738  
                     
                     
            PREFERRED STOCKS — 0.8%        
                     
            Brazil — 0.4%        
      708,700     Marcopolo SA 4.06%     2,427,930  
                     

         
12
  See accompanying notes to the financial statements.    

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
Shares /
 		           
Par Value     Description   Value ($)  
            South Korea — 0.4%        
      38,370     Daelim Industrial Co Ltd 0.52%     988,042  
      124,760     Daishin Securities Co Ltd 10.10%     1,152,164  
                     
            Total South Korea     2,140,206  
                     
                     
            TOTAL PREFERRED STOCKS (COST $3,810,561)     4,568,136  
                     
                     
            RIGHTS AND WARRANTS — 0.1%        
                     
            Australia — 0.0%        
      95,010     West Australian Newspapers Rights, Expires 03/18/11 *     38,694  
                     
                     
            Belgium — 0.1%        
      111,200     Nyrstar Rights, Expires 03/11/11 *     300,763  
                     
                     
            Canada — 0.0%        
      312,500     Gran Colombia Gold Corp Warrants, Expires 08/24/15 *     266,970  
                     
                     
            Italy — 0.0%        
      100,428     Unione di Banche Italiane SCPA Warrants, Expires 06/30/11 *     263  
                     
                     
            TOTAL RIGHTS AND WARRANTS (COST $464,046)     606,690  
                     
                     
            SHORT-TERM INVESTMENTS — 2.4%        
                     
            Time Deposits — 2.4%        
AUD
    53,761     Brown Brothers Harriman (Grand Cayman) Time Deposit, 3.84%, due 03/01/11     54,736  
CAD
    3,926     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.23%, due 03/01/11     4,041  
EUR
    2,717,241     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.12%, due 03/01/11     3,749,582  
GBP
    554,660     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.09%, due 03/01/11     901,683  
JPY
    17,116,680     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.01%, due 03/01/11     209,238  
NOK
    70     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.97%, due 03/01/11     13  
NZD
    48     Brown Brothers Harriman (Grand Cayman) Time Deposit, 2.15%, due 03/01/11     36  
SGD
    70,896     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.01%, due 03/01/11     55,745  
EUR
    1,447,964     Citibank (New York) Time Deposit, 0.12%, due 03/01/11     1,998,118  
USD
    200,000     Commerzbank (Grand Cayman) Time Deposit, 0.16%, due 03/01/11     200,000  
USD
    54,774     HSBC Bank (New York) Time Deposit, 0.03%, due 03/01/11     54,774  

         
    See accompanying notes to the financial statements.   13

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value     Description   Value ($)  
            Time Deposits — continued        
USD
    2,000,000     HSBC Bank (USA) Time Deposit, 0.16%, due 03/01/11     2,000,000  
USD
    2,000,000     Royal Bank of Canada (Grand Cayman) Time Deposit, 0.15%, due 03/01/11     2,000,000  
USD
    2,000,000     Societe Generale (Grand Cayman) Time Deposit, 0.15%, due 03/01/11     2,000,000  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $13,227,966)     13,227,966  
                     
                     
            TOTAL INVESTMENTS — 99.5%
(Cost $439,890,402) 		    543,140,530  
            Other Assets and Liabilities (net) — 0.5%     2,638,396  
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 545,778,926  
                     
 
Notes to Schedule of Investments:
 
GDR - Global Depository Receipt
REIT - Real Estate Investment Trust
SDR - Swedish Depository Receipt
* Non-income producing security.
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
 
Currency Abbreviations:
 
AUD - Australian Dollar
CAD - Canadian Dollar
EUR - Euro
GBP - British Pound
JPY - Japanese Yen
NOK - Norwegian Krone
NZD - New Zealand Dollar
SGD - Singapore Dollar
USD - United States Dollar

         
14
  See accompanying notes to the financial statements.    

 

GMO Foreign Small Companies Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments, at value (cost $439,890,402) (Note 2)
  $ 543,140,530  
Foreign currency, at value (cost $785,998) (Note 2)
    769,571  
Receivable for investments sold
    1,882,820  
Receivable for Fund shares sold
    12,651  
Dividends and interest receivable
    683,957  
Foreign taxes receivable
    18,686  
Receivable for expenses reimbursed by Manager (Note 5)
    66,248  
Miscellaneous receivable
    59,517  
         
Total assets
    546,633,980  
         
         
Liabilities:
       
Payable for investments purchased
    265,707  
Payable to affiliate for (Note 5):
       
Management fee
    292,267  
Shareholder service fee
    55,825  
Trustees and Trust Officers or agents unaffiliated with the Manager
    1,281  
Payable for foreign currency purchased
    4,710  
Accrued expenses
    235,264  
         
Total liabilities
    855,054  
         
Net assets
  $ 545,778,926  
         
Net assets consist of:
       
Paid-in capital
  $ 479,202,786  
Distributions in excess of net investment income
    (153,209 )
Accumulated net realized loss
    (36,662,295 )
Net unrealized appreciation
    103,391,644  
         
    $ 545,778,926  
         
Net assets attributable to:
       
Class III shares
  $ 398,647,516  
         
Class IV shares
  $ 147,131,410  
         
Shares outstanding:
       
Class III
    28,039,142  
         
Class IV
    10,358,311  
         
Net asset value per share:
       
Class III
  $ 14.22  
         
Class IV
  $ 14.20  
         

         
    See accompanying notes to the financial statements.   15

 

GMO Foreign Small Companies Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends (net of withholding taxes of $805,191)
  $ 9,181,132  
Interest
    25,657  
         
Total investment income
    9,206,789  
         
Expenses:
       
Management fee (Note 5)
    3,275,076  
Shareholder service fee – Class III (Note 5)
    486,279  
Shareholder service fee – Class IV (Note 5)
    143,682  
Custodian and fund accounting agent fees
    430,829  
Audit and tax fees
    94,713  
Transfer agent fees
    43,800  
Legal fees
    40,260  
Trustees fees and related expenses (Note 5)
    11,193  
Registration fees
    1,968  
Miscellaneous
    39,130  
         
Total expenses
    4,566,930  
Fees and expenses reimbursed by Manager (Note 5)
    (640,544 )
Expense reductions (Note 2)
    (570 )
         
Net expenses
    3,925,816  
         
Net investment income (loss)
    5,280,973  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments (net of foreign capital gains tax of $113,896) (Note 2)
    50,756,052  
Foreign currency, forward contracts and foreign currency related transactions (net of foreign transaction taxes of $192,994) (Note 2)
    (901,852 )
         
Net realized gain (loss)
    49,854,200  
         
Change in net unrealized appreciation (depreciation) on:
       
Investments
    80,314,579  
Foreign currency, forward contracts and foreign currency related transactions
    109,050  
         
Net unrealized gain (loss)
    80,423,629  
         
Net realized and unrealized gain (loss)
    130,277,829  
         
Net increase (decrease) in net assets resulting from operations
  $ 135,558,802  
         

         
16
  See accompanying notes to the financial statements.    

 

GMO Foreign Small Companies Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 5,280,973     $ 3,838,781  
Net realized gain (loss)
    49,854,200       (80,252,411 )
Change in net unrealized appreciation (depreciation)
    80,423,629       203,852,124  
                 
Net increase (decrease) in net assets from operations
    135,558,802       127,438,494  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (3,312,648 )     (3,377,934 )
Class IV
    (1,689,129 )     (1,023,334 )
                 
Total distributions from net investment income
    (5,001,777 )     (4,401,268 )
                 
Net share transactions (Note 9):
               
Class III
    14,717,938       (8,194,206 )
Class IV
    22,787,951       (67,114,119 )
                 
Increase (decrease) in net assets resulting from net share transactions
    37,505,889       (75,308,325 )
                 
Purchase premiums and redemption fees (Notes 2 and 9):
               
Class III
    362,249       452,668  
Class IV
    277,572       32,431  
                 
Increase in net assets resulting from purchase premiums and redemption fees
    639,821       485,099  
                 
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees
    38,145,710       (74,823,226 )
                 
Total increase (decrease) in net assets
    168,702,735       48,214,000  
                 
Net assets:
               
Beginning of period
    377,076,191       328,862,191  
                 
End of period (including distributions in excess of net investment income of $153,209 and $1,570,851, respectively)
  $ 545,778,926     $ 377,076,191  
                 

         
    See accompanying notes to the financial statements.   17

 

GMO Foreign Small Companies Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 10.74     $ 6.41     $ 14.63     $ 18.38     $ 17.98  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.14       0.13       0.30       0.31       0.28  
Net realized and unrealized gain (loss)
    3.47       4.32       (7.43 )     (0.36 )     4.51  
                                         
                                         
Total from investment operations
    3.61       4.45       (7.13 )     (0.05 )     4.79  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.13 )     (0.12 )     (0.27 )     (0.41 )     (0.44 )
From net realized gains
    —       —       (0.81 )     (3.29 )     (3.95 )
Return of capital
    —       —       (0.01 )     —       —  
                                         
                                         
Total distributions
    (0.13 )     (0.12 )     (1.09 )     (3.70 )     (4.39 )
                                         
                                         
Net asset value, end of period
  $ 14.22     $ 10.74     $ 6.41     $ 14.63     $ 18.38  
                                         
                                         
Total Return(a)
    33.67 %     69.44 %     (51.33 )%     (1.96 )%     29.94 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 398,648     $ 292,852     $ 185,298     $ 338,804     $ 375,565  
Net expenses to average daily net assets
    0.85 %(b)     0.86 %(b)     0.85 %(c)     0.86 %(c)     0.86 %
Net investment income (loss) to average daily net assets
    1.15 %     1.40 %     2.59 %     1.69 %     1.53 %
Portfolio turnover rate
    61 %     78 %     42 %     42 %     37 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.14 %     0.14 %     0.11 %     0.09 %     0.09 %
Purchase premiums and redemption fees consisted of the following per share amounts (Note 2):†
  $ 0.01     $ 0.02     $ 0.00 (d)     —       —  
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
(d) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.

         
18
  See accompanying notes to the financial statements.    

 

GMO Foreign Small Companies Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class IV share outstanding throughout each period)
 
                                                 
        Period from
 		  Period from
 		           
        August 12,
 		  March 1,
 		           
        2009
 		  2009
 		           
        through
 		  through
 		           
    Year Ended
 		  February 28,
 		  March 16,
 		  Year Ended February 28/29,
    February 28, 2011   2010(a)   2009(a)   2009   2008   2007
 
                                                 
Net asset value, beginning of period
  $ 10.73     $ 9.84     $ 6.42     $ 14.64     $ 18.39     $ 17.99  
                                                 
                                                 
Income (loss) from investment operations:
                                               
Net investment income (loss)†
    0.13       0.02       0.01       0.33       0.31       0.28  
Net realized and unrealized gain (loss)
    3.47       1.00       0.01       (7.46 )     (0.35 )     4.52  
                                                 
                                                 
Total from investment operations
    3.60       1.02       0.02       (7.13 )     (0.04 )     4.80  
                                                 
                                                 
Less distributions to shareholders:
                                               
From net investment income
    (0.13 )     (0.13 )     —       (0.27 )     (0.42 )     (0.45 )
From net realized gains
    —       —       —       (0.81 )     (3.29 )     (3.95 )
Return of capital
    —       —       —       (0.01 )     —       —  
                                                 
                                                 
Total distributions
    (0.13 )     (0.13 )     —       (1.09 )     (3.71 )     (4.40 )
                                                 
                                                 
Net asset value, end of period
  $ 14.20     $ 10.73     $ 6.44     $ 6.42     $ 14.64     $ 18.39  
                                                 
                                                 
Total Return(b)
     33.67 %     10.33 %**     0.31 %**     (51.29 )%     (1.91 )%     30.00 %
                                                 
Ratios/Supplemental Data:
                                               
Net assets, end of period (000’s)
  $ 147,131     $ 84,225     $ 144,101     $ 143,564     $ 666,991     $ 740,872  
Net expenses to average daily net assets
    0.80 %(c)     0.81 %(c)*     0.81 %(c)*     0.80 %(d)     0.81 %(d)     0.81 %
Net investment income (loss) to average daily net assets
    1.07 %     0.35 %*     3.28 %*     2.74 %     1.70 %     1.54 %
Portfolio turnover rate
    61 %     78 %††     40 %†††     42 %     42 %     37 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.14 %     0.08 %*     0.22 %*    
0.11 		%     0.09 %     0.09 %
Purchase premiums and redemption fees consisted of the following per share amounts (Note 2):†
   $ 0.02     $ 0.00 (e)   $ 0.00 (e)    
0.00 		(e)     —       —  
 
(a) The class was inactive from March 17, 2009 to August 11, 2009.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(c) The net expense ratio does not include the effect of expense reductions (Note 2).
(d) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
(e) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the year ended February 28, 2010.
††† Calculation represents portfolio turnover of the Fund for the period ended August 31, 2009.
* Annualized.
** Not annualized.

         
    See accompanying notes to the financial statements.   19

 

GMO Foreign Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO Foreign Small Companies Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund seeks total return in excess of that of its benchmark, the S&P Developed ex-U.S. Small Cap Index. The Fund typically makes equity investments directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the “underlying funds,” or derivatives) in companies tied economically to non-U.S. countries whose outstanding publicly traded equity investments are in the smallest 25% of companies in a particular country as measured by total float-adjusted market capitalization (“small companies”). The term “equity investments” refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts. Under normal circumstances, the Fund invests directly and indirectly at least 80% of its assets in securities of small companies that are tied economically to countries outside the U.S. The market capitalization range of companies whose equity investments are held by the Fund is generally within the market capitalization range of companies in the Fund’s benchmark, which represents the bottom 15% of available market capitalization (float) of the S&P Broad Market Index in each country.
 
The Fund’s country selections relative to its benchmark are determined by a cumulative quantitative value score for each country together with the Manager’s evaluation of the country’s fundamentals. The Fund typically overweights or underweights (sometimes to a significant extent) its investment exposures in particular countries relative to the Fund’s benchmark. The Manager selects stocks using fundamental analysis that is informed by a disciplined quantitative screening process. The Manager separates companies with valuations it believes are deservedly low from those it believes represent investment opportunities. The Manager analyzes companies for financial, operational and managerial strength and compares them to their global, regional and local industry peers. As part of the investment process, the Manager frequently meets with management and/or visits companies.
 
The Fund normally does not take temporary defensive positions but may hold up to 10% of its total assets in cash and cash equivalents to manage cash inflows and outflows as a result of shareholder purchases and redemptions. To the extent the Fund takes temporary defensive positions or holds cash or cash equivalents to manage shareholder purchases or redemptions, it may not achieve its investment objective. The Fund typically makes investments tied economically to emerging countries, but these investments (excluding investments in companies tied economically to emerging countries included in the Fund’s benchmark) generally represent 10% or less of the Fund’s total assets.

         
20
       

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
In pursuing its investment objective, the Fund may (but is not obligated to) use a wide variety of exchange-traded and over-the-counter (“OTC”) derivatives, including, without limitation, futures and options. In addition, the Fund may lend its portfolio securities. The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund.
 
As of February 28, 2011, the Fund had two classes of shares outstanding: Class III and Class IV. Each class of shares bears a different shareholder servicing fee.
 
The Fund currently limits subscriptions due to capacity considerations.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the OTC market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of February 28, 2011, the total value of securities held directly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 0.2% of net assets. The Fund classifies such securities (as defined below) as Level 3. Additionally, because many foreign equity securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices adjusted by a factor supplied by a third party vendor

         
        21

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
using that vendor’s proprietary models. As of February 28, 2011, 87.6% of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified as using Level 2 inputs in the table below. See Note 4 for a further discussion on valuation of derivative financial instruments.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include: fair value adjustments applied to local closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund’s daily NAV calculation.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund used the following fair value techniques on Level 3 investments: Certain of the Fund’s securities in Thailand were valued at the local price as adjusted by applying a premium or discount when the holdings exceed foreign ownership limitations.

         
22
       

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Common Stocks
                               
Australia
  $ —     $ 19,198,190     $ —     $ 19,198,190  
Austria
    —       2,285,150       —       2,285,150  
Belgium
    —       9,447,370       —       9,447,370  
Brazil
    20,180,446       —       —       20,180,446  
Canada
    17,253,377       —       —       17,253,377  
Chile
    1,859,152       —       —       1,859,152  
China
    —       2,632,345       —       2,632,345  
Denmark
    —       4,720,571       —       4,720,571  
Finland
    —       10,053,867       —       10,053,867  
France
    —       23,823,708       —       23,823,708  
Germany
    —       26,143,033       —       26,143,033  
Greece
    1,158,715       3,883,762       —       5,042,477  
Hong Kong
    —       9,296,086       —       9,296,086  
India
    —       2,323,548       —       2,323,548  
Indonesia
    682,027       722,578       —       1,404,605  
Ireland
    —       5,055,915       —       5,055,915  
Italy
    —       39,658,069       —       39,658,069  
Japan
    —       116,219,113       —       116,219,113  
Mexico
    4,784,068       —       —       4,784,068  
Netherlands
    1,497,178       18,229,839       —       19,727,017  
New Zealand
    —       2,848,556       —       2,848,556  
Norway
    —       9,932,539       —       9,932,539  
Philippines
    579,820       3,553,050       —       4,132,870  
Russia
    —       1,716,913       —       1,716,913  
Singapore
    —       6,326,191       —       6,326,191  
South Korea
    —       23,844,198       —       23,844,198  
Spain
    —       6,548,940       —       6,548,940  
Sweden
    —       6,737,620       —       6,737,620  
Switzerland
    —       19,834,180       —       19,834,180  
Taiwan
    —       1,569,072       —       1,569,072  

         
        23

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
  
  ASSET VALUATION INPUTS — continued
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Thailand
  $ —     $ —     $ 921,051     $ 921,051  
United Kingdom
    —       99,217,501       —       99,217,501  
                                 
TOTAL COMMON STOCKS
    47,994,783       475,821,904       921,051       524,737,738  
                                 
Preferred Stocks
                               
Brazil
    2,427,930       —       —       2,427,930  
South Korea
    —       2,140,206       —       2,140,206  
                                 
TOTAL PREFERRED STOCKS
    2,427,930       2,140,206       —       4,568,136  
                                 
Rights and Warrants
                               
Australia
    —       38,694       —       38,694  
Belgium
    —       300,763       —       300,763  
Canada
    —       266,970       —       266,970  
Italy
    —       263       —       263  
                                 
TOTAL RIGHTS AND WARRANTS
    —       606,690       —       606,690  
                                 
Short-Term Investments
    13,227,966       —       —       13,227,966  
                                 
Total Investments
    63,650,679       478,568,800       921,051       543,140,530  
                                 
Total
  $ 63,650,679     $ 478,568,800     $ 921,051     $ 543,140,530  
                                 
 
The aggregate net value of the Fund’s direct investments in securities using Level 3 inputs was 0.2% of total net assets.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.

         
24
       

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a reconciliation of investments and derivatives, if any, in which significant unobservable inputs (Level 3) were used in determining value:
 
                                                                                   
 
                                      Net Change in
    
                                      Unrealized
    
                                      Appreciation
    
                                      (Depreciation)
    
                                      from
    
    Balances
               Change in
           Balances
     Investments
    
    as of
   Net
   Accrued
   Total
   Unrealized
   Transfers
   Transfers
   as of
     Held as of
    
    February 28,
   Purchases/
   Discounts/
   Realized
   Appreciation
   into
   out of
   February 28,
     February 28,
    
    2010   (Sales)   Premiums   Gain/(Loss)   (Depreciation)   Level 3*   Level 3*   2011     2011    
Common Stocks
                                                                                 
Canada
  $ 861     $ —     $      —     $ (612 )   $ (249 )   $      —     $      —     $ —       $ —          
Thailand
    2,337,225       (1,765,919 )     —       1,333,477       (983,732 )     —       —       921,051         (133,610 )        
                                                                                   
Total
  $ 2,338,086     $ (1,765,919 )   $ —     $ 1,332,865     $ (983,981 )   $ —     $ —     $ 921,051         (133,610 )        
                                                                                   
 
            * The Fund accounts for investments and derivatives transferred into Level 3 at the value at the beginning of the period and transfers out of Level 3 at the value at the end of the period.
 
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 pm. Income and expenses denominated in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country’s tax treaty with the United States. The foreign withholding rates applicable to a Fund’s investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.

         
        25

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if paid by the shareholders of the Fund.
 
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Taxes related to capital gains realized during the year ended February 28, 2011, if any, are reflected as part of Net realized gain (loss) in the Statement of Operations. Changes in tax liabilities related to capital gain taxes on unrealized investment gains, if any, are reflected as part of Change in net unrealized appreciation (depreciation) in the Statement of Operations. Transaction-based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards, foreign currency transactions, losses on wash sale transactions and passive foreign investment company transactions.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 5,001,777     $ 4,401,268  
                 
Total distributions
  $ 5,001,777     $ 4,401,268  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.

         
26
       

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 3,357,427  
Other Tax Attributes:
       
Capital loss carryforwards
  $ (35,868,490 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards and future realized losses, if any, subsequent to February 28, 2011 could be subject to limitations imposed by the Code related to share ownership activity. The Fund’s capital loss carryforwards expire as follows:
 
         
February 28, 2018
  $ (34,211,796 )
February 28, 2019
  $ (1,656,694 )
         
Total
  $ (35,868,490 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 444,075,078     $ 120,332,665     $ (21,267,213 )   $ 99,065,452      
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.

         
        27

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, 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 among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class’s operations.
 
Brown Brothers Harriman & Co. (“BBH”) serves as the Fund’s custodian and fund accounting agent. State Street Bank and Trust Company (“State Street”) serves as the Fund’s transfer agent. BBH’s and State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
Purchases and redemptions of Fund shares
For the year ended February 28, 2011, the premium on cash purchases and fee on cash redemptions of Fund shares were each 0.50% of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by the Fund (and are allocated pro rata among the classes) to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. Such fees are recorded as a component of the Fund’s net share transactions. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of the Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund’s shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund’s shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer

         
28
       

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
fees) incurred by the Fund in connection with the transfer of the purchasing shareholder’s securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of the Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Smaller Company Risk — The securities of small companies often are less widely held and trade less frequently and in lesser quantities, and their market prices often fluctuate more, than the securities of companies with larger market capitalizations.
 
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund’s investments.
 
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund’s investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund’s investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
 
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund’s foreign currency holdings and investments denominated in foreign currencies.

         
        29

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
• Market Risk — Value Securities — The Fund purchases some equity investments at prices below what the Manager believes to be their fundamental value. The Fund runs the risk that the prices of these investments will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value.
 
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind. These risks are particularly pronounced for the Fund because it makes equity investments in small companies and may make investments in companies tied economically to emerging countries.
 
• Credit and Counterparty Risk — The Fund runs the risk that the counterparty to an over-the-counter derivatives contract or a borrower of the Fund’s securities will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations.
 
Other principal risks of an investment in the Fund include Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments); and Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk).
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by “equitizing” its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including

         
30
       

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically “sell” a portion of the Fund’s portfolio) in combination with a long futures contract on another index (to synthetically “buy” exposure to that index). The Funds also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral (e.g., foreign currency forwards; see “Currency Risk” above), that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a

         
        31

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
 
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund’s forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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.
 
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the

         
32
       

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. During the year ended February 28, 2011, the Fund used forward currency contracts to manage against anticipated currency exchange rate changes. The Fund had no forward currency contracts outstanding at the end of the period.
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because regular trading on many foreign exchanges closes prior to the close of the NYSE, closing prices for these foreign futures contracts (including foreign index futures) do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures contracts using fair value prices, which are based on local closing prices adjusted by a factor supplied by a third party vendor using that vendor’s proprietary models. The Fund had no futures contracts outstanding at the end of the period.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash,

         
        33

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).

         
34
       

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility

         
        35

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. During the year ended February 28, 2011, the Fund held rights and warrants received as a result of a corporate action. Rights and warrants held by the Fund at the end of the period are listed in the Fund’s Schedule of Investments.
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of
February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Assets:
                                               
Investments, at value (rights and warrants)
  $      —     $      —     $      —     $ 606,690     $      —     $ 606,690  
                                                 
Total
  $ —     $ —     $ —     $ 606,690     $ —     $ 606,690  
                                                 

         
36
       

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
  
  Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of
  February 28, 2011Ù: — continued
 
 
The Effect of Derivative Instruments on the Statement of Operations for the year ended February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Investments (rights and warrants)
  $      —     $      —     $      —     $ 142,733     $      —     $ 142,733  
Forward currency contracts
    —       (712,785 )     —       —       —       (712,785 )
                                                 
Total
  $ —     $ (712,785 )   $ —     $ 142,733     $ —     $ (570,052 )
                                                 
Change in Unrealized Appreciation (Depreciation) on:
                                               
Investments (rights and warrants)
  $ —     $ —     $ —     $ 138,090     $ —     $ 138,090  
                                                 
Total
  $ —     $ —     $ —     $ 138,090     $ —     $ 138,090  
                                                 
 
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
 
The volume of derivative activity, based on absolute values (forward currency contracts and rights and warrants), outstanding at each month-end, was as follows for the year ended February 28, 2011:
 
                 
        Forward
    Rights and
   currency
    Warrants   contracts
 
Average amount outstanding
  $ 174,985     $ 3,190,584  
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.70% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets of each class at the annual rate of 0.15% for Class III shares and 0.10% for Class IV shares.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.70% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and

         
        37

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund’s Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund’s Expense Reimbursement Amount. These contractual expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $11,193 and $3,311, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 aggregated $311,202,197 and $270,590,125, respectively.
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 67.82% of the outstanding shares of the Fund were held by four shareholders, each holding more than 10% of the Fund’s outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.

         
38
       

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, 0.05% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers, and none of the Fund’s shares were held by accounts for which the Manager had investment discretion.
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    4,611,478     $ 59,311,867       9,025,272     $ 99,118,049  
Shares issued to shareholders in reinvestment of distributions
    240,580       3,187,692       264,894       2,935,030  
Shares repurchased
    (4,089,097 )     (47,781,621 )     (10,915,361 )     (110,247,285 )
Purchase premiums
    —       126,785       —       393,056  
Redemption fees
    —       235,464       —       59,612  
                                 
Net increase (decrease)
    762,961     $ 15,080,187       (1,625,195 )   $ (7,741,538 )
                                 
                                 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class IV:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    4,856,910     $ 55,916,512       8,073,696     $ 79,445,170  
Shares issued to shareholders in reinvestment of distributions
    72,672       962,175       28,005       310,014  
Shares repurchased
    (2,422,931 )     (34,090,736 )     (22,611,732 )     (146,869,303 )
Purchase premiums
    —       277,526       —       —  
Redemption fees
    —       46       —       32,431  
                                 
Net increase (decrease)
    2,506,651     $ 23,065,523       (14,510,031 )   $ (67,081,688 )
                                 

         
        39

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Foreign Small Companies Fund:
 
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 Small Companies Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
40
       

 

GMO Foreign Small Companies Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including management fees, shareholder service fees and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premium and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total

         
        41

 

 
GMO Foreign Small Companies Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.85 %   $ 1,000.00     $ 1,295.70     $ 4.84  
2) Hypothetical
    0.85 %   $ 1,000.00     $ 1,020.58     $ 4.26  
                                 
Class IV
                               
                                 
1) Actual
    0.80 %   $ 1,000.00     $ 1,295.70     $ 4.55  
2) Hypothetical
    0.80 %   $ 1,000.00     $ 1,020.83     $ 4.01  
                                 
 
            * Expenses are calculated using each Class’s annualized net expense ratio for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
42
       

 

GMO Foreign Small Companies Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
During the year ended February 28, 2011, the Fund paid foreign taxes of $898,977 and recognized foreign source income of $9,986,323.
 
For taxable, non-corporate shareholders, 100.00% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 represents qualified dividend income subject to the 15% rate category.

         
        43

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
   Position(s)
   Length of Time
   During Past
   Complex
     Other Directorships
Date of Birth   Held with the Trust   Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
44        

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
   Position(s)
   Length of Time
   During Past
   Complex
     Other Directorships
Date of Birth   Held with the Trust   Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of Time
   During Past
   Complex
     Directorships
Date of Birth   Held with Trust   Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee;
President
and Chief Executive
Officer of the
Trust 		  Trustee since
March 2010; President and
Chief Executive
Officer since March 2009. 		  General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
        45

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
46        

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money Laundering
Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        47

 

 
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Asset Allocation Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
GMO Global Balanced Asset Allocation Fund returned +12.0% for the fiscal year ended February 28, 2011, as compared with +16.0% for the Fund’s benchmark, the GMO Global Balanced Index (65% MSCI ACWI [All Country World Index] Index and 35% Barclays Capital U.S. Aggregate Index).
 
Underlying fund implementation was negative, detracting 1.9% from relative performance. GMO Quality Fund was the largest detractor from relative performance.
 
Asset allocation detracted 2.2% from relative performance. The Fund’s underweight to equities, broadly, and the shorter duration of the underlying funds’ fixed income portfolios were the primary drivers of the underperformance.
 
Because some of the securities and instruments held directly or indirectly by the Fund had positive fair value adjustments during the fiscal year (and the performance of indices are not fair valued), the Fund’s absolute and relative performance is better than it otherwise would have been.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice. References to specific securities are not recommendations of such securities and may not be representative of any GMO portfolio’s current or future investments.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO Global Balanced Asset Allocation Fund Class III Shares and the GMO Global Balanced Index
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Each performance figure assumes a purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of .09% on the purchase and .09% on the redemption. Transaction fees are retained by the Fund to cover trading costs. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. All information is unaudited.
 
 
* The GMO Global Balanced Asset Allocation Index is comprised of MSCI ACWI prior to June 30, 2002 and GMO Global Balanced Index thereafter.
 
** The GMO Global Balanced Index is a composite benchmark computed by GMO and comprised of 48.75% S&P 500 Index, 16.25% MSCI ACWI ex-U.S. and 35% Barclays Capital U.S. Aggregate Index prior to March 31, 2007 and 65% MSCI ACWI Index and 35% Barclays Capital U.S. Aggregate Index thereafter.
 
MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.

 

GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary*   % of Total Net Assets  
Common Stocks
    70.5 %
Debt Obligations
    17.2  
Short-Term Investments
    10.6  
Cash and Cash Equivalents
    10.1  
Preferred Stocks
    1.3  
Investment Funds
    0.4  
Options Purchased
    0.1  
Loan Participations
    0.1  
Loan Assignments
    0.0 Ù
Rights and Warrants
    0.0 Ù
Promissory Notes
    0.0 Ù
Written Options
    (0.0 )Ù
Forward Currency Contracts
    (0.2 )
Reverse Repurchase Agreements
    (0.5 )
Swap Agreements
    (2.8 )
Futures Contracts
    (8.8 )
Other
    2.0  
         
      100.0 %
         
 
         
Country / Region Summary**   % of Investments  
United States
    40.4 %
Emerging***
    14.9  
Australia
    8.9  
Japan
    8.8  
United Kingdom
    7.6  
France
    4.0  
Switzerland
    3.5  
Germany
    2.7  
Italy
    1.9  
Sweden
    1.2  
Singapore
    0.9  
Netherlands
    0.8  
Denmark
    0.6  
New Zealand
    0.6  
Spain
    0.6  
Belgium
    0.5  
Canada
    0.5  
Hong Kong
    0.5  
Finland
    0.3  

         
        1

 

 
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2011 (Unaudited)
 
         
Country / Region Summary**   % of Investments  
Austria
    0.2 %
Greece
    0.2  
Ireland
    0.2  
Israel
    0.1  
Norway
    0.1  
Portugal
    0.0 Ù
         
      100 %
         
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust (“underlying funds”).
Ù Rounds to 0.0%
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds except for GMO Alpha Only Fund and GMO Special Situations Fund. The table excludes short-term investments. The table includes exposure through the use of derivative contracts.
*** The “Emerging” exposure is comprised of Argentina, Brazil, Chile, China, Colombia, Congo, Czech Republic, Dominican Republic, Egypt, Hungary, India, Indonesia, Malaysia, Mexico, Philippines, Poland, Russia, South Africa, South Korea, Taiwan, Thailand, Turkey, Ukraine, and Venezuela.

         
2
       

 

GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares /
 		           
Par Value ($)     Description   Value ($)  
            MUTUAL FUNDS — 98.4%        
                     
            Affiliated Issuers — 98.4%        
      18,914,459     GMO Alpha Only Fund, Class IV     444,489,793  
      4,332,272     GMO Asset Allocation Bond Fund, Class VI     108,350,120  
      24,589,384     GMO Domestic Bond Fund, Class VI     112,619,380  
      1,693,597     GMO Emerging Country Debt Fund, Class IV     15,394,798  
      28,308,183     GMO Emerging Markets Fund, Class VI     407,920,924  
      2,081,146     GMO Flexible Equities Fund, Class VI     40,832,080  
      17,820,991     GMO International Core Equity Fund, Class VI     547,460,836  
      6,304,429     GMO International Growth Equity Fund, Class IV     150,549,756  
      6,678,065     GMO International Intrinsic Value Fund, Class IV     155,598,926  
      42,169,174     GMO Quality Fund, Class VI     877,962,197  
      361,698     GMO Short-Duration Investment Fund, Class III     3,023,794  
      5,333,776     GMO Special Situations Fund, Class VI     147,372,218  
      23,778,063     GMO Strategic Fixed Income Fund, Class VI     365,706,603  
      1,032,718     GMO World Opportunity Overlay Fund     23,422,041  
                     
                     
            TOTAL MUTUAL FUNDS (COST $3,038,405,908)     3,400,703,466  
                     
                     
            DEBT OBLIGATIONS — 1.6%        
                     
            Asset-Backed Securities — 1.6%        
            ABS Collateralized Debt Obligations — 0.0%        
      500,000     Paragon CDO Ltd., Series 04-1A, Class A, 144A, 3 mo. LIBOR + .65%, 0.95%, due 10/20/44     —  
                     
                     
            Airlines — 0.0%        
      543,736     Aircraft Finance Trust, Series 99-1A, Class A1, 144A, 1 mo. LIBOR + .48%, 0.75%, due 05/15/24     320,804  
                     
                     
            Auto Financing — 0.2%        
      200,000     Capital Auto Receivable Asset Trust, Series 08-1, Class A4B,
1 mo. LIBOR + 1.35%, 1.62%, due 07/15/14 		    201,813  
      800,000     Carmax Auto Owner Trust, Series 08-2, Class A4B, 1 mo. LIBOR + 1.65%, 1.92%, due 08/15/13     810,800  

         
    See accompanying notes to the financial statements.   3

 

 
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            Auto Financing — continued        
      700,000     Daimler Chrysler Auto Trust, Series 08-B, Class A4A, 5.32%, due 11/10/14     719,180  
      600,000     Daimler Chrysler Auto Trust, Series 08-B, Class A4B, 1 mo.
LIBOR + 1.85%, 2.11%, due 11/10/14 		    606,714  
      1,100,000     Ford Credit Auto Owner Trust, Series 08-B, Class A4B, 1 mo.
LIBOR + 2.00%, 2.27%, due 03/15/13 		    1,113,871  
      2,200,000     Ford Credit Floorplan Master Owner Trust, Series 06-4, Class A, 1 mo.
LIBOR + .25%, 0.52%, due 06/15/13 		    2,190,410  
      300,000     Franklin Auto Trust, Series 08-A, Class A4B, 1 mo. LIBOR + 1.95%, 2.21%, due 05/20/16     303,000  
      400,000     Wachovia Auto Owner Trust, Series 08-A, Class A4B, 1 mo. LIBOR + 1.15%, 1.41%, due 03/20/14     403,040  
                     
            Total Auto Financing     6,348,828  
                     
                     
            Business Loans — 0.1%        
      208,499     ACAS Business Loan Trust, Series 07-1A, Class A, 144A, 3 mo.
LIBOR + .14%, 0.45%, due 08/16/19 		    205,372  
      83,626     Bayview Commercial Asset Trust, Series 04-1, Class A, 144A, 1 mo.
LIBOR + .36%, 0.62%, due 04/25/34 		    74,009  
      61,355     Bayview Commercial Asset Trust, Series 04-3, Class A1, 144A, 1 mo.
LIBOR + .37%, 0.63%, due 01/25/35 		    52,766  
      301,431     Bayview Commercial Asset Trust, Series 05-4A, Class A2, 144A, 1 mo.
LIBOR + .39%, 0.65%, due 01/25/36 		    235,116  
      258,254     Bayview Commercial Asset Trust, Series 07-3, Class A1, 144A, 1 mo.
LIBOR + .24%, 0.50%, due 07/25/37 		    206,603  
      1,000,000     Bayview Commercial Asset Trust, Series 07-6A, Class A2, 144A, 1 mo.
LIBOR + 1.30%, 1.56%, due 12/25/37 		    830,000  
      39,246     Capitalsource Commercial Loan Trust, Series 07-1A, Class A, 144A, 1 mo. LIBOR + .13%, 0.39%, due 03/20/17     38,461  
      82,754     GE Business Loan Trust, Series 04-1, Class A, 144A, 1 mo. LIBOR + .29%, 0.56%, due 05/15/32     75,720  
      127,431     GE Business Loan Trust, Series 05-2A, Class A, 144A, 1 mo. LIBOR + .24%, 0.51%, due 11/15/33     110,228  
      222,399     Lehman Brothers Small Balance Commercial, Series 05-1A, Class A, 144A, 1 mo. LIBOR + .25%, 0.51%, due 02/25/30     182,367  
      175,984     Lehman Brothers Small Balance Commercial, Series 05-2A, Class 1A, 144A, 1 mo. LIBOR + .25%, 0.51%, due 09/25/30     144,307  

         
4
  See accompanying notes to the financial statements.    

 

 
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            Business Loans — continued        
      579,563     Lehman Brothers Small Balance Commercial, Series 07-3A, Class 1A2, 144A, 1 mo. LIBOR + .85%, 1.11%, due 10/25/37     492,628  
                     
            Total Business Loans     2,647,577  
                     
                     
            CMBS — 0.2%        
      656,386     Citigroup/Deutsche Bank Commercial Mortgage, Series 05-CD1, Class A2FL, 1 mo. LIBOR + .12%, 0.38%, due 07/15/44     649,277  
      1,100,000     Commercial Mortgage Pass-Through Certificates, Series 06-FL12, Class AJ, 144A, 1 mo. LIBOR + .13%, 0.40%, due 12/15/20     968,000  
      361,305     GE Capital Commercial Mortgage Corp., Series 05-C4, Class A2, 5.31%, due 11/10/45     361,305  
      500,000     GE Capital Commercial Mortgage Corp., Series 06-C1, Class A2, 5.17%, due 03/10/44     500,650  
      565,553     GS Mortgage Securities Corp., Series 06-GG6, Class A2, 5.51%, due 04/10/38     576,511  
      207,981     GS Mortgage Securities Corp., Series 07-EOP, Class A1, 144A, 1 mo.
LIBOR + .09%, 1.14%, due 03/06/20 		    205,381  
      300,000     GS Mortgage Securities Corp., Series 07-EOP, Class A2, 144A, 1 mo.
LIBOR + .57%, 1.32%, due 03/06/20 		    295,140  
      1,201,387     J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 06-LDP7, Class A2, 5.85%, due 04/15/45     1,209,556  
      754,622     Merrill Lynch Mortgage Trust, Series 06-C1, Class A2, 5.62%, due 05/12/39     779,148  
      379,362     Morgan Stanley Capital I, Series 06-IQ11, Class A3, 5.70%, due 10/15/42     393,945  
      3,860     Morgan Stanley Dean Witter Capital I, Series 03-TOP9, Class A1, 3.98%, due 11/13/36     3,861  
      662,776     Wachovia Bank Commercial Mortgage Trust, Series 06-WL7A, Class A1, 144A, 1 mo. LIBOR + .09%, 0.36%, due 09/15/21     647,439  
                     
            Total CMBS     6,590,213  
                     
                     
            CMBS Collateralized Debt Obligations — 0.0%        
      499,812     American Capital Strategies Ltd. Commercial Real Estate CDO Trust, Series 07-1A, Class A, 144A, 3 mo. LIBOR + .80%, 1.11%, due 11/23/52     4,998  
      332,274     G-Force LLC, Series 05-RR2, Class A2, 144A, 5.16%, due 12/25/39     225,946  
      442,644     Guggenheim Structured Real Estate Funding, Series 05-2A, Class A, 144A, 1 mo. LIBOR + .32%, 0.58%, due 08/26/30     416,085  

         
    See accompanying notes to the financial statements.   5

 

 
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            CMBS Collateralized Debt Obligations — continued        
      800,000     Marathon Real Estate CDO, Series 06-1A, Class A1, 144A, 1 mo.
LIBOR + .33%, 0.59%, due 05/25/46 		    688,000  
                     
            Total CMBS Collateralized Debt Obligations     1,335,029  
                     
                     
            Corporate Collateralized Debt Obligations — 0.1%        
      1,000,000     Morgan Stanley ACES SPC, Series 06-13A, Class A, 144A, 3 mo.
LIBOR + .29%, 0.59%, due 06/20/13 		    953,200  
      1,000,000     Prism Orso Trust, Series 04-MAPL, Class CERT, 144A, 3 mo. LIBOR + .70%, 1.00%, due 08/01/11     999,600  
                     
            Total Corporate Collateralized Debt Obligations     1,952,800  
                     
                     
            Credit Cards — 0.2%        
      1,100,000     Cabela’s Master Credit Card Trust, Series 08-4A, Class A2, 144A, 1 mo. LIBOR + 3.00%, 3.27%, due 09/15/14     1,115,697  
      700,000     Capital One Multi-Asset Execution Trust, Series 04-A7, Class A7, 3 mo. LIBOR + .15%, 0.46%, due 06/16/14     699,846  
      600,000     Capital One Multi-Asset Execution Trust, Series 08-A6, Class A6, 1 mo. LIBOR + 1.10%, 1.37%, due 03/17/14     601,128  
      1,300,000     Charming Shoppes Master Trust, Series 07-1A, Class A1, 144A, 1 mo.
LIBOR + 1.25%, 1.52%, due 09/15/17 		    1,300,000  
EUR
    1,100,000     Citibank Credit Card Issuance Trust, Series 04-A2, Class A, 3 mo. EUR LIBOR + .10%, 1.18%, due 05/24/13     1,515,865  
      400,000     MBNA Credit Card Master Note Trust, Series 04-A8, Class A8, 1 mo.
LIBOR + .15%, 0.42%, due 01/15/14 		    400,056  
      1,300,000     National City Credit Card Master Trust, Series 08-3, Class A, 1 mo.
LIBOR + 1.80%, 2.07%, due 05/15/13 		    1,304,875  
      400,000     World Financial Network Credit Card Master Trust, Series 06-A, Class A, 144A, 1 mo. LIBOR + .13%, 0.40%, due 02/15/17     393,044  
                     
            Total Credit Cards     7,330,511  
                     
                     
            Equipment Leases — 0.0%        
      247,509     CNH Equipment Trust, Series 08-A, Class A4B, 1 mo. LIBOR + 1.95%, 2.22%, due 08/15/14     249,786  
                     
                     
            Insured Auto Financing — 0.1%        
      380,963     AmeriCredit Automobile Receivables Trust, Series 07-AX, Class A4, XL, 1 mo. LIBOR + .04%, 0.30%, due 10/06/13     378,868  

         
6
  See accompanying notes to the financial statements.    

 

 
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            Insured Auto Financing — continued        
      307,118     AmeriCredit Automobile Receivables Trust, Series 07-BF, Class A4, FSA, 1 mo. LIBOR + .05%, 0.31%, due 12/06/13     305,610  
      371,015     AmeriCredit Automobile Receivables Trust, Series 07-DF, Class A4B, FSA, 1 mo. LIBOR + .80%, 1.06%, due 06/06/14     370,276  
      680,537     AmeriCredit Prime Automobile Receivable Trust, Series 07-2M, Class A4B, MBIA, 1 mo. LIBOR + .50%, 0.76%, due 03/08/16     679,244  
      96,434     Capital One Auto Finance Trust, Series 07-A, Class A4, AMBAC, 1 mo. LIBOR + .02%, 0.29%, due 11/15/13     95,874  
      427,207     Santander Drive Auto Receivables Trust, Series 07-3, Class A4B, FGIC, 1 mo. LIBOR + .65%, 0.92%, due 10/15/14     425,673  
      1,700,000     Triad Auto Receivables Owner Trust, Series 07-B, Class A4B, FSA, 1 mo. LIBOR + 1.20%, 1.46%, due 07/14/14     1,715,759  
                     
            Total Insured Auto Financing     3,971,304  
                     
                     
            Insured Business Loans — 0.0%        
      261,297     CNL Commercial Mortgage Loan Trust, Series 03-2A, Class A1, 144A, AMBAC, 1 mo. LIBOR + .44%, 0.70%, due 10/25/30     188,134  
                     
                     
            Insured High Yield Collateralized Debt Obligations — 0.0%        
      148,379     GSC Partners CDO Fund Ltd., Series 03-4A, Class A3, 144A, AMBAC, 3 mo. LIBOR + .46%, 0.76%, due 12/16/15     139,476  
      61,629     GSC Partners CDO Fund Ltd., Series 2A, Class A, 144A, FSA, 6 mo.
LIBOR + .52%, 0.96%, due 05/22/13 		    54,234  
                     
            Total Insured High Yield Collateralized Debt Obligations     193,710  
                     
                     
            Insured Other — 0.1%        
      1,500,000     Dominos Pizza Master Issuer LLC, Series 07-1, Class A2, 144A, MBIA, 5.26%, due 04/25/37     1,545,000  
      654,078     Henderson Receivables LLC, Series 06-3A, Class A1, 144A, MBIA, 1 mo. LIBOR + .20%, 0.47%, due 09/15/41     591,379  
      662,811     Henderson Receivables LLC, Series 06-4A, Class A1, 144A, MBIA, 1 mo. LIBOR + .20%, 0.47%, due 12/15/41     614,317  
      409,662     TIB Card Receivables Fund, 144A, FGIC, 3 mo. LIBOR + .25%, 0.55%, due 01/05/14     344,116  

         
    See accompanying notes to the financial statements.   7

 

 
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            Insured Other — continued        
      100,000     Toll Road Investment Part II, Series B, 144A, NPGC, Zero Coupon, due 02/15/30     16,464  
      900,000     Toll Road Investment Part II, Series C, 144A, MBIA, Zero Coupon, due 02/15/37     76,095  
                     
            Total Insured Other     3,187,371  
                     
                     
            Insured Residential Asset-Backed Securities (United States) Ù — 0.0%        
      78,895     Ameriquest Mortgage Securities, Inc., Series 04-R6, Class A1, XL, 1 mo. LIBOR + .21%, 0.47%, due 07/25/34     68,639  
      94,987     Citigroup Mortgage Loan Trust, Inc., Series 03-HE3, Class A, AMBAC, 1 mo. LIBOR + .38%, 0.64%, due 12/25/33     79,243  
      25,773     Quest Trust, Series 04-X1, Class A, 144A, AMBAC, 1 mo. LIBOR + .33%, 0.59%, due 03/25/34     22,061  
      468,235     Residential Asset Mortgage Products, Inc., Series 05-RS9, Class AI3, FGIC, 1 mo. LIBOR + .22%, 0.48%, due 11/25/35     329,038  
                     
            Total Insured Residential Asset-Backed Securities (United States)     498,981  
                     
                     
            Insured Residential Mortgage-Backed Securities (United States) — 0.0%        
      15,106     Chevy Chase Mortgage Funding Corp., Series 03-4A, Class A1, 144A, AMBAC, 1 mo. LIBOR + .34%, 0.60%, due 10/25/34     10,574  
      36,838     Chevy Chase Mortgage Funding Corp., Series 04-1A, Class A2, 144A, AMBAC, 1 mo. LIBOR + .33%, 0.59%, due 01/25/35     25,786  
      316,731     Countrywide Home Equity Loan Trust, Series 07-E, Class A, MBIA, 1 mo. LIBOR + .15%, 0.42%, due 06/15/37     206,667  
      202,843     GMAC Mortgage Corp. Loan Trust, Series 04-HE3, Class A3, FSA, 1 mo. LIBOR + .23%, 0.49%, due 10/25/34     152,497  
      10,515     GreenPoint Home Equity Loan Trust, Series 04-1, Class A, AMBAC, 1 mo. LIBOR + .23%, 0.72%, due 07/25/29     6,323  
      13,668     GreenPoint Home Equity Loan Trust, Series 04-4, Class A, AMBAC, 1 mo. LIBOR + .28%, 0.83%, due 08/15/30     7,841  
      24,203     Lehman ABS Corp., Series 04-2, Class A, AMBAC, 1 mo. LIBOR + .22%, 0.70%, due 06/25/34     14,038  
      6,271     Residential Funding Mortgage Securities II, Series 03-HS1, Class AII, FGIC, 1 mo. LIBOR + .29%, 0.55%, due 12/25/32     2,747  
      164,170     SBI Heloc Trust, Series 05-HE1, Class 1A, 144A, FSA, 1 mo. LIBOR + .19%, 0.45%, due 11/25/35     120,500  
                     
            Total Insured Residential Mortgage-Backed Securities (United States)     546,973  
                     

         
8
  See accompanying notes to the financial statements.    

 

 
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
                     
            Insured Time Share — 0.0%        
      86,148     Sierra Receivables Funding Co., Series 06-1A, Class A2, 144A, MBIA, 1 mo. LIBOR + .15%, 0.41%, due 05/20/18     81,535  
      109,172     Sierra Receivables Funding Co., Series 07-1A, Class A2, 144A, FGIC, 1 mo. LIBOR + .15%, 0.41%, due 03/20/19     105,896  
      310,541     Sierra Receivables Funding Co., Series 07-2A, Class A2, 144A, MBIA, 1 mo. LIBOR + 1.00%, 1.26%, due 09/20/19     293,734  
                     
            Total Insured Time Share     481,165  
                     
                     
            Insured Transportation — 0.0%        
      126,667     GE Seaco Finance SRL, Series 04-1A, Class A, 144A, AMBAC, 1 mo.
LIBOR + .30%, 0.56%, due 04/17/19 		    123,183  
                     
                     
            Residential Asset-Backed Securities (United States) Ù — 0.3%        
      37,311     Accredited Mortgage Loan Trust, Series 04-4, Class A1B, 1 mo. LIBOR + .39%, 0.65%, due 01/25/35     30,339  
      91,524     ACE Securities Corp., Series 06-ASL1, Class A, 1 mo. LIBOR + .14%, 0.40%, due 02/25/36     22,824  
      261,796     ACE Securities Corp., Series 06-ASP2, Class A2C, 1 mo. LIBOR + .18%, 0.44%, due 03/25/36     186,857  
      118,698     ACE Securities Corp., Series 06-ASP4, Class A2B, 1 mo. LIBOR + .10%, 0.36%, due 08/25/36     88,103  
      700,000     ACE Securities Corp., Series 06-ASP5, Class A2C, 1 mo. LIBOR + .18%, 0.44%, due 10/25/36     238,875  
      325,703     ACE Securities Corp., Series 06-CW1, Class A2B, 1 mo. LIBOR + .10%, 0.36%, due 07/25/36     278,965  
      200,000     ACE Securities Corp., Series 06-HE2, Class A2C, 1 mo. LIBOR + .16%, 0.42%, due 05/25/36     131,500  
      127,666     ACE Securities Corp., Series 06-HE3, Class A2B, 1 mo. LIBOR + .09%, 0.35%, due 06/25/36     120,963  
      400,000     ACE Securities Corp., Series 06-OP1, Class A2C, 1 mo. LIBOR + .15%, 0.41%, due 04/25/36     270,000  
      123,211     ACE Securities Corp., Series 06-SL1, Class A, 1 mo. LIBOR + .16%, 0.58%, due 09/25/35     26,028  
      267,572     ACE Securities Corp., Series 06-SL3, Class A1, 1 mo. LIBOR + .10%, 0.36%, due 06/25/36     45,487  
      342,435     ACE Securities Corp., Series 06-SL3, Class A2, 1 mo. LIBOR + .17%, 0.43%, due 06/25/36     44,516  

         
    See accompanying notes to the financial statements.   9

 

 
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            Residential Asset-Backed Securities (United States) — continued        
      145,974     ACE Securities Corp., Series 07-HE1, Class A2A, 1 mo. LIBOR + .09%, 0.35%, due 01/25/37     76,052  
      162,842     ACE Securities Corp., Series 07-WM1, Class A2A, 1 mo. LIBOR + .07%, 0.33%, due 11/25/36     107,883  
      371,326     Alliance Bancorp Trust, Series 07-S1, Class A1, 144A, 1 mo. LIBOR + .20%, 0.46%, due 05/25/37     47,010  
      130,475     Argent Securities, Inc., Series 04-W8, Class A5, 1 mo. LIBOR + .52%, 0.78%, due 05/25/34     123,605  
      1,412,066     Argent Securities, Inc., Series 06-M1, Class A2C, 1 mo. LIBOR + .15%, 0.41%, due 07/25/36     619,544  
      264,176     Argent Securities, Inc., Series 06-M2, Class A2B, 1 mo. LIBOR + .11%, 0.37%, due 09/25/36     101,708  
      356,416     Argent Securities, Inc., Series 06-W2, Class A2B, 1 mo. LIBOR + .19%, 0.45%, due 03/25/36     146,130  
      265,992     Argent Securities, Inc., Series 06-W5, Class A2C, 1 mo. LIBOR + .15%, 0.41%, due 06/25/36     102,158  
      88,737     Asset Backed Funding Certificates, Series 06-OPT2, Class A3B, 1 mo.
LIBOR + .11%, 0.37%, due 10/25/36 		    88,453  
      300,000     Asset Backed Funding Certificates, Series 06-OPT2, Class A3C, 1 mo.
LIBOR + .15%, 0.41%, due 10/25/36 		    208,500  
      613,627     Asset Backed Funding Certificates, Series 07-NC1, Class A1, 144A, 1 mo. LIBOR + .22%, 0.48%, due 05/25/37     518,208  
      236,281     Bayview Financial Acquisition Trust, Series 04-B, Class A1, 144A, 1 mo. LIBOR + .50%, 1.26%, due 05/28/39     99,829  
      236,281     Bayview Financial Acquisition Trust, Series 04-B, Class A2, 144A, 1 mo. LIBOR + .65%, 1.56%, due 05/28/39     90,377  
      316,496     Bayview Financial Acquisition Trust, Series 05-A, Class A1, 144A, 1 mo. LIBOR + .50%, 1.26%, due 02/28/40     196,228  
      136,343     Bear Stearns Asset Backed Securities, Inc., Series 07-AQ1, Class A1, 1 mo. LIBOR + .11%, 0.37%, due 11/25/36     117,678  
      300,000     Bear Stearns Asset Backed Securities, Inc., Series 07-AQ1, Class A2, 1 mo. LIBOR + .20%, 0.46%, due 11/25/36     54,630  
      95,646     Bear Stearns Mortgage Funding Trust, Series 07-SL2, Class 1A, 1 mo.
LIBOR + .16%, 0.42%, due 02/25/37 		    12,367  
      60,599     Carrington Mortgage Loan Trust, Series 07-FRE1, Class A1, 1 mo.
LIBOR + .12%, 0.38%, due 02/25/37 		    58,921  

         
10
  See accompanying notes to the financial statements.    

 

 
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            Residential Asset-Backed Securities (United States) — continued        
      1,300,000     Carrington Mortgage Loan Trust, Series 07-FRE1, Class A2, 1 mo.
LIBOR + .20%, 0.46%, due 02/25/37 		    766,480  
      400,912     Centex Home Equity, Series 06-A, Class AV3, 1 mo. LIBOR + .16%, 0.42%, due 06/25/36     369,108  
      6,966     Chase Funding Mortgage Loan Trust, Series 03-3, Class 2A2, 1 mo.
LIBOR + .27%, 0.80%, due 04/25/33 		    5,956  
      4,716     Citigroup Mortgage Loan Trust, Inc., Series 04-OPT1, Class A1B, 1 mo. LIBOR + .41%, 0.67%, due 10/25/34     4,338  
      400,000     Citigroup Mortgage Loan Trust, Inc., Series 06-HE3, Class A2C, 1 mo.
LIBOR + .16%, 0.42%, due 12/25/36 		    160,000  
      1,000,000     Countrywide Asset-Backed Certificates, Series 06-BC3, Class 2A2, 1 mo. LIBOR + .14%, 0.40%, due 02/25/37     837,700  
      72,073     Countrywide Asset-Backed Certificates, Series 06-BC5, Class 2A1, 1 mo. LIBOR + .08%, 0.34%, due 03/25/37     71,843  
      17,968     Equity One ABS, Inc., Series 04-1, Class AV2, 1 mo. LIBOR + .30%, 0.56%, due 04/25/34     14,259  
      428,345     First Franklin Mortgage Loan Asset Backed Certificates, Series 06-FF5, Class 2A3, 1 mo. LIBOR + .16%, 0.42%, due 04/25/36     316,306  
      134,396     Fremont Home Loan Trust, Series 06-A, Class 1A2, 1 mo. LIBOR + .20%, 0.46%, due 05/25/36     91,452  
      42,898     Fremont Home Loan Trust, Series 06-B, Class 2A2, 1 mo. LIBOR + .10%, 0.36%, due 08/25/36     21,074  
      600,000     Fremont Home Loan Trust, Series 06-B, Class 2A3, 1 mo. LIBOR + .16%, 0.42%, due 08/25/36     250,500  
      122,157     Household Home Equity Loan Trust, Series 05-2, Class A2, 1 mo.
LIBOR + .31%, 0.57%, due 01/20/35 		    110,362  
      111,960     Household Home Equity Loan Trust, Series 05-3, Class A2, 1 mo.
LIBOR + .29%, 0.55%, due 01/20/35 		    104,542  
      321,773     Household Home Equity Loan Trust, Series 06-1, Class A1, 1 mo.
LIBOR + .16%, 0.42%, due 01/20/36 		    299,852  
      959,451     J.P. Morgan Mortgage Acquisition Corp., Series 06-WMC4, Class A3, 1 mo. LIBOR + .12%, 0.38%, due 12/25/36     411,892  
      76,365     Master Asset-Backed Securities Trust, Series 05-FRE1, Class A4, 1 mo.
LIBOR + .25%, 0.51%, due 10/25/35 		    73,311  
      109,614     Master Asset-Backed Securities Trust, Series 06-AM3, Class A2, 1 mo.
LIBOR + .13%, 0.39%, due 10/25/36 		    106,325  

         
    See accompanying notes to the financial statements.   11

 

 
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            Residential Asset-Backed Securities (United States) — continued        
      596,928     Master Asset-Backed Securities Trust, Series 06-FRE2, Class A4, 1 mo.
LIBOR + .15%, 0.41%, due 03/25/36 		    349,203  
      400,000     Master Asset-Backed Securities Trust, Series 06-HE2, Class A3, 1 mo.
LIBOR + .15%, 0.41%, due 06/25/36 		    152,000  
      746,912     Master Asset-Backed Securities Trust, Series 06-HE3, Class A3, 1 mo.
LIBOR + .15%, 0.41%, due 08/25/36 		    280,092  
      500,000     Master Asset-Backed Securities Trust, Series 06-NC3, Class A4, 1 mo.
LIBOR + .16%, 0.42%, due 10/25/36 		    190,000  
      204,810     Master Second Lien Trust, Series 06-1, Class A, 1 mo. LIBOR + .16%, 0.42%, due 03/25/36     25,601  
      180,230     Merrill Lynch Mortgage Investors, Series 07-HE2, Class A2A, 1 mo.
LIBOR + .12%, 0.38%, due 02/25/37 		    107,867  
      89,561     Morgan Stanley Capital, Inc., Series 04-SD1, Class A, 1 mo. LIBOR + .40%, 0.66%, due 08/25/34     73,887  
      1,000,000     Morgan Stanley Capital, Inc., Series 07-HE4, Class A2C, 1 mo. LIBOR + .23%, 0.49%, due 02/25/37     385,000  
      200,212     Morgan Stanley Home Equity Loans, Series 07-2, Class A1, 1 mo.
LIBOR + .10%, 0.36%, due 04/25/37 		    189,200  
      300,000     Morgan Stanley IXIS Real Estate Capital Trust, Series 06-2, Class A3, 1 mo. LIBOR + .15%, 0.41%, due 11/25/36     114,750  
      211,846     People’s Choice Home Loan Securities Trust, Series 05-4, Class 1A2, 1 mo. LIBOR + .26%, 0.52%, due 12/25/35     132,933  
      225,181     RAAC Series Trust, Series 06-SP1, Class A2, 1 mo. LIBOR + .19%, 0.45%, due 09/25/45     200,501  
      68,345     Residential Asset Mortgage Products, Inc., Series 05-RS8, Class A2, 1 mo. LIBOR + .29%, 0.55%, due 10/25/33     64,346  
      199,379     Residential Asset Securities Corp., Series 05-KS12, Class A2, 1 mo.
LIBOR + .25%, 0.51%, due 01/25/36 		    184,394  
      62,310     Residential Asset Securities Corp., Series 07-KS3, Class AI1, 1 mo.
LIBOR + .11%, 0.37%, due 04/25/37 		    61,357  
      9,319     Saxon Asset Securities Trust, Series 04-1, Class A, 1 mo. LIBOR + .27%, 0.80%, due 03/25/35     6,497  
      49,339     Securitized Asset Backed Receivables LLC, Series 06-NC1, Class A2, 1 mo. LIBOR + .16%, 0.42%, due 03/25/36     46,779  
      35,995     Security National Mortgage Loan Trust, Series 06-2A, Class A1, 144A, 1 mo. LIBOR + .29%, 0.55%, due 10/25/36     35,275  

         
12
  See accompanying notes to the financial statements.    

 

 
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            Residential Asset-Backed Securities (United States) — continued        
      47,759     SG Mortgage Securities Trust, Series 05-OPT1, Class A2, 1 mo. LIBOR + .26%, 0.52%, due 10/25/35     45,997  
      43,811     Soundview Home Equity Loan Trust, Series 07-NS1, Class A1, 1 mo.
LIBOR + .12%, 0.38%, due 01/25/37 		    42,928  
      500,000     Specialty Underwriting & Residential Finance, Series 06-BC3, Class A2C, 1 mo. LIBOR + .15%, 0.41%, due 06/25/37     229,400  
      181,802     Structured Asset Investment Loan Trust, Series 06-1, Class A3, 1 mo.
LIBOR + .20%, 0.46%, due 01/25/36 		    142,715  
      114,767     Structured Asset Securities Corp., Series 05-S6, Class A2, 1 mo. LIBOR + .29%, 0.55%, due 11/25/35     96,978  
      526,050     Yale Mortgage Loan Trust, Series 07-1, Class A, 144A, 1 mo. LIBOR + .40%, 0.66%, due 06/25/37     31,563  
                     
            Total Residential Asset-Backed Securities (United States)     11,458,301  
                     
                     
            Residential Mortgage-Backed Securities (Australian) — 0.1%        
      204,020     Crusade Global Trust, Series 06-1, Class A1, 144A, 3 mo. LIBOR + .06%, 0.36%, due 07/20/38     196,114  
      325,509     Crusade Global Trust, Series 07-1, Class A1, 3 mo. LIBOR + .06%, 0.36%, due 04/19/38     312,917  
      69,612     Interstar Millennium Trust, Series 03-3G, Class A2, 3 mo. LIBOR + .25%, 0.80%, due 09/27/35     65,609  
      516,828     Interstar Millennium Trust, Series 04-2G, Class A, 3 mo. LIBOR + .20%, 0.70%, due 03/14/36     491,090  
      46,670     Interstar Millennium Trust, Series 05-1G, Class A, 3 mo. LIBOR + .12%, 0.70%, due 12/08/36     44,570  
      68,435     Interstar Millennium Trust, Series 06-2GA, Class A2, 144A, 3 mo.
LIBOR + .08%, 0.39%, due 05/27/38 		    64,678  
      37,678     Medallion Trust, Series 05-1G, Class A1, 3 mo. LIBOR + .08%, 0.39%, due 05/10/36     36,398  
      241,252     Medallion Trust, Series 06-1G, Class A1, 3 mo. LIBOR + .05%, 0.35%, due 06/14/37     228,307  
      259,503     National RMBS Trust, Series 06-3, Class A1, 144A, 3 mo. LIBOR + .07%, 0.37%, due 10/20/37     252,062  
      319,330     Puma Finance Ltd., Series G5, Class A1, 144A, 3 mo. LIBOR + .07%, 0.38%, due 02/21/38     305,854  
      341,878     Superannuation Members Home Loans Global Fund, Series 07-1, Class A1, 3 mo. LIBOR + .06%, 0.36%, due 06/12/40     325,356  

         
    See accompanying notes to the financial statements.   13

 

 
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            Residential Mortgage-Backed Securities (Australian) — continued        
      39,924     Superannuation Members Home Loans Global Fund, Series 7, Class A1, 3 mo. LIBOR + .14%, 0.58%, due 03/09/36     38,919  
      36,462     Superannuation Members Home Loans Global Fund, Series 8, Class A1, 3 mo. LIBOR + .07%, 0.37%, due 01/12/37     35,587  
      249,749     Westpac Securitization Trust, Series 07-1G, Class A2A, 3 mo. LIBOR + .05%, 0.36%, due 05/21/38     242,207  
                     
            Total Residential Mortgage-Backed Securities (Australian)     2,639,668  
                     
                     
            Residential Mortgage-Backed Securities (European) — 0.1%        
      385,764     Aire Valley Mortgages, Series 06-1A, Class 1A, 144A, 3 mo. LIBOR + .11%, 0.41%, due 09/20/66     329,095  
      912,487     Brunel Residential Mortgages, Series 07-1A, Class A4C, 144A, 3 mo.
LIBOR + .10%, 0.40%, due 01/13/39 		    823,337  
      143,729     Granite Master Issuer Plc, Series 06-2, Class A4, 1 mo. LIBOR + .04%, 0.30%, due 12/20/54     135,824  
      75,386     Granite Mortgages Plc, Series 04-3, Class 2A1, 3 mo. LIBOR + .14%, 0.44%, due 09/20/44     71,993  
      328,466     Kildare Securities Ltd., Series 07-1A, Class A2, 144A, 3 mo. LIBOR + .06%, 0.36%, due 12/10/43     298,904  
      86,878     Leek Finance Plc, Series 17A, Class A2B, 144A, 3 mo. LIBOR + .14%, 0.44%, due 12/21/37     85,561  
      313,318     Paragon Mortgages Plc, Series 12A, Class A2C, 144A, 3 mo. LIBOR + .11%, 0.42%, due 11/15/38     262,435  
      220,423     Paragon Mortgages Plc, Series 14A, Class A2C, 144A, 3 mo. LIBOR + .10%, 0.40%, due 09/15/39     179,094  
      198,446     Paragon Mortgages Plc, Series 7A, Class A1A, 144A, 3 mo. LIBOR + .42%, 0.73%, due 05/15/34     172,093  
      1,000,000     Permanent Master Issuer Plc, Series 06-1, Class 5A, 3 mo. LIBOR + .11%, 0.41%, due 07/15/33     975,900  
      200,000     Permanent Master Issuer Plc, Series 07-1, Class 4A, 3 mo. LIBOR + .08%, 0.38%, due 10/15/33     197,960  
                     
            Total Residential Mortgage-Backed Securities (European)     3,532,196  
                     
                     
            Residential Mortgage-Backed Securities (United States) — 0.0%        
      22,762     Chevy Chase Mortgage Funding Corp., Series 04-3A, Class A2, 144A, 1 mo. LIBOR + .30%, 0.56%, due 08/25/35     15,592  

         
14
  See accompanying notes to the financial statements.    

 

 
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            Residential Mortgage-Backed Securities (United States) — continued        
      80,599     Mellon Residential Funding Corp., Series 04-TBC1, Class A, 144A, 1 mo. LIBOR + .25%, 0.51%, due 02/26/34     62,175  
                     
            Total Residential Mortgage-Backed Securities (United States)     77,767  
                     
                     
            Student Loans — 0.1%        
      36,332     College Loan Corp. Trust, Series 07-1, Class A1, 3 mo. LIBOR + .01%, 0.31%, due 01/25/23     36,299  
      700,000     College Loan Corp. Trust, Series 07-2, Class A1, 3 mo. LIBOR + .25%, 0.55%, due 01/25/24     699,209  
      48,875     Goal Capital Funding Trust, Series 07-1, Class A1, 3 mo. LIBOR + .02%, 0.32%, due 06/25/21     48,802  
      13,042     Montana Higher Education Student Assistance Corp., Series 05-1, Class A, 3 mo. LIBOR + .04%, 0.34%, due 06/20/15     13,039  
      155,950     National Collegiate Student Loan Trust, Series 06-1, Class A2, 1 mo.
LIBOR + .14%, 0.40%, due 08/25/23 		    152,831  
      400,000     Nelnet Student Loan Trust, Series 05-2, Class A4, 3 mo. LIBOR + .08%, 0.38%, due 12/23/19     393,508  
      228,519     SLM Student Loan Trust, Series 07-A, Class A1, 3 mo. LIBOR + .03%, 0.33%, due 09/15/22     224,520  
                     
            Total Student Loans     1,568,208  
                     
                     
            Time Share — 0.0%        
      138,582     Sierra Receivables Funding Co., Series 08-1A, Class A2, 144A, 1 mo.
LIBOR + 4.00%, 4.26%, due 02/20/20 		    145,641  
                     
            Total Asset-Backed Securities     55,388,150  
                     
                     
            Corporate Debt — 0.0%        
      598,000     Health Care Property Investors, Inc., Series G, MTN, 5.63%, due 02/28/13     651,820  
                     
                     
            U.S. Government Agency — 0.0%        
      134,200     Agency for International Development Floater (Support of C.A.B.E.I), 6 mo. U.S. Treasury Bill + .40%, 0.56%, due 10/01/12 (a)     133,078  
      68,515     Agency for International Development Floater (Support of Honduras), 3 mo. U.S. Treasury Bill x 117%, 0.16%, due 10/01/11 (a)     68,174  
      534,537     Agency for International Development Floater (Support of Jamaica), 6 mo. U.S. Treasury Bill + 0.75%, 0.91%, due 03/30/19 (a)     520,812  

         
    See accompanying notes to the financial statements.   15

 

 
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($) /
 		           
Share     Description   Value ($)  
            U.S. Government Agency — continued        
      52,415     Agency for International Development Floater (Support of Peru), Series B, 6 mo. U.S. Treasury Bill +.35%, 0.51%, due 05/01/14 (a)     51,509  
      200,001     Agency for International Development Floater (Support of Zimbabwe), 3 mo. U.S. Treasury Bill x 115%, 0.16%, due 01/01/12 (a)     198,324  
                     
            Total U.S. Government Agency     971,897  
                     
                     
            TOTAL DEBT OBLIGATIONS (COST $51,763,423)     57,011,867  
                     
                     
            SHORT-TERM INVESTMENTS — 0.0%        
                     
            Money Market Funds — 0.0%        
      58,674     State Street Institutional U.S. Government Money Market Fund-Institutional Class     58,674  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $58,674)     58,674  
                     
                     
            TOTAL INVESTMENTS — 100.0%
(Cost $3,090,228,005) 		    3,457,774,007  
            Other Assets and Liabilities (net) — (0.0%)     (70,772 )
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 3,457,703,235  
                     
 
Notes to Schedule of Investments:
144A - Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors.
AMBAC - Insured as to the payment of principal and interest by AMBAC Assurance Corporation.
C.A.B.E.I. - Central American Bank for Economic Integration
CDO - Collateralized Debt Obligation
CMBS - Commercial Mortgage Backed Security
EUR LIBOR - London Interbank Offered Rate denominated in Euros.
FGIC - Insured as to the payment of principal and interest by Financial Guaranty Insurance Corporation.
FSA - Insured as to the payment of principal and interest by Financial Security Assurance.
LIBOR - London Interbank Offered Rate
MBIA - Insured as to the payment of principal and interest by MBIA Insurance Corp.
MTN - Medium Term Note
NPGC - Insured as to the payment of principal and interest by National Public Guarantee Corp.
RMBS - Residential Mortgage Backed Security

         
16
  See accompanying notes to the financial statements.    

 

 
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2010
 
XL - Insured as to the payment of principal and interest by XL Capital Assurance.
The rates shown on variable rate notes are the current interest rates at February 28, 2011, which are subject to change based on the terms of the security.
Ù These securities are primarily backed by subprime mortgages.
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
 
Currency Abbreviations:
 
EUR - Euro

         
    See accompanying notes to the financial statements.   17

 

GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $51,822,097) (Note 2)
  $ 57,070,541  
Investments in affiliated issuers, at value (cost $3,038,405,908) (Notes 2 and 10)
    3,400,703,466  
Receivable for investments sold
    8,122,163  
Receivable for Fund shares sold
    5,870  
Interest receivable
    54,368  
Receivable for expenses reimbursed by Manager (Note 5)
    23,296  
Miscellaneous receivable
    7,321  
         
Total assets
    3,465,987,025  
         
         
Liabilities:
       
Payable for Fund shares repurchased
    8,135,322  
Payable to affiliate for (Note 5):
       
Trustees and Trust Officers or agents unaffiliated with the Manager
    8,409  
Accrued expenses
    140,059  
         
Total liabilities
    8,283,790  
         
Net assets
  $ 3,457,703,235  
         
Net assets consist of:
       
Paid-in capital
  $ 3,763,302,519  
Accumulated undistributed net investment income
    680,007  
Accumulated net realized loss
    (673,825,293 )
Net unrealized appreciation
    367,546,002  
         
    $ 3,457,703,235  
         
Net assets attributable to:
       
Class III shares
  $ 3,457,703,235  
         
Shares outstanding:
       
Class III
    338,412,986  
         
Net asset value per share:
       
Class III
  $ 10.22  
         

         
18
  See accompanying notes to the financial statements.    

 

GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends from affiliated issuers (Note 10)
  $ 51,050,454  
Interest
    5,653,866  
Dividends from unaffiliated issuers
    2,712  
         
Total investment income
    56,707,032  
         
Expenses:
       
Legal fees
    130,031  
Custodian, fund accounting agent and transfer agent fees
    74,317  
Audit and tax fees
    71,480  
Trustees fees and related expenses (Note 5)
    69,776  
Chief Compliance Officer (Note 5)
    23,802  
Registration fees
    4,445  
Miscellaneous
    33,445  
         
Total expenses
    407,296  
Fees and expenses reimbursed by Manager (Note 5)
    (313,168 )
Expense reductions (Note 2)
    (1,684 )
         
Net expenses
    92,444  
         
Net investment income (loss)
    56,614,588  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in unaffiliated issuers
    2,650,423  
Investments in affiliated issuers
    (134,915,104 )
Realized gain distributions from affiliated issuers (Note 10)
    8,400,498  
Foreign currency and foreign currency related transactions
    (54 )
         
Net realized gain (loss)
    (123,864,237 )
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in unaffiliated issuers
    (948,219 )
Investments in affiliated issuers
    435,717,005  
         
Net unrealized gain (loss)
    434,768,786  
         
Net realized and unrealized gain (loss)
    310,904,549  
         
Net increase (decrease) in net assets resulting from operations
  $ 367,519,137  
         

         
    See accompanying notes to the financial statements.   19

 

GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
 
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 56,614,588     $ 89,279,309  
Net realized gain (loss)
    (123,864,237 )     (342,664,709 )
Change in net unrealized appreciation (depreciation)
    434,768,786       1,044,631,683  
                 
                 
Net increase (decrease) in net assets from operations
    367,519,137       791,246,283  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (63,193,309 )     (115,922,229 )
                 
Net share transactions (Note 9):
               
Class III
    48,282,089       (5,463,035 )
Purchase premiums and redemption fees (Notes 2 and 9):
               
Class III
    802,582       1,444,675  
                 
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees
    49,084,671       (4,018,360 )
                 
                 
Total increase (decrease) in net assets
    353,410,499       671,305,694  
                 
Net assets:
               
Beginning of period
    3,104,292,736       2,432,987,042  
                 
End of period (including accumulated undistributed net investment income of $680,007 and distributions in excess of net investment income of $36,739,638, respectively)
  $ 3,457,703,235     $ 3,104,292,736  
                 

         
20
  See accompanying notes to the financial statements.    

 

GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 9.30     $ 7.28     $ 11.37     $ 12.01     $ 11.76  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)(a)†
    0.17       0.27       0.87       0.48       0.39  
Net realized and unrealized gain (loss)
    0.94       2.10       (3.43 )     0.05       0.66  
                                         
                                         
Total from investment operations
    1.11       2.37       (2.56 )     0.53       1.05  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.19 )     (0.35 )     (1.04 )     (0.53 )     (0.43 )
From net realized gains
    —       —       (0.49 )     (0.64 )     (0.37 )
                                         
                                         
Total distributions
    (0.19 )     (0.35 )     (1.53 )     (1.17 )     (0.80 )
                                         
                                         
Net asset value, end of period
  $ 10.22     $ 9.30     $ 7.28     $ 11.37     $ 12.01  
                                         
                                         
Total Return(b)
    11.98 %     32.60 %     (24.30 )%     4.10 %     9.22 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 3,457,703     $ 3,104,293     $ 2,432,987     $ 3,364,855     $ 3,079,164  
Net expenses to average daily net assets(c)(d)
    0.00 %(e)     0.00 %(e)     0.00 %(e)     0.00 %(e)     0.00 %
Net investment income (loss) to average daily net assets
    1.73 %     3.00 %     8.81 %     3.89 %     3.28 %
Portfolio turnover rate
    32 %     29 %     44 %     76 %     23 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.01 %     0.01 %     0.01 %     0.01 %     0.01 %
Purchase premiums and redemption fees consisted of the following per share amounts (Note 2):†
  $ 0.00 (f)   $ 0.00 (f)   $ 0.00 (f)   $ 0.00 (f)   $ 0.01  
 
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(d) Net expenses to average daily net assets were less than 0.01%.
(e) The net expense ratio does not include the effect of expense reductions (Note 2).
(f) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.

         
    See accompanying notes to the financial statements.   21

 

GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO Global Balanced Asset Allocation Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund seeks total return greater than that of its benchmark, the GMO Global Balanced Index. The GMO Global Balanced Index is a composite benchmark computed by the Manager, consisting of (i) the MSCI ACWI (All Country World Index) Index and (ii) the Barclays Capital U.S. Aggregate Index in the following proportions: 65% MSCI ACWI Index and 35% Barclays Capital U.S. Aggregate Index. The Fund is a fund of funds and invests primarily in shares of other GMO Funds, which may include GMO International Equity Funds, GMO U.S. Equity Funds, GMO Fixed Income Funds, GMO Alpha Only Fund, GMO Alternative Asset Opportunity Fund, GMO Debt Opportunities Fund, GMO High Quality Short-Duration Bond Fund, GMO Special Situations Fund, and GMO World Opportunity Overlay Fund (GMO Funds in which the Fund invests are collectively referred to as “underlying funds”). In addition, the Fund may hold securities (particularly asset-backed securities) directly or through one or more subsidiaries or other entities. The Fund may be exposed to foreign and U.S. equity investments (including emerging country equities, both growth and value style equities, and equities of any market capitalization), U.S. and foreign fixed income securities (including fixed income securities of any credit quality and having any maturity or duration), the investment returns of commodities and, from time to time, other alternative asset classes.
 
The Manager uses multi-year forecasts of relative value and risk among asset classes (e.g., foreign equity, U.S. equity, emerging country equity, emerging country debt, U.S. fixed income, foreign fixed income, and commodities) to select the underlying funds in which the Fund invests and to decide how much to invest in each. The Manager changes the Fund’s holdings of underlying funds in response to changes in its investment outlook and market valuations and may use redemption/purchase activity to rebalance the Fund’s investments. The Manager, however, intends to invest at least 25% of the Fund’s assets in fixed income investments and at least 25% in equity investments.
 
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
 
The financial statements of the underlying funds should be read in conjunction with the Fund’s financial statements. These financial statements are available, without charge, upon request, by calling

         
22
       

 

 
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
(617) 346-7646 (collect) or at gmo.com. As of February 28, 2011, shares of GMO Alternative Asset Opportunity Fund, GMO Special Situations Fund, and GMO World Opportunity Overlay Fund were not publicly available for direct purchase.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Shares of the underlying funds and other investment funds are generally valued at their net asset value. Investments held by the Fund and the underlying funds are valued as follows. Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the over-the-counter (“OTC”) market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of February 28, 2011, the total value of securities held directly and indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 2.6% of net assets. The Fund and the underlying funds classify such securities (as defined below) as Level 3. Additionally, because many foreign securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund and the underlying funds generally value those foreign securities as of the NYSE close using fair value prices, which are based on adjustments to local closing prices supplied by a third party vendor using that vendor’s proprietary models. As of February 28, 2011, those foreign securities, (including futures, derivatives and other securities whose values are based on indices comprised of such securities) representing 42.0%, (0.1%) and (0.3%),

         
        23

 

 
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
respectively, of the net assets of the Fund were valued using fair value prices based on those adjustments. Those underlying funds classify such securities (as defined below) as Level 2.
 
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. Although alternative prices are available for securities held by the Fund and the underlying funds, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by the Fund and the underlying funds. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fund and the underlying funds. As of February 28, 2011, the total value of securities held directly and indirectly for which no alternative pricing source was available represented 0.3% of the net assets of the Fund.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include most recent bid prices, interest rates, prepayment speeds, credit risk, yield curves and similar data.

         
24
       

 

 
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund utilized a number of fair value techniques on Level 3 investments, including the following: The Fund valued certain debt securities using indicative bids received from primary pricing sources. The Fund valued certain other debt securities by using an estimated specified spread above the LIBOR Rate or U.S. Treasury yield.
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Mutual Funds
  $ 3,400,703,466       —       —     $ 3,400,703,466  
                                 
Debt Obligations
                               
Asset-Backed Securities
    —     $ 11,326,420     $ 44,061,730       55,388,150  
Corporate Debt
    —       651,820       —       651,820  
U.S. Government Agency
    —       —       971,897       971,897  
                                 
TOTAL DEBT OBLIGATIONS
    —       11,978,240       45,033,627       57,011,867  
                                 
Short-Term Investments
    58,674       —       —       58,674  
                                 
Total Investments
    3,400,762,140       11,978,240       45,033,627       3,457,774,007  
                                 
Total
  $ 3,400,762,140     $ 11,978,240     $ 45,033,627     $ 3,457,774,007  
                                 
 
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements. The aggregate net values of the Fund’s investments (both direct and indirect) in securities and other financial instruments using Level 3 inputs were 8.9% and (0.1%) of total net assets, respectively.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.

         
        25

 

 
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a reconciliation of investments and derivatives, if any, in which significant unobservable inputs (Level 3) were used in determining value:
 
                                                                           
 
                                      Net Change
                                      in Unrealized
                                      Appreciation
                                      (Depreciation)
                                      from
    Balances
 		              Change in
 		          Balances
     Investments
    as of
 		  Net
 		  Accrued
 		  Total
 		  Unrealized
 		          as of
     Still Held as of
    February 28,
 		  Purchases/
 		  Discounts/
 		  Realized
 		  Appreciation
 		  Transfers into
 		  Transfers out of
   February 28,
     February 28,
    2010   (Sales)   Premiums   Gain/(Loss)   (Depreciation)   Level 3*   Level 3*   2011     2011
Debt Obligations
                                                                         
Asset-Backed Securities
  $ 64,106,588     $ (25,351,491 )   $ 1,683,253     $ 3,222,438     $ 929,563     $      —     $ (528,621 )**   $ 44,061,730       $ 2,542,899  
U.S. Government Agency
    1,373,924       (410,997 )     11,040       10,337       (12,407 )     —       —       971,897         (12,406 )
                                                                           
Total Debt Obligations
    65,480,512       (25,762,488 )     1,694,293       3,232,775       917,156       —       (528,621 )     45,033,627         2,530,493  
                                                                           
Preferred Stocks
    90,000       (156,410 )     —       (2,398 )     68,808       —       —       —         —  
                                                                           
Total
  $ 65,570,512     $ (25,918,898 )   $ 1,694,293     $ 3,230,377     $ 985,964     $ —     $ (528,621 )   $ 45,033,627       $ 2,530,493  
                                                                           
 
            * The Fund accounts for investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the value at the end of the period.
            ** Financial assets transferred between Level 2 and Level 3 were due to a change in observable and/or unobservable inputs.
 
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 pm. Income and expenses denominated in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after

         
26
       

 

 
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to differing treatment of mutual fund distributions received, partnership interest tax allocations, differing treatment of amortization and accretion on debt securities, losses on wash sale transactions, post-October capital losses, and capital loss carryforwards.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 63,193,309     $ 115,922,229  
                 
Total distributions
  $ 63,193,309     $ 115,922,229  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.

         
        27

 

 
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attribuutes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 594,697  
         
Other Tax Attributes:
       
Capital loss carryforwards
  $ (338,712,856 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 28, 2018
  $ (293,447,811 )
February 28, 2019
    (45,265,045 )
         
Total
  $ (338,712,856 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 3,425,255,132     $ 110,257,990     $ (77,739,116 )   $ 32,518,874      
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.

         
28
       

 

 
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Income dividends and capital gain distributions from the underlying funds are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (Note 5).
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
Purchases and redemptions of Fund shares
Prior to June 30, 2010, the premium on cash purchases and the fee on cash redemptions were each 0.07% of the amount invested or redeemed. Effective June 30, 2010, the premium on cash purchases and the fee on cash redemptions were each 0.09% of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by the Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. The Fund charges purchase premiums and redemption fees based on the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premiums and/or redemption fees, if any, imposed by the underlying Funds in which it invests, provided that, if that weighted average is less than 0.05%, the Fund generally will not charge a purchase premium or redemption fee. Such fees are recorded as a component of the Fund’s net share transactions. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of the Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). All or a portion of the Fund’s purchase premiums and/or redemption fees may be waived at the Manager’s discretion when they are de minimis and/or the Manager deems it equitable to do so, including without limitation when the weighted average of (i) the estimated transaction

         
        29

 

 
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
costs for directly held assets and (ii) the purchase premiums and/or redemption fees, if any, imposed by the underlying funds are less than the purchase premiums and/or redemption fees imposed by the Fund. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund’s shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of a Fund’s shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder’s securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of the Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. References to investments include those held directly by the Fund and indirectly through the Fund’s investments in the underlying funds. Some of the underlying funds are non-diversified investment companies under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by those funds may affect their performance more than if they were diversified. The principal risks of investing in the Fund are summarized below, including those risks to which the Fund is exposed as a result of its investments in the underlying funds. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Declines in stock market prices generally are likely to reduce the market value of the Fund’s investments.
 
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund or the underlying funds may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund or the underlying funds need to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund or the underlying funds to credit and other risks with respect to participating brokers, custodians, clearing

         
30
       

 

 
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund’s investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund’s investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
 
• Market Risk — Fixed Income Securities — Typically, the value of fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
 
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund or an underlying fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
 
• Derivatives Risk — The use of derivatives involves the risk that their value may not correlate with the value of the relevant underlying assets, rates or indices. Derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk.
 
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in the underlying funds, including the risk that the underlying funds in which it invests do not perform as expected. Because the Fund bears the fees and expenses of the underlying funds in which it invests, new investments in underlying funds with higher fees or expenses than those of the underlying funds in which the Fund is currently invested will increase the Fund’s total expenses. The fees and expenses associated with an investment in the Fund are less predictable and may be higher than fees and expenses associated with an investment in funds that charge a fixed management fee.
 
Other principal risks of an investment in the Fund include Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Market Risk — Value Securities (risk that the price of investments held by the Fund will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Market Risk — Growth Securities (greater price fluctuations resulting from dependence on future earnings expectations); Commodities Risk (value of an underlying fund’s shares may be affected by factors particular to the commodities markets and may fluctuate more than the share value of a fund with a broader range of investments); Currency Risk (risk that fluctuations in exchange rates may adversely affect the value of investments denominated in foreign currencies or that the U.S. dollar will decline in value relative to a foreign currency being hedged); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities lending); Credit and Counterparty Risk (risk of default of an issuer of a portfolio security, a derivatives counterparty, or a borrower of the Fund’s securities); Real Estate Risk (risk to an underlying fund that concentrates its assets in real estate-related investments that factors affecting the real estate industry may

         
        31

 

 
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
cause the value of the Fund’s investments to fluctuate more than if it invested in securities of companies in a broader range of industries); Short Sales Risk (risk that an underlying fund’s loss on the short sale of securities that it does not own is unlimited); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
 
The most significant market risk for Funds investing in fixed income securities is that the securities in which they invest experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund because it invests in asset-backed securities. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as “collateralized debt obligations” or “collateralized loan obligations”) and by the fees earned by service providers. Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. Many asset-backed securities owned (directly or indirectly) by the Fund that were once rated investment grade are now rated below investment grade as of the date of this report.
 
The existence of insurance on an asset-backed security does not guarantee that principal and/or interest will be paid because the insurer could default on its obligations. In recent years, a significant number of asset-backed security insurers have defaulted on their obligations.
 
With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced

         
32
       

 

 
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.
 
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and a Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.
 
The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution’s business may have a material impact on multiple investments.
 
4. Derivative financial instruments
 
At February 28, 2011, the Fund held no derivative financial instruments directly. For a listing of derivative financial instruments held by the underlying funds, if any, please refer to the underlying funds’ Schedule of Investments.
 
5. Fees and other transactions with affiliates
 
The Manager decides how to allocate the assets of the Fund among underlying funds. The Manager does not charge the Fund a management fee or shareholder service fee, but it receives management and shareholder service fees from the underlying funds in which the Fund invests. Because those fees vary from fund to fund, the levels of indirect net expenses set forth below are affected by the Manager’s asset allocation decisions.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.00% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for

         
        33

 

 
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). This contractual expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $69,776 and $23,802, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in the Statement of Operations.
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
                   
Indirect Net
 		                 
Expenses
                  
(excluding
                  
shareholder service
     Indirect
            
fees and interest
     Shareholder
     Indirect Interest
     Total Indirect
expense)     Service Fees     Expense     Expenses
0.409%
    0.063%     0.004%     0.476%
                   
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments and class exchanges, for the year ended February 28, 2011 aggregated $1,131,812,612 and $1,034,667,967, respectively.
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.

         
34
       

 

 
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
8. Principal shareholders and related parties
 
As of February 28, 2011, no shareholder owned more than 10% of the outstanding shares of the Fund.
 
As of February 28, 2011, 0.12% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and none of the Fund’s shares were held by accounts for which the Manager had investment discretion.
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    64,149,232     $ 626,351,461       42,511,488     $ 381,059,284  
Shares issued to shareholders in reinvestment of distributions
    5,410,463       53,853,799       10,743,096       99,072,970  
Shares repurchased
    (64,763,129 )     (631,923,171 )     (53,683,925 )     (485,595,289 )
Purchase premiums
    —       519,281       —       242,434  
Redemption fees
    —       283,301       —       1,202,241  
                                 
Net increase (decrease)
    4,796,566     $ 49,084,671       (429,341 )   $ (4,018,360 )
                                 
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                         
    Value,
               Distributions
   Return
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   of
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   Capital   period
 
GMO Alpha Only Fund, Class IV
  $ 414,351,557     $ 171,327,290     $ 122,471,637     $ —     $ —     $ —     $ 444,489,793  
GMO Asset Allocation Bond Fund, Class VI
    130,221,749       121,287,126       140,308,131       2,380,302       6,898,537       —       108,350,120  
GMO Domestic Bond Fund, Class VI
    153,529,995       —       5,000,000       1,672,706       —       44,791,360       112,619,380  
GMO Emerging Country Debt Fund, Class IV
    13,084,375       3,064,635       1,822,613       1,821,317       —       —       15,394,798  
GMO Emerging Markets Fund, Class VI
    245,086,938       165,666,589       80,817,453       5,088,027       —       —       407,920,924  

         
        35

 

 
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
                                                         
    Value,
               Distributions
   Return
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   of
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   Capital   period
 
GMO Flexible Equities Fund, Class VI
  $ 48,307,295     $ 5,018,829     $ 13,910,507     $ 504,993     $ —     $ —     $ 40,832,080  
GMO Inflation Indexed Plus Bond Fund, Class VI
    33,878,670       2,664,941       37,972,956       940,046       1,501,961       —       —  
GMO International Core Equity Fund, Class VI
    316,191,644       264,744,858       129,767,194       10,775,937       —       —       547,460,836  
GMO International Growth Equity Fund, Class IV
    137,124,023       19,871,359       32,885,678       1,456,968       —       —       150,549,756  
GMO International Intrinsic Value Fund, Class IV
    134,818,303       21,575,433       25,096,918       1,998,764       —       —       155,598,926  
GMO International Small Companies Fund, Class III
    55,989,577       862,429       58,345,568       562,894       —       —       —  
GMO Quality Fund, Class VI
    963,211,867       149,074,933       309,405,028       16,508,861       —       —       877,962,197  
GMO Short-Duration Investment Fund, Class III
    2,903,113       16,109       —       17,872       —       —       3,023,794  
GMO Special Situations Fund, Class VI
    93,869,260       80,357,566       28,043,203       —       —       —       147,372,218  
GMO Strategic Fixed Income Fund, Class VI
    245,961,786       126,280,515       6,000,000       7,321,767       —       5,799,679       365,706,603  
GMO World Opportunity Overlay Fund
    21,996,890       —       —       —       —       —       23,422,041  
                                                         
Totals
  $ 3,010,527,042     $ 1,131,812,612     $ 991,846,886     $ 51,050,454     $ 8,400,498     $ 50,591,039     $ 3,400,703,466  
                                                         

         
36
       

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Global Balanced Asset Allocation Fund:
 
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 Asset Allocation Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian, and transfer agent provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
        37

 

GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including indirect management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
38
       

 

 
GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.49 %   $ 1,000.00     $ 1,127.90     $ 2.59  
2) Hypothetical
    0.49 %   $ 1,000.00     $ 1,022.36     $ 2.46  
                                 
 
            * Expenses are calculated using the Class’s annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
        39

 

GMO Global Balanced Asset Allocation Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
For taxable, non-corporate shareholders, 57.35 of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 represents qualified dividend income subject to the 15% rate category.
 
For corporate shareholders, 25.13% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 qualified for the dividends-received deduction.
 
The Fund hereby designates as qualified interest income with respect to its taxable year ended February 28, 2011, $6,414,744 or if determined to be different, the qualified interest income of such year.
 
Of the ordinary income distributions made by the Fund during the fiscal year ended February 28, 2011, 6.14% is derived from investments in U.S. Government and Agency Obligations. All or a portion of the distributions from this income may be exempt from taxation at the state level. Consult your tax advisor for state specific information.

         
40        

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
   Position(s)
   Length of
   During Past
   Complex
     Other Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
        41

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
   Position(s)
   Length of
   During Past
   Complex
     Other Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since
March 2010. 		  Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
   Position(s)
   Length of
   During Past
   Complex
    Other Directorships
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee;
President and
Chief Executive
Officer of the Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
42        

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        43

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
44        

 

 
GMO Global Bond Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO Global Bond Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
GMO Global Bond Fund returned +12.8% for the fiscal year ended February 28, 2011, as compared with +5.9% for the J.P. Morgan Global Government Bond Index.
 
The Fund’s investment exposures were achieved directly through a mixture of bonds, futures and swaps and indirectly through its investment in underlying GMO Trust mutual funds, primarily GMO Short-Duration Collateral Fund (SDCF), GMO World Opportunity Overlay Fund (Overlay Fund), GMO Emerging Country Debt Fund (ECDF), and GMO U.S. Treasury Fund (USTF).
 
The Fund outperformed the benchmark during the fiscal year by 6.9%. Exposures to asset-backed securities held indirectly through SDCF and Overlay Fund were the largest positive contributors for the fiscal year, followed by positive contributions from developed markets interest-rate positioning (primarily through exchange-traded futures and interest-rate swaps), exposure to emerging country debt via ECDF, and developed markets currency selection (primarily through currency forwards and options).
 
Approximately 5.7% of the outperformance derived from asset-backed securities held indirectly in SDCF and Overlay Fund. Asset-backed security spreads tightened and pricing and liquidity conditions in securitized credit markets improved during the fiscal year. SDCF and Overlay Fund experienced credit downgrades during the fiscal year: SDCF had 55 downgraded securities, and Overlay Fund had 35, representing 11% and 10% of their respective market values from the beginning of the fiscal year. At fiscal year-end, 52% of SDCF’s portfolio was rated AAA, and 72% of Overlay Fund’s was rated AAA.
 
Developed markets interest-rate positioning also contributed positively to performance. Positive contributions from euro zone, Canadian, Swedish, and U.S. positions more than offset losses from Swiss, U.K., and Australian positions. Within the euro zone, strategy underweights in Italy and Spain relative to Germany contributed positively. These exposures were achieved directly.
 
A small exposure to emerging country debt through investment in ECDF added value due to positive contributions from both security and country selection within ECDF.
 
In developed markets currency selection, Australian dollar, Swedish krona, Japanese yen, and Norwegian krone positions drove gains, though this performance was offset somewhat by Swiss franc, Canadian dollar, pound sterling, and opportunistic positions. These exposures were achieved directly.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO Global Bond Fund Class III Shares and the J.P. Morgan Global Government Bond Index
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited.

 

GMO Global Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary*   % of Total Net Assets  
Debt Obligations
    93.9 %
Short-Term Investments
    6.4  
Forward Currency Contracts
    0.9  
Options Purchased
    0.4  
Loan Participations
    0.2  
Loan Assignments
    0.1  
Rights and Warrants
    0.0 Ù
Promissory Notes
    0.0 Ù
Written Options
    (0.0 )Ù
Swap Agreements
    (0.7 )
Futures Contracts
    (0.8 )
Reverse Repurchase Agreements
    (1.4 )
Other
    1.0  
         
      100.0 %
         
 
         
Country / Region Summary**   % of Investments  
United States
    43.0 %
Euro Region***
    29.4  
Japan
    26.7  
United Kingdom
    10.9  
Canada
    6.1  
Emerging****
    4.7  
Denmark
    0.0 Ù
New Zealand
    0.0 Ù
Norway
    0.0 Ù
South Africa
    0.0 Ù
Switzerland
    (2.5 )
Sweden
    (8.2 )
Australia
    (10.1 )
         
      100.0 %
         
 
Ù The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust (“underlying funds”).
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative financial instruments. The table excludes exposure through certain currency linked derivatives such as forward currency contracts and currency options. The table is based on duration adjusted exposures, taking into account the market value of securities and the notional amounts of swaps and other derivative financial instruments. For example, U.S. Asset-backed securities represent a relatively small percentage due to their short duration, even through they represent a large

         
        1

 

 
GMO Global Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2010 (Unaudited)
 
percentage of market value (direct and indirectly). Duration is based on the Manager’s models. The greater the duration of a bond, the greater its contribution to the concentration percentage. Credit default swap exposures (both positive and negative) are factored into the duration-adjusted exposure using a reference security and applying the same methodology to that security.
*** The “Euro Region” is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
**** The “Emerging” exposure is comprised of: Argentina, Brazil, Chile, China, Colombia, Congo, Czech Republic, Dominican Republic, Egypt, Hungary, India, Indonesia, Malaysia, Mexico, Philippines, Poland, Russia, South Africa, South Korea, Taiwan, Thailand, Turkey, Ukraine and Venezuela.
Ù Rounds to 0.0%.

         
2
       

 

GMO Global Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value     Description   Value ($)  
            DEBT OBLIGATIONS — 33.3%        
                     
            Canada — 2.0%        
            Foreign Government Obligations — 2.0%        
CAD
    1,500,000     Government of Canada, 8.00%, due 06/01/23     2,234,600  
CAD
    2,000,000     Government of Canada, 3.50%, due 06/01/20     2,091,503  
                     
            Total Canada     4,326,103  
                     
                     
            France — 3.3%        
            Foreign Government Obligations — 3.3%        
EUR
    5,000,000     Government of France, 4.00%, due 10/25/38     6,890,780  
                     
                     
            Germany — 0.8%        
            Foreign Government Obligations — 0.8%        
EUR
    1,000,000     Republic of Deutschland, 4.75%, due 07/04/34     1,602,950  
                     
                     
            Italy — 1.3%        
            Foreign Government Obligations — 1.3%        
EUR
    2,400,000     Republic of Italy, 4.00%, due 02/01/37     2,686,001  
                     
                     
            Japan — 14.2%        
            Foreign Government Obligations — 14.2%        
JPY
    2,300,000,000     Japan Government Twenty Year Bond, 2.20%, due 06/20/26     29,804,266  
                     
                     
            Spain — 1.1%        
            Foreign Government Obligations — 1.1%        
EUR
    2,000,000     Government of Spain, 4.70%, due 07/30/41     2,265,270  
                     
                     
            United Kingdom — 4.3%        
            Foreign Government Obligations — 4.3%        
GBP
    5,500,000     U.K. Treasury Gilt, 4.25%, due 12/07/27     8,987,562  
                     

         
    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, 2011
 
                     
Par Value /
 		           
Shares /
 		           
Principal Amount     Description   Value ($)  
                     
            United States — 6.3%        
            U.S. Government — 6.3%        
USD
    3,132,145     U.S. Treasury Inflation Indexed Note, 2.00%, due 04/15/12 (a) (b)     3,271,134  
USD
    15,000,000     U.S. Treasury Principal Strip Bond, due 11/15/21     9,995,295  
                     
            Total United States     13,266,429  
                     
                     
            TOTAL DEBT OBLIGATIONS (COST $67,821,997)     69,829,361  
                     
                     
            MUTUAL FUNDS — 64.2%        
                     
            United States — 64.2%        
            Affiliated Issuers — 64.2%        
      772,356     GMO Emerging Country Debt Fund, Class IV     7,020,716  
      7,873,225     GMO Short-Duration Collateral Fund     81,724,080  
      45,838     GMO Special Purpose Holding Fund (c)     22,919  
      169,119     GMO U.S. Treasury Fund     4,227,972  
      1,844,276     GMO World Opportunity Overlay Fund     41,828,178  
                     
            Total United States     134,823,865  
                     
                     
            TOTAL MUTUAL FUNDS (COST $145,547,525)     134,823,865  
                     
                     
            OPTIONS PURCHASED — 0.0%        
                     
            Currency Options — 0.0%        
AUD
    11,600,000     AUD Put/USD Call, Expires 05/12/11, Strike 0.95     61,958  
                     
                     
            TOTAL OPTIONS PURCHASED (COST $438,302)     61,958  
                     

         
4
  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, 2011
 
                     
 
 		           
 
 		           
Shares /
 		           
Principal Amount     Description   Value ($)  
                     
            SHORT-TERM INVESTMENTS — 1.1%        
                     
            Money Market Funds — 0.3%        
      553,611     State Street Institutional Treasury Plus Money Market Fund-Institutional Class     553,611  
                     
                     
            U.S. Government — 0.8%        
USD
    1,600,000     U.S. Treasury Bill, 0.19%, due 11/17/11 (a) (d)     1,597,854  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $2,150,711)     2,151,465  
                     
                     
            TOTAL INVESTMENTS — 98.6%
(Cost $215,958,535) 		    206,866,649  
            Other Assets and Liabilities (net) — 1.4%     3,024,613  
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 209,891,262  
                     

         
    See accompanying notes to the financial statements.   5

 

 
GMO Global Bond Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
A summary of outstanding financial instruments at February 28, 2011 is as follows:
 
Forward Currency Contracts
 
                                     
                    Net Unrealized
Settlement
 		                  Appreciation
Date   Counterparty   Deliver/Receive   Units of Currency   Value   (Depreciation)
 
Buys †
                                   
3/22/11
    Citibank N.A.     AUD     2,300,000     $ 2,335,992     $ 25,343  
3/22/11
    Deutsche Bank AG     AUD     3,900,000       3,961,030       101,395  
3/29/11
    Deutsche Bank AG     CAD     1,800,000       1,851,660       14,033  
5/03/11
    Citibank N.A.     CHF     800,000       861,520       361  
3/01/11
    Deutsche Bank AG     CHF     4,800,000       5,166,290       (31,328 )
3/01/11
    Royal Bank of Scotland PLC     CHF     2,000,000       2,152,621       56,457  
5/03/11
    Royal Bank of Scotland PLC     CHF     1,000,000       1,076,900       (3,573 )
3/08/11
    Citibank N.A.     EUR     5,700,000       7,865,123       232,051  
3/08/11
    Deutsche Bank AG     EUR     33,600,000       46,362,833       1,997,523  
3/08/11
    Royal Bank of Scotland PLC     EUR     2,500,000       3,449,616       30,491  
4/05/11
    Citibank N.A.     GBP     700,000       1,137,641       10,193  
4/05/11
    Deutsche Bank AG     GBP     2,900,000       4,713,086       102,086  
4/05/11
    Royal Bank of Scotland PLC     GBP     1,200,000       1,950,242       18,080  
3/15/11
    Citibank N.A.     JPY     170,000,000       2,078,275       27,218  
3/15/11
    Deutsche Bank AG     JPY     2,152,600,000       26,315,854       414,675  
4/19/11
    Deutsche Bank AG     NZD     9,800,000       7,348,282       (133,969 )
                                 
                        $ 118,626,965     $ 2,861,036  
                                 
Sales #
                                   
3/22/11
    Deutsche Bank AG     AUD     1,100,000     $ 1,117,213     $ (15,981 )
3/22/11
    Royal Bank of Scotland PLC     AUD     1,400,000       1,421,908       (46,296 )
3/29/11
    Deutsche Bank AG     CAD     2,800,000       2,880,359       (81,922 )
3/29/11
    Royal Bank of Scotland PLC     CAD     1,300,000       1,337,310       (33,176 )
3/01/11
    Citibank N.A.     CHF     6,800,000       7,318,911       (497,252 )
5/03/11
    Deutsche Bank AG     CHF     4,800,000       5,169,120       31,510  
3/08/11
    Deutsche Bank AG     EUR     400,000       551,939       (16,670 )
3/08/11
    Royal Bank of Scotland PLC     EUR     500,000       689,923       (15,078 )
4/05/11
    Deutsche Bank AG     GBP     400,000       650,081       (341 )
4/05/11
    Royal Bank of Scotland PLC     GBP     500,000       812,601       (10,996 )
3/15/11
    Citibank N.A.     JPY     100,000,000       1,222,515       (7,315 )
3/15/11
    Deutsche Bank AG     JPY     200,000,000       2,445,030       (16,814 )
3/15/11
    Royal Bank of Scotland PLC     JPY     70,000,000       855,760       (6,359 )
4/19/11
    Royal Bank of Scotland PLC     NZD     4,900,000       3,674,141       (10,590 )
                                 
                        $ 30,146,811     $ (727,280 )
                                 
 
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.

         
6
  See accompanying notes to the financial statements.    

 

 
GMO Global Bond Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Forward Cross Currency Contracts
 
                                             
                Net Unrealized
Settlement
 		          Receive/
 		  Appreciation
Date   Counterparty   Deliver/Units of Currency   In Exchange For   (Depreciation)
 
4/12/11
    Deutsche Bank AG     EUR     4,800,000       NOK       37,654,320     $ 88,894  
      Royal Bank of                                      
4/12/11
    Scotland PLC     NOK     9,498,710       EUR       1,200,000       (37,392 )
4/26/11
    Deutsche Bank AG     EUR     6,800,000       SEK       59,384,000       (26,433 )
      Royal Bank of                                      
4/26/11
    Scotland PLC     SEK     4,378,270       EUR       500,000       86  
                                         
                                        $ 25,155  
                                         
 
Futures Contracts
 
                             
                Net Unrealized
Number of
 		      Expiration
 		  Contract
 		  Appreciation
Contracts   Type   Date   Value   (Depreciation)
 
Buys
                           
45
    U.S. Treasury Bond 30 Yr. (CBT)     March 2011   $ 5,487,188     $ (141,229 )
29
    Euro Bund     March 2011     4,967,102       31,236  
91
    Euro BOBL     March 2011     14,714,930       (202,613 )
34
    Canadian Government Bond 10 Yr.     June 2011     4,207,874       17,885  
96
    U.S. Treasury Note 10 Yr. (CBT)     June 2011     11,428,500       18,090  
188
    U.S. Treasury Note 5 Yr. (CBT)     June 2011     21,984,250       42,624  
142
    U.S. Treasury Note 2 Yr. (CBT)     June 2011     30,998,156       30,668  
40
    UK Gilt Long Bond     June 2011     7,587,228       16,408  
                         
                $ 101,375,228     $ (186,931 )
                         
Sales
                           
36
    Australian Government Bond 10 Yr.     March 2011   $ 3,804,871     $ (42,514 )
74
    Australian Government Bond 3 Yr.     March 2011     7,720,744       (28,846 )
5
    Japanese Government Bond 10 Yr. (TSE)     March 2011     8,528,819       26,828  
                         
                $ 20,054,434     $ (44,532 )
                         

         
    See accompanying notes to the financial statements.   7

 

 
GMO Global Bond Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Reverse Repurchase Agreements
 
                     
Average balance outstanding
  $ (9,259,306 )
Average interest rate
    0.32 %
Maximum balance outstanding
  $ (9,750,000 )
 
Average balance outstanding was calculated based on daily face value balances outstanding during the period that the Fund had entered into reverse repurchase agreements. The Fund had no reverse repurchase agreements outstanding at the end of the period.
 
Written Options
 
A summary of open written option contracts for the Fund at February 28, 2011 is as follows:
 
                                     
    Principal
 		  Expiration
 		              Market
   
Amount
  Date       Description   Premiums   Value
 
Put
    11,600,000     05/12/2011   AUD   AUD Put/USD Call, 0.89   $ (228,729 )   $ (18,224 )
                                     
 
Swap Agreements
 
Credit Default Swaps
 
                                                     
                            Maximum
 		   
                            Potential
 		   
                            Amount of
 		   
                            Future
 		   
                            Payments
 		   
                        Implied
 		      by the Fund
 		   
Notional
 		  Expiration
 		      Receive
 		  Annual
 		  Credit
 		  Deliverable
 		  Under the
 		  Market
Amount   Date   Counterparty   (Pay)Ù   Premium   Spread (1)   on Default   Contract (2)   Value
 
  21,000,000     USD   3/20/2014   Deutsche
Bank AG 		  (Pay)   1.70%   1.55%   Republic of Italy     N/A         $ (160,530 )
  15,000,000     USD   3/20/2019   Deutsche
Bank AG 		  Receive   1.66%   1.84%   Republic of Italy     15,000,000     USD     (134,201 )
                                                     
                                                $ (294,731 )
                                                     
Premiums to (Pay) Receive
  $  —  
         
 
Ù Receive - Fund receives premium and sells credit protection. If a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.

         
8
  See accompanying notes to the financial statements.    

 

 
GMO Global Bond Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
(Pay) - Fund pays premium and buys credit protection. If a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) receive from the seller of protection an amount equal to the notional amount of the swap and deliver the referenced obligation or underlying securities comprising the referenced index or (ii) receive a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.
(1) Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on the reference security, as of February 28, 2011, serve as an indicator of the current status of the payment/performance risk and reflect the likelihood or risk of default for the reference entity. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection. Wider (i.e. higher) credit spreads represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.
(2) The maximum potential amount the Fund could be required to pay as a seller of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.
 
Interest Rate Swaps
 
                                     
Notional
 		  Expiration
 		      Receive
 		          Market
Amount   Date   Counterparty   (Pay)#   Fixed Rate   Variable Rate   Value
 
                JPMorgan Chase                    
  1,400,000     CHF   3/16/2016   Bank, N.A.   Receive   1.30%   6 Month CHF LIBOR   $ (21,465 )
  44,300,000     SEK   3/16/2016   Citibank N.A.   (Pay)   2.60%   3 Month SEK STIBOR     301,062  
  69,600,000     SEK   3/16/2016   Barclays Bank PLC   (Pay)   2.60%   3 Month SEK STIBOR     473,001  
                                     
                                $ 752,598  
                                     
Premiums to (Pay) Receive
  $ (384,824 )
         
 
# Receive - Fund receives fixed rate and pays variable rate.
(Pay) - Fund pays fixed rate and receives variable rate.
 
As of February 28, 2011, for forward currency contracts, futures contracts, swap agreements, written options, and reverse repurchase agreements, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
 
Notes to Schedule of Investments:
 
BOBL - Bundesobligationen
CBT - Chicago Board of Trade
CHF LIBOR - London Interbank Offered Rate denominated in Swiss Franc.
SEK STIBOR - Stockholm Interbank Offered Rate denominated in Swedish Krona.
TSE - Tokyo Stock Exchange

         
    See accompanying notes to the financial statements.   9

 

 
GMO Global Bond Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
(a) All or a portion of this security has been pledged to cover margin requirements on futures contracts, collateral on swap contracts, forward currency contracts, and written options, if any (Note 4).
(b) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
(c) Underlying investment represents interests in defaulted claims.
 
(d) Rate shown represents yield-to-maturity.
 
Currency Abbreviations:
 
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
EUR - Euro
GBP - British Pound
JPY - Japanese Yen
NOK - Norwegian Krone
NZD - New Zealand Dollar
SEK - Swedish Krona
USD - United States Dollar

         
10
  See accompanying notes to the financial statements.    

 

GMO Global Bond Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $70,411,010) (Note 2)
  $ 72,042,784  
Investments in affiliated issuers, at value (cost $145,547,525) (Notes 2 and 10)
    134,823,865  
Receivable for Fund shares sold
    1,000  
Dividends and interest receivable
    505,244  
Unrealized appreciation on open forward currency contracts (Note 4)
    3,150,396  
Receivable for variation margin on open futures contracts (Note 4)
    255,178  
Receivable for open swap contracts (Note 4)
    774,063  
Receivable for expenses reimbursed by Manager (Note 5)
    21,493  
         
Total assets
    211,574,023  
         
         
Liabilities:
       
Payable to affiliate for (Note 5):
       
Management fee
    30,394  
Shareholder service fee
    23,996  
Trustees and Trust Officers or agents unaffiliated with the Manager
    513  
Due to broker (including variation margin on futures contracts)
    214,599  
Unrealized depreciation on open forward currency contracts (Note 4)
    991,485  
Payable for open swap contracts (Note 4)
    316,196  
Written options outstanding, at value (premiums $228,729) (Note 4)
    18,224  
Accrued expenses
    87,354  
         
Total liabilities
    1,682,761  
         
Net assets
  $ 209,891,262  
         
Net assets consist of:
       
Paid-in capital
  $ 255,163,276  
Accumulated undistributed net investment income
    680,583  
Accumulated net realized loss
    (39,081,826 )
Net unrealized depreciation
    (6,870,771 )
         
    $ 209,891,262  
         
Net assets attributable to:
       
Class III shares
  $ 209,891,262  
         
Shares outstanding:
       
Class III
    26,539,404  
         
Net asset value per share:
       
Class III
  $ 7.91  
         

         
    See accompanying notes to the financial statements.   11

 

GMO Global Bond Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends from affiliated issuers (Note 10)
  $ 2,294,429  
Interest
    1,674,698  
Dividends
    452  
         
Total investment income
    3,969,579  
         
Expenses:
       
Management fee (Note 5)
    398,586  
Shareholder service fee – Class III (Note 5)
    314,673  
Custodian, fund accounting agent and transfer agent fees
    119,692  
Audit and tax fees
    82,575  
Interest expense (Note 2)
    14,944  
Legal fees
    9,300  
Trustees fees and related expenses (Note 5)
    5,236  
Registration fees
    4,354  
Miscellaneous
    13,222  
         
Total expenses
    962,582  
Fees and expenses reimbursed by Manager (Note 5)
    (100,497 )
Expense reductions (Note 2)
    (126 )
Indirectly incurred fees waived or borne by Manager (Note 5)
    (31,122 )
Shareholder service fee waived (Note 5)
    (9,811 )
         
Net expenses
    821,026  
         
Net investment income (loss)
    3,148,553  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in unaffiliated issuers
    17,219  
Investments in affiliated issuers
    (1,861,988 )
Realized gains distributions from affiliated issuers (Note 10)
    602  
Futures contracts
    6,470,026  
Swap contracts
    (615,103 )
Foreign currency, forward contracts and foreign currency related transactions
    1,581,916  
         
Net realized gain (loss)
    5,592,672  
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in unaffiliated issuers
    2,148,084  
Investments in affiliated issuers
    12,626,776  
Futures contracts
    (1,282,945 )
Written options
    210,505  
Swap contracts
    20,779  
Foreign currency, forward contracts and foreign currency related transactions
    2,533,457  
         
Net unrealized gain (loss)
    16,256,656  
         
Net realized and unrealized gain (loss)
    21,849,328  
         
Net increase (decrease) in net assets resulting from operations
  $ 24,997,881  
         
         

         
12
  See accompanying notes to the financial statements.    

 

GMO Global Bond Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 3,148,553     $ 3,653,268  
Net realized gain (loss)
    5,592,672       (2,147,889 )
Change in net unrealized appreciation (depreciation)
    16,256,656       66,752,334  
                 
                 
Net increase (decrease) in net assets from operations
    24,997,881       68,257,713  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (15,807,412 )     (20,301,309 )
                 
Net share transactions (Note 9):
               
Class III
    (13,174,249 )     (96,209,181 )
                 
Purchase premiums and redemption fees (Notes 2 and 9):
               
Class III
    —       421,557  
                 
Total increase (decrease) in net assets resulting from net share transactions and redemption fees
    (13,174,249 )     (95,787,624 )
                 
Total increase (decrease) in net assets
    (3,983,780 )     (47,831,220 )
                 
Net assets:
               
Beginning of period
    213,875,042       261,706,262  
                 
End of period (including accumulated undistributed net investment income of $680,583 and distributions in excess of net investment income of $6,234,096, respectively)
  $ 209,891,262     $ 213,875,042  
                 
                 

         
    See accompanying notes to the financial statements.   13

 

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,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 7.58     $ 6.33     $ 8.70     $ 8.92     $ 8.53  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)(a)†
    0.12       0.10       0.25       0.42       0.38  
Net realized and unrealized gain (loss)
    0.82       1.66       (2.11 )     0.11       0.38  
                                         
                                         
Total from investment operations
    0.94       1.76       (1.86 )     0.53       0.76  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.61 )     (0.51 )     (0.51 )     (0.75 )     (0.37 )
                                         
                                         
Total distributions
    (0.61 )     (0.51 )     (0.51 )     (0.75 )     (0.37 )
                                         
                                         
Net asset value, end of period
  $ 7.91     $ 7.58     $ 6.33     $ 8.70     $ 8.92  
                                         
                                         
Total Return(b)
    12.84 %     28.99 %     (22.77 )%     6.50 %     8.99 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 209,891     $ 213,875     $ 261,706     $ 338,614     $ 185,321  
Net operating expenses to average daily net assets(c)
    0.38 %(d)     0.38 %(d)     0.39 %(d)     0.38 %(d)     0.39 %
Interest expense to average daily net assets(e)
    0.01 %     0.00 %(f)     —       —       —  
Total net expenses to average daily net assets(c)
    0.39 %(d)     0.38 %(d)     0.39 %(d)     0.38 %(d)     0.39 %
Net investment income (loss) to average daily net assets(a)
    1.50 %     1.37 %     3.24 %     4.86 %     4.33 %
Portfolio turnover rate
    45 %     31 %     35 %     20 %     22 %
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets:
    0.07 %     0.04 %     0.03 %     0.03 %     0.06 %
Redemption fees consisted of the following per share amounts (Notes 2):†
  $ —     $ 0.01     $ 0.00 (g)   $ —     $ —  
 
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(d) The net expense ratio does not include the effect of expense reductions (Note 2).
(e) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund’s net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income.
(f) Interest expense was less than 0.01% to average daily net assets.
(g) Redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.

         
14
  See accompanying notes to the financial statements.    

 

GMO Global Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO Global Bond Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund seeks total return in excess of that of its benchmark, the J.P. Morgan Global Government Bond Index. The Fund seeks to add value relative to its benchmark by exploiting misvaluations in global interest rates, sectors, currencies, credit and emerging country debt markets. As a result, the Fund’s interest rate, sector, credit and currency exposures will differ from those of its benchmark.
 
The Manager seeks to determine the relative values of the interest rate and currency markets, to determine currency and interest rate exposures, and to identify investments the Manager believes are undervalued or are likely to provide downside protection. The Manager selects investments based on an evaluation of various factors including, but not limited to, fundamental factors such as inflation and current account positions, as well as price-based factors such as interest and exchange rates.
 
Under normal circumstances, the Fund invests directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the “underlying funds” or derivatives) at least 80% of its assets in bonds. The term “bond” refers to any fixed income security, which includes (i) obligations of an issuer to make payments of principal and/or interest on future dates, (ii) synthetic debt instruments created by the Manager by using derivatives (e.g., a futures contract, swap contract, currency forward or option), and (iii) instruments with variable interest payments.
 
The Fund implements its investment program by investing in or holding: exchange-traded and over-the-counter (“OTC”) derivatives, including without limitation, futures contracts, currency options, interest rate options, currency forwards, reverse repurchase agreements, credit default swaps, and other swap contracts (to gain exposure to the global interest rate, credit, and currency markets); foreign government securities and other investment-grade bonds denominated in various currencies, including U.S. government securities, asset-backed securities issued by foreign governments and U.S. government agencies (including securities neither guaranteed nor insured by the U.S. government), corporate bonds, and mortgage-backed and other asset-backed securities issued by private issuers; shares of GMO Short-Duration Collateral Fund (“SDCF”) (a fund that invests primarily in U.S. asset-backed securities); shares of GMO World Opportunity Overlay Fund (“Overlay Fund”) (to attempt to exploit misvaluations in world interest rates, currencies and credit markets); shares of GMO Emerging Country Debt Fund (“ECDF”) (to gain exposure to emerging country debt markets); shares of GMO High Quality Short-Duration Bond Fund (to seek to generate a return in excess of that of the J.P. Morgan U.S. 3 Month Cash Index by investing in a wide variety of high quality

         
        15

 

 
GMO Global Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
U.S. and foreign debt investments); shares of GMO Debt Opportunities Fund (to seek to generate a positive return by investing in a wide variety of U.S. and foreign debt investments without regard to the credit quality of the investment); and shares of GMO U.S. Treasury Fund (for liquidity management purposes). In addition, the Fund may invest in unaffiliated money market funds.
 
Historically, the Fund has used derivatives and investments in other GMO Funds as the principal means to gain investment exposure. As a result, the Fund has substantial holdings of SDCF (a fund that invests primarily in U.S. asset-backed securities) and Overlay Fund (a fund that invests in U.S. and foreign asset-backed securities and uses derivatives to attempt to exploit misvaluations in world interest rates, currencies and credit markets). Because of the deterioration in credit markets that became acute in 2008, the Fund, including through its investment in SDCF and Overlay Fund, currently has and may continue to have material exposure to below investment grade U.S. securities. This is in addition to the Fund’s below investment grade emerging country debt investments. The Fund is not limited in its use of derivatives or in the absolute face value of its derivatives positions, and, as a result, the Fund may be leveraged in relation to its assets.
 
The Manager normally seeks to maintain the Fund’s estimated interest rate duration within +/- 2 years of the benchmark’s duration. The Fund, if deemed prudent by the Manager, will take temporary defensive measures until the Manager has determined that normal conditions have returned or that it is otherwise prudent to resume investing in accordance with the Fund’s normal investment strategies. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
 
The financial statements of the underlying funds should be read in conjunction with the Fund’s financial statements. These financial statements are available, without charge, upon request by calling (617) 346-7646 (collect). As of February 28, 2011, shares of SDCF, GMO Special Purpose Holding Fund (“SPHF”) and Overlay Fund were not publicly available for direct purchase.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the OTC market to be a better indicator of

         
16
       

 

 
GMO Global Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of February 28, 2011, the total value of securities held indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 1.0% of net assets. The underlying funds classify such securities (as defined below) as Level 3. During the year ended February 28, 2011, the Manager has evaluated the Fund’s OTC derivatives contracts and determined that no reduction in value was warranted on account of the creditworthiness of a counterparty. See Note 4 for a further discussion on valuation of derivative financial instruments.
 
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. Although alternative prices are available for securities held by the Fund and the underlying funds, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by the Fund and the underlying funds. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fund and the underlying funds. As of February 28, 2011, the total value of securities held directly and indirectly for which no alternative pricing source was available represented 5.5% of the net assets of the Fund.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis

         
        17

 

 
GMO Global Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
(i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include most recent bid prices, interest rates, prepayment speeds, credit risk, yield curves and similar data. The Fund also used third party valuation services (which use industry models and inputs from pricing vendors) to value credit default swaps.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Debt Obligations
                               
U.S. Government
  $ —     $ 13,266,429     $      —     $ 13,266,429  
Foreign Government Obligations
    —       56,562,932       —       56,562,932  
                                 
TOTAL DEBT OBLIGATIONS
    —       69,829,361       —       69,829,361  
                                 
Mutual Funds
    134,800,946       22,919       —       134,823,865  
Options Purchased
    —       61,958       —       61,958  
Short-Term Investments
    2,151,465       —       —       2,151,465  
                                 
Total Investments
    136,952,411       69,914,238       —       206,866,649  
                                 

         
18
       

 

 
GMO Global Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
  
  ASSET VALUATION INPUTS — continued
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Derivatives *
                               
Forward Currency Contracts
                               
Foreign currency risk
  $ —     $ 3,150,396     $ —     $ 3,150,396  
Futures Contracts
                               
Interest rate risk
    183,739       —       —       183,739  
Swap Agreements
                               
Interest rate risk
    —       774,063       —       774,063  
                                 
Total
  $ 137,136,150     $ 73,838,697     $ —     $ 210,974,847  
                                 
 
LIABILITY VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Liabilities
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Derivatives *
                               
Forward Currency Contracts
                               
Foreign currency risk
  $ —     $ (991,485 )   $      —     $ (991,485 )
Futures Contracts
                               
Interest rate risk
    (415,202 )     —       —       (415,202 )
Swap Agreements
                               
Credit risk
    —       (294,731 )     —       (294,731 )
Interest rate risk
    —       (21,465 )     —       (21,465 )
Written options
                               
Foreign currency risk
    —       (18,224 )     —       (18,224 )
                                 
Total
  $ (415,202 )   $ (1,325,905 )   $ —     $ (1,741,107 )
                                 
 
The risks referenced above are not intended to be inclusive of all risks. Please see the Investment Risks and Derivative Financial Instruments sections below for a further discussion of risks.
 
* Because the tables above are based on market values or unrealized appreciation (depreciation) rather than the notional amounts of derivatives, the uncertainties surrounding the valuation inputs for a derivative are

         
        19

 

 
GMO Global Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
likely to be more significant to the Fund’s net asset value than the uncertainties surrounding inputs for a non-derivative security with the same market value.
 
The underlying funds held at period end are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements. The aggregate net values of the Fund’s indirect investments in securities and derivative financial instruments using Level 3 inputs were 35.6% and (0.1)% of total net assets, respectively.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
The following is a reconciliation of investments and derivatives, if any, in which significant unobservable inputs (Level 3) were used in determining value:
 
                                                                           
 
                                      Net
                                      Change in
                                      Unrealized
                                      Appreciation
                                      (Depreciation)
                                      from
                                      Investments
    Balances
               Change in
           Balances
 		    Still Held
    as of
   Net
   Accrued
   Total
   Unrealized
   Transfer
   Transfers
 		  as of
 		    as of
    February 28,
   Purchases/
   Discounts/
   Realized
   Appreciation
   into
   out of
 		  February 28,
 		    February 28,
    2010   (Sales)   Premiums   Gain/(Loss)   (Depreciation)   Level 3*   Level 3*   2011     2011
Swap Agreements
  $ 17,943     $ 109,200     $      —     ($ 109,200 )   ($ 312,674 )   $      —     $ 294,731 **   $      —       $      —  
                                                                           
Total
  $ 17,943     $ 109,200     $ —     ($ 109,200 )   ($ 312,674 )   $ —     $ 294,731 **   $ —       $ —    
                                                                           
 
            * The Fund accounts for investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the value at the end of the period.
            ** Financial assets transferred between Level 2 and Level 3 were due to a change in observable and/or unobservable inputs.
 
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 pm. Income and expenses denominated in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in

         
20
       

 

 
GMO Global Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.
 
Repurchase agreements
The Fund may enter into repurchase agreements. Under a repurchase agreement 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 it acquired under the repurchase agreement. The value of the securities acquired is required by contract to be marked to market daily and additional collateral is required to be transferred so that the market value is at least equal to the amount owed to the Fund by the seller. If the seller of a repurchase agreement defaults or enters into insolvency proceedings and/or the value of the securities subject to the repurchase agreement is insufficient, the Fund’s recovery of cash from the seller may be delayed and the Fund may incur a loss equal to the difference between the cash it paid and the value of the securities. The Fund had no repurchase agreements outstanding at the end of the period.
 
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at an agreed upon price and date. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which generally causes the Fund’s portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the event of a buyer’s bankruptcy or insolvency, the Fund’s use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund’s right to repurchase the securities. The Fund had no reverse repurchase agreements outstanding at the end of the period.
 
Inflation-indexed bonds
The Fund may invest in inflation indexed bonds. Inflation indexed bonds are fixed income securities whose principal value is adjusted periodically according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that reflects inflation in the principal value of the bond. Most other issuers pay out any inflation related accruals as part of a semiannual coupon.
 
The value of inflation indexed bonds is expected to change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates (i.e., stated interest rates) and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates (i.e. nominal interest rate minus inflation) might decline, leading to an increase in value of inflation indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation indexed bonds. There can be no assurance, however,

         
        21

 

 
GMO Global Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
that the value of inflation indexed bonds will be directly correlated to changes in nominal interest rates, and short term increases in inflation may lead to a decline in their value. Coupon payments received by the Fund from inflation indexed bonds are included in the Fund’s gross income for the period in which they accrue. In addition, any increase or decrease in the principal amount of an inflation indexed bond will increase or decrease taxable ordinary income to the Fund, even though principal is not paid until maturity. Inflation-indexed bonds outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country’s tax treaty with the United States. The foreign withholding rates applicable to a Fund’s investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Taxes related to capital gains realized during the year ended February 28, 2011, if any, are reflected as part of Net realized gain (loss) in the Statement of Operations. Changes in tax liabilities related to capital gain taxes on unrealized investment gains, if any, are reflected as part of Change in net unrealized appreciation (depreciation) in the Statement of Operations. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards, derivative contract transactions, foreign currency transactions, losses on wash sale transactions, partnership interest tax allocations and post-October capital losses.

         
22
       

 

 
GMO Global Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 15,807,412     $ 20,301,309  
                 
Total distributions
  $ 15,807,412     $ 20,301,309  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 2,850,897  
         
Other Tax Attributes:
       
Capital loss carryforwards
  $ (28,027,936 )
Post-October capital loss deferral
  $ (1,867,952 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards, post-October capital losses and future realized losses, if any, subsequent to February 28, 2011 could be subject to limitations imposed by the Code related to share ownership activity. The Fund’s capital loss carryforwards expire as follows:
 
         
February 29, 2012
  $ (7,601,799 )
February 28, 2014
    (7,575,780 )
February 28, 2015
    (269,796 )
February 28, 2017
    (4,412,277 )
February 28, 2018
    (6,769,760 )
February 28, 2019
    (1,398,524 )
         
Total
  $ (28,027,936 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 225,210,332     $ 3,194,906     $ (21,538,589 )   $ (18,343,683 )    

         
        23

 

 
GMO Global Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (Note 5).
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.

         
24
       

 

 
GMO Global Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Purchases and redemptions of Fund shares
Purchase premiums and redemption fees are paid to and retained by the Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. Such fees are recorded as a component of the Fund’s net share transactions. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of the Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund’s shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund’s shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder’s securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of the Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
 
Other matters
GMO Special Purpose Holding Fund (“SPHF”), an investment of the Fund, has litigation pending against various entities related to the 2002 fraud and related default of securities previously held by SPHF. The outcome of the lawsuits against the remaining defendants is not known and any potential recoveries are not reflected in the net asset value of SPHF. For the year ended February 28, 2011, the Fund received no distributions from SPHF in connection with the defaulted securities or the related litigation.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.

         
        25

 

 
GMO Global Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund’s foreign currency holdings and investments denominated in foreign currencies.
 
• Market Risk — Fixed Income Securities — Typically, the value of the Fund’s fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
 
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
 
• Credit and Counterparty Risk — The Fund runs the risk that the issuer or guarantor of a fixed income security, the counterparty to an over-the-counter derivatives contract, a borrower of the Fund’s securities or the obligor of an obligation underlying an asset-backed security will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations. This risk is particularly pronounced for the Fund because it typically uses over-the-counter derivatives, including swap contracts with longer-term maturities, and may have significant exposure to a single counterparty. The risk of counterparty default is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions.
 
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in underlying funds, including the risk that the underlying funds in which it invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments.
 
Other principal risks of an investment in the Fund include Foreign Investment Risk (risk that the market prices of foreign securities will fluctuate more rapidly and to a greater extent than those of U.S. securities); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities lending); Focused Investment Risk (increased risk from the Fund’s to focus on investments in countries, regions, sectors or companies with high positive correlations to one another); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).

         
26
       

 

 
GMO Global Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The most significant market risk for Funds investing in fixed income securities is that the securities in which they invest experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund because it invests in asset-backed securities. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as “collateralized debt obligations” or “collateralized loan obligations”) and by the fees earned by service providers. Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. Many asset-backed securities owned (directly or indirectly) by the Fund that were once rated investment grade are now rated below investment grade as of the date of this report.
 
The existence of insurance on an asset-backed security does not guarantee that principal and/or interest will be paid because the insurer could default on its obligations. In recent years, a significant number of asset-backed security insurers have defaulted on their obligations.
 
With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.
 
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial

         
        27

 

 
GMO Global Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
mortgages, also are subject to unscheduled prepayment, and a Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.
 
The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution’s business may have a material impact on multiple investments.
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps or other derivatives on an index, a single security or a basket of securities to gain investment exposures (e.g., by selling protection under a credit default swap). The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). For example, the Fund may use credit default swaps to take a short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund’s exposure to the credit of an issuer through the debt instrument, but adjust the Fund’s interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed versus variable rates and shorter duration versus longer duration exposure. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.

         
28
       

 

 
GMO Global Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral (e.g., foreign currency forwards; see “Currency Risk” above), that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.

         
        29

 

 
GMO Global Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
 
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund’s forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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.
 
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. During the year ended February 28, 2011, the Fund used forward currency contracts to adjust exposure to foreign currencies and otherwise adjust currency exchange rate risk. Forward currency contracts outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby

         
30
       

 

 
GMO Global Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. During the year ended February 28, 2011, the Fund used futures contracts to adjust interest rate exposure and enhance the diversity and liquidity of the portfolio. Futures contracts outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. During the year ended February 28, 2011, the Fund used purchased call option contracts to adjust exposure to currencies and otherwise manage currency exchange rate risk. Option contracts purchased by the Fund and outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. During the year ended February 28, 2011, the Fund used written option contracts to adjust exposure to foreign currencies and otherwise manage currency exchange rate risk. Written options outstanding at the end of the period are listed in the Fund’s Schedule of Investments.

         
        31

 

 
GMO Global Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
For the year ended February 28, 2011, investment activity in options contracts written by the Fund was as follows:
 
                                                 
    Puts   Calls
    Principal
           Principal
        
    Amount
   Number
       Amount
   Number
    
    of Contracts   of Contracts   Premiums   of Contracts   of Contracts   Premiums
 
Outstanding, beginning of year
         —            —     $      —            —            —     $      —  
Options written
    (11,600,000 )     —       (228,729 )     —       —       —  
Options exercised
                                               
Options expired
    —       —       —       —       —       —  
Options sold
    —       —       —       —       —       —  
                                                 
Outstanding, end of year
    (11,600,000 )     —     $ (228,729 )     —       —     $ —  
                                                 
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are

         
32
       

 

 
GMO Global Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.

         
        33

 

 
GMO Global Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the year ended February 28, 2011, the Fund used swap agreements to adjust interest rate exposure, achieve exposure to a reference entity’s credit, and/or provide a measure of protection against default loss. Swap agreements outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.

         
34
       

 

 
GMO Global Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of
February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Assets:
                                               
Investments, at value (purchased options)
  $ —     $ 61,958     $ —     $      —     $      —     $ 61,958  
Unrealized appreciation on futures contracts *
    183,739       —       —       —       —       183,739  
Unrealized appreciation on forward currency contracts
    —       3,150,396       —       —       —       3,150,396  
Unrealized appreciation on swap agreements
    774,063       —       —       —       —       774,063  
                                                 
Total
  $ 957,802     $ 3,212,354     $ —     $ —     $ —     $ 4,170,156  
                                                 
Liabilities:
                                               
Written options outstanding
  $ —     $ (18,224 )   $ —     $ —     $ —     $ (18,224 )
Unrealized depreciation on futures contracts *
    (415,202 )     —       —       —       —       (415,202 )
Unrealized depreciation on forward currency contracts
            (991,485 )     —       —       —       (991,485 )
Unrealized depreciation on swap agreements
    (21,465 )     —       (294,731 )     —       —       (316,196 )
                                                 
Total
  $ (436,667 )   $ (1,009,709 )   $ (294,731 )   $ —     $ —     $ (1,741,107 )
                                                 
 
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Forwards contracts
  $ —     $ 4,434,503     $ —     $      —     $      —     $ 4,434,503  
Futures contracts
    6,470,026       —       —       —       —       6,470,026  
Swap agreements
    (505,903 )     —       (109,200 )     —       —       (615,103 )
                                                 
Total
  $ 5,964,123     $ 4,434,503     $ (109,200 )   $ —     $ —     $ 10,289,426  
                                                 

         
        35

 

 
GMO Global Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended February 28, 2011Ù: — continued
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Change in Unrealized Appreciation
(Depreciation) on:
                                               
Investments (purchased options)
  $ —     $ (376,344 )   $ —     $ —     $ —     $ (376,344 )
Written options
    —       210,505       —       —       —       210,505  
Futures contracts
    (1,282,945 )     —       —       —       —       (1,282,945 )
Forward currency contracts
    —       2,516,423       —       —       —       2,516,423  
Swap agreements
    333,453       —       (312,674 )     —       —       20,779  
                                                 
Total
  $ (949,492 )   $ 2,350,584     $ (312,674 )   $ —     $ —     $ 1,088,418  
                                                 
 
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
            * The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.
 
The volume of derivative activity, based on absolute values (forward currency contracts and futures contracts), principal amounts (options), or notional amounts (swap agreements) outstanding at each month-end, was as follows for the year ended February 28, 2011:
 
                                 
    Forward
            
    currency
   Futures
   Swap
    
    contracts   contracts   agreements   Options
 
Average amount outstanding
  $ 176,766,784     $ 136,177,907     $ 54,815,179     $ 7,723,666  
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.19% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares. The Manager has contractually agreed through at least June 30, 2011 to waive the Fund’s shareholder service fee to the extent that the aggregate of any direct and indirect shareholder service fees borne by the Fund exceeds 0.15%; provided, however, that the amount of this waiver will not exceed 0.15%.

         
36
       

 

 
GMO Global Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.25% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in other GMO Funds (excluding those Funds’ Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund’s Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $5,236 and $1,460, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
                   
Indirect Net
 		                 
Expenses
                  
(excluding
                  
shareholder service
     Indirect
            
fees and interest
     Shareholder
     Indirect Interest
     Total Indirect
expense)     Service Fees     Expense     Expenses
0.019%
    0.005%     0.012%     0.036%
                   

         
        37

 

 
GMO Global Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 were as follows:
 
                 
    Purchases   Sales
 
U.S. Government securities
  $ 3,254,125     $ 3,228,687  
Investments (non-U.S. Government securities)
    107,630,918       92,885,738  
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 54.25% of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund’s outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
 
As of February 28, 2011, 0.03% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and 53.27% of the Fund’s shares were held by accounts for which the Manager had investment discretion.

         
38
       

 

 
GMO Global Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    1,623,975     $ 12,775,056       1,294,349     $ 9,676,543  
Shares issued to shareholders in reinvestment of distributions
    1,409,609       10,790,314       287,450       2,026,517  
Shares repurchased
    (4,725,788 )     (36,739,619 )     (14,686,486 )     (107,912,241 )
Redemption fees
    —       —       —       421,557  
                                 
Net increase (decrease)
    (1,692,204 )   $ (13,174,249 )     (13,104,687 )   $ (95,787,624 )
                                 
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                         
    Value,
               Distributions
   Return
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   of
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   Capital   period
 
GMO Emerging Country Debt Fund, Class III
  $ 9,552,710     $ 257,887     $ 10,005,738     $ 257,887     $ —     $ —     $ —  
GMO Emerging Country Debt Fund, Class IV
    —       6,495,859       —       590,121       —       —       7,020,716  
GMO Short-Duration Collateral Fund
    117,940,927       —       —       1,440,015       —       43,420,262       81,724,080  
GMO Special Purpose Holding Fund
    25,211       —       —       —       —       —       22,919  
GMO U.S. Treasury Fund
    3,526,004       71,282,008       70,580,000       6,406       602       —       4,227,972  
GMO World Opportunity Overlay Fund
    46,984,479       4,300,000       12,300,000       —       —       —       41,828,178  
                                                         
Totals
  $ 178,029,331     $ 82,335,754     $ 92,885,738     $ 2,294,429     $ 602     $ 43,420,262     $ 134,823,865  
                                                         

         
        39

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Global Bond Fund:
 
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 (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian, brokers, and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
40
       

 

GMO Global Bond Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
        41

 

 
GMO Global Bond Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.42 %   $ 1,000.00     $ 1,037.10     $ 2.12  
2) Hypothetical
    0.42 %   $ 1,000.00     $ 1,022.71     $ 2.11  
                                 
 
            * Expenses are calculated using the annualized expense ratio (including interest expense and indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
42
       

 

GMO Global Bond Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
The Fund hereby designates as qualified interest income with respect to its taxable year ended February 28, 2011, $45,714,691 or if determined to be different, the qualified interest income of such year.
 
Of the ordinary income distributions made by the Fund during the fiscal year ended February 28, 2011, 5.28% is derived from investments in U.S. Government and Agency Obligations. All or a portion of the distributions from this income may be exempt from taxation at the state level. Consult your tax advisor for state specific information.

         
        43

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
   Position(s)
   Length of
   During Past
   Complex
     Other Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
44        

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
   Position(s)
   Length of
   During Past
   Complex
     Other Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
   Position(s)
   Length of
   During Past
   Complex
     Other Directorships
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee; President
and Chief Executive
Officer of the
Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC
(October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005). 		    63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
        45

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial
Officer since March 2007; Treasurer since November 2006;
Assistant Treasurer,
September 2004  – November 2006. 		  Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer,
Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
46        

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        47

 

 
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO Global Equity Allocation Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Asset Allocation Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
GMO Global Equity Allocation Fund returned +18.0% for the fiscal year ended February 28, 2011, as compared with +21.5% for the Fund’s benchmark, the MSCI ACWI (All Country World Index) Index.
 
Underlying fund implementation detracted 3.2% from relative performance as GMO Quality Fund and GMO U.S. Core Equity Fund both underperformed their respective benchmarks.
 
Asset allocation contributed negatively to relative performance, although it subtracted only 0.4%. A modest holding in fixed income acted as a detractor during rising equity markets.
 
Because some of the securities and instruments held directly or indirectly by the Fund had positive fair value adjustments during the fiscal year (and the performance of indices are not fair valued), the Fund’s absolute and relative performance is better than it otherwise would have been.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice. References to specific securities are not recommendations of such securities and may not be representative of any GMO portfolio’s current or future investments.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO Global Equity Allocation Fund Class III Shares and the MSCI ACWI
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Each performance figure assumes a purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of .13% on the purchase and .13% on the redemption. Transaction fees are retained by the Fund to cover trading costs. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. All information is unaudited.
 
 
* The MSCI ACWI + Index represents 75% S&P 500 Index and 25% MSCI ACWI prior to May 30, 2008 and MSCI ACWI thereafter.
MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.

 

GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary*   % of Total Net Assets  
Common Stocks
    94.7 %
Short-Term Investments
    2.6  
Preferred Stocks
    1.8  
Cash and Cash Equivalents
    0.8  
Investment Funds
    0.3  
Debt Obligations
    0.1  
Rights and Warrants
    0.0 Ù
Private Equity Securities
    0.0 Ù
Forward Currency Contracts
    (0.0 )Ù
Swap Agreements
    (0.2 )
Futures Contracts
    (0.6 )
Other
    0.5  
         
      100.0 %
         
 
         
Country / Region Summary**   % of Investments  
United States
    35.0 %
Emerging***
    16.2  
Japan
    11.4  
United Kingdom
    10.5  
France
    5.4  
Switzerland
    4.6  
Germany
    3.8  
Italy
    2.6  
Sweden
    1.7  
Singapore
    1.3  
Netherlands
    1.1  
Australia
    0.9  
Denmark
    0.9  
Hong Kong
    0.8  
Spain
    0.8  
Canada
    0.7  
Belgium
    0.6  
Finland
    0.5  
Austria
    0.3  
Ireland
    0.3  
Greece
    0.2  
Norway
    0.2  
Israel
    0.1  

         
        1

 

 
GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2011 (Unaudited)
 
         
Country / Region Summary**   % of Investments  
New Zealand
    0.1 %
Portugal
    0.0 Ù
         
      100.0 %
         
 
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust (“underlying funds”).
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds except for GMO Alpha Only Fund. The table excludes short-term investments. The table includes exposure through the use of derivative financial instruments. The table excludes exposure through forward currency contracts.
*** The “Emerging” exposure is comprised of Argentina, Brazil, Chile, China, Colombia, Congo, Czech Republic, Dominican Republic, Egypt, Hungary, India, Indonesia, Malaysia, Mexico, Philippines, Poland, Russia, South Africa, South Korea, Taiwan, Thailand, Turkey and Venezuela.
Ù Rounds to 0.0%.

         
2
       

 

GMO Global Equity Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            AFFILIATED ISSUERS — 100.0%        
                     
            Mutual Funds — 100.0%        
      631,975     GMO Alpha Only Fund, Class IV     14,851,414  
      16,573,881     GMO Emerging Markets Fund, Class VI     238,829,624  
      925,616     GMO Flexible Equities Fund, Class VI     18,160,575  
      11,718,314     GMO International Core Equity Fund, Class VI     359,986,618  
      5,348,029     GMO International Growth Equity Fund, Class IV     127,710,937  
      5,645,940     GMO International Intrinsic Value Fund, Class IV     131,550,402  
      24,963,166     GMO Quality Fund, Class VI     519,733,118  
      17,080     GMO Short-Duration Investment Fund, Class III     142,792  
      6,246,341     GMO U.S. Core Equity Fund, Class VI     74,768,699  
                     
                  1,485,734,179  
                     
                     
            Private Investment Fund — 0.0%        
      175     GMO SPV I, LLC (a)     26  
                     
                     
            TOTAL AFFILIATED ISSUERS (COST $1,234,916,033)     1,485,734,205  
                     
                     
            SHORT-TERM INVESTMENTS — 0.0%        
                     
            Time Deposits — 0.0%        
      28,340     State Street Eurodollar Time Deposit, 0.01%, due 03/01/11     28,340  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $28,340)     28,340  
                     
                     
            TOTAL INVESTMENTS — 100.0%
(COST $1,234,944,373) 		    1,485,762,545  
            Other Assets and Liabilities (net) — (0.0%)     (50,292 )
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 1,485,712,253  
                     
 
Notes to Schedule of Investments:
 
(a) Underlying investment represents interests in defaulted claims.

         
    See accompanying notes to the financial statements.   3

 

GMO Global Equity Allocation Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $28,340) (Note 2)
  $ 28,340  
Investments in affiliated issuers, at value (cost $1,234,916,033) (Notes 2 and 10)
    1,485,734,205  
Receivable for investments sold
    1,323,061  
Receivable for Fund shares sold
    36,749  
Receivable for expenses reimbursed by Manager (Note 5)
    27,552  
         
Total assets
    1,487,149,907  
         
         
Liabilities:
       
Payable for Fund shares repurchased
    1,345,837  
Payable to affiliate for (Note 5):
       
Trustees and Trust Officers or agents unaffiliated with the Manager
    3,498  
Accrued expenses
    88,319  
         
Total liabilities
    1,437,654  
         
Net assets
  $ 1,485,712,253  
         
         
Net assets consist of:
       
Paid-in capital
  $ 1,390,027,427  
Accumulated undistributed net investment income
    2,263,076  
Accumulated net realized loss
    (157,396,422 )
Net unrealized appreciation
    250,818,172  
         
    $ 1,485,712,253  
         
Net assets attributable to:
       
Class III shares
  $ 1,485,712,253  
         
Shares outstanding:
       
Class III
    172,764,824  
         
Net asset value per share:
       
Class III
  $ 8.60  
         

         
4
  See accompanying notes to the financial statements.    

 

GMO Global Equity Allocation Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends from affiliated issuers (Note 10)
  $ 20,317,560  
Interest
    1  
         
Total investment income
    20,317,561  
         
Expenses:
       
Custodian, fund accounting agent and transfer agent fees
    55,633  
Legal fees
    42,021  
Audit and tax fees
    34,211  
Registration fees
    27,821  
Trustees fees and related expenses (Note 5)
    21,634  
Miscellaneous
    21,832  
         
Total expenses
    203,152  
Fees and expenses reimbursed by Manager (Note 5)
    (174,546 )
Expense reductions (Note 2)
    (1,702 )
         
Net expenses
    26,904  
         
Net investment income (loss)
    20,290,657  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in affiliated issuers
    1,879,570  
         
Net realized gain (loss)
    1,879,570  
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in affiliated issuers
    168,702,128  
         
Net realized and unrealized gain (loss)
    170,581,698  
         
Net increase (decrease) in net assets resulting from operations
  $ 190,872,355  
         

         
    See accompanying notes to the financial statements.   5

 

GMO Global Equity Allocation Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 20,290,657     $ 16,058,955  
Net realized gain (loss)
    1,879,570       (139,014,177 )
Change in net unrealized appreciation (depreciation)
    168,702,128       282,127,540  
                 
                 
Net increase (decrease) in net assets from operations
    190,872,355       159,172,318  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (19,864,018 )     (14,212,365 )
Net realized gains
               
Class III
    —       (3,648,757 )
                 
      (19,864,018 )     (17,861,122 )
                 
Net share transactions (Note 9):
               
Class III
    609,037,100       131,749,573  
Purchase premiums and redemption fees (Notes 2 and 9):
               
Class III
    801,222       526,638  
                 
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees
    609,838,322       132,276,211  
                 
                 
Total increase (decrease) in net assets
    780,846,659       273,587,407  
                 
Net assets:
               
Beginning of period
    704,865,594       431,278,187  
                 
End of period (including accumulated undistributed net investment income of $2,263,076 and $1,836,437, respectively)
  $ 1,485,712,253     $ 704,865,594  
                 

         
6
  See accompanying notes to the financial statements.    

 

GMO Global Equity Allocation Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 7.40     $ 5.29     $ 10.25     $ 11.96     $ 11.89  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)(a)†
    0.15       0.20       0.34       0.20       0.23  
Net realized and unrealized gain (loss)
    1.17       2.11       (4.01 )     0.09 (b)     1.08  
                                         
                                         
Total from investment operations
    1.32       2.31       (3.67 )     0.29       1.31  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.12 )     (0.15 )     (0.31 )     (0.49 )     (0.38 )
From net realized gains
    —       (0.05 )     (0.98 )     (1.51 )     (0.86 )
                                         
                                         
Total distributions
    (0.12 )     (0.20 )     (1.29 )     (2.00 )     (1.24 )
                                         
                                         
Net asset value, end of period
  $ 8.60     $ 7.40     $ 5.29     $ 10.25     $ 11.96  
                                         
                                         
Total Return(c)
    17.97 %     43.73 %     (39.44 )%     1.01 %     11.56 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 1,485,712     $ 704,866     $ 431,278     $ 356,524     $ 354,236  
Net expenses to average daily net assets(d)(f)
    0.00 %(e)     0.00 %(e)     0.00 %(e)     0.00 %(e)     0.00 %
Net investment income (loss) to average daily net assets(a)
    1.96 %     2.78 %     4.27 %     1.63 %     1.90 %
Portfolio turnover rate
    6 %     34 %     52 %     30 %     15 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.02 %     0.02 %     0.03 %     0.02 %     0.02 %
Purchase premiums and redemption fees consisted of the following per share amounts (Note 2):†
  $ 0.01     $ 0.01     $ 0.01     $ 0.00 (g)   $ 0.00 (g)
 
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(b) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain (loss) on investments due to the timing of purchases and redemptions of Fund shares in relation to fluctuating market values of the investments of the Fund.
(c) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(e) Net expenses to average daily net assets were less than 0.01%.
(f) The net expense ratio does not include the effect of expense reductions (Note 2).
(g) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.

         
    See accompanying notes to the financial statements.   7

 

GMO Global Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO Global Equity Allocation Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund seeks total return greater than that of its benchmark, the MSCI ACWI (All Country World Index) Index. The Fund is a fund of funds and invests primarily in shares of the GMO International Equity Funds and the GMO U.S. Equity Funds. The Fund also may invest in shares of other GMO Funds, including the GMO Fixed Income Funds, GMO Alpha Only Fund, and GMO Alternative Asset Opportunity Fund (GMO Funds in which the Fund invests are collectively referred to as “underlying funds”). In addition, the Fund may hold securities directly. Although the Fund’s primary exposure is to foreign and U.S. equity investments (including emerging country equities, both growth and value style equities, and equities of any market capitalization), the Fund also may have exposure to foreign and U.S. fixed income securities (including fixed income securities of any credit quality and having any maturity or duration), the investment returns of commodities and, from time to time, other alternative asset classes. Under normal circumstances, the Fund invests (including through investment in the underlying funds) at least 80% of its assets in equity investments. The term “equity investments” refers to direct and indirect (e.g., through the underlying funds) investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts.
 
The Manager uses multi-year forecasts of relative value and risk among asset classes (e.g., U.S. equity, foreign equity, emerging country equity, emerging country debt, foreign fixed income, U.S. fixed income, and commodities) to select the underlying funds in which the Fund invests and to decide how much to invest in each. The Manager changes the Fund’s holdings of the underlying funds in response to changes in its investment outlook and market valuations and may use redemption/purchase activity to rebalance the Fund’s investments.
 
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
 
The financial statements of the underlying funds should be read in conjunction with the Fund’s financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect), or by visiting GMO’s website at www.gmo.com

         
8
       

 

 
GMO Global Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Shares of the underlying funds and other investment funds are generally valued at their net asset value. Investments held by the underlying funds are valued as follows. Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the over-the-counter (“OTC”) market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of February 28, 2011, the total value of securities held indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of GMO Trust represented 1.2% of net assets. Those underlying funds classify such securities (as defined below) as Level 3. Additionally, because many foreign securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund and the underlying funds generally value those foreign securities (including futures, derivatives and other securities whose values are based on indices comprised of such securities) as of the NYSE close using fair value prices, which are based on local closing prices adjusted by a factor supplied by a third party vendor using that vendor’s proprietary models. As of February 28, 2011, those foreign equity securities, foreign index futures contracts and swap agreements representing 57.0%, 0.1% and (0.1)% respectively, of the net assets of the Fund through investments in the underlying funds, were valued using fair value prices based on those adjustments. Those underlying funds classify such securities (as defined below) as Level 2.

         
        9

 

 
GMO Global Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS

         
10
       

 

 
GMO Global Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Mutual Funds
  $ 1,485,734,179     $ —     $      —     $ 1,485,734,179  
Private Investment Fund
    —       26       —       26  
Short-Term Investments
    28,340       —       —       28,340  
                                 
Total Investments
    1,485,762,519       26       —       1,485,762,545  
                                 
Total
  $ 1,485,762,519     $ 26     $ —     $ 1,485,762,545  
                                 
 
The underlying funds held at period end are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements. The aggregate net values of the Fund’s indirect investments in securities using Level 3 inputs were 1.2% of total net assets.
 
The Fund held no investments or derivative financial instruments directly at either February 28, 2011 or February 28, 2010, whose fair value was categorized using Level 3 inputs.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from

         
        11

 

 
GMO Global Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards and losses on wash sale transactions.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 19,864,018     $ 14,222,518  
Net long-term capital gain
    —       3,638,604  
                 
Total distributions
  $ 19,864,018     $ 17,861,122  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 2,263,076  
         
Other Tax Attributes:
       
Capital loss carryforwards
  $ (16,918,486 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 28, 2018
  $ (12,045,252 )
February 28, 2019
    (4,873,234 )
         
Total
  $ (16,918,486 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 1,375,422,310     $ 112,185,346     $ (1,845,111 )   $ 110,340,235      

         
12
       

 

 
GMO Global Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Income dividends and capital gain distributions from the underlying funds are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (Note 5).
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.

         
        13

 

 
GMO Global Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Purchases and redemptions of Fund shares
Prior to June 30, 2010, the premium on cash purchases and the fee on cash redemptions were each 0.11% of the amount invested or redeemed. Effective June 30, 2010, the premium on cash purchases and the fee on cash redemptions were each 0.13% of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by the Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. The Fund charges purchase premiums and redemption fees based on the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premiums and/or redemption fees, if any, imposed by the underlying Funds in which it invests, provided that, if that weighted average is less than 0.05%, the Fund generally will not charge a purchase premium or redemption fee. Such fees are recorded as a component of the Fund’s net share transactions. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of the Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. All or a portion of the Fund’s purchase premiums and /or redemption fees may be waived at the Manager’s discretion when they are de minimis and /or the Manager deems it equitable to do so, including without limitation when the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premiums and /or redemption fees, if any, imposed by the underlying funds are less than the purchase premiums and /or redemption fees imposed by the Fund. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund’s shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund’s shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder’s securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of a Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. References to investments include those held directly by the Fund and indirectly through the Fund’s investments in the underlying funds. Some of the underlying funds are non-diversified investment companies under the Investment Company Act of 1940, as

         
14
       

 

 
GMO Global Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
amended, and therefore a decline in the market value of a particular security held by those funds may affect their performance more than if they were diversified. The principal risks of investing in the Fund are summarized below, including those risks to which the Fund is exposed as a result of its investments in the underlying funds. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund and the underlying funds normally do not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund’s investments.
 
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund or the underlying funds may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund or the underlying funds needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund or the underlying funds to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund’s investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund’s investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
 
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund or an underlying fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
 
• Derivatives risk — The use of derivatives involves the risk that their value may not correlate with the value of the relevant underlying assets, rates or indices. Derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk.
 
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in the underlying funds, including the risk that the underlying funds in which it invests do not perform as expected. Because the Fund bears the fees and expenses of the underlying funds in which it invests, new investments in underlying funds with higher fees or expenses than those of the underlying funds in which the Fund is currently invested will increase the Fund’s total expenses. The fees and expenses associated

         
        15

 

 
GMO Global Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
with an investment in the Fund are less predictable and may be higher than fees and expenses associated with an investment in funds that charge a fixed management fee.
 
• Market Risk — Fixed Income Securities — Typically, the value of fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
 
Other principal risks of an investment in the Fund include Smaller Company Risk (greater market risk and liquidity risk resulting from investments in companies with smaller market capitalizations); Market Risk — Value Securities (risk that the price of investments held by the Fund will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Market Risk — Growth Securities (greater price fluctuations resulting from dependence on future earnings expectations); Commodities Risk (value of an underlying fund’s shares may be affected by factors particular to the commodities markets and may fluctuate more than the share value of a fund with a broader range of investments); Currency Risk (risk that fluctuations in exchange rates may adversely affect the value of investments denominated in foreign currencies or that the U.S. dollar will decline in value relative to a foreign currency being hedged); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities lending); Credit and Counterparty Risk (risk of default of an issuer of a portfolio security, a derivatives counterparty, or a borrower of the Fund’s securities); Real Estate Risk (risk to an underlying fund that concentrates its assets in real estate related investments that factors affecting the real estate industry may cause the value of the Fund’s investments to fluctuate more than if it invested in securities of companies in a broader range of industries); Short Sales Risk (risk that an underlying fund’s loss on the short sale of securities that it does not own is unlimited); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
 
4. Derivative financial instruments
 
At February 28, 2011, the Fund held no derivative financial instruments directly. For a listing of derivative financial instruments held by the underlying funds, if any, please refer to the underlying funds’ Schedule of Investments.
 
5. Fees and other transactions with affiliates
 
The Manager decides how to allocate the assets of the Fund among underlying funds. The Manager does not charge the Fund a management fee or shareholder service fee, but it receives management and shareholder service fees from the underlying funds in which the Fund invests. Because those fees vary

         
16
       

 

 
GMO Global Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
from fund to fund, the levels of indirect net expenses set forth below are affected by the Manager’s asset allocation decisions.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.00% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). This contractual expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ending February 28, 2011 was $21,634 and $6,819, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
                   
Indirect Net
 		                 
Expenses
                  
(excluding
                  
shareholder service
     Indirect
            
fees and interest
     Shareholder
     Indirect Interest
     Total Indirect
expense)     Service Fees     Expense     Expenses
0.460%
    0.062%     <0.001%     0.522%
                   
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments and class exchanges, for the year ended February 28, 2011 aggregated $676,621,796 and $66,354,569, respectively.

         
        17

 

 
GMO Global Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, the Fund had no shareholders who individually held more than 10% of the fund’s outstanding shares.
 
As of February 28, 2011, less than 0.01% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and none of the Fund’s shares were held by accounts for which the Manager had investment discretion.
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    81,004,335     $ 636,414,783       46,544,896     $ 312,606,188  
Shares issued to shareholders in reinvestment of distributions
    1,914,512       15,661,020       1,696,262       12,485,743  
Shares repurchased
    (5,448,966 )     (43,038,703 )     (34,398,417 )     (193,342,358 )
Purchase premiums
    —       774,495       —       336,280  
Redemption fees
    —       26,727       —       190,358  
                                 
Net increase (decrease)
    77,469,881     $ 609,838,322       13,842,741     $ 132,276,211  
                                 

         
18
       

 

 
GMO Global Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                 
    Value,
               Distributions
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   period
 
GMO Alpha Only Fund, Class IV
  $ 10,242,390     $ 5,235,301     $ 47,616     $ —     $      —     $ 14,851,414  
GMO Emerging Markets Fund, Class VI
    91,427,217       118,124,155       3,786,083       3,002,504       —       238,829,624  
GMO Flexible Equities Fund, Class VI
    14,048,654       3,223,307       56,124       211,359       —       18,160,575  
GMO International Core Equity Fund, Class VI
    124,737,553       191,935,889       8,214,848       6,502,787       —       359,986,618  
GMO International Growth Equity Fund, Class IV
    65,456,833       46,912,478       2,704,394       1,117,440       —       127,710,937  
GMO International Intrinsic Value Fund, Class IV
    64,812,931       50,237,374       950,898       1,534,935       —       131,550,402  
GMO International Small Companies Fund, Class III
    12,192,825       533,947       12,981,911       131,599       —       —  
GMO Quality Fund, Class VI
    284,801,188       214,328,194       23,172,086       7,021,766       —       519,733,118  
GMO Short-Duration Investment Fund, Class III
    137,011       844       —       844       —       142,792  
GMO SPV I, LLC
    32       —       —       —       —       26  
GMO U.S. Core Equity Fund, Class VI
    37,011,744       46,089,246       14,421,464       794,262       —       74,768,699  
GMO U.S. Growth Fund, Class III
    16,902       1,061       19,145       64       —       —  
                                                 
Totals
  $ 704,885,280     $ 676,621,796     $ 66,354,569     $ 20,317,560     $ —     $ 1,485,734,205  
                                                 

         
        19

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Global Equity Allocation Fund:
 
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 Equity Allocation Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
20
       

 

GMO Global Equity Allocation Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including indirect management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
        21

 

 
GMO Global Equity Allocation Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.53 %   $ 1,000.00     $ 1,214.90     $ 2.91  
2) Hypothetical
    0.53 %   $ 1,000.00     $ 1,022.17     $ 2.66  
                                 
 
            * Expenses are calculated using the Class’s annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
22
       

 

GMO Global Equity Allocation Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
For taxable, non-corporate shareholders, 100.00% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 represents qualified dividend income subject to the 15% rate category.
 
For corporate shareholders, 37.98% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 qualified for the dividends-received deduction.

         
        23

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
24        

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
   Position(s)
   Length of
   During Past
   Complex
     Other Directorships
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee; President
and Chief Executive
Officer of the Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
        25

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003–2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
26        

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money
Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        27

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
The Class III shares of GMO Inflation Indexed Plus Bond Fund returned +13.5% for the for the fiscal year ended February 28, 2011, as compared with +7.0% for the Barclays Capital U.S. Treasury Inflation Notes Index.
 
The Fund’s direct investment exposures were achieved primarily through bond positions and partially through derivatives. Indirect investment exposure was achieved through its investment in underlying GMO Trust mutual funds, primarily GMO Short-Duration Collateral Fund (SDCF), GMO World Opportunity Overlay Fund (Overlay Fund) and GMO Emerging Country Debt Fund (ECDF).
 
The Fund outperformed the benchmark during the fiscal year by 6.6%. Exposures to asset-backed securities held indirectly through SDCF and Overlay Fund were the largest positive contributors for the year, followed by positive contributions from the exposure to emerging country debt via ECDF, developed markets currency selection (primarily through currency forwards and options), and developed markets interest-rate positioning (primarily through exchange-traded futures and interest-rate swaps).
 
Spread tightening in the asset-backed securities held indirectly in SDCF and Overlay Fund contributed about 5.7% to the Fund’s performance. Both SDCF and Overlay Fund experienced credit downgrades during the fiscal year: SDCF had 55 downgraded securities, and Overlay Fund had 35, representing 11% and 10% of their respective market values from the beginning of the fiscal year. At fiscal year-end, 52% of SDCF’s portfolio was rated AAA, and 72% of Overlay Fund’s was rated AAA.
 
A small exposure to emerging country debt through investment in ECDF added value due to positive contributions from both security and country selection within ECDF.
 
In developed markets currency selection, Australian dollar, Swedish krona, Norwegian krone, and Japanese yen positions drove gains, though this performance was offset somewhat by Swiss franc, Canadian dollar, euro, pound sterling, and opportunistic positions.
 
Developed markets interest-rate positioning also contributed positively to performance. These positions were primarily achieved directly. Positive contributions from euro zone, Canadian, Swedish, and U.S. positions more than offset losses from Swiss, U.K., and Australian positions.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO Inflation Indexed Plus Bond Fund Class III Shares and the
Barclays Capital U.S. Treasury Inflation Notes Index
As of February 28, 2011
 
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited. Performance for classes may vary due to different fees.
 
 
* Class III performance information represents Class VI performance from May 31, 2006 to June 29, 2006 and Class III performance thereafter.

 

GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary*   % of Total Net Assets  
Debt Obligations
    96.5 %
Short-Term Investments
    8.3  
Options Purchased
    0.4  
Loan Participations
    0.2  
Loan Assignments
    0.1  
Rights and Warrants
    0.0 Ù
Promissory Notes
    0.0 Ù
Written Options
    (0.0 )Ù
Swap Agreements
    (0.2 )
Forward Currency Contracts
    (0.4 )
Futures Contracts
    (0.7 )
Reverse Repurchase Agreements
    (5.0 )
Other
    0.8  
         
      100.0 %
         
 
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust (“underlying funds”).

         
        1

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2011 (Unaudited)
 
         
Country / Region Summary**   % of Investments  
United States
    127.6 %
Emerging***
    4.4  
Canada
    3.9  
United Kingdom
    3.4  
Norway
    0.0 Ù
Denmark
    0.0 Ù
New Zealand
    0.0 Ù
South Africa
    0.0 Ù
Switzerland
    (2.7 )
Euro Region****
    (3.9 )
Sweden
    (8.7 )
Australia
    (11.1 )
Japan
    (12.9 )
         
      100.0 %
         
 
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative financial instruments. The table excludes exposure through certain currency linked derivatives such as forward currency contracts and currency options. The table is based on duration adjusted exposures, taking into account the market value of securities and the notional amounts of swaps and other derivative financial instruments. For example, U.S. Asset-backed securities represent a relatively small percentage due to their short duration, even though they represent a large percentage of market value (direct and indirectly). Duration is based on the Manager’s models. The greater the duration of a bond, the greater its contribution to the concentration percentage. Credit default swap exposures (both positive and negative) are factored into the duration-adjusted exposure using a reference security and applying the same methodology to that security.
*** The “Emerging” exposure is comprised of: Argentina, Brazil, Chile, China, Colombia, Congo, Czech Republic, Dominican Republic, Egypt, Hungary, India, Indonesia, Malaysia, Mexico, Philippines, Poland, Russia, South Africa, South Korea Taiwan, Thailand, Turkey, Ukraine and Venezuela.
**** The “Euro Region” is comprised of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
Ù Rounds to 0.0%.

         
2
       

 

GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
Par Value ($) /
 		           
Shares /
 		           
Principal Amount     Description   Value ($)  
            DEBT OBLIGATIONS — 29.6%        
                     
            U.S. Government — 29.6%        
      18,640,620     U.S. Treasury Inflation Indexed Bond, 1.25%, due 04/15/14 (a) (b) (c)     19,877,742  
      5,024,750     U.S. Treasury Inflation Indexed Bond, 1.25%, due 07/15/20 (a) (b)     5,171,176  
      5,104,000     U.S. Treasury Inflation Indexed Bond, 2.13%, due 01/15/19 (a)     5,687,372  
      2,028,000     U.S. Treasury Inflation Indexed Bond, 2.13%, due 02/15/40 (a)     2,107,536  
      2,143,680     U.S. Treasury Inflation Indexed Bond, 2.50%, due 01/15/29 (a)     2,404,607  
      2,469,480     U.S. Treasury Inflation Indexed Bond, 3.38%, due 04/15/32 (a)     3,147,622  
      2,666,360     U.S. Treasury Inflation Indexed Bond, 3.88%, due 04/15/29 (a) (b)     3,538,342  
      3,005,670     U.S. Treasury Inflation Indexed Note, 1.13%, due 01/15/21 (a)     3,033,379  
                     
            Total U.S. Government     44,967,776  
                     
                     
            TOTAL DEBT OBLIGATIONS (COST $44,275,282)     44,967,776  
                     
                     
            MUTUAL FUNDS — 72.8%        
                     
            Affiliated Issuers — 72.8%        
      515,576     GMO Emerging Country Debt Fund, Class IV     4,686,583  
      6,561,309     GMO Short-Duration Collateral Fund     68,106,389  
      28,918     GMO Special Purpose Holding Fund (d)     14,459  
      260,056     GMO U.S. Treasury Fund     6,501,391  
      1,373,912     GMO World Opportunity Overlay Fund     31,160,332  
                     
            TOTAL MUTUAL FUNDS (COST $104,800,984)     110,469,154  
                     
                     
            OPTIONS PURCHASED — 0.1%        
                     
            Currency Options — 0.1%        
AUD
    20,900,000     AUD Put/USD Call, Expires 05/12/11, Strike 0.95     111,631  
                     
                     
            TOTAL OPTIONS PURCHASED (COST $789,699)     111,631  
                     

         
    See accompanying notes to the financial statements.   3

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            SHORT-TERM INVESTMENTS — 0.5%        
                     
            Money Market Funds — 0.4%        
      560,030     State Street Institutional Treasury Plus Money Market Fund-Institutional Class     560,030  
                     
                     
            U.S. Government — 0.1%        
      250,000     U.S. Treasury Bill, 0.19%, due 11/17/11 (b) (e)     249,665  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $809,577)     809,695  
                     
                     
            TOTAL INVESTMENTS — 103.0%
(Cost $150,675,542) 		    156,358,256  
            Other Assets and Liabilities (net) — (3.0%)     (4,625,407 )
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 151,732,849  
                     

         
4
  See accompanying notes to the financial statements.    

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
A summary of outstanding financial instruments at February 28, 2011 is as follows:
 
Forward Currency Contracts
 
                                     
                    Net Unrealized
Settlement
 		                  Appreciation
Date   Counterparty   Deliver/Receive   Units of Currency   Value   (Depreciation)
 
Buys †
                                   
3/22/11
    Citibank N.A.     AUD     1,600,000     $ 1,625,038     $ 17,630  
3/22/11
    Deutsche Bank AG     AUD     1,600,000       1,625,038       41,598  
3/29/11
    Deutsche Bank AG     CAD     1,400,000       1,440,180       11,363  
3/01/11
    Barclays Bank PLC     CHF     7,200,000       7,749,435       417,795  
5/03/11
    Citibank N.A.     CHF     500,000       538,450       225  
3/01/11
    Deutsche Bank AG     CHF     3,500,000       3,767,086       (22,843 )
3/01/11
    Royal Bank of Scotland PLC     CHF     1,400,000       1,506,835       39,256  
5/03/11
    Royal Bank of Scotland PLC     CHF     800,000       861,520       (2,859 )
3/08/11
    Citibank N.A.     EUR     4,900,000       6,761,246       181,950  
3/08/11
    Deutsche Bank AG     EUR     500,000       689,923       3,473  
3/08/11
    Royal Bank of Scotland PLC     EUR     2,700,000       3,725,585       41,760  
4/05/11
    Citibank N.A.     GBP     500,000       812,601       7,281  
4/05/11
    Deutsche Bank AG     GBP     200,000       325,040       7,040  
4/05/11
    Royal Bank of Scotland PLC     GBP     900,000       1,462,682       13,560  
3/15/11
    Citibank N.A.     JPY     30,000,000       366,754       248  
3/15/11
    Deutsche Bank AG     JPY     76,700,000       937,669       7,200  
4/19/11
    Deutsche Bank AG     NZD     7,000,000       5,248,773       (95,692 )
                                 
                        $ 39,443,855     $ 668,985  
                                 
Sales #
                                   
3/22/11
    Deutsche Bank AG     AUD     700,000     $ 710,954     $ (10,170 )
3/22/11
    Royal Bank of Scotland PLC     AUD     1,000,000       1,015,649       (33,068 )
3/29/11
    Deutsche Bank AG     CAD     1,800,000       1,851,659       (52,159 )
3/29/11
    Royal Bank of Scotland PLC     CAD     1,000,000       1,028,700       (25,520 )
3/01/11
    Citibank N.A.     CHF     12,100,000       13,023,356       (887,258 )
5/03/11
    Deutsche Bank AG     CHF     3,500,000       3,769,150       22,976  
3/08/11
    Deutsche Bank AG     EUR     1,600,000       2,207,754       (99,098 )
3/08/11
    Royal Bank of Scotland PLC     EUR     300,000       413,954       (9,047 )
4/05/11
    Deutsche Bank AG     GBP     200,000       325,040       (170 )
4/05/11
    Royal Bank of Scotland PLC     GBP     400,000       650,081       (8,797 )
3/15/11
    Citibank N.A.     JPY     60,000,000       733,509       (4,389 )
3/15/11
    Deutsche Bank AG     JPY     120,000,000       1,467,018       (10,088 )

         
    See accompanying notes to the financial statements.   5

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Forward Currency Contracts — continued
 
                                     
                    Net Unrealized
Settlement
 		                  Appreciation
Date   Counterparty   Deliver/Receive   Units of Currency   Value   (Depreciation)
 
3/15/11
    Royal Bank of Scotland PLC     JPY     80,000,000     $ 978,012     $ (7,268 )
4/19/11
    Royal Bank of Scotland PLC     NZD     3,600,000       2,699,369       (7,755 )
                                 
                        $ 30,874,205     $ (1,131,811 )
                                 
 
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
 
Forward Cross Currency Contracts
 
                                             
                Net Unrealized
Settlement
 		              Appreciation
Date   Counterparty   Deliver/Units of Currency   Receive/In Exchange For   (Depreciation)
 
4/12/11
    Deutsche Bank AG     EUR     3,400,000       NOK       26,671,810     $ 62,967  
4/26/11
    Deutsche Bank AG     EUR     4,300,000       SEK       37,551,500       (16,738 )
      Royal Bank of                                      
4/12/11
    Scotland PLC     NOK     6,330,642       EUR       800,000       (24,602 )
      Royal Bank of                                      
4/26/11
    Scotland PLC     SEK     2,626,962       EUR       300,000       51  
                                         
                                        $ 21,678  
                                         
 
Futures Contracts
 
                             
                Net Unrealized
Number of
 		      Expiration
 		  Contract
 		  Appreciation
Contracts   Type   Date   Value   (Depreciation)
 
Buys
                           
34
    Canadian Government Bond 10 Yr.     June 2011   $ 4,194,921     $ 20,213  
27
    UK Gilt Long Bond     June 2011     5,124,061       10,010  
20
    U.S. Treasury Note 2 Yr. (CBT)     June 2011     4,365,938       3,984  
29
    U.S. Treasury Note 5 Yr. (CBT)     June 2011     3,391,187       5,242  
17
    U.S. Treasury Bond 30 Yr. (CBT)     March 2011     2,072,937       (45,562 )
                         
                $ 19,149,044     $ (6,113 )
                         

         
6
  See accompanying notes to the financial statements.    

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Futures Contracts — continued
 
                             
                Net Unrealized
Number of
 		      Expiration
 		  Contract
 		  Appreciation
Contracts   Type   Date   Value   (Depreciation)
 
Sales
                           
60
    Australian Government Bond 3 Yr.     March 2011   $ 6,260,987     $ (21,730 )
29
    Australian Government Bond 10 Yr.     March 2011     3,065,487       (32,049 )
9
    Euro BOBL     March 2011     1,456,641       (248 )
18
    Euro Bund     March 2011     3,085,822       (248 )
10
    Japanese Government Bond 10 Yr. (TSE)     March 2011     17,031,614       53,876  
11
    U.S. Treasury Note 10 Yr. (CBT)     June 2011     1,309,515       (2,836 )
                         
                $ 32,210,066     $ (3,235 )
                         
 
Reverse Repurchase Agreements
 
                     
Face Value   Description   Market Value
 
USD
    5,375,000     Barclays Bank PLC, 0.20%, dated 02/08/11, to be repurchased on demand at face value plus accrued interest with a stated maturity date of 03/08/11.   $ (5,375,627 )
                     
                     
                $ (5,375,627 )
                     
         
Average balance outstanding
  $ (5,239,930 )
Average interest rate
    0.66 %
Maximum balance outstanding
  $ (5,375,627 )
 
Average balance outstanding was calculated based on daily face value balances outstanding during the period that the Fund has entered into reverse repurchase agreements.
 
Written Options
 
A summary of open written option contracts for the Fund at February 28, 2011 is as follows:
 
                                     
    Principal
 		  Expiration
 		              Market
   
Amount
  Date       Description   Premiums   Value
 
Put
    20,900,000     5/12/2011   AUD   AUD Put/USD Call, Strike 0.89%   $ (412,106 )   $ (32,834 )
                                     
                        $ (412,106 )   $ (32,834 )
                                     

         
    See accompanying notes to the financial statements.   7

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Swap Agreements
 
Interest Rate Swaps
 
                                     
Notional
 		  Expiration
 		      Receive
 		          Market
Amount   Date   Counterparty   (Pay)#   Fixed Rate   Variable Rate   Value
 
  1,000,000     CHF   3/16/2016   Barclays Bank PLC   Receive   1.30%   6 Month CHF LIBOR   $ (15,332 )
  51,000,000     SEK   3/16/2016   Barclays Bank PLC   (Pay)   2.60%   3 Month SEK STIBOR     346,595  
  36,100,000     SEK   3/16/2016   Citibank N.A.   (Pay)   2.60%   3 Month SEK STIBOR     245,335  
                                     
                                $ 576,598  
                                     
Premiums to (Pay) Receive
  $ (280,321 )
         
 
# Receive - Fund receives fixed rate and pays variable rate.
(Pay) - Fund pays fixed rate and receives variable rate.
 
Total Return Swaps
 
                                     
Notional
 		  Expiration
 		              Market
Amount   Date   Counterparty   Fund Pays   Fund Receives   Value
 
  110,000,000     USD   4/15/2011   Barclays Bank PLC   0.34%     Barclays TIPS Total Return Index (a )   $ 548,894  
                                     
                                $ 548,894  
                                     
Premiums to (Pay) Receive
  $ —  
         
 
As of February 28, 2011, for forward currency contracts, futures contracts, swap agreements, written options and reverse repurchase agreements, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
 
Notes to Schedule of Investments:
 
BOBL - Bundesobligationen
CBT - Chicago Board of Trade
CHF LIBOR - London Interbank Offered Rate denominated in Swiss Franc.
SEK STIBOR - Stockholm Interbank Offered Rate denominated in Swedish Krona.
TIPS - Treasury Inflation Protected Securities
TSE - Tokyo Stock Exchange

         
8
  See accompanying notes to the financial statements.    

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
(a) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
(b) All or a portion of this security has been pledged to cover margin requirements on futures contracts, collateral on swap contracts, forward currency contracts, and written options, if any (Note 4).
(c) All or a portion of this security has been pledged to cover collateral requirements on reverse repurchase agreements (Note 2).
(d) Underlying investment represents interests in defaulted claims.
(e) Rate shown represents yield-to-maturity.
 
Currency Abbreviations:
 
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
EUR - Euro
GBP - British Pound
JPY - Japanese Yen
NOK - Norwegian Krone
NZD - New Zealand Dollar
SEK - Swedish Krona
USD - United States Dollar

         
    See accompanying notes to the financial statements.   9

 

GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in affiliated issuers, at value (cost $104,800,984) (Notes 2 and 10)
  $ 110,469,154  
Investments in unaffiliated issuers, at value (cost $45,874,558) (Note 2)
    45,889,102  
Receivable for Fund shares sold
    37,695  
Dividends and interest receivable
    192,157  
Unrealized appreciation on open forward currency contracts (Note 4)
    876,373  
Receivable for variation margin on open futures contracts (Note 4)
    39,831  
Receivable for open swap contracts (Note 4)
    1,140,824  
Receivable for expenses reimbursed by Manager (Note 5)
    29,597  
         
Total assets
    158,674,733  
         
         
Liabilities:
       
Payable to affiliate for (Note 5):
       
Management fee
    28,545  
Shareholder service fee
    11,418  
Trustees and Trust Officers or agents unaffiliated with the Manager
    519  
Due to broker (including variation margin on futures contracts)
    33,599  
Unrealized depreciation on open forward currency contracts (Note 4)
    1,317,521  
Payable for open swap contracts (Note 4)
    15,332  
Payable for reverse repurchase agreements (Note 2)
    5,375,627  
Written options outstanding, at value (premiums $412,106) (Note 4)
    32,834  
Accrued expenses
    126,489  
         
Total liabilities
    6,941,884  
         
Net assets
  $ 151,732,849  
         

         
10
  See accompanying notes to the financial statements.    

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011 — (Continued)
 
         
Net assets consist of:
       
Paid-in capital
  $ 195,012,659  
Accumulated undistributed net investment income
    4,504,333  
Accumulated net realized loss
    (54,239,901 )
Net unrealized appreciation
    6,455,758  
         
    $ 151,732,849  
         
Net assets attributable to:
       
Class III shares
  $ 71,855,648  
         
Class VI shares
  $ 79,877,201  
         
Shares outstanding:
       
Class III
    3,681,586  
         
Class VI
    4,091,242  
         
Net asset value per share:
       
Class III
  $ 19.52  
         
Class VI
  $ 19.52  
         

         
    See accompanying notes to the financial statements.   11

 

GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends from affiliated issuers (Note 10)
  $ 3,152,884  
Interest
    2,023,539  
Dividends from unaffiliated issuers
    375  
         
Total investment income
    5,176,798  
         
Expenses:
       
Management fee (Note 5)
    860,031  
Shareholder service fee – Class III (Note 5)
    111,411  
Shareholder service fee – Class VI (Note 5)
    148,357  
Custodian, fund accounting agent and transfer agent fees
    174,884  
Audit and tax fees
    79,825  
Legal fees
    19,122  
Trustees fees and related expenses (Note 5)
    9,537  
Interest expense (Note 2)
    2,448  
Registration fees
    1,748  
Miscellaneous
    16,368  
         
Total expenses
    1,423,731  
Fees and expenses reimbursed by Manager (Note 5)
    (285,193 )
Expense reductions (Note 2)
    (35 )
Indirectly incurred fees waived or borne by Manager (Note 5)
    (52,926 )
Shareholder service fee waived (Note 5)
    (12,451 )
         
Net expenses
    1,073,126  
         
Net investment income (loss)
    4,103,672  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in unaffiliated issuers
    35,170,680  
Investments in affiliated issuers
    (25,958,758 )
Realized gains distributions from affiliated issuers (Note 10)
    1,797  
Futures contracts
    2,152,453  
Swap contracts
    15,125,100  
Foreign currency, forward contracts and foreign currency related transactions
    1,566,412  
         
Net realized gain (loss)
    28,057,684  
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in unaffiliated issuers
    79,452  
Investments in affiliated issuers
    13,563,012  
Futures contracts
    14,044  
Written options
    379,272  
Swap contracts
    1,415,750  
Foreign currency, forward contracts and foreign currency related transactions
    (826,508 )
         
Net unrealized gain (loss)
    14,625,022  
         
Net realized and unrealized gain (loss)
    42,682,706  
         
Net increase (decrease) in net assets resulting from operations
  $ 46,786,378  
         

         
12
  See accompanying notes to the financial statements.    

 

GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 4,103,672     $ 6,098,911  
Net realized gain (loss)
    28,057,684       24,421,315  
Change in net unrealized appreciation (depreciation)
    14,625,022       83,949,621  
                 
Net increase (decrease) in net assets from operations
    46,786,378       114,469,847  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (1,864,727 )     (5,448,884 )
Class VI
    (7,636,155 )     (12,391,638 )
                 
Total distributions from net investment income
    (9,500,882 )     (17,840,522 )
                 
Net realized gains
               
Class III
    (3,079,112 )     —  
Class VI
    (12,200,679 )     —  
                 
Total distributions from net realized gains
    (15,279,791 )     —  
                 
Return of capital
               
Class III
    —       (3,458,538 )
Class VI
    —       (8,000,942 )
                 
Total distributions from return of capital
    —       (11,459,480 )
                 
      (24,780,673 )     (29,300,002 )
                 
Net share transactions (Note 9):
               
Class III
    (8,805,726 )     (63,026,588 )
Class VI
    (266,555,940 )     15,144,929  
                 
Increase (decrease) in net assets resulting from net share transactions
    (275,361,666 )     (47,881,659 )
                 
Redemption fees (Notes 2 and 9):
               
Class III
    —       9,699  
Class VI
    —       21,546  
                 
Increase in net assets resulting from redemption fees
    —       31,245  
                 
Total increase (decrease) in net assets resulting from net share transactions and redemption fees
    (275,361,666 )     (47,850,414 )
                 
                 
Total increase (decrease) in net assets
    (253,355,961 )     37,319,431  
                 
Net assets:
               
Beginning of period
    405,088,810       367,769,379  
                 
End of period (including undistributed net investment income of $4,504,333 and distributions in excess of net investment income of $25,462,540, respectively)
  $ 151,732,849     $ 405,088,810  
                 

         
    See accompanying notes to the financial statements.   13

 

GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007(a)
 
Net asset value, beginning of period
  $ 18.40     $ 14.88     $ 23.52     $ 25.47     $ 24.96  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)(b)†
    0.22       0.25       0.82       1.13       0.75  
Net realized and unrealized gain (loss)
    2.25       4.45       (6.90 )     (0.21 )     0.68  
                                         
                                         
Total from investment operations
    2.47       4.70       (6.08 )     0.92       1.43  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.51 )     (0.72 )     (2.56 )     (2.81 )     (0.87 )
From net realized gains
    (0.84 )     —       —       (0.06 )     (0.05 )
Return of capital
    —       (0.46 )     —       —       —  
                                         
                                         
Total distributions
    (1.35 )     (1.18 )     (2.56 )     (2.87 )     (0.92 )
                                         
                                         
Net asset value, end of period
  $ 19.52     $ 18.40     $ 14.88     $ 23.52     $ 25.47  
                                         
                                         
Total Return(c)
    13.55 %     32.96 %     (26.89 )%     3.95 %     5.79 %**
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 71,856     $ 76,048     $ 114,859     $ 137,492     $ 260,205  
Net operating expenses to average daily net assets(e)
    0.39 %(d)     0.38 %     0.39 %(d)     0.37 %(d)     0.39 %*
Interest expense to average daily net assets(f)
    0.00 (g)     —       —       0.07 %     —  
Total net expenses to average daily net assets(e)
    0.39 %(d)     0.38 %     0.39 %(d)     0.44 %(d)     0.39 %*
Net investment income (loss) to average daily net assets(b)
    1.13 %     1.50 %     4.17 %     4.51 %     4.37 %*
Portfolio turnover rate
    81 %     44 %     56 %     131 %     37 %††
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets:
    0.12 %     0.10 %     0.11 %     0.06 %     0.06 %*
Redemption fees consisted of the following per share amounts (Note 2):†
  $ —     $ 0.00 (h)   $ 0.01     $ —     $ —  
 
(a) Period from June 29, 2006 (commencement of operations) through February 28, 2007.
(b) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(c) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(d) The net expense ratio does not include the effect of expense reductions (Note 2).
(e) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(f) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund’s net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income.
(g) Interest expense was less than 0.01% to average daily net assets.
(h) Redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the period from May 31, 2006 (commencement of operations) through February 28, 2007.
* Annualized.
** Not annualized.

         
14
  See accompanying notes to the financial statements.    

 

GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class VI share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007(a)
 
Net asset value, beginning of period
  $ 18.39     $ 14.87     $ 23.51     $ 25.48     $ 25.00  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)(b)†
    0.24       0.26       1.37       1.38       0.83  
Net realized and unrealized gain (loss)
    2.25       4.45       (7.43 )     (0.45 )     0.60  
                                         
                                         
Total from investment operations
    2.49       4.71       (6.06 )     0.93       1.43  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.52 )     (0.72 )     (2.58 )     (2.84 )     (0.90 )
From net realized gains
    (0.84 )     —       —       (0.06 )     (0.05 )
Return of capital
    —       (0.47 )     —       —       —  
                                         
                                         
Total distributions
    (1.36 )     (1.19 )     (2.58 )     (2.90 )     (0.95 )
                                         
                                         
Net asset value, end of period
  $ 19.52     $ 18.39     $ 14.87     $ 23.51     $ 25.48  
                                         
                                         
Total Return(c)
    13.71 %     33.05 %     (26.82 )%     4.00 %     5.75 %**
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 79,877     $ 329,041     $ 252,911     $ 90,360     $ 1,874,841  
Net operating expenses to average daily net assets(d)
    0.29 %(e)     0.29 %     0.30 %(e)     0.29 %(e)     0.29 %*
Interest expense to average daily net assets(f)
    0.00 (g)     —       —       0.07 %     —  
Total net expenses to average daily net assets(d)
    0.29 %(e)     0.29 %     0.30 %(e)     0.36 %(e)     0.29 %*
Net investment income (loss) to average daily net assets(b)
    1.21 %     1.54 %     7.73 %     5.48 %     4.33 %*
Portfolio turnover rate
    81 %     44 %     56 %     131 %     37 %**
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets:
    0.10 %     0.10 %     0.09 %     0.06 %     0.06 %*
Redemption fees consisted of the following per share amounts (Note 2):†
  $ —     $ 0.00 (h)   $ —     $ —     $ —  
 
(a) Period from May 31, 2006 (commencement of operations) through February 28, 2007.
(b) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(c) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(e) The net expense ratio does not include the effect of expense reductions (Note 2).
(f) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund’s net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income.
(g) Interest expense was less than 0.01% to average daily net assets.
(h) Redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.

         
    See accompanying notes to the financial statements.   15

 

GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO Inflation Indexed Plus Bond Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund seeks total return in excess of that of its benchmark, the Barclays Capital U.S. Treasury Inflation Notes Index. The Fund’s investment program has two principal components. One component of the investment program is designed to approximate the return of the Fund’s benchmark. The second component seeks to add value relative to that benchmark by exploiting misvaluations in global markets (e.g., global interest rates, sectors, currencies, credit and emerging country debt markets) beyond those represented in the Fund’s benchmark. As a result, the Fund’s interest rate, sector, credit and currency exposures will differ from those of its benchmark.
 
The Manager seeks to determine the relative values of the interest rate and currency markets, to determine currency and interest rate exposures, and to identify investments the Manager believes are undervalued or are likely to provide downside protection. The Manager selects investments based on an evaluation of various factors including, but not limited to, fundamental factors such as inflation and current account positions, as well as price-based factors such as interest and exchange rates.
 
Under normal circumstances, the Fund invests directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the “underlying funds,” or derivatives) at least 80% of its assets in inflation indexed bonds. The term “inflation indexed bonds” include instruments that are “linked” to general measures of inflation because their principal and/or interest components change with general movements of inflation in the country of issue.
 
The Fund implements its investment program by investing in or holding: exchange-traded and over-the-counter (“OTC”) derivatives, including without limitation, futures contracts, currency options, interest rate options, currency forwards, reverse repurchase agreements, credit default swaps, and other swap contracts (to gain exposure to inflation indexed bonds and/or the global interest rate, credit, and currency markets); inflation indexed bonds issued by the U.S. and foreign governments and their agencies or instrumentalities (including securities neither guaranteed nor insured by the U.S. government), including Inflation-Protected Securities issued by the U.S. Treasury (“TIPS”), and inflation indexed bonds issued by corporations; non-inflation indexed (or nominal) fixed income securities issued by the U.S. and foreign governments and their agencies or instrumentalities (including securities neither guaranteed nor insured by the U.S. government) and by corporations (to gain direct exposure to such securities and/or for use as part of a synthetic position); shares of GMO Short-Duration Collateral Fund (“SDCF”) (a fund that invests primarily in asset-backed securities); shares of GMO World Opportunity Overlay Fund (“Overlay Fund”)

         
16
       

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
(to attempt to exploit misvaluations in world interest rates, currencies and credit markets); shares of GMO Emerging Country Debt Fund (“ECDF”) (to gain exposure to emerging country debt markets); shares of GMO High Quality Short-Duration Bond Fund (to seek to generate a return in excess of that of the J.P. Morgan U.S. 3 Month Cash Index by investing in a wide variety of high quality U.S. and foreign debt investments); shares of GMO Debt Opportunities Fund (to seek to generate a positive return by investing in a wide variety of U.S. and foreign debt investments without regard to the credit quality of the investment); and shares of GMO U.S. Treasury Fund (for liquidity management purposes). In addition, the Fund may invest in unaffiliated money market funds.
 
Historically, the Fund has used derivatives and investments in other GMO Funds as the principal means to gain investment exposure. As a result, the Fund has substantial holdings of SDCF (a fund that invests primarily in asset-backed securities) and Overlay Fund (a fund that invests in asset-backed securities and uses derivatives to attempt to exploit misvaluations in world interest rates, currencies and credit markets). Because of the deterioration in credit markets that became acute in 2008, the Fund, including through its investment in SDCF and Overlay Fund, currently has and may continue to have material exposure to below investment grade securities that are not inflation indexed. This is in addition to the Fund’s below investment grade emerging country debt investments. The Fund is not limited in its use of derivatives or in the absolute face value of its derivatives positions, and, as a result, the Fund may be leveraged in relation to its assets.
 
The Fund, if deemed prudent by the Manager, will take temporary defensive measures until the Manager has determined that normal conditions have returned or that it is otherwise prudent to resume investing in accordance with the Fund’s normal investment strategies. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
 
Throughout the year ended February 28, 2011, the Fund had two classes of shares outstanding: Class III and Class VI. Each class of shares bears a different shareholder service fee.
 
The financial statements of the underlying funds should be read in conjunction with the Fund’s financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect) or at gmo.com. As of February 28, 2011, shares of GMO Special Purpose Holding Fund (“SPHF”) and Overlay Fund were not publicly available.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.

         
        17

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the OTC market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of February 28, 2011, the total value of securities held indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 1.1% of net assets. The underlying funds classify such securities (as defined below) as Level 3. During the year ended February 28, 2011, the Manager has evaluated the Fund’s OTC derivatives contracts and determined that no reduction in value was warranted on account of the creditworthiness of a counterparty. See Note 4 for a further discussion on valuation of derivative financial instruments.
 
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. Although alternative prices are available for securities held by the Fund and the underlying funds, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by the Fund and the underlying funds. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fund and the underlying funds. As of February 28, 2011, the total value of securities held directly and indirectly for which no alternative pricing source was available represented 6.1% of the net assets of the Fund.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

         
18
       

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include most recent bid prices, interest rates, prepayment speeds, credit risk, yield curves and similar data.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Debt Obligations
                               
U.S. Government
  $ —     $ 44,967,776     $ —     $ 44,967,776  
                                 
TOTAL DEBT OBLIGATIONS
    —       44,967,776       —       44,967,776  
                                 
Mutual Funds
    110,454,695       14,459       —       110,469,154  
Options Purchased
    —       111,631       —       111,631  
Short-Term Investments
    809,695       —       —       809,695  
                                 
Total Investments
    111,264,390       45,093,866       —       156,358,256  
                                 

         
        19

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
  
  ASSET VALUATION INPUTS — continued
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Derivatives *
                               
Forward Currency Contracts
                               
Foreign currency risk
  $ —     $ 876,373     $      —     $ 876,373  
Futures Contracts
                               
Interest rate risk
    93,325       —       —       93,325  
Swap Agreements
                               
Interest rate risk
    —       1,140,824       —       1,140,824  
                                 
Total
  $ 111,357,715     $ 47,111,063     $ —     $ 158,468,778  
                                 
 
LIABILITY VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Liabilities
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Derivatives *
                               
Forward Currency Contracts
                               
Foreign currency risk
  $ —     $ (1,317,521 )   $      —     $ (1,317,521 )
Futures Contracts
                               
Interest rate risk
    (102,673 )     —       —       (102,673 )
Swap Agreements
                               
Interest rate risk
    —       (15,332 )     —       (15,332 )
Written Options
                               
Foreign currency risk
    —       (32,834 )   $ —       (32,834 )
                                 
Total
  $ (102,673 )   $ (1,365,687 )   $ —     $ (1,468,360 )
                                 
 
The risks referenced above are not intended to be inclusive of all risks. Please see the Investment Risks and Derivative Financial Instruments sections below for a further discussion of risks.
            * Because the tables above are based on market values or unrealized appreciation (depreciation) rather than the notional amounts of derivatives, the uncertainties surrounding the valuation inputs for a derivative are likely to be more significant to the Fund’s net asset value than the uncertainties surrounding inputs for a non-derivative security with the same market value.

         
20
       

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The underlying funds held at period end are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements. The aggregate net values of the Fund’s indirect investments in securities and derivative financial instruments using Level 3 inputs were 39.7% and (0.1)% of total net assets, respectively.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
The Fund held no direct investments or derivative financial instruments directly at either February 28, 2011 or February 28, 2010, whose fair value was categorized using Level 3 inputs.
 
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 pm. Income and expenses denominated in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.
 
Loan agreements
The Fund may invest in loans to corporate, governmental, or other borrowers. The Fund’s investments in loans may be in the form of participations in loans or assignments of all or a portion of loans. A loan is often administered by a bank or other financial institution that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, (i) the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the party from whom the Fund has purchased the participation and only upon receipt by that party of payments from the borrower and (ii) the Fund generally has no right to enforce compliance by the borrower with the terms of the loan agreement or to vote on matters arising under the loan agreement. Thus, the Fund may be subject to credit risk both of the party from whom it purchased the loan participation and the borrower and the Fund may have minimal control over the terms of any loan modification. When the Fund purchases assignments of loans, it acquires direct rights against the borrower. The Fund had no loan agreements outstanding at the end of the period.
 
Repurchase agreements
The Fund may enter into repurchase agreements. Under a repurchase agreement 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 it acquired

         
        21

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
under the repurchase agreement. The value of the securities acquired is required by contract to be marked to market daily and additional collateral is required to be transferred so that the market value is at least equal to the amount owed to the Fund by the seller. If the seller of a repurchase agreement defaults or enters into insolvency proceedings and/or the value of the securities subject to the repurchase agreement is insufficient, the Fund’s recovery of cash from the seller may be delayed and the Fund may incur a loss equal to the difference between the cash it paid and the value of the securities. The Fund had no repurchase agreements outstanding at the end of the period.
 
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at an agreed upon price and date. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which generally causes the Fund’s portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the event of a buyer’s bankruptcy or insolvency, the Fund’s use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund’s right to repurchase the securities. As of February 28, 2011, the Fund had received $5,375,000 from reverse repurchase agreements relating to securities with a market value, plus accrued interest, of $5,547,047. Reverse repurchase agreements outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Inflation-indexed bonds
The Fund may invest in inflation indexed bonds. Inflation indexed bonds are fixed income securities whose principal value is adjusted periodically according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that reflects inflation in the principal value of the bond. Most other issuers pay out any inflation related accruals as part of a semiannual coupon.
 
The value of inflation indexed bonds is expected to change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates (i.e., stated interest rates) and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates (i.e. nominal interest rate minus inflation) might decline, leading to an increase in value of inflation indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation indexed bonds. There can be no assurance, however, that the value of inflation indexed bonds will be directly correlated to changes in nominal interest rates, and short term increases in inflation may lead to a decline in their value. Coupon payments received by the Fund from inflation indexed bonds are included in the Fund’s gross income for

         
22
       

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
the period in which they accrue. In addition, any increase or decrease in the principal amount of an inflation indexed bond will increase or decrease taxable ordinary income to the Fund, even though principal is not paid until maturity. Inflation-indexed bonds outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund has adopted a tax year-end of December 31. Unless otherwise indicated, all applicable tax disclosures reflect tax adjusted balances as of December 31, 2010. The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to differing treatment of amortization and accretion, capital loss carryforwards, derivative contract transactions, foreign currency transactions, differing treatment of security sales, partnership interest tax allocations, and losses on wash sale transactions.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    December 31, 2010   December 31, 2009
 
Ordinary income (including any net short-term capital gain)
  $ 22,451,803     $ 17,840,522  
Net long-term capital gain
    2,328,870       —  
Tax Return of Capital
    —       11,459,480  
                 
Total distributions
  $ 24,780,673     $ 29,300,002  
                 

         
        23

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of December 31, 2010, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 3,663,355  
Undistributed net long-term capital gain
  $ 2,545,720  
         
Other Tax Attributes:
       
Capital loss carryforwards
  $ (32,096,244 )
 
As of December 31, 2010, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards and future realized losses, if any, subsequent to December 31, 2010 could be subject to limitations imposed by the Code related to share ownership activity. The Fund’s capital loss carryforwards expire as follows:
 
         
December 31, 2015
  $ (22,863,205 )
December 31, 2016
    (9,233,039 )
         
Total
  $ (32,096,244 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 180,151,843     $ 6,908,095     $ (30,701,682 )   $ (23,793,587 )    
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the tax year ended December 31, 2010 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are

         
24
       

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
generally subject to examination by the relevant U.S. federal and state tax authorities include the tax periods ended December 31, 2007 through December 31, 2010.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, 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 among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged at that class’s operations. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 5).
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
Purchases and redemptions of Fund shares
Purchase premiums and redemption fees are paid to and retained by the Fund and are allocated pro rata among the classes to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. Such fees are recorded as a component of the Fund’s net share transactions. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of the Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends

         
        25

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund’s shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund’s shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder’s securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of the Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
 
Other matters
SPHF, an investment of the Fund, has litigation pending against various entities related to the 2002 fraud and related default of securities previously held by SPHF. The outcome of the lawsuits against the remaining defendants is not known and any potential recoveries are not reflected in the net asset value of SPHF. For the year ended February 28, 2011, the Fund received no distributions from SPHF in connection with the defaulted securities or the related litigation.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Fixed Income Securities — Typically, the value of fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities. In addition, increases in real interest rates need not be accompanied by increases in nominal interest rates. In such instances, the value of inflation indexed bonds may experience greater declines than non-inflation indexed (or nominal) fixed income investments with similar maturities. There can be no assurance that the value of the Fund’s inflation indexed bond investments will be directly correlated to changes in nominal interest rates, and short-term increases in inflation may lead to a decline in their value.

         
26
       

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
• Credit and Counterparty Risk — The Fund runs the risk that the issuer or guarantor of a fixed income security, the counterparty to an over-the-counter derivatives contract, a borrower of the Fund’s securities or the obligor of an obligation underlying an asset-backed security will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations. This risk is particularly pronounced for the Fund because it typically uses over-the-counter derivatives, including swap contracts with longer-term maturities, and may have significant exposure to a single counterparty. The risk of counterparty default is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions.
 
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
 
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in underlying funds, including the risk that the underlying funds in which it invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments.
 
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund’s foreign currency holdings and investments denominated in foreign currencies.
 
Other principal risks of an investment in the Fund include Foreign Investment Risk (risk that the market prices of foreign securities will fluctuate more rapidly and to a greater extent than those of U.S. securities); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities lending); Focused Investment Risk (increased risk from the Fund’s focus on investments in countries, regions, sectors or companies with high positive correlations to one another); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
 
The most significant market risk for Funds investing in fixed income securities is that the securities in which they invest experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund because it invests in asset-backed securities. Asset-backed securities may be backed by many types of

         
        27

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as “collateralized debt obligations” or “collateralized loan obligations”) and by the fees earned by service providers. Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. Many asset-backed securities owned (directly or indirectly) by the Fund that were once rated investment grade are now rated below investment grade as of the date of this report.
 
The existence of insurance on an asset-backed security does not guarantee that principal and/or interest will be paid because the insurer could default on its obligations. In recent years, a significant number of asset-backed security insurers have defaulted on their obligations.
 
With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.
 
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and a Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.

         
28
       

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution’s business may have a material impact on multiple investments.
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps or other derivatives on an index, a single security or a basket of securities to gain investment exposures (e.g., by selling protection under a credit default swap). The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). For example, the Fund may use credit default swaps to take a short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund’s exposure to the credit of an issuer through the debt instrument, but adjust the Fund’s interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed versus variable rates and shorter duration versus longer duration exposure. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.

         
        29

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral (e.g., foreign currency forwards; see “Currency Risk” above), that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.

         
30
       

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
 
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund’s forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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.
 
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. During the year ended February 28, 2011, the Fund used forward currency contracts to adjust exposure to foreign currencies and otherwise adjust currency exchange rate risk. Forward currency contracts outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of

         
        31

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. During the year ended February 28, 2011, the Fund used futures contracts to adjust interest-rate exposure and enhance the diversity and liquidity of the portfolio. Futures contracts outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. During the year ended February 28, 2011, the Fund used purchased option contracts to adjust exposure to currencies and otherwise adjust currency exchange rate risk, as well as to enhance the diversity and liquidity of the portfolio and to adjust interest rate exposure. Option contracts purchased by the Fund and outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. During the year ended February 28, 2011, the Fund used written option contracts to adjust exposure to currencies and otherwise adjust currency exchange rate risk, as well as to enhance the diversity and liquidity of the portfolio and to adjust interest rate exposure. Written options outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a

         
32
       

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
For the year ended February 28, 2011, investment activity in options contracts written by the Fund was as follows:
 
                                                 
    Puts   Calls
    Principal
           Principal
        
    Amount
   Number
       Amount
   Number
    
    of Contracts   of Contracts   Premiums   of Contracts   of Contracts   Premiums
 
Outstanding, beginning of year
  $ —       —     $ —       —       —     $      —  
Options written
    (20,900,000 )     —       (412,106 )     —       —       —  
Options bought back
    —       —       —       —       —       —  
Options expired
    —       —       —       —       —       —  
Options sold
    —       —       —       —       —       —  
                                                 
Outstanding, end of year
  $ (20,900,000 )     —     $ (412,106 )     —       —     $ —  
                                                 
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.

         
        33

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.

         
34
       

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the year ended February 28, 2011, the Fund used swap agreements to adjust interest rate exposure and adjust its exposure to certain markets. Swap agreements outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Assets:
                                               
Investments, at value (purchased options)
  $ —     $ 111,631     $      —     $      —     $      —     $ 111,631  
Unrealized appreciation on futures contracts *
    93,325       —       —       —       —       93,325  
Unrealized appreciation on forward currency contracts
    —       876,373       —       —       —       876,373  
Unrealized appreciation on swap agreements
    1,140,824       —       —       —       —       1,140,824  
                                                 
Total
  $ 1,234,149     $ 988,004     $ —     $ —     $ —     $ 2,222,153  
                                                 

         
        35

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of February 28, 2011Ù: — continued
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Liabilities:
                                               
Unrealized depreciation on written options outstanding
  $ —     $ (32,834 )   $ —     $ —     $ —     $ (32,834 )
Unrealized depreciation on futures contracts *
    (102,673 )     —       —       —       —       (102,673 )
Unrealized depreciation on forward currency contracts
    —       (1,317,521 )     —       —       —       (1,317,521 )
Unrealized depreciation on swap agreements
    (15,332 )     —       —       —       —       (15,332 )
                                                 
Total
  $ (118,005 )   $ (1,350,355 )   $ —     $ —     $ —     $ (1,468,360 )
                                                 
 
The Effect of Derivative Instruments on the Statement of Operations for the Period Ended February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Futures contracts
  $ 2,152,453     $ —     $      —     $      —     $      —     $ 2,152,453  
Forward currency contracts
    —       1,775,347       —       —       —       1,775,347  
Swap agreements
    15,125,100       —       —       —       —       15,125,100  
                                                 
Total
  $ 17,277,553     $ 1,775,347     $ —     $ —     $ —     $ 19,052,900  
                                                 
                                                 
Change in Unrealized Appreciation (Depreciation) on:
                                               
Investments (purchased options)
  $ —     $ (678,068 )   $ —     $ —     $ —     $ (678,068 )
Written options
    —       379,272       —       —       —       379,272  
Futures contracts
    14,044       —       —       —       —       14,044  
Forward currency contracts
    —       (825,558 )     —       —       —       (825,558 )
Swap agreements
    1,415,750       —       —       —       —       1,415,750  
                                                 
Total
  $ 1,429,794     $ (1,124,354 )   $ —     $ —     $ —     $ 305,440  
                                                 
 
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
            * The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.

         
36
       

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The volume of derivative activity, based on absolute values (forward currency contracts and futures contracts), or notional amounts (swap agreements), or principal amounts (options) outstanding at each month-end, was as follows for the year ended February 28, 2011:
 
                                         
    Forward
                
    currency
   Futures
   Swap
        
    contracts   contracts   agreements   Options    
 
Average amount outstanding
  $ 168,227,569     $ 101,340,378     $ 275,318,450     $ 13,852,694          
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.25% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets of each class at the annual rate of 0.15% for Class III shares and 0.055% for Class VI shares. The Manager has contractually agreed through at least June 30, 2011 to waive the Fund’s shareholder service fee to the extent that the aggregate of any direct and indirect shareholder service fees borne by a class of shares of the Fund exceeds 0.15% for Class III shares and 0.055% for Class VI shares; provided, however, that the amount of this waiver will not exceed the respective Class’s shareholder service fee.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.25% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in other GMO Funds (excluding those Funds’ Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund’s Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011

         
        37

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
was $9,537 and $2,810, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
The Fund incurs fees and expenses indirectly as a shareholder in underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
                   
Indirect Net
 		                 
Expenses
                  
(excluding
                  
shareholder service
     Indirect
            
fees and interest
     Shareholder
     Indirect Interest
     Total Indirect
expense)     Service Fees     Expense     Expense
0.019%
    0.004%     0.012%     0.035%
                   
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 were as follows:
 
                 
    Purchases   Sales
 
U.S. Government securities
  $ 156,694,430     $ 206,874,485  
Investments (non-U.S. Government securities)
    119,368,067       275,426,237  
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 86.03% of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund’s outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.

         
38
       

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, 0.20% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and 53.65% of the Fund’s shares were held by accounts for which the Manager had investment discretion.
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    46,611     $ 914,977       21,496     $ 389,217  
Shares issued to shareholders in reinvestment of distributions
    21,656       414,502       8,643       139,900  
Shares repurchased
    (519,800 )     (10,135,205 )     (3,615,300 )     (63,555,705 )
Redemption fees
    —       —       —       9,699  
                                 
Net increase (decrease)
    (451,533 )   $ (8,805,726 )     (3,585,161 )   $ (63,016,889 )
                                 
                                 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class VI:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    152,422     $ 2,978,174       1,044,739     $ 18,057,561  
Shares issued to shareholders in reinvestment of distributions
    986,689       18,875,362       —       —  
Shares repurchased
    (14,936,078 )     (288,409,476 )     (162,375 )     (2,912,632 )
Redemption fees
    —       —       —       21,546  
                                 
Net increase (decrease)
    (13,796,967 )   $ (266,555,940 )     882,364     $ 15,166,475  
                                 

         
        39

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                         
    Value,
               Distributions
   Return
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   of
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   Capital   period
 
GMO Emerging Country Debt Fund, Class IV
  $ 18,524,773     $ 913,897     $ 17,000,000     $ 913,897     $ —     $ —     $ 4,686,583  
GMO Short-Duration Collateral Fund
    209,275,413       —       85,500,000       2,226,311       —       67,129,225       68,106,389  
GMO Special Purpose Holding Fund
    15,905       —       —       —       —       —       14,459  
GMO U.S. Treasury Fund
    68,716       117,664,470       111,226,237       12,676       1,797       —       6,501,391  
GMO World Opportunity Overlay Fund
    88,013,103       —       61,700,000       —       —       —       31,160,332  
                                                         
Totals
  $ 315,897,910     $ 118,578,367     $ 275,426,237     $ 3,152,884     $ 1,797     $ 67,129,225     $ 110,469,154  
                                                         

         
40
       

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Inflation Indexed Plus Bond Fund:
 
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Inflation Indexed Plus Bond Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years for the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian, brokers, and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
        41

 

GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
42
       

 

 
GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.43 %   $ 1,000.00     $ 1,040.00     $ 2.17  
2) Hypothetical
    0.43 %   $ 1,000.00     $ 1,022.66     $ 2.16  
                                 
Class VI
                               
                                 
1) Actual
    0.33 %   $ 1,000.00     $ 1,040.40     $ 1.67  
2) Hypothetical
    0.33 %   $ 1,000.00     $ 1,023.16     $ 1.66  
                                 
 
            * Expenses are calculated using each Class’s annualized net expense ratio (including interest expense and indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
        43

 

GMO Inflation Indexed Plus Bond Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended December 31, 2010 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
The Fund’s distributions to shareholders include $2,328,870 from long-term capital gains.
 
The Fund hereby designates as qualified interest income and qualified short-term capital gains with respect to its taxable year ended December 31, 2010, $3,225,550 and $12,950,921, respectively, or if determined to be different, the qualified interest income and qualified short-term capital gains of such year.
 
Of the ordinary income distributions made by the Fund during the taxable year ended December 31, 2010, 12.06% is derived from investments in U.S. Government and Agency Obligations. All or a portion of the distributions from this income may be exempt from taxation at the state level. Consult your tax advisor for state specific information.

         
44        

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with the
   Length of Time
   During Past
   Complex
     Directorships
Date of Birth   Trust   Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
        45

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with the
   Length of Time
   During Past
   Complex
     Directorships
Date of Birth   Trust   Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of Time
   During Past
   Complex
     Directorships
Date of Birth   Held with Trust   Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee;
President and
Chief Executive
Officer of the
Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
46        

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        47

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
48        

 

 
GMO International Bond Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO International Bond Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
GMO International Bond Fund returned +13.4% for the fiscal year ended February 28, 2011, as compared with +7.0% for the J.P. Morgan Non-U.S. Government Bond Index.
 
The Fund’s investment exposures were achieved directly through a mixture of bonds, futures and swaps, and indirectly through its investment in underlying GMO Trust mutual funds, primarily GMO Short-Duration Collateral Fund (SDCF), GMO World Opportunity Overlay Fund (Overlay Fund), and GMO Emerging Country Debt Fund (ECDF).
 
The Fund outperformed its benchmark during the fiscal year by 6.4%. Exposures to asset-backed securities in SDCF and Overlay Fund were the largest positive contributors for the fiscal year, followed by positive contributions from developed markets interest-rate positioning (primarily through exchange-traded futures and interest-rate swaps), exposure to emerging country debt via ECDF, and developed markets currency selection (primarily through currency forwards and options).
 
Approximately 5.3% of the outperformance derived from asset-backed securities held indirectly in SDCF and Overlay Fund. Asset-backed security spreads tightened and pricing and liquidity conditions in securitized credit markets improved during the fiscal year. SDCF and Overlay Fund experienced credit downgrades during the fiscal year: SDCF had 55 downgraded securities, and Overlay Fund had 35, representing 11% and 10% of their respective market values from the beginning of the fiscal year. At fiscal year-end, 52% of SDCF’s portfolio was rated AAA, and 72% of Overlay Fund’s was rated AAA.
 
Developed markets interest-rate positioning also contributed positively to performance. Positive contributions from euro zone, Canadian, Swedish, and U.S. positions more than offset losses from Swiss, U.K., and Australian positions. Within the euro zone, strategy underweights in Italy and Spain relative to Germany contributed positively. These exposures were achieved directly.
 
A small exposure to emerging country debt through investment in ECDF added value due to positive contributions from both security and country selection within ECDF. In developed markets currency selection, Australian dollar, Japanese yen, Swedish krona, and Norwegian krone positions drove gains, though this performance was offset somewhat by Swiss franc, Canadian dollar, pound sterling, and opportunistic positions. These exposures were achieved directly.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO International Bond Fund Class III Shares and the
J.P. Morgan Non-U.S. Government Bond Index
As of February 28, 2011
 
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited.
 

 

GMO International Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary*   % of Total Net Assets  
Debt Obligations
    95.7 %
Short-Term Investments
    6.0  
Forward Currency Contracts
    1.7  
Options Purchased
    0.3  
Loan Participations
    0.2  
Loan Assignments
    0.1  
Rights and Warrants
    0.0 Ù
Promissory Notes
    0.0 Ù
Written Options
    (0.0 )Ù
Futures Contracts
    (0.6 )
Swap Agreements
    (0.7 )
Reverse Repurchase Agreements
    (3.4 )
Other
    0.7  
         
      100.0 %
         
 
         
Country / Region Summary**   % of Investments  
Euro Region***
    44.9 %
Japan
    44.2  
United Kingdom
    14.5  
Canada
    7.2  
United States
    5.2  
Emerging****
    4.3  
Norway
    0.0 Ù
New Zealand
    0.0 Ù
Switzerland
    (2.6 )
Sweden
    (8.1 )
Australia
    (9.6 )
         
      100.0 %
         
 
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust (“underlying funds”).
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative financial instruments. The table excludes exposure through certain currency linked derivatives such as forward currency contracts and currency options. The table is based on duration adjusted exposures, taking into account the market value of securities and the notional amounts of swaps and other derivative financial instruments. For example, U.S. asset-backed securities represent a relatively small percentage due to their short duration, even though they represent a large percentage of market value (direct and indirect). Duration is based on the Manager’s models. The greater the duration of a bond, the greater its contribution to the concentration percentage. Credit default swap exposures (both positive and

         
        1

 

 
GMO International Bond Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2011 (Unaudited)
 
negative) are factored into the duration-adjusted exposure using a reference security and applying the same methodology to that security.
*** The “Euro Region” is comprised of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
**** The “Emerging” exposure is associated only with investments in the GMO Emerging Country Debt Fund, which is exposed to emerging countries primarily comprised of Russia, Argentina, Brazil, Philippines, Mexico, Venezuela, Colombia, Dominican Republic, Turkey, and Indonesia. Additional information about the fund’s emerging country exposure is available in the financial statements of the GMO Emerging Country Debt Fund.
Ù Rounds to 0.0%.

         
2
       

 

GMO International Bond Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value     Description   Value ($)  
            DEBT OBLIGATIONS — 35.9%        
                     
            Canada — 2.9%        
            Foreign Government Obligations        
CAD
    3,000,000     Government of Canada, 3.50%, due 06/01/20     3,137,255  
                     
                     
            France — 3.8%        
            Foreign Government Obligations        
EUR
    3,000,000     Government of France, 4.00%, due 10/25/38     4,134,468  
                     
                     
            Germany — 2.2%        
            Foreign Government Obligations        
EUR
    1,500,000     Republic of Deutschland, 4.75%, due 07/04/34 (a)     2,404,425  
                     
                     
            Italy — 1.8%        
            Foreign Government Obligations        
EUR
    1,750,000     Republic of Italy, 4.00%, due 02/01/37     1,958,542  
                     
                     
            Japan — 13.6%        
            Foreign Government Obligations        
JPY
    1,138,400,000     Japan Government Twenty Year Bond, 2.20%, due 06/20/26     14,751,816  
                     
                     
            Spain — 1.5%        
            Foreign Government Obligations        
EUR
    1,400,000     Government of Spain, 4.70%, due 07/30/41     1,585,689  
                     
                     
            United Kingdom — 5.6%        
            Foreign Government Obligations        
GBP
    3,750,000     U.K. Treasury Gilt, 4.25%, due 12/07/27     6,127,883  
                     
            Total Foreign Government Obligations     34,100,078  
                     
                     
            United States — 4.5%        
            U.S. Government        
USD
    4,741,420     U.S. Treasury Inflation Indexed Note, 2.00%, due 04/15/12 (a) (b) (c)     4,951,820  
                     
                     
            TOTAL DEBT OBLIGATIONS (COST $37,914,224)     39,051,898  
                     

         
    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, 2011
 
                     
Shares /
 		           
Principal Amount /
 		           
Par Value ($)     Description   Value ($)  
                     
            MUTUAL FUNDS — 62.8%        
                     
            United States — 62.8%        
            Affiliated Issuers        
      364,389     GMO Emerging Country Debt Fund, Class IV     3,312,292  
      3,980,527     GMO Short-Duration Collateral Fund     41,317,873  
      37,466     GMO Special Purpose Holding Fund (d)     18,733  
      64,008     GMO U.S. Treasury Fund     1,600,199  
      971,965     GMO World Opportunity Overlay Fund     22,044,168  
                     
            Total United States     68,293,265  
                     
                     
            TOTAL MUTUAL FUNDS (COST $67,868,852)     68,293,265  
                     
                     
            OPTIONS PURCHASED — 0.0%        
                     
            Currency Options — 0.0%        
AUD
    8,000,000     AUD Put/USD Call, Expires 05/12/11, Strike 0.95     42,730  
                     
                     
            TOTAL OPTIONS PURCHASED (COST $302,277)     42,730  
                     
                     
            SHORT-TERM INVESTMENTS — 1.2%        
                     
            Money Market Funds — 0.6%        
      605,485     State Street Institutional Treasury Plus Money Market Fund-Institutional Class     605,485  
                     
                     
            U.S. Government — 0.6%        
      600,000     U.S. Treasury Bill, 0.19%, due 11/17/11 (a) (e)     599,195  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $1,204,398)     1,204,680  
                     
                     
            TOTAL INVESTMENTS — 99.9%
(Cost $107,289,751) 		    108,592,573  
            Other Assets and Liabilities (net) — 0.1%     91,399  
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 108,683,972  
                     

         
4
  See accompanying notes to the financial statements.    

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
A summary of outstanding financial instruments at February 28, 2011 is as follows:
 
Forward Currency Contracts
 
                                     
                    Net Unrealized
Settlement
 		                  Appreciation
Date   Counterparty   Deliver/Receive   Units of Currency   Value   (Depreciation)
 
Buys†
                                   
3/22/11
    Citibank N.A.     AUD     1,300,000     $ 1,320,343     $ 14,324  
3/22/11
    Deutshe Bank AG     AUD     2,400,000       2,437,557       62,397  
3/29/11
    Deutshe Bank AG     CAD     800,000       822,960       6,349  
3/01/11
    Barclays Bank PLC     CHF     1,200,000       1,291,572       69,632  
3/01/11
    Deutshe Bank AG     CHF     2,500,000       2,690,776       (16,317 )
3/01/11
    Royal Bank of Scotland PLC     CHF     1,000,000       1,076,310       26,909  
5/03/11
    Citibank N.A.     CHF     300,000       323,070       135  
5/03/11
    Royal Bank of Scotland PLC     CHF     600,000       646,140       (2,144 )
3/08/11
    Citibank N.A.     EUR     3,400,000       4,691,477       150,053  
3/08/11
    Deutshe Bank AG     EUR     25,100,000       34,634,140       1,516,117  
3/08/11
    Royal Bank of Scotland PLC     EUR     1,400,000       1,931,785       14,203  
4/05/11
    Citibank N.A.     GBP     400,000       650,081       5,825  
4/05/11
    Deutshe Bank AG     GBP     2,700,000       4,388,045       95,045  
4/05/11
    Royal Bank of Scotland PLC     GBP     600,000       975,121       9,040  
3/15/11
    Citibank N.A.     JPY     110,000,000       1,344,766       15,967  
3/15/11
    Deutshe Bank AG     JPY     2,503,900,000       30,610,549       493,878  
4/19/11
    Deutshe Bank AG     NZD     5,200,000       3,899,089       (71,085 )
                                 
                        $ 93,733,781     $ 2,390,328  
                                 
Sales #
                                   
3/22/11
    Deutshe Bank AG     AUD     700,000     $ 710,954     $ (10,170 )
3/22/11
    Royal Bank of Scotland PLC     AUD     600,000       609,389       (19,841 )
3/29/11
    Deutshe Bank AG     CAD     1,300,000       1,337,309       (37,719 )
3/29/11
    Royal Bank of Scotland PLC     CAD     700,000       720,090       (17,864 )
3/01/11
    Citibank N.A.     CHF     4,700,000       5,058,659       (341,813 )
5/03/11
    Deutshe Bank AG     CHF     2,500,000       2,692,250       16,412  
3/08/11
    Deutshe Bank AG     EUR     800,000       1,103,877       (24,506 )
3/08/11
    Royal Bank of Scotland PLC     EUR     300,000       413,954       (9,047 )
4/05/11
    Deutshe Bank AG     GBP     400,000       650,081       (341 )
4/05/11
    Royal Bank of Scotland PLC     GBP     300,000       487,560       (6,598 )
3/15/11
    Citibank N.A.     JPY     60,000,000       733,509       (4,389 )
3/15/11
    Deutshe Bank AG     JPY     140,000,000       1,711,521       (10,919 )

         
    See accompanying notes to the financial statements.   5

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Forward Currency Contracts — continued
 
                                     
                    Net Unrealized
Settlement
 		                  Appreciation
Date   Counterparty   Deliver/Receive   Units of Currency   Value   (Depreciation)
 
3/15/11
    Royal Bank of Scotland PLC     JPY     60,000,000     $ 733,509     $ (18,606 )
4/19/11
    Royal Bank of Scotland PLC     NZD     2,700,000       2,024,527       (5,754 )
                                 
                        $ 18,987,189     $ (491,155 )
                                 
 
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
 
Forward Cross Currency Contracts
 
                                             
                Net Unrealized
Settlement
 		          Receive/
 		  Appreciation
Date   Counterparty   Deliver/Units of Currency   In Exchange For   (Depreciation)
 
      Royal Bank of                                      
4/12/11
    Scotland PLC     NOK     5,541,372       EUR       700,000     $ (21,894 )
4/12/11
    Deutsche Bank AG     EUR     2,600,000       NOK       20,396,090       48,151  
      Royal Bank of                                      
4/26/11
    Scotland PLC     SEK     2,626,962       EUR       300,000       51  
4/26/11
    Deutshe Bank AG     EUR     3,700,000       SEK       32,308,500       (14,915 )
                                         
                                        $ 11,393  
                                         
 
Futures Contracts
 
                             
                Net Unrealized
Number of
 		      Expiration
 		  Contract
 		  Appreciation
Contracts   Type   Date   Value   (Depreciation)
 
Buys
                           
17
    Canadian Government Bond 10 Yr.     June 2011   $ 2,103,937     $ 8,942  
31
    Euro Bund     March 2011     5,309,661       3,993  
170
    Federal Funds 30 Day     March 2011     70,732,741       (315 )
8
    Japanese Govenment Bond 10 Yr. (TSE)     March 2011     13,646,110       (52,660 )
27
    UK Gilt Long Bond     June 2011     5,121,379       11,686  
12
    U.S. Treasury Bond 30 Yr. (CBT)     March 2011     1,463,250       (33,348 )
6
    U.S. Treasury Note 2 Yr. (CBT)     June 2011     1,309,781       920  

         
6
  See accompanying notes to the financial statements.    

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Futures Contracts — continued
 
                             
                Net Unrealized
Number of
 		      Expiration
 		  Contract
 		  Appreciation
Contracts   Type   Date   Value   (Depreciation)
 
20
    U.S. Treasury Note 5 Yr. (CBT)     June 2011   $ 2,338,750     $ 3,674  
                         
                $ 102,025,609     $ (57,108 )
                         
Sales
                           
36
    Australian Government Bond 3 Yr.     March 2011   $ 3,756,038     $ (13,017 )
17
    Australian Government Bond 10 Yr.     March 2011     1,796,745       (19,539 )
128
    Euro BOBL     March 2011     20,697,923       239,758  
8
    U.S. Treasury Note 10 Yr. (CBT)     June 2011     952,375       (2,087 )
                         
                $ 27,203,081     $ 205,115  
                         
 
Reverse Repurchase Agreements
 
                     
Face Value   Description   Market Value
 
                     
USD
    2,217,500     Barclays Bank, 0.22%, dated 02/16/11, to be repurchased on demand at face value plus accrued interest with a stated maturity date of 3/18/2011.   $ (2,217,676 )
                     
         
Average balance outstanding
  $ (3,859,335 )
Average interest rate
    0.28 %
Maximum balance outstanding
  $ (16,565,973 )
 
Average balance outstanding was calculated based on daily face value balances outstanding during the period that the Fund has entered into reverse repurchase agreements.
 
Written Options
 
A summary of open written option contracts for the Fund at February 28, 2011 is as follows:
 
Currency Options
 
                                     
    Principal
 		  Expiration
 		              Market
   
Amount
  Date       Description   Premiums   Value
 
Put
    8,000,000     05/12/2011   AUD   AUD Put/USD Call, Strike 0.89   $ (157,744 )   $ (12,568 )
                                     

         
    See accompanying notes to the financial statements.   7

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Swap Agreements
 
Credit Default Swaps
 
                                                     
                            Maximum
 		   
                            Potential
 		   
                            Amount of
 		   
                            Future
 		   
                            Payments
 		   
                        Implied
 		      by the Fund
 		   
Notional
 		  Expiration
 		      Receive
 		  Annual
 		  Credit
 		  Deliverable
 		  Under the
 		  Market
Amount   Date   Counterparty   (Pay)Ù   Premium   Spread (1)   on Default   Contract (2)   Value
 
  21,000,000     USD   3/20/2014   Deutsche Bank AG   (Pay)   1.70%   1.55%   Republic of Italy     N/A         $ (160,529 )
  15,000,000     USD   3/20/2019   Deutsche Bank AG   Receive   1.66%   1.84%   Republic of Italy     15,000,000     USD     (134,201 )
                                                     
                                                $ (294,730 )
                                                     
Premiums to (Pay) Receive
  $  —  
         
 
Ù Receive - Fund receives premium and sells credit protection. If a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.
(Pay) - Fund pays premium and buys credit protection. If a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) receive from the seller of protection an amount equal to the notional amount of the swap and deliver the referenced obligation or underlying securities comprising the referenced index or (ii) receive a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.
(1) Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on the reference security, as of February 28, 2011, serve as an indicator of the current status of the payment/performance risk and reflect the likelihood or risk of default for the reference entity. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection. Wider (i.e.higher) credit spreads represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.
(2) The maximum potential amount the Fund could be required to pay as a seller of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.

         
8
  See accompanying notes to the financial statements.    

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Interest Rate Swaps
 
                                     
Notional
 		  Expiration
 		      Receive
 		  Fixed
 		      Market
Amount   Date   Counterparty   (Pay)#   Rate   Variable Rate   Value
 
  54,000,000     EUR   3/28/2013   Merrill Lynch Capital Services   Receive   2.22%   6 Month EUR LIBOR   $ 97,398  
  25,000,000     SEK   3/16/2016   Citibank N.A.   (Pay)   2.60%   3 Month SEK STIBOR     169,900  
  33,100,000     SEK   3/16/2016   Barclays Bank PLC   (Pay)   2.60%   3 Month SEK STIBOR     224,947  
  800,000     CHF   3/16/2016   Barclays Bank PLC   Receive   1.30%   6 Month CHF LIBOR     (12,266 )
                                     
                                $ 479,979  
                                     
Premiums to (Pay) Receive
  $ (211,389 )
         
 
# Receive - Fund receives fixed rate and pays variable rate.
(Pay) - Fund pays fixed rate and receives variable rate.
 
As of February 28, 2011, for forward currency contracts, futures contracts, swap agreements, written options and reverse repurchase agreements, if any, the Fund had sufficient cash and/ or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
 
Notes to Schedule of Investments:
 
BOBL - Bundesobligationen
CBT - Chicago Board of Trade
CHF LIBOR - London Interbank Offered Rate denominated in Swiss Francs.
EUR LIBOR - London Interbank Offered Rate denominated in Euros.
SEK LIBOR - Stockolm Interbank Offered Rate denominated in Swedish Kronor.
TSE - Tokyo Stock Exchange
(a) All or a portion of this security has been pledged to cover margin requirements on futures contracts, collateral on swap contracts, forward currency contracts, and written options, if any. (Note 4).
(b) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
(c) All or a portion of this security has been pledged to cover collateral requirements on reverse repurchase agreements (Note 2).
(d) Underlying investment represents interests in defaulted claims.
(e) Rate shown represents yield-to-maturity.

         
    See accompanying notes to the financial statements.   9

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
 
Currency Abbreviations:
 
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
EUR - Euro
GBP - British Pound
JPY - Japanese Yen
NOK - Norwegian Krone
NZD - New Zealand Dollar
SEK - Swedish Krona
USD - United States Dollar

         
10
  See accompanying notes to the financial statements.    

 

GMO International Bond Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $39,420,899) (Note 2)
  $ 40,299,308  
Investments in affiliated issuers, at value (cost $67,868,852) (Notes 2 and 10)
    68,293,265  
Dividends and interest receivable
    364,796  
Unrealized appreciation on open forward currency contracts (Note 4)
    2,544,488  
Due from broker (including variation margin on futures contracts) (Note 4)
    153,026  
Receivable for open swap contracts (Note 4)
    492,245  
Receivable for expenses reimbursed by Manager (Note 5)
    27,462  
Other expense reimbursement from Manager (Note 2)
    830,768  
         
Total assets
    113,005,358  
         
         
Liabilities:
       
Payable for investments purchased
    130  
Payable for Fund shares repurchased
    50,000  
Payable to affiliate for (Note 5):
       
Management fee
    20,918  
Shareholder service fee
    12,551  
Trustees and Trust Officers or agents unaffiliated with the Manager
    275  
Payable to broker for closed futures contracts
    152,735  
Unrealized depreciation on open forward currency contracts (Note 4)
    633,922  
Payable for open swap contracts (Note 4)
    306,996  
Payable for reverse repurchase agreements (Note 2)
    2,217,676  
Written options outstanding, at value (premiums $157,744) (Note 4)
    12,568  
Accrued expenses
    913,615  
         
Total liabilities
    4,321,386  
         
Net assets
  $ 108,683,972  
         
Net assets consist of:
       
Paid-in capital
  $ 175,584,845  
Accumulated undistributed net investment income
    1,415,287  
Accumulated net realized loss
    (71,803,849 )
Net unrealized appreciation
    3,487,689  
         
    $ 108,683,972  
         
Net assets attributable to:
       
Class III shares
  $ 108,683,972  
         
Shares outstanding:
       
Class III
    15,280,958  
         
Net asset value per share:
       
Class III
  $ 7.11  
         

         
    See accompanying notes to the financial statements.   11

 

GMO International Bond Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends from affiliated issuers (Note 10)
  $ 1,401,285  
Interest
    1,319,363  
Dividends
    415  
         
Total investment income
    2,721,063  
         
Expenses:
       
Management fee (Note 5)
    370,508  
Shareholder service fee – Class III (Note 5)
    222,305  
Custodian, fund accounting agent and transfer agent fees
    108,004  
Audit and tax fees
    79,388  
Legal fees
    6,637  
Interest expense (Note 2)
    5,238  
Registration fees
    5,187  
Trustees fees and related expenses (Note 5)
    3,808  
Miscellaneous
    12,661  
         
Total expenses
    813,736  
Fees and expenses reimbursed by Manager (Note 5)
    (210,074 )
Expense reductions (Note 2)
    (69 )
Indirectly incurred fees waived or borne by Manager (Note 5)
    (21,945 )
Shareholder service fee waived (Note 5)
    (7,108 )
         
Net expenses
    574,540  
         
Net investment income (loss)
    2,146,523  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in unaffiliated issuers
    1,344,626  
Investments in affiliated issuers
    (7,176,769 )
Realized gains distributions from affiliated issuers (Note 10)
    133  
Futures contracts
    3,252,992  
Swap contracts
    (344,066 )
Foreign currency, forward contracts and foreign currency related transactions
    1,333,960  
         
Net realized gain (loss)
    (1,589,124 )
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in unaffiliated issuers
    314,191  
Investments in affiliated issuers
    14,796,214  
Futures contracts
    (715,546 )
Written options
    145,176  
Swap contracts
    (81,544 )
Foreign currency, forward contracts and foreign currency related transactions
    2,061,097  
         
Net unrealized gain (loss)
    16,519,588  
         
Net realized and unrealized gain (loss)
    14,930,464  
         
Net increase (decrease) in net assets resulting from operations
  $ 17,076,987  
         

         
12
  See accompanying notes to the financial statements.    

 

GMO International Bond Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 2,146,523     $ 2,771,503  
Net realized gain (loss)
    (1,589,124 )     (2,883,139 )
Change in net unrealized appreciation (depreciation)
    16,519,588       54,098,070  
                 
                 
Net increase (decrease) in net assets from operations
    17,076,987       53,986,434  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (7,001,558 )     (40,402,952 )
                 
Net share transactions (Note 9):
               
Class III
    (110,541,146 )     (16,281,460 )
Purchase premiums and redemption fees (Notes 2 and 9):
               
Class III
    —       83,993  
                 
Total increase (decrease) in net assets resulting from net share transactions and redemption fees
    (110,541,146 )     (16,197,467 )
                 
Total increase (decrease) in net assets
    (100,465,717 )     (2,613,985 )
                 
Net assets:
               
Beginning of period
    209,149,689       211,763,674  
                 
End of period (including accumulated undistributed net investment income of $1,415,287 and $2,012,146, respectively)
  $ 108,683,972     $ 209,149,689  
                 

         
    See accompanying notes to the financial statements.   13

 

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,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 6.59     $ 6.17     $ 9.51     $ 9.73     $ 9.57  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)(a)†
    0.10       0.09       0.19       0.41       0.41  
Net realized and unrealized gain (loss)
    0.77       1.65       (2.32 )     0.31       0.38  
                                         
                                         
Total from investment operations
    0.87       1.74       (2.13 )     0.72       0.79  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.35 )     (1.32 )     (1.21 )     (0.94 )     (0.54 )
From net realized gains
    —       —       —       —       (0.09 )
                                         
                                         
Total distributions
    (0.35 )     (1.32 )     (1.21 )     (0.94 )     (0.63 )
                                         
                                         
Net asset value, end of period
  $ 7.11     $ 6.59     $ 6.17     $ 9.51     $ 9.73  
                                         
                                         
Total Return(b)
    13.36 %     29.54 %     (24.52 )%     8.09 %     8.32 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 108,684     $ 209,150     $ 211,764     $ 514,570     $ 449,478  
Net operating expenses to average daily net assets(c)
    0.39 %(d)     0.38 %(d)     0.39 %     0.38 %(d)     0.39 %
Interest expense to average daily net assets(e)
    0.00 %(f)     0.00 %(f)     —       —       —  
Total net expenses to average daily net assets(c)
    0.39 %(d)     0.38 %(d)     0.39 %     0.38 %(d)     0.39 %
Net investment income (loss) to average daily net assets(a)
    1.45 %     1.32 %     2.20 %     4.26 %     4.17 %
Portfolio turnover rate
    46 %     29 %     47 %     51 %     32 %
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets:(h)
    0.16 %     0.12 %     0.09 %     0.07 %     0.26 %(g)
Redemption fees consisted of the following per share amounts (Note 2):†
  $ 0.00 (i)   $ 0.00 (j)   $ 0.01     $ 0.00 (i)   $ 0.00 (i)
 
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(d) The net expense ratio does not include the effect of expense reductions (Note 2).
(e) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund’s net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income.
(f) Interest expense was less than 0.01% to average daily net assets.
(g) Includes 0.19% non-recurring Internal Revenue Code Section 860 expense reimbursed by the Manager (Note 2).
(h) Ratios include reimbursement of direct operating expenses and waiver of expenses indirectly incurred through investment in the underlying funds (See Note 5).
(i) There were no redemption fees during the period.
(j) Redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.

         
14
  See accompanying notes to the financial statements.    

 

GMO International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO International Bond Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund seeks total return in excess of that of its benchmark, the J.P. Morgan Non-U.S. Government Bond Index. The Fund seeks to add value relative to its benchmark by exploiting misvaluations in global interest rates, sectors, currencies, credit and emerging country debt markets. As a result, the Fund’s interest rate, sector, credit and currency exposures will differ from those of its benchmark.
 
The Manager seeks to determine the relative values of the interest rate and currency markets, to determine currency and interest rate exposures, and to identify investments the Manager believes are undervalued or are likely to provide downside protection. The Manager selects investments based on an evaluation of various factors including, but not limited to, fundamental factors such as inflation and current account positions, as well as price-based factors such as interest and exchange rates.
 
Under normal circumstances, the Fund invests directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the “underlying funds,” or derivatives) at least 80% of its assets in bonds. The term “bond” refers to any fixed income security, which includes (i) obligations of an issuer to make payments of principal and/or interest on future dates, (ii) synthetic debt instruments created by the Manager by using derivatives (e.g., a futures contract, swap contract, currency forward or option), and (iii) instruments with variable interest payments.
 
The Fund may implement its investment program by investing in or holding: exchange-traded and over-the-counter (“OTC”) derivatives, including without limitation, futures contracts, currency options, interest rate options, currency forwards, reverse repurchase agreements, credit default swaps, and other swap contracts (to gain exposure to the global interest rate, credit, and currency markets); foreign government securities and other investment-grade bonds denominated in various currencies, including U.S. government securities, asset-backed securities issued by foreign governments and U.S. government agencies (including securities neither guaranteed nor insured by the U.S. government), corporate bonds, and mortgage-backed and other asset-backed securities issued by private issuers; shares of GMO Short-Duration Collateral Fund (“SDCF”) (a fund that invests primarily in U.S. asset-backed securities); shares of GMO World Opportunity Overlay Fund (“Overlay Fund”) (to attempt to exploit misvaluations in world interest rates, currencies and credit markets); shares of GMO Emerging Country Debt Fund (“ECDF”) (to gain exposure to emerging country debt markets); shares of GMO High Quality Short-Duration Bond Fund (to seek to generate a return in excess of that of the J.P. Morgan U.S. 3 Month Cash Index by investing in a wide

         
        15

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
variety of high quality U.S. and foreign debt investments); shares of GMO Debt Opportunities Fund (to seek to generate a positive return by investing in a wide variety of U.S. and foreign debt investments without regard to the credit quality of the investment); and shares of GMO U.S. Treasury Fund (for liquidity management purposes). In addition, the Fund may invest in unaffiliated money market funds.
 
Historically, the Fund has used derivatives and investments in other GMO Funds as the principal means to gain investment exposure. As a result, the Fund has substantial holdings of SDCF (a fund that invests primarily in U.S. asset-backed securities) and Overlay Fund (a fund that invests in U.S. asset-backed securities and uses derivatives to attempt to exploit misvaluations in world interest rates, currencies and credit markets). Because of the deterioration in credit markets that became acute in 2008, the Fund, including through its investment in SDCF and Overlay Fund, currently has and may continue to have material exposure to below investment grade U.S. securities. This is in addition to the Fund’s below investment grade emerging country debt investments. The Fund is not limited in its use of derivatives or in the absolute face value of its derivatives positions, and, as a result, the Fund may be leveraged in relation to its assets.
 
The Manager normally seeks to maintain the Fund’s estimated interest rate duration within +/- 2 years of the benchmark’s duration. The Fund, if deemed prudent by the Manager, will take temporary defensive measures until the Manager has determined that normal conditions have returned or that it is otherwise prudent to resume investing in accordance with the Fund’s normal investment strategies. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
 
The financial statements of the series of the underlying funds should be read in conjunction with the Fund’s financial statements. These financial statements are available, upon request, without charge by calling (617) 346-7646 (collect). As of February 28, 2011, shares of the SDCF, Overlay Fund and GMO Special Purpose Holding Fund (“SPHF”) were not publicly available for direct purchase.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the OTC market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily

         
16
       

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of February 28, 2011, the total value of securities held indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 1.0% of net assets. The underlying funds classify such securities (as defined below) as Level 3. During the year ended February 28, 2011, the Manager has evaluated the Fund’s OTC derivatives contracts and determined that no reduction in value was warranted on account of the creditworthiness of a counterparty. See Note 4 for a further discussion on valuation of derivative financial instruments.
 
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. Although alternative prices are available for securities held by the Fund and the underlying funds, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by the Fund and the underlying funds. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fund and the underlying funds. As of February 28, 2011, the total value of securities held directly and indirectly for which no alternative pricing source was available represented 5.4% of the net assets of the Fund.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s)

         
        17

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include most recent bid prices, interest rates, prepayment speeds, credit risk, yield curves and similar data. The Fund also used third party valuation services (which use industry models and inputs from pricing vendors) to value credit default swaps.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Debt Obligations
                               
U.S. Government
  $ —     $ 4,951,820     $      —     $ 4,951,820  
Foreign Government Obligations
    —       34,100,078       —       34,100,078  
                                 
TOTAL DEBT OBLIGATIONS
    —       39,051,898       —       39,051,898  
                                 
Mutual Funds
    68,274,532       18,733       —       68,293,265  
Options Purchased
    —       42,730       —       42,730  
Short-Term Investments
    1,204,680       —       —       1,204,680  
                                 
Total Investments
    69,479,212       39,113,361       —       108,592,573  
                                 
Derivatives *
                               
Forward Currency Contracts Foreign currency risk
    —       2,544,488       —       2,544,488  
Futures Contracts
Interest rate risk
    268,973       —       —       268,973  

         
18
       

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
  
  ASSET VALUATION INPUTS — continued
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Swap Agreements
Interest rate risk
  $ —     $ 492,245     $ —     $ 492,245  
                                 
Total
  $ 69,748,185     $ 42,150,094     $ —     $ 111,898,279  
                                 
 
LIABILITY VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Liabilities
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Derivatives*
                               
Forward Currency Contracts Foreign currency risk
  $ —     $ (633,922 )   $      —     $ (633,922 )
Futures Contracts
Interest Rate risk
    (120,966 )     —       —       (120,966 )
Swap Agreements
Credit risk
    —       (294,730 )     —       (294,730 )
Interest rate risk
    —       (12,266 )     —       (12,266 )
Written Options
Foreign currency risk
    —       (12,568 )     —       (12,568 )
                                 
Total
  $ (120,966 )   $ (953,486 )   $ —     $ (1,074,452 )
                                 
 
The risks referenced above are not intended to be inclusive of all risks. Please see the Investment Risks and Derivative Financial Instruments sections below for a further discussion of risks.
 
* Because the tables above are based on market values or unrealized appreciation (depreciation) rather than the notional amounts of derivatives, the uncertainties surrounding the valuation inputs for a derivative are likely to be more significant to the Fund’s net asset value than the uncertainties surrounding inputs for a non-derivative security with the same market value.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.

         
        19

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The underlying funds held at period end are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements. The aggregate net values of the Fund’s investments (both direct and indirect) in securities and derivative financial instruments using Level 3 inputs were 34.9% and (0.1)% of total net assets, respectively.
 
The following is a reconciliation of investments and derivatives, if any, in which significant unobservable inputs (Level 3) were used in determining value:
 
                                                                           
 
                                      Net Change in
                                      Unrealized
                                      Appreciation
                                      (Depreciation)
    Balances
               Change in
           Balances
     from Investments
    as of
   Net
   Accrued
   Total
   Unrealized
           as of
     Still held as
    February 28,
   Purchases/
   Discounts/
   Realized
   Appreciation
   Transfers into
   Transfers out
   February 28,
     of February 28,
    2010   (Sales)   Premiums   Gain/(Loss)   (Depreciation)   Level 3*   of Level 3*   2011     2011
Swap Agreements
  $ 17,943     $ (109,200 )   $      —     $ (109,200 )   $ (94,273 )   $      —     $ 294,730 **   $ —       $ —  
                                                                           
Total
  $ 17,943     $ (109,200 )   $ —     $ (109,200 )   $ (94,273 )   $ —     $ 294,730     $      —       $      —  
                                                                           
 
            * The Fund accounts for investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the value at the end of the period.
            ** Financial assets transferred between Level 2 and Level 3 were due to a change in observable and/or unobservable inputs.
 
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 pm. Income and expenses denominated in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.
 
Repurchase agreements
The Fund may enter into repurchase agreements. Under a repurchase agreement 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 it acquired under the repurchase agreement. The value of the securities acquired is required by contract to be marked

         
20
       

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
to market daily and additional collateral is required to be transferred so that the market value is at least equal to the amount owed to the Fund by the seller. If the seller of a repurchase agreement defaults or enters into insolvency proceedings and/or the value of the securities subject to the repurchase agreement is insufficient, the Fund’s recovery of cash from the seller may be delayed and the Fund may incur a loss equal to the difference between the cash it paid and the value of the securities. The Fund had no repurchase agreements outstanding at the end of the period.
 
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at an agreed upon price and date. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which generally causes the Fund’s portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the event of a buyer’s bankruptcy or insolvency, the Fund’s use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund’s right to repurchase the securities. As of February 28, 2011, the Fund had received $2,217,500 from reverse repurchase agreements relating to securities with a market value, plus accrued interest, of $2,272,378. Reverse repurchase agreements outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Inflation-indexed bonds
The Fund may invest in inflation indexed bonds. Inflation indexed bonds are fixed income securities whose principal value is adjusted periodically according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that reflects inflation in the principal value of the bond. Most other issuers pay out any inflation related accruals as part of a semiannual coupon.
 
The value of inflation indexed bonds is expected to change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates (i.e., stated interest rates) and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates (i.e. nominal interest rate minus inflation) might decline, leading to an increase in value of inflation indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation indexed bonds. There can be no assurance, however, that the value of inflation indexed bonds will be directly correlated to changes in nominal interest rates, and short term increases in inflation may lead to a decline in their value. Coupon payments received by the Fund from inflation indexed bonds are included in the Fund’s gross income for the period in which they accrue. In addition, any increase or decrease in the principal amount of an

         
        21

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
inflation indexed bond will increase or decrease taxable ordinary income to the Fund, even though principal is not paid until maturity. Inflation-indexed bonds outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country’s tax treaty with the United States. The foreign withholding rates applicable to a Fund’s investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Taxes related to capital gains realized during the year ended February 28, 2011, if any, are reflected as part of Net realized gain (loss) in the Statement of Operations. Changes in tax liabilities related to capital gain taxes on unrealized gains, if any, are reflected as part of Change in net unrealized appreciation (depreciation) in the Statement of Operations. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards, derivative contract transactions, differing treatment for security transactions, foreign currency transactions, partnership interest tax allocations, losses on wash sale transactions and post-October capital losses.

         
22
       

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 7,001,558     $ 40,402,952  
                 
Total distributions
  $ 7,001,558     $ 40,402,952  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 3,301,606  
         
Other Tax Attributes:
       
Capital loss carryforwards
  $ (57,631,863 )
Post-October capital loss deferral
  $ (987,117 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 28, 2015
  $ (23,687,952 )
February 29, 2016
    (507,910 )
February 28, 2017
    (20,766,787 )
February 28, 2018
    (8,506,660 )
February 28, 2019
    (4,162,554 )
         
Total
  $ (57,631,863 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 120,490,856     $ 2,071,860     $ (13,970,143 )   $ (11,898,283 )    
 
On October 12, 2006, the Fund paid a dividend under Code Section 860 of $0.09229 per share to shareholders of record as of October 11, 2006. It is anticipated the Fund will be required to make a

         
        23

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
payment, estimated to be $830,768, to the Internal Revenue Service (“IRS”) related to such dividend, which has been included in accrued expenses on the Statement of Assets and Liabilities. The Manager will make a reimbursement payment to the Fund concurrent with the Fund’s payment to the IRS.
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 28, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 5).

         
24
       

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
Purchases and redemptions of Fund shares
Purchase premiums and redemption fees are paid to and retained by the Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. Such fees are recorded as a component of the Fund’s net share transactions. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of the Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund’s shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund’s shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder’s securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of the Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions the day after those orders are received by the broker or agent.
 
Other matters
SPHF, an investment of the Fund, has litigation pending against various entities related to the 2002 fraud and related default of securities previously held by SPHF. The outcome of the lawsuits against the remaining defendants is not known and any potential recoveries are not reflected in the net asset value of SPHF. For the year ended February 28, 2011, the Fund received no distributions from SPHF in connection with the defaulted securities or the related litigation.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment

         
        25

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund’s foreign currency holdings and investments denominated in foreign currencies.
 
• Market Risk — Fixed Income Securities — Typically, the value of the Fund’s fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
 
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
 
• Credit and Counterparty Risk — The Fund runs the risk that the issuer or guarantor of a fixed income security, the counterparty to an over-the-counter derivatives contract, a borrower of the Fund’s securities or the obligor of an obligation underlying an asset-backed security will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations. This risk is particularly pronounced for the Fund because it typically uses over-the-counter derivatives, including swap contracts with longer-term maturities, and may have significant exposure to a single counterparty. The risk of counterparty default is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions.
 
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in underlying funds, including the risk that the underlying funds in which it invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments.
 
Other principal risks of an investment in the Fund include Foreign Investment Risk (risk that the market prices of foreign securities will fluctuate more rapidly and to a greater extent than those of U.S. securities); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities lending); Focused Investment Risk (increased risk from the Fund’s focus on investments in countries, regions, sectors or companies with high positive correlations to one another); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations);

         
26
       

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, accredited investors, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
 
The most significant market risk for Funds investing in fixed income securities is that the securities in which they invest experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund because it invests in asset-backed securities. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as “collateralized debt obligations” or “collateralized loan obligations”) and by the fees earned by service providers. Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. Many asset-backed securities owned (directly or indirectly) by the Fund that were once rated investment grade are now rated below investment grade as of the date of this report.
 
The existence of insurance on an asset-backed security does not guarantee that principal and/or interest will be paid because the insurer could default on its obligations. In recent years, a significant number of asset-backed security insurers have defaulted on their obligations.
 
With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g.,

         
        27

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.
 
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and a Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.
 
The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution’s business may have a material impact on multiple investments.
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps or other derivatives on an index, a single security or a basket of securities to gain investment exposures (e.g., by selling protection under a credit default swap). The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). For example, the Fund may use credit default swaps to take a short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or

         
28
       

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
make new direct investments. For instance, the Manager may alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund’s exposure to the credit of an issuer through the debt instrument, but adjust the Fund’s interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed versus variable rates and shorter duration versus longer duration exposure. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral (e.g., foreign currency forwards; see “Currency Risk” above), that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.

         
        29

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
 
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund’s forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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.
 
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. During the year ended February 28, 2011, the Fund used forward currency contracts to adjust exposure to foreign currencies and otherwise adjust currency exchange rate risk. Forward currency contracts outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash,

         
30
       

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. During the year ended February 28, 2011, the Fund used futures contracts to adjust interest-rate exposure and enhance the diversity and liquidity of the portfolio. Futures contracts outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. During the year ended February 28, 2011, the Fund used purchased currency option contracts to adjust exposure to currencies and otherwise manage currency exchange rate risk. Option contracts purchased by the Fund and outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. During

         
        31

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
the period ended February 28, 2011, the Fund used written currency option contracts to adjust exposure to currencies and otherwise manage currency exchange rate risk. Written options outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
For the year ended February 28, 2011, investment activity in options contracts written by the Fund was as follows:
 
                                                 
    Puts   Calls
    Principal
   Number
       Principal
   Number
    
    Amount
   of Futures
       Amount
   of Futures
    
    of Contracts   Contracts   Premiums   of Contracts   Contracts   Premiums
 
Outstanding, beginning of year
    —            —     $ —            —            —     $      —  
Options written
    (8,000,000 )     —       (157,744 )     —       —       —  
Options exercised
    —       —       —       —       —       —  
Options expired
    —       —       —       —       —       —  
Options sold
    —       —       —       —       —       —  
                                                 
Outstanding, end of year
    (8,000,000 )     —     $ (157,744 )     —       —     $ —  
                                                 
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.

         
32
       

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price

         
        33

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the year ended February 28, 2011, the Fund used swap agreements to adjust interest rate exposure, achieve exposure to a reference entity’s credit, and/or provide a measure of protection against default loss. Swap agreements outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.

         
34
       

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
Fair values of derivative instruments on the Statement of Assets and Liabilities as of
February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Assets:
                                               
Investments, at value (purchased options)
  $ —     $ 42,730     $ —     $      —     $      —     $ 42,730  
Unrealized appreciation on futures contracts *
    268,973       —       —       —       —       268,973  
Unrealized appreciation on forward currency contracts
    —       2,544,488       —       —       —       2,544,488  
Unrealized appreciation on swap agreements
    492,245       —       —       —       —       492,245  
                                                 
Total
  $ 761,218     $ 2,587,218     $ —     $ —     $ —     $ 3,348,436  
                                                 
Liabilities:
                                               
Written options outstanding
  $ —     $ (12,568 )   $ —     $ —     $ —     $ (12,568 )
Unrealized depreciation on futures contracts *
    (120,966 )     —       —       —       —       (120,966 )
Unrealized depreciation on forward currency contracts
    —       (633,922 )     —       —       —       (633,922 )
Unrealized depreciation on swap agreements
    (12,266 )     —       (294,730 )     —       —       (306,996 )
                                                 
Total
  $ (133,232 )   $ (646,490 )   $ (294,730 )   $ —     $ —     $ (1,074,452 )
                                                 
 
The Effect of Derivative Instruments on the Statement of Operations for the Period Ended February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign exchange
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Futures contracts
  $ 3,252,992     $ —     $ —     $      —     $      —     $ 3,252,992  
Forward currency contracts
    —       1,301,860       —       —       —       1,301,860  
Swap contracts
    (234,866 )     —       (109,200 )     —       —       (344,066 )
                                                 
Total
  $ 3,018,126     $ 1,301,860     $ (109,200 )   $ —     $ —     $ 4,210,786  
                                                 

         
        35

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Effect of Derivative Instruments on the Statement of Operations for the Period Ended February 28, 2011Ù: — continued
 
                                                 
    Interest rate
   Foreign exchange
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Change in Unrealized Appreciation (Depreciation) on:
                                               
Investments (purchased options)
  $ —     $ (259,547 )   $ —     $ —     $ —     $ (259,547 )
Written options
    —       145,176       —       —       —       145,176  
Futures contracts
    (715,546 )     —       —               —       (715,546 )
Forward currency contracts
    —       2,023,813       —       —       —       2,023,813  
Swap contracts
    231,129       —       (312,673 )     —       —       (81,544 )
                                                 
Total
  $ (484,417 )   $ 1,909,442     $ (312,673 )   $ —     $ —     $ 1,112,352  
                                                 
 
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
            * The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.
 
The volume of derivative activity, based on absolute values (forward currency contracts and futures contracts), or notional amounts (swap agreements), or principal amounts (options) outstanding at each month-end, was as follows for the year ended February 28, 2011:
 
                                 
    Forward
            
    currency
   Futures
   Swap
    
    contracts   contracts   agreements   Options
 
Average amount outstanding
  $ 174,068,077     $ 96,535,844     $ 121,664,871     $ 5,326,666  
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.25% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares. The Manager has contractually agreed through at least June 30, 2011 to waive the Fund’s shareholder service fee to the extent that the aggregate of any direct and indirect shareholder service fees borne by the Fund exceeds 0.15%; provided, however, that the amount of this waiver will not exceed 0.15%.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.25% of the Fund’s average daily net assets (the “Expense Reimbursement

         
36
       

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in other GMO Funds (excluding those Funds’ Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund’s Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $3,808 and $1,159, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
                   
Indirect Net
 		                 
Expenses
                  
(excluding
                  
Shareholder service
     Indirect
            
fees and interest
     Shareholder
     Indirect Interest
     Total Indirect
expense)     Service Fees     Expense     Expenses
0.019%
    0.005%     0.012%     0.036%
                   

         
        37

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
6. Purchases and sales of securities
 
For the year ended February 28, 2011, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
 
                 
    Purchases   Sales
 
U.S. Government securities
  $ 4,925,905     $ 4,887,048  
Investments (non-U.S. Government securities)
    63,753,458       147,232,736  
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 78.15% of the outstanding shares of the Fund were held by four shareholders, each holding more than 10% of the Fund’s outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
 
As of February 28, 2011, 2.97% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and 36.70% of the Fund’s shares were held by accounts for which the Manager had investment discretion.

         
38
       

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    21,637     $ 149,794       655,777     $ 4,339,722  
Shares issued to shareholders in reinvestment of distributions
    661,554       4,525,027       1,101,072       7,286,041  
Shares repurchased
    (17,120,840 )     (115,215,967 )     (4,346,752 )     (27,907,223 )
Redemption fees
    —       —       —       83,993  
                                 
Net increase (decrease)
    (16,437,649 )   $ (110,541,146 )     (2,589,903 )   $ (16,197,467 )
                                 
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                         
    Value,
               Distributions
   Return
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   of
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   Capital   period
 
GMO Emerging Country Debt Fund, Class III
  $ 9,209,717     $ 187,377     $ 9,903,627     $ 187,377     $ —     $ —     $ —  
GMO Emerging Country Debt Fund, Class IV
    —       4,782,039       1,800,000       278,412       —       —       3,312,292  
GMO Short-Duration Collateral Fund
    95,722,342       —       31,000,000       932,398       —       28,119,864       41,317,873  

         
        39

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
                                                         
    Value,
               Distributions
   Return
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   of
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   Capital   period
 
GMO Special Purpose Holding Fund
  $ 20,606     $ —     $ —     $ —     $ —     $ —     $ 18,733  
GMO U.S. Treasury Fund
    2,918,168       36,703,231       38,021,000       3,098       133       —       1,600,199  
GMO World Opportunity Overlay Fund
    45,924,652       2,650,000       28,600,000       —       —       —       22,044,168  
                                                         
Totals
  $ 153,795,485     $ 44,322,647     $ 109,324,627     $ 1,401,285     $ 133     $ 28,119,864     $ 68,293,265  
                                                         

         
40
       

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO International Bond Fund:
 
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 (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian, brokers, and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
        41

 

GMO International Bond Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
42
       

 

 
GMO International Bond Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.42 %   $ 1,000.00     $ 1,052.20     $ 2.14  
2) Hypothetical
    0.42 %   $ 1,000.00     $ 1,022.71     $ 2.11  
                                 
 
            * Expenses are calculated using the annualized expense ratio (including interest expense and indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
        43

 

GMO International Bond Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
Of the ordinary income distributions made by the Fund during the fiscal year ended February 28, 2011, 5.14% is derived from investments in U.S. Government and Agency Obligations. All or a portion of the distributions from this income may be exempt from taxation at the state level. Consult your tax advisor for state specific information.

         
44        

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
   Position(s)
   Length of Time
   During Past
   Complex
     Other Directorships
Date of Birth   Held with the Trust   Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of
Trustees since March 2005;
Lead Independent Trustee (September 2004 – March 2005);
Trustee since
December 2000. 		  Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman
Professor of
Financial Management,
Harvard Business
School (since 1989). 		    63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
        45

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
   Position(s)
   Length of Time
   During Past
   Complex
     Other Directorships
Date of Birth   Held with the Trust   Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier
Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007). 		    63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
   Position(s)
   Length of Time
   During Past
   Complex
     Other Directorships
Date of Birth   Held with Trust   Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee; President
and Chief Executive
Officer of the
Trust 		  Trustee since
March 2010;
President and
Chief Executive Officer since March 2009. 		  General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
46        

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        47

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
48        

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO International Core Equity Fund
(A Series of GMO Trust)
 
Portfolio Managers
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Quantitative Equity Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
The Class III shares of GMO International Core Equity Fund returned +22.6% for the fiscal year ended February 28, 2011, as compared with +20.0% for the MSCI EAFE Index.
 
Stock selection had a positive impact on performance relative to the benchmark. An underweight position in British oil company BP and overweight positions in Canadian auto parts maker Magna International and British luxury goods retailer Burberry Group were among the biggest contributors. On the negative side were holdings in French pharmaceutical Sanofi-Aventis and Japanese financial Resona Holdings.
 
Country selection had a positive impact on relative performance. The Fund’s underweight to Australia, which underperformed, helped relative performance while the Fund’s underweight to Germany, which outperformed, hurt.
 
Sector selection had a negative impact on performance relative to the benchmark. The positive impact from overweighting Consumer Discretionary, which outperformed, and underweighting Financials, which underperformed, was offset largely by the negative impact from overweighting Health Care, which underperformed.
 
Currency selection had a positive impact on relative performance, mainly from the Fund’s underweight to the euro.
 
Because some of the securities and instruments held directly or indirectly by the Fund had positive fair value adjustments during the fiscal year (and the performance of indices are not fair valued), the Fund’s absolute and relative performance is better than it otherwise would have been.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice. References to specific securities are not recommendations of such securities and may not be representative of any GMO portfolio’s current or future investments.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO International Core Equity Fund Class III Shares and the MSCI EAFE Index
As of February 28, 2011
 
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited. Performance for classes may vary due to different fees.
 
 
† The Fund is the successor to the GMO International Disciplined Equity Fund, therefore, performance for the periods prior to September 16, 2005 is that of GMO International Disciplined Equity Fund.
MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.

 

GMO International Core Equity Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary   % of Total Net Assets  
Common Stocks
    95.5 %
Short-Term Investments
    1.7  
Preferred Stocks
    1.2  
Mutual Funds
    0.9  
Futures Contracts
    0.1  
Rights and Warrants
    0.0  
Forward Currency Contracts
    (0.1 )
Other
    0.7  
         
      100.0 %
         
 
         
Country Summary*   % of Investments  
Japan
    24.3 %
United Kingdom
    21.7  
France
    10.9  
Germany
    8.8  
Italy
    6.8  
Switzerland
    5.5  
Sweden
    3.3  
Singapore
    2.9  
Australia
    2.7  
Netherlands
    1.9  
Spain
    1.9  
Denmark
    1.7  
Hong Kong
    1.6  
Canada
    1.2  
Finland
    1.1  
Belgium
    0.9  
Ireland
    0.8  
Austria
    0.6  
Greece
    0.5  
Israel
    0.3  
New Zealand
    0.3  
Norway
    0.3  
Malta
    0.0 Ù
Portugal
    0.0 Ù
         
      100.0 %
         
 
* The table above shows country exposure in the Fund. The table excludes short-term investments. The table includes exposure through derivative financial instruments. The table excludes exposure through forward currency contracts, if any. The table takes into account the market value of securities and options and the notional amounts of swap agreements and other derivative financial instruments, if any.
Ù Rounds to 0.0%.

         
        1

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2011 (Unaudited)
 
         
Industry Group Summary   % of Equity Investments**  
Pharmaceuticals, Biotechnology & Life Sciences
    15.1 %
Energy
    12.8  
Capital Goods
    10.0  
Materials
    8.4  
Telecommunication Services
    7.1  
Automobiles & Components
    6.9  
Banks
    6.5  
Utilities
    4.7  
Retailing
    3.6  
Food, Beverage & Tobacco
    3.3  
Consumer Durables & Apparel
    3.1  
Real Estate
    3.0  
Diversified Financials
    2.4  
Technology Hardware & Equipment
    2.2  
Media
    1.7  
Food & Staples Retailing
    1.6  
Transportation
    1.6  
Software & Services
    1.2  
Semiconductors & Semiconductor Equipment
    1.1  
Household & Personal Products
    1.0  
Consumer Services
    1.0  
Insurance
    0.8  
Health Care Equipment & Services
    0.5  
Commercial & Professional Services
    0.4  
         
      100.0 %
         
 
** Equity investments may consist of common stocks and other stock-related securities, such as preferred stocks. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.

         
2
       

 

GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            COMMON STOCKS — 95.5%        
                     
            Australia — 4.6%        
      255,994     BHP Billiton Ltd     12,096,790  
      4,355,114     BlueScope Steel Ltd     9,333,488  
      1,137,490     Boart Longyear Group     5,398,039  
      2,003,355     Charter Hall Office (REIT)     6,527,505  
      546,405     Commonwealth Bank of Australia     29,701,225  
      7,985,316     Dexus Property Group (REIT)     6,985,705  
      3,525,604     Goodman Fielder Ltd     4,489,156  
      12,346,449     Goodman Group (REIT)     8,848,740  
      4,437,857     GPT Group (REIT)     14,095,536  
      6,653,144     ING Industrial Fund Unit     3,599,988  
      9,727,652     ING Office Fund     6,070,319  
      3,719,347     Mirvac Group (REIT)     4,947,008  
      159,503     Newcrest Mining Ltd     6,164,834  
      1,508,014     OneSteel Ltd     4,181,738  
      3,612,133     Pacific Brands Ltd *     3,274,864  
      2,376,736     Qantas Airways Ltd *     5,694,510  
      241,906     QBE Insurance Group Ltd     4,481,417  
      153,667     Rio Tinto Ltd     13,417,540  
      4,635,125     Stockland (REIT)     18,036,043  
      446,752     Suncorp-Metway Ltd     3,835,184  
      1,087,325     TABCORP Holdings Ltd     8,447,294  
      10,075,216     Telstra Corp Ltd     28,688,753  
      458,696     Wesfarmers Ltd     15,537,963  
      330,897     Westfield Group (REIT)     3,299,091  
      377,374     Woodside Petroleum Ltd     16,456,630  
      407,311     Woolworths Ltd     11,174,451  
                     
            Total Australia     254,783,811  
                     
                     
            Austria — 0.6%        
      74,343     Erste Group Bank AG     3,921,841  
      1,225,432     Immofinanz AG *     5,411,503  
      376,070     OMV AG     15,981,090  

         
    See accompanying notes to the financial statements.   3

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Austria — continued        
      98,205     Raiffeisen International Bank Holding     5,898,155  
      86,920     Voestalpine AG     4,018,959  
                     
            Total Austria     35,231,548  
                     
                     
            Belgium — 0.9%        
      2,668,574     Ageas     8,466,270  
      1     Anheuser-Busch InBev NV     56  
      249,113     Belgacom SA     9,344,566  
      182,839     Colruyt SA     9,188,776  
      83,972     Delhaize Group     6,486,354  
      1,427,339     Dexia SA *     6,235,820  
      84,698     KBC Groep NV *     3,542,059  
      123,603     Umicore SA     6,231,849  
                     
            Total Belgium     49,495,750  
                     
                     
            Canada — 2.4%        
      345,800     Barrick Gold Corp     18,251,890  
      271,900     BCE Inc     10,080,632  
      1,087,400     EnCana Corp     35,345,676  
      399,500     Magna International Inc Class A     19,675,853  
      187,400     Methanex Corp     5,452,934  
      108,200     Metro Inc Class A     4,900,211  
      81,600     National Bank of Canada     6,287,454  
      150,700     Research In Motion Ltd *     9,950,497  
      321,200     Sun Life Financial Inc     10,668,647  
      169,600     Teck Resources Ltd Class B     9,382,945  
      522,100     Yellow Media Inc     2,993,255  
                     
            Total Canada     132,989,994  
                     
                     
            Denmark — 1.7%        
      82,169     Carlsberg A/S Class B     8,727,538  
      240,293     Danske Bank A/S *     5,632,767  
      631,340     Novo-Nordisk A/S Class B     79,575,548  
                     
            Total Denmark     93,935,853  
                     

         
4
  See accompanying notes to the financial statements.    

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Finland — 1.1%        
      235,884     Metso Oyj     12,201,746  
      347,677     Neste Oil Oyj     6,166,221  
      1,504,292     Nokia Oyj     12,969,496  
      137,300     Sampo Oyj Class A     4,249,517  
      891,029     Stora Enso Oyj Class R     10,037,423  
      121,409     Tieto Oyj     2,330,685  
      722,983     UPM – Kymmene Oyj     14,357,055  
                     
            Total Finland     62,312,143  
                     
                     
            France — 10.8%        
      96,754     Arkema     7,074,149  
      534,238     BNP Paribas     41,694,715  
      75,140     Casino Guichard-Perrachon SA     7,357,774  
      85,131     Compagnie de Saint-Gobain     5,084,783  
      85,715     Essilor International SA     6,125,437  
      612,896     France Telecom SA     13,562,658  
      60,823     Hermes International     13,231,125  
      89,910     L’Oreal SA     10,461,266  
      239,511     Lagardere SCA     10,780,393  
      245,784     LVMH Moet Hennessy Louis Vuitton SA     38,763,018  
      21,810     Nexans SA     1,977,658  
      131,879     Peugeot SA *     5,282,202  
      72,865     PPR     11,054,809  
      234,945     Renault SA *     14,407,434  
      462,083     Rhodia SA     13,317,531  
      206,597     Safran SA     7,353,507  
      2,137,827     Sanofi-Aventis     147,826,292  
      85,015     Schneider Electric SA     14,081,293  
      286,270     Societe Generale     20,129,278  
      18,922     Technip SA     1,870,050  
      2,447,550     Total SA     150,034,866  
      156,829     Valeo SA *     9,774,369  

         
    See accompanying notes to the financial statements.   5

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            France — continued        
      1,270,414     Vivendi SA     36,207,869  
      144,324     Wendel     14,893,797  
                     
            Total France     602,346,273  
                     
                     
            Germany — 6.3%        
      59,686     Adidas AG     3,833,015  
      80,854     Aixtron AG     3,347,519  
      172,634     Aurubis AG     9,198,134  
      346,688     BASF AG     28,906,842  
      387,751     Bayerische Motoren Werke AG     31,501,850  
      806,774     Daimler AG (Registered) *     57,014,026  
      439,129     Deutsche Lufthansa AG (Registered) *     8,996,581  
      76,381     Dialog Semiconductor Plc *     1,567,443  
      1,591,488     E.ON AG     52,272,137  
      2,233,039     Infineon Technologies AG     24,531,075  
      302,876     Kloeckner & Co AG *     9,880,771  
      279,191     Lanxess AG     20,803,600  
      83,686     Leonische Drahtwerke AG *     3,511,970  
      114,505     MAN SE     14,593,359  
      175,079     MTU Aero Engines Holding AG     11,698,911  
      67,976     RWE AG     4,596,813  
      110,628     Salzgitter AG     9,206,033  
      415,716     SAP AG     25,121,169  
      37,435     Siemens AG (Registered)     5,061,395  
      70,076     Software AG     11,330,040  
      120,324     Stada Arzneimittel AG     4,818,636  
      243,706     Suedzucker AG     6,707,106  
      25,110     Volkswagen AG     3,819,695  
                     
            Total Germany     352,318,120  
                     

         
6
  See accompanying notes to the financial statements.    

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Greece — 0.4%        
      990,702     Alpha Bank A.E. *     6,549,442  
      823,578     National Bank of Greece SA *     7,656,800  
      517,515     OPAP SA     10,805,333  
                     
            Total Greece     25,011,575  
                     
                     
            Hong Kong — 1.5%        
      2,264,000     Cathay Pacific Airways Ltd     5,279,573  
      2,532,221     CLP Holdings Ltd     20,625,261  
      1,406,600     Esprit Holdings Ltd     6,923,052  
      2,417,500     Hong Kong Electric Holdings Ltd     15,803,931  
      967,000     Hutchison Whampoa Ltd     11,420,167  
      9,275,000     Pacific Basin Shipping Ltd     5,445,508  
      427,000     Sun Hung Kai Properties Ltd     6,939,445  
      526,500     Swire Pacific Ltd     7,388,815  
      1,959,000     Yue Yuen Industrial Holdings     6,180,600  
                     
            Total Hong Kong     86,006,352  
                     
                     
            Ireland — 0.8%        
      1,043,269     C&C Group Plc     5,085,565  
      914,141     CRH Plc     21,139,905  
      226,171     DCC Plc     7,259,123  
      259,848     Kerry Group Plc Class A     9,429,325  
                     
            Total Ireland     42,913,918  
                     
                     
            Israel — 0.3%        
      2,539,190     Bezeq Israeli Telecommunication Corp Ltd     6,890,014  
      467,596     Israel Chemicals Ltd     7,786,619  
      214,666     Partner Communications Co Ltd     3,988,397  
                     
            Total Israel     18,665,030  
                     
                     
            Italy — 5.5%        
      104,575     Bulgari SPA     1,108,558  
      12,730,364     Enel SPA     75,863,762  
      5,517,205     ENI SPA     134,523,649  

         
    See accompanying notes to the financial statements.   7

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Italy — continued        
      493,612     Fiat SPA     4,583,967  
      517,754     Fondiaria – Sai SPA     4,900,166  
      415,093     Mediobanca SPA     4,394,521  
      328,864     Recordati SPA     3,074,944  
      347,826     Saipem SPA     17,571,607  
      1,703,817     Snam Rete Gas SPA     9,322,440  
      8,253,299     Telecom Italia SPA     12,885,240  
      13,861,075     Telecom Italia SPA-Di RISP     18,345,903  
      1,777,635     Terna SPA     8,199,976  
      6,119,544     UniCredit SPA     15,744,419  
                     
            Total Italy     310,519,152  
                     
                     
            Japan — 23.2%        
      2,978     Advance Residence Investment Corp (REIT)     6,205,893  
      200,100     Aeon Co Ltd     2,524,699  
      1,365,000     All Nippon Airways Co Ltd *     4,937,421  
      1,291,500     Alps Electric Co Ltd     17,408,647  
      221,000     Anritsu Corp     2,074,484  
      190,000     Asahi Diamond Industrial Co Ltd     3,674,075  
      672,600     Astellas Pharma Inc     26,447,359  
      268,800     Canon Inc     12,999,006  
      1,740     CyberAgent Inc     5,583,431  
      522,450     Daiei Inc *     2,130,025  
      914,000     Daiichi Chuo Kisen Kaisha *     2,226,469  
      1,775,000     Daikyo Inc *     3,455,417  
      1,365,000     Dainippon Ink and Chemicals Inc     3,640,425  
      652,000     Dainippon Screen Manufacturing Co Ltd *     6,343,827  
      354,800     Daito Trust Construction Co Ltd     29,073,539  
      650,000     Daiwabo Co Ltd     1,593,182  
      389,800     Dena Co Ltd     15,128,812  
      253,900     Don Quijote Co Ltd     8,877,413  
      241,900     Eisai Co Ltd     9,062,077  
      253,300     Fanuc Ltd     39,567,786  
      75,900     Fast Retailing Co Ltd     11,916,659  

         
8
  See accompanying notes to the financial statements.    

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Japan — continued        
      1,682,000     Fuji Electric Holdings Co Ltd     5,710,042  
      1,778,000     Fuji Heavy Industries Ltd     15,321,110  
      193,300     Fuji Oil Co Ltd     2,760,955  
      637,000     Gunze Ltd     2,738,469  
      1,196,000     Hanwa Co Ltd     5,578,672  
      1,487,500     Haseko Corp *     1,391,135  
      119,400     Hikari Tsushin Inc     2,925,059  
      5,345,000     Hitachi Ltd     32,531,920  
      990,900     Honda Motor Co Ltd     43,245,032  
      1,067     INPEX Corp     7,497,679  
      4,391,000     Isuzu Motors Ltd     19,856,090  
      1,475,000     Itochu Corp     15,338,640  
      253,900     JFE Holdings Inc     8,040,850  
      7,041,130     JX Holdings Inc     49,601,073  
      329,820     K’s Holdings Corp     11,138,878  
      3,513,000     Kajima Corp     9,417,115  
      959     Kakaku.com Inc     5,620,658  
      790,800     Kao Corp     21,360,172  
      3,169,000     Kawasaki Kisen Kaisha Ltd     13,868,951  
      3,904     KDDI Corp     25,352,820  
      645,900     Komatsu Ltd     19,815,357  
      329,000     Konami Corp     6,954,927  
      125,000     Lawson Inc     6,155,205  
      1,412,500     Leopalace21 Corp *     2,384,795  
      2,052,000     Marubeni Corp     15,750,213  
      4,805,000     Mazda Motor Corp     12,444,161  
      50,904     Meiji Holdings Co Ltd     2,400,242  
      1,660,500     Mitsubishi Chemical Holdings Corp     12,177,673  
      242,900     Mitsubishi Corp     6,758,026  
      1,311,000     Mitsubishi Electric Corp     15,577,913  
      168,890     Mitsubishi UFJ Lease & Finance Co Ltd     7,504,027  
      1,349,000     Mitsui OSK Lines Ltd     8,970,178  
      10,326,800     Mizuho Financial Group Inc     21,286,918  
      87,000     Murata Manufacturing Co Ltd     6,485,745  

         
    See accompanying notes to the financial statements.   9

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Japan — continued        
      2,060     Net One Systems Co Ltd     3,317,660  
      32,900     Nintendo Co Ltd     9,675,407  
      4,090,000     Nippon Light Metal Co Ltd *     8,808,843  
      1,946,000     Nippon Steel Corp     7,077,223  
      671,800     Nippon Telegraph & Telephone Corp     32,863,034  
      700,000     Nippon Yakin Koguo Co Ltd *     1,989,336  
      2,823,000     Nippon Yusen KK     12,485,489  
      3,323,700     Nissan Motor Co Ltd     34,151,355  
      113,450     Nitori Co Ltd     10,044,831  
      249,400     Nitto Denko Corp     15,123,760  
      584,000     NSK Ltd     5,588,006  
      19,971     NTT Docomo Inc     37,517,034  
      1,876,000     Obayashi Corp     8,439,343  
      534,000     OKUMA Corp *     5,041,945  
      239,200     Omron Corp     6,669,748  
      125,100     Ono Pharmaceutical Co Ltd     6,550,059  
      216,880     ORIX Corp     24,425,403  
      3,705,000     Osaka Gas Co Ltd     14,109,000  
      2,116,900     Pioneer Corp *     11,446,235  
      124,100     Point Inc     5,966,956  
      2,300,800     Resona Holdings Inc     12,569,438  
      514,000     Ricoh Company Ltd     6,858,256  
      768,400     Round One Corp     5,050,951  
      119,500     Ryohin Keikaku Co Ltd     5,683,888  
      193,700     Sankyo Co Ltd     10,970,871  
      41,600     Sawai Pharmaceuticals Co Ltd     3,904,254  
      162,800     Secom Co Ltd     8,218,911  
      425,800     Seven & I Holdings Co Ltd     11,885,451  
      414,300     SoftBank Corp     17,033,568  
      5,469,000     Sojitz Corp     12,334,432  
      729,000     Sumitomo Heavy Industries Ltd     5,142,681  
      1,907,000     Sumitomo Corp     28,332,688  
      2,344,068     Sumitomo Trust & Banking Co Ltd     14,935,479  
      6,697,000     Taiheiyo Cement Co Ltd *     9,963,482  

         
10
  See accompanying notes to the financial statements.    

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Japan — continued        
      3,576,000     Taisei Corp     8,482,356  
      311,000     Taisho Pharmaceutical Co Ltd     6,814,576  
      1,510,300     Takeda Pharmaceutical Co Ltd     75,243,078  
      393,280     Takefuji Corp (a) (b)     4,808  
      1,384,000     Tokyo Gas Co Ltd     6,187,257  
      665,700     Tokyo Steel Manufacturing Co     7,437,449  
      2,066,000     Tokyo Tatemono Co Ltd     9,752,661  
      356,000     TonenGeneral Sekiyu KK     4,204,018  
      993,900     Toyota Motor Corp     46,442,372  
      782,800     Toyota Tsusho Corp     14,864,397  
      451,000     Tsugami Corp     3,391,212  
      75,700     Unicharm Corp     2,930,800  
      792,000     UNY Co Ltd     7,904,125  
      58,670     USS Co Ltd     4,760,853  
      234,420     Yamada Denki Co Ltd     17,907,033  
      806,000     Zeon Corp     8,269,819  
                     
            Total Japan     1,297,603,177  
                     
                     
            Malta — 0.0%        
      15,998,662     BGP Holdings Plc *     —  
                     
                     
            Netherlands — 1.9%        
      56,586     Boskalis Westminster     2,940,788  
      200,804     CSM     7,140,302  
      271,398     Heineken NV     13,996,482  
      4,584,013     ING Groep NV *     57,504,285  
      1,078,654     Koninklijke BAM Groep NV     6,921,072  
      117,559     Koninklijke DSM NV     6,905,808  
      2     Koninklijke Philips Electronics NV     65  
      2     Reed Elsevier NV     26  
      83,577     Wereldhave NV (REIT)     8,490,530  
                     
            Total Netherlands     103,899,358  
                     

         
    See accompanying notes to the financial statements.   11

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            New Zealand — 0.3%        
      1,053,568     Fletcher Building Ltd     6,991,553  
      6,982,140     Telecom Corp of New Zealand     10,991,408  
                     
            Total New Zealand     17,982,961  
                     
                     
            Norway — 0.3%        
      163,421     Acergy SA     4,209,872  
      4     DnB NOR ASA     62  
      108,680     Frontline Ltd     2,943,612  
      132,109     Yara International ASA     7,014,475  
                     
            Total Norway     14,168,021  
                     
                     
            Portugal — 0.0%        
      433,396     EDP – Energias de Portugal SA     1,644,172  
                     
                     
            Singapore — 2.3%        
      3,449,000     CapitaCommercial Trust (REIT)     3,744,758  
      954,000     Ezra Holdings Ltd     1,175,849  
      747,000     Fraser & Neave Ltd     3,307,256  
      8,485,000     Genting Singapore Plc *     12,776,663  
      35,619,000     Golden Agri-Resources Ltd     18,269,931  
      2,793,000     Jaya Holdings Ltd *     1,223,138  
      1,096,200     MobileOne Ltd     2,049,685  
      4,623,000     Neptune Orient Lines Ltd *     7,489,605  
      181     Noble Group Ltd     294  
      1,528,000     Oversea-Chinese Banking Corp Ltd     11,092,500  
      1,346,000     SembCorp Marine Ltd     5,693,148  
      2,450,000     Singapore Exchange Ltd     15,267,576  
      2,927,000     Singapore Press Holdings Ltd     8,935,974  
      9,983,000     Singapore Telecommunications     23,379,286  
      5,428,000     Suntec Real Estate Investment Trust (REIT)     6,331,324  
      468,000     Venture Corp Ltd     3,481,242  
      3,469,000     Yangzijiang Shipbuilding Holdings Ltd     4,901,663  
                     
            Total Singapore     129,119,892  
                     

         
12
  See accompanying notes to the financial statements.    

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Spain — 1.9%        
      1,430,474     Banco Popular Espanol SA     8,652,175  
      1,743,194     Banco Santander SA     21,461,753  
      321,293     Gas Natural SDG SA     5,489,574  
      1,188,881     Iberdrola SA     10,372,984  
      167,306     Inditex SA     12,124,550  
      1,045,408     Repsol YPF SA     35,093,290  
      528,067     Telefonica SA     13,425,681  
                     
            Total Spain     106,620,007  
                     
                     
            Sweden — 3.3%        
      402,284     Alfa Laval AB     8,218,457  
      313,383     Assa Abloy AB Class B     8,776,678  
      865,190     Atlas Copco AB Class A     21,753,200  
      712,971     Boliden AB     15,245,332  
      781,528     Hennes & Mauritz AB Class B     25,535,894  
      104,623     Modern Times Group AB Class B     7,001,738  
      144,597     NCC Class B     3,779,137  
      819,064     Sandvik AB     15,719,999  
      229,585     Scania AB Class B     5,120,574  
      704,215     Skandinaviska Enskilda Banken AB Class A     6,405,636  
      342,481     SKF AB Class B     9,558,734  
      1     Svenska Handelsbanken AB Class A     34  
      1,649,280     Swedbank AB Class A *     29,060,444  
      643,136     Trelleborg AB Class B     6,458,355  
      1,329,199     Volvo AB Class B *     23,005,365  
                     
            Total Sweden     185,639,577  
                     
                     
            Switzerland — 5.5%        
      378,221     Clariant AG (Registered) *     6,242,983  
      580,104     Compagnie Financiere Richemont SA Class A     33,195,877  
      1,231,085     Nestle SA (Registered)     69,702,808  
      1,985,371     Novartis AG (Registered)     111,571,164  
      300,866     Roche Holding AG (Non Voting)     45,383,368  
      46,809     Swatch Group AG     19,938,832  

         
    See accompanying notes to the financial statements.   13

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Switzerland — continued        
      13,008     Swisscom AG (Registered)     5,743,205  
      117,590     Synthes Inc     16,143,884  
                     
            Total Switzerland     307,922,121  
                     
                     
            United Kingdom — 19.9%        
      2,203,733     3i Group Plc     11,187,960  
      334,880     Aggreko Plc     7,880,134  
      1     Anglo American Plc     54  
      262,502     Antofagasta Plc     6,011,759  
      2,394,789     ARM Holdings Plc     23,929,422  
      135,137     ASOS Plc *     4,140,802  
      2,631,552     AstraZeneca Plc     128,767,925  
      4,830,587     Barclays Plc     25,068,994  
      624,096     BBA Aviation Plc     2,258,619  
      1,270,057     BG Group Plc     30,926,684  
      407,430     BHP Billiton Plc     16,150,292  
      3,555,549     BP Plc     28,663,662  
      381,369     British American Tobacco Plc     15,279,173  
      12,176,757     BT Group Plc     36,167,808  
      1,183,033     Burberry Group Plc     23,056,523  
      491,679     Capita Group Plc     5,798,790  
      2,610,403     Centrica Plc     14,435,222  
      800,530     Compass Group Plc     7,203,300  
      827,212     Diageo Plc     16,172,493  
      5,879,076     Dixons Retail Plc *     1,851,578  
      1,172,083     Drax Group Plc     7,522,253  
      386,150     Electrocomponents Plc     1,734,892  
      357,081     Eurasian Natural Resources Corp     5,602,539  
      787,014     FirstGroup Plc     4,670,153  
      1,429,769     Game Group Plc     1,420,661  
      8,431,506     GlaxoSmithKline Plc     161,854,628  
      2,494,316     Home Retail Group Plc     8,950,169  
      481,765     HSBC Holdings Plc     5,305,755  
      355,562     ICAP Plc     3,009,762  

         
14
  See accompanying notes to the financial statements.    

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            United Kingdom — continued        
      587,863     IMI Plc     8,496,716  
      289,010     Kazakhmys Plc     6,793,226  
      2,794,562     Kesa Electricals Plc     5,819,289  
      466,807     Lancashire Holdings Ltd     4,562,743  
      18,212,881     Lloyds Banking Group Plc *     18,392,613  
      547,458     Next Plc     17,584,993  
      227,152     Petrofac Ltd     5,143,215  
      317,126     Reckitt Benckiser Group Plc     16,349,694  
      713,280     Rio Tinto Plc     50,226,795  
      511,945     Rolls – Royce Group Plc *     5,138,429  
      567,226     Royal Dutch Shell Group Class A (Amsterdam)     20,419,957  
      1,980,890     Royal Dutch Shell Plc A Shares (London)     71,258,241  
      1,552,411     Royal Dutch Shell Plc B Shares (London)     55,496,091  
      527,846     Scottish & Southern Energy Plc     10,630,705  
      260,883     Shire Plc     7,388,295  
      635,403     Smith & Nephew Plc     7,360,129  
      186,709     Spectris Plc     4,233,056  
      1,204,442     Stagecoach Group Plc     4,053,393  
      834,520     Standard Chartered Plc     22,072,086  
      755,574     Tesco Plc     4,962,806  
      926,118     Travis Perkins Plc     14,984,154  
      897,287     Trinity Mirror Plc *     1,180,831  
      753,886     Tullett Prebon Plc     4,986,732  
      2     Unilever Plc     59  
      26,623,735     Vodafone Group Plc     75,587,319  
      449,763     Weir Group Plc (The)     12,537,797  
      220,948     WH Smith Plc     1,653,511  
      2,427,575     William Hill Plc     7,569,995  
      608,278     Wolseley Plc *     21,179,266  
      554,213     WPP Plc     7,627,295  
      731,871     Xstrata Plc     16,738,707  
                     
            Total United Kingdom     1,115,450,144  
                     
                     
            TOTAL COMMON STOCKS (COST $4,739,156,394)     5,346,578,949  
                     

         
    See accompanying notes to the financial statements.   15

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 Shares /
 		           
Par Value     Description   Value ($)  
                     
            PREFERRED STOCKS — 1.2%        
                     
            Germany — 1.2%        
      56,602     Henkel AG & Co KGaA 1.61%     3,410,388  
      229,517     Porsche Automobil Holding SE 0.17%     18,284,842  
      327,429     ProSiebenSat.1 Media AG 4.97%     10,640,005  
      190,774     Volkswagen AG 1.87%     32,442,030  
                     
            Total Germany     64,777,265  
                     
                     
            TOTAL PREFERRED STOCKS (COST $44,524,273)     64,777,265  
                     
                     
            RIGHTS AND WARRANTS — 0.0%        
                     
            Austria — 0.0%        
      1,225,432     Immofinanz AG Rights, Expires 03/02/11 *     —  
                     
                     
            TOTAL RIGHTS AND WARRANTS (COST $0)     —  
                     
                     
            MUTUAL FUNDS — 0.9%        
                     
            United States — 0.9%        
            Affiliated Issuers        
      2,084,160     GMO U.S. Treasury Fund     52,104,000  
                     
                     
            TOTAL MUTUAL FUNDS (COST $52,104,000)     52,104,000  
                     
                     
            SHORT-TERM INVESTMENTS — 1.7%        
                     
            Time Deposits — 1.7%        
CHF
    9,577     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.01%, due 03/01/11     10,308  
DKK
    57,569     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.05%, due 03/01/11     10,655  
GBP
    148,134     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.09%, due 03/01/11     240,815  
HKD
    77,836     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.01%, due 03/01/11     9,994  
JPY
    14,890,120     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.01%, due 03/01/11     182,020  
NOK
    57,623     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.97%, due 03/01/11     10,290  
NZD
    12,890     Brown Brothers Harriman (Grand Cayman) Time Deposit, 2.15%, due 03/01/11     9,698  
SEK
    64,339     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.55%, due 03/01/11     10,158  
SGD
    358,211     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.01%, due 03/01/11     281,657  

         
16
  See accompanying notes to the financial statements.    

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value     Description   Value ($)  
            Time Deposits — continued        
AUD
    1,273,478     Brown Brothers Harriman (Grand Cayman) Time Deposit, 3.84%, due 03/01/11     1,296,591  
CAD
    34,468     Citibank (New York) Time Deposit, 0.23%, due 03/01/11     35,477  
EUR
    232,705     Citibank (New York) Time Deposit, 0.12%, due 03/01/11     321,122  
USD
    55,299     Citibank (New York) Time Deposit, 0.03%, due 03/01/11     55,299  
USD
    25,000,000     Commerzbank (Grand Cayman) Time Deposit, 0.16%, due 03/01/11     25,000,000  
USD
    19,700,000     HSBC Bank (USA) Time Deposit, 0.16%, due 03/01/11     19,700,000  
USD
    25,000,000     Royal Bank of Canada (Grand Cayman) Time Deposit, 0.15%, due 03/01/11     25,000,000  
USD
    25,000,000     Societe Generale (Grand Cayman) Time Deposit, 0.15%, due 03/01/11     25,000,000  
                     
            Total Time Deposits     97,174,084  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $97,174,084)     97,174,084  
                     
                     
            TOTAL INVESTMENTS — 99.3%
(COST $4,932,958,751) 		    5,560,634,298  
            Other Assets and Liabilities (net) — 0.7%     40,119,672  
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 5,600,753,970  
                     

         
    See accompanying notes to the financial statements.   17

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
A summary of outstanding financial instruments at February 28, 2011 is as follows:
 
Forward Currency Contracts
 
                                     
                    Net Unrealized
Settlement
 		      Deliver/
 		  Units of
 		      Appreciation
Date   Counterparty   Receive   Currency   Value   (Depreciation)
 
Buys †
                                   
4/20/11
    Brown Brothers Harriman & Co.      GBP     16,573,977     $ 26,931,164     $ 405,343  
4/20/11
    Deutsche Bank AG     GBP     14,697,355       23,881,829       397,660  
4/20/11
    Barclays Bank PLC     GBP     16,573,977       26,931,164       415,287  
4/20/11
    Bank of America, N.A.     GBP     27,166,412       44,142,881       610,825  
4/20/11
    Bank of New York Mellon     GBP     17,876,578       29,047,769       464,372  
4/20/11
    Morgan Stanley Capital Services Inc.      GBP     19,351,371       31,444,170       525,652  
4/20/11
    Royal Bank of Scotland PLC     GBP     10,579,539       17,190,762       270,451  
4/20/11
    Barclays Bank PLC     HKD     184,129,190       23,654,395       11,715  
4/20/11
    Morgan Stanley Capital Services Inc.      HKD     184,129,190       23,654,395       15,479  
4/20/11
    Brown Brothers Harriman & Co.      HKD     245,505,587       31,539,193       23,713  
4/20/11
    State Street Bank and Trust and Company     HKD     317,537,381       40,792,850       33,810  
4/20/11
    JPMorgan Chase Bank, N.A.     HKD     60,254,935       7,740,728       3,486  
4/20/11
    Deutsche Bank AG     JPY     1,399,968,000       17,119,197       333,111  
4/20/11
    Bank of America, N.A.     SEK     148,010,367       23,311,502       599,176  
4/20/11
    Deutsche Bank AG     SEK     117,804,372       18,554,084       504,253  
4/20/11
    Bank of New York Mellon     SEK     42,045,858       6,622,185       168,980  
4/20/11
    Royal Bank of Scotland PLC     SEK     50,932,818       8,021,874       217,556  
4/20/11
    JPMorgan Chase Bank, N.A.     SEK     98,804,003       15,561,543       425,894  
4/20/11
    Barclays Bank PLC     SGD     21,021,261       16,533,636       135,117  
4/20/11
    Bank of America, N.A.     SGD     96,716,350       76,069,313       614,594  
4/20/11
    Bank of New York Mellon     SGD     14,421,360       11,342,684       94,941  
4/20/11
    Morgan Stanley Capital Services Inc.      SGD     28,842,721       22,685,368       184,302  
4/20/11
    State Street Bank and Trust and Company     SGD     14,421,360       11,342,683       97,695  
                                 
                        $ 554,115,369     $ 6,553,412  
                                 
Sales #
                                   
4/20/11
    Barclays Bank PLC     AUD     5,512,174     $ 5,577,103     $ (59,692 )
4/20/11
    Deutsche Bank AG     CAD     7,813,987       8,034,122       (138,398 )
4/20/11
    Morgan Stanley Capital Services Inc.      CAD     39,011,168       40,110,187       (703,733 )
4/20/11
    Royal Bank of Scotland PLC     CAD     6,520,031       6,703,713       (114,988 )
4/20/11
    State Street Bank and Trust and Company     CAD     35,863,258       36,873,595       (616,585 )
4/20/11
    Barclays Bank PLC     CAD     12,307,889       12,654,626       (216,573 )
4/20/11
    Brown Brothers Harriman & Co.      CAD     22,489,156       23,122,718       (462,249 )

         
18
  See accompanying notes to the financial statements.    

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Forward Currency Contracts — continued
 
                                     
                    Net Unrealized
Settlement
 		      Deliver/
 		  Units of
 		      Appreciation
Date   Counterparty   Receive   Currency   Value   (Depreciation)
 
4/20/11
    Deutsche Bank AG     CHF     33,930,010     $ 36,535,542     $ (1,660,058 )
4/20/11
    Royal Bank of Scotland PLC     CHF     23,159,428       24,937,872       (1,053,284 )
4/20/11
    State Street Bank and Trust and Company     CHF     7,191,000       7,743,207       (330,493 )
4/20/11
    Barclays Bank PLC     CHF     26,440,731       28,471,151       (1,226,148 )
4/20/11
    Royal Bank of Scotland PLC     DKK     218,082,412       40,346,876       (992,369 )
4/20/11
    State Street Bank and Trust and Company     DKK     218,082,412       40,346,876       (962,626 )
4/20/11
    Royal Bank of Scotland PLC     EUR     9,037,163       12,463,127       (303,606 )
4/20/11
    Deutsche Bank AG     EUR     12,386,000       17,081,499       (452,613 )
4/20/11
    Bank of America, N.A.     EUR     25,349,395       34,959,282       (838,413 )
4/20/11
    Morgan Stanley Capital Services Inc.      EUR     10,933,000       15,077,671       (358,540 )
4/20/11
    Bank of America, N.A.     NZD     12,464,049       9,344,045       22,289  
                                 
                        $ 400,383,212     $ (10,468,079 )
                                 
 
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
 
Futures Contracts
 
                             
                Net Unrealized
        Expiration
 		  Contract
 		  Appreciation
Number of Contracts   Type   Date   Value   (Depreciation)
 
Buys
                           
452
    TOPIX     March 2011   $ 52,776,925     $ 2,899,558  
447
    FTSE/MIB     March 2011     69,346,536       5,513,597  
571
    MSCI Singapore     March 2011     31,842,485       (61,320 )
278
    DAX     March 2011     69,941,423       2,537,950  
887
    FTSE 100     March 2011     86,206,612       2,119,242  
                         
                $ 310,113,981     $ 13,009,027  
                         
Sales
                           
391
    S&P Toronto 60     March 2011   $ 65,406,124     $ (4,602,329 )
870
    SPI 200     March 2011     107,458,973       (1,646,017 )
                         
                $ 172,865,097     $ (6,248,346 )
                         
 
As of February 28, 2011, for futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.

         
    See accompanying notes to the financial statements.   19

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Notes to Schedule of Investments:
 
REIT - Real Estate Investment Trust
* Non-income producing security.
(a) Bankrupt issuer.
(b) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
 
Currency Abbreviations:
 
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
DKK - Danish Krone
EUR - Euro
GBP - British Pound
HKD - Hong Kong Dollar
JPY - Japanese Yen
NOK - Norwegian Krone
NZD - New Zealand Dollar
SEK - Swedish Krona
SGD - Singapore Dollar
USD - United States Dollar

         
20
  See accompanying notes to the financial statements.    

 

GMO International Core Equity Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $4,880,854,751) (Note 2)
  $ 5,508,530,298  
Investments in affiliated issuers, at value (cost $52,104,000) (Notes 2 and 10)
    52,104,000  
Receivable for Fund shares sold
    67,623  
Dividends and interest receivable
    18,947,662  
Foreign taxes receivable
    1,220,385  
Unrealized appreciation on open forward currency contracts (Note 4)
    6,575,701  
Receivable for collateral on open futures contracts (Note 2)
    28,028,038  
Receivable for variation margin on open futures contracts (Note 4)
    1,065,656  
Receivable for expenses reimbursed by Manager (Note 5)
    228,312  
Miscellaneous receivable
    4,838  
         
Total assets
    5,616,772,513  
         
         
Liabilities:
       
Payable for investments purchased
    971,000  
Payable for Fund shares repurchased
    1,696,081  
Payable to affiliate for (Note 5):
       
Management fee
    1,637,101  
Shareholder service fee
    334,146  
Trustees and Trust Officers or agents unaffiliated with the Manager
    13,343  
Unrealized depreciation on open forward currency contracts (Note 4)
    10,490,368  
Accrued expenses
    876,504  
         
Total liabilities
    16,018,543  
         
Net assets
  $ 5,600,753,970  
         

         
    See accompanying notes to the financial statements.   21

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011 — (Continued)
 
         
Net assets consist of:
       
Paid-in capital
  $ 6,167,007,713  
Accumulated undistributed net investment income
    14,200,543  
Accumulated net realized loss
    (1,211,128,815 )
Net unrealized appreciation
    630,674,529  
         
    $ 5,600,753,970  
         
Net assets attributable to:
       
Class III shares
  $ 857,774,266  
         
Class IV shares
  $ 1,235,302,845  
         
Class VI shares
  $ 3,507,676,859  
         
Shares outstanding:
       
Class III
    27,876,457  
         
Class IV
    40,168,568  
         
Class VI
    114,167,591  
         
Net asset value per share:
       
Class III
  $ 30.77  
         
Class IV
  $ 30.75  
         
Class VI
  $ 30.72  
         

         
22
  See accompanying notes to the financial statements.    

 

GMO International Core Equity Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends (net of withholding taxes of $12,391,911)
  $ 135,784,498  
Interest
    337,445  
Dividends from affiliated issuers (Note 10)
    21,106  
         
Total investment income
    136,143,049  
         
Expenses:
       
Management fee (Note 5)
    19,031,077  
Shareholder service fee – Class III (Note 5)
    1,400,910  
Shareholder service fee – Class IV (Note 5)
    923,881  
Shareholder service fee – Class VI (Note 5)
    1,676,237  
Custodian and fund accounting agent fees
    1,911,791  
Legal fees
    207,370  
Trustees fees and related expenses (Note 5)
    105,886  
Audit and tax fees
    91,354  
Transfer agent fees
    48,925  
Registration fees
    43,241  
Miscellaneous
    105,320  
         
Total expenses
    25,545,992  
Fees and expenses reimbursed by Manager (Note 5)
    (2,368,383 )
Expense reductions (Note 2)
    (1,946 )
         
Net expenses
    23,175,663  
         
Net investment income (loss)
    112,967,386  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments
    (6,277,076 )
Realized gains distributions from affiliated issuers (Note 10)
    839  
Closed futures contracts
    6,956,971  
Written options
    3,563,998  
Swap contracts
    (841,549 )
Foreign currency, forward contracts and foreign currency related transactions
    7,455,597  
         
Net realized gain (loss)
    10,858,780  
         
Change in net unrealized appreciation (depreciation) on:
       
Investments
    971,444,534  
Open futures contracts
    14,237,917  
Written options
    (1,851,883 )
Swap contracts
    30,452  
Foreign currency, forward contracts and foreign currency related transactions
    (1,791,356 )
         
Net unrealized gain (loss)
    982,069,664  
         
Net realized and unrealized gain (loss)
    992,928,444  
         
Net increase (decrease) in net assets resulting from operations
  $ 1,105,895,830  
         

         
    See accompanying notes to the financial statements.   23

 

GMO International Core Equity Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 112,967,386     $ 93,456,349  
Net realized gain (loss)
    10,858,780       (785,833,674 )
Change in net unrealized appreciation (depreciation)
    982,069,664       2,113,210,885  
                 
                 
Net increase (decrease) in net assets from operations
    1,105,895,830       1,420,833,560  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (19,384,014 )     (36,644,433 )
Class IV
    (23,845,517 )     (31,139,124 )
Class VI
    (71,405,695 )     (72,326,484 )
                 
Total distributions from net investment income
    (114,635,226 )     (140,110,041 )
                 
Net share transactions (Note 9):
               
Class III
    (334,920,790 )     (205,314,911 )
Class IV
    236,787,681       (846,830,399 )
Class VI
    604,118,020       754,238,113  
                 
Increase (decrease) in net assets resulting from net share transactions
    505,984,911       (297,907,197 )
                 
                 
Total increase (decrease) in net assets
    1,497,245,515       982,816,322  
                 
Net assets:
               
Beginning of period
    4,103,508,455       3,120,692,133  
                 
End of period (including accumulated undistributed net investment income of $14,200,543 and $2,161,779, respectively)
  $ 5,600,753,970     $ 4,103,508,455  
                 

         
24
  See accompanying notes to the financial statements.    

 

GMO International Core Equity Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 25.63     $ 18.15     $ 37.25     $ 39.38     $ 35.23  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.62       0.55       0.92       1.01       0.86  
Net realized and unrealized gain (loss)
    5.11       7.79       (18.54 )     (0.51 )     6.06  
                                         
                                         
Total from investment operations
    5.73       8.34       (17.62 )     0.50       6.92  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.59 )     (0.86 )     (1.19 )     (0.68 )     (0.77 )
From net realized gains
    —       —       (0.29 )     (1.95 )     (2.00 )
                                         
                                         
Total distributions
    (0.59 )     (0.86 )     (1.48 )     (2.63 )     (2.77 )
                                         
                                         
Net asset value, end of period
  $ 30.77     $ 25.63     $ 18.15     $ 37.25     $ 39.38  
                                         
                                         
Total Return(a)
    22.61 %     45.97 %     (48.61 )%     0.69 %     20.04 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 857,774     $ 1,017,207     $ 855,690     $ 917,685     $ 877,816  
Net expenses to average daily net assets
    0.53 %(b)(c)     0.53 %(b)     0.53 %(d)     0.53 %(d)     0.53 %
Net investment income (loss) to average daily net assets
    2.28 %     2.22 %     3.08 %     2.44 %     2.29 %
Portfolio turnover rate
    40 %     48 %     41 %     43 %     47 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.05 %     0.05 %     0.05 %     0.05 %     0.05 %
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(d) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† Calculated using average shares outstanding throughout the period.

         
    See accompanying notes to the financial statements.   25

 

GMO International Core Equity Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class IV share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 25.62     $ 18.14     $ 37.23     $ 39.36     $ 35.21  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.61       0.64       0.94       1.04       0.85  
Net realized and unrealized gain (loss)
    5.13       7.71       (18.53 )     (0.52 )     6.09  
                                         
                                         
Total from investment operations
    5.74       8.35       (17.59 )     0.52       6.94  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.61 )     (0.87 )     (1.21 )     (0.70 )     (0.79 )
From net realized gains
    —       —       (0.29 )     (1.95 )     (2.00 )
                                         
                                         
Total distributions
    (0.61 )     (0.87 )     (1.50 )     (2.65 )     (2.79 )
                                         
                                         
Net asset value, end of period
  $ 30.75     $ 25.62     $ 18.14     $ 37.23     $ 39.36  
                                         
                                         
Total Return(a)
    22.68 %     46.04 %     (48.56 )%     0.75 %     20.14 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 1,235,303     $ 797,730     $ 1,166,165     $ 947,063     $ 711,712  
Net expenses to average daily net assets
    0.47 %(b)(c)     0.47 %(b)     0.47 %(d)     0.47 %(d)     0.47 %
Net investment income (loss) to average daily net assets
    2.24 %     2.65 %     3.18 %     2.51 %     2.27 %
Portfolio turnover rate
    40 %     48 %     41 %     43 %     47 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.05 %     0.05 %     0.05 %     0.05 %     0.05 %
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(d) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† Calculated using average shares outstanding throughout the period.

         
26
  See accompanying notes to the financial statements.    

 

GMO International Core Equity Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class VI share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007(a)
 
Net asset value, beginning of period
  $ 25.60     $ 18.13     $ 37.22     $ 39.35     $ 36.09  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.61       0.52       0.92       0.98       0.74  
Net realized and unrealized gain (loss)
    5.13       7.83       (18.50 )     (0.45 )     5.33  
                                         
                                         
Total from investment operations
    5.74       8.35       (17.58 )     0.53       6.07  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.62 )     (0.88 )     (1.22 )     (0.71 )     (0.81 )
From net realized gains
    —       —       (0.29 )     (1.95 )     (2.00 )
                                         
                                         
Total distributions
    (0.62 )     (0.88 )     (1.51 )     (2.66 )     (2.81 )
                                         
                                         
Net asset value, end of period
  $ 30.72     $ 25.60     $ 18.13     $ 37.22     $ 39.35  
                                         
                                         
Total Return(b)
    22.69 %     46.11 %     (48.56 )%     0.78 %     17.24 %**
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 3,507,677     $ 2,288,572     $ 1,098,838     $ 3,567,360     $ 1,377,829  
Net expenses to average daily net assets
    0.44 %(c)(d)     0.44 %(c)     0.44 %(e)     0.44 %(e)     0.44 %*
Net investment income (loss) to average daily net assets
    2.25 %     2.08 %     3.07 %     2.36 %     2.11 %*
Portfolio turnover rate
    40 %     48 %     41 %     43 %     47 %††
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.05 %     0.05 %     0.05 %     0.05 %     0.05 %*
 
(a) Period from March 28, 2006 (commencement of operations) through February 28, 2007.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(c) The net expense ratio does not include the effect of expense reductions (Note 2).
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (See Note 5).
(e) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the year ended February 28, 2007.
* Annualized.
** Not annualized.

         
    See accompanying notes to the financial statements.   27

 

GMO International Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO International Core Equity Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund’s investment objective is high total return. The Manager seeks to achieve the Fund’s investment objective by investing in equities or groups of equities that the Manager believes will provide higher returns than the MSCI EAFE Index. The Manager uses active investment management methods, which means that equities are bought and sold according to the Manager’s evaluation of companies’ published financial information, securities’ prices, equity and bond markets, and the overall economy.
 
In selecting equities for the Fund, the Manager may use a combination of investment methods to identify equities that the Manager believes present positive return potential relative to other equities. Some of these methods evaluate individual equities or a group of equities based on the ratio of their price relative to historical financial information and forecasted financial information provided by industry analysts. Historical financial information may include book value, cash flow and earnings. The Manager may compare these ratios to industry or market averages in order to assess the relative attractiveness of an equity. Other methods focus on evaluating patterns of price movement or volatility of an equity or group of equities relative to the Fund’s investment universe. The Manager also may adjust the Fund’s portfolio for factors such as position size, market capitalization, and exposure to groups such as industry, sector, country or currency.
 
As a substitute for direct investments in equities, the Manager may use exchange-traded and over-the-counter (“OTC”) derivatives. The Manager also may use derivatives: (i) in an attempt to reduce investment exposures (which may result in a reduction below zero); (ii) to effect transactions intended as substitutes for securities lending; and (iii) in an attempt to adjust elements of the Fund’s investment exposure. Derivatives used may include futures, options, forward currency contracts and swap contracts. In addition, the Fund may lend its portfolio securities.
 
The Fund typically invests directly and indirectly (e.g., through underlying funds or derivatives) in equities of companies tied economically to countries other than the U.S. Under normal circumstances, the Fund invests directly and indirectly at least 80% of its assets in equity investments. The terms “equities” and “equity investments” refer to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts. The Manager may make investments tied economically to emerging countries.

         
28
       

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
For cash management purposes, the Fund may invest in unaffiliated money market funds and/or GMO U.S. Treasury Fund.
 
Throughout the year ended February 28, 2011, the Fund had three classes of shares outstanding: Class III, Class IV and Class VI. Each class of shares bears a different shareholder service fee.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the over-the-counter (“OTC”) market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of February 28, 2011, the total value of securities held directly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 0.0% of net assets. Additionally, because many foreign equity securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices adjusted by a factor supplied by a third party vendor using that vendor’s proprietary models. As of February 28, 2011, 94.24% of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified as using Level 2 inputs in the table below. See below for a further discussion on valuation of derivative financial instruments.

         
        29

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
In accordance with the authoritative guidance on fair value measurements and disclosures under the accounting principles generally accepted in the United States of America (“U.S. GAAP”), the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include: fair value adjustments applied to local closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund’s daily NAV calculation.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund used the following fair value techniques on Level 3 investments: The Fund considered certain bankrupt securities to be near worthless.
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Common Stocks
                               
Australia
  $ —     $ 254,783,811     $ —     $ 254,783,811  
Austria
    —       35,231,548       —       35,231,548  
Belgium
    —       49,495,750       —       49,495,750  
Canada
    132,989,994       —       —       132,989,994  
Denmark
    —       93,935,853       —       93,935,853  
Finland
    —       62,312,143       —       62,312,143  
France
    —       602,346,273       —       602,346,273  
Germany
    —       352,318,120       —       352,318,120  
Greece
    —       25,011,575       —       25,011,575  
Hong Kong
    —       86,006,352       —       86,006,352  
Ireland
    —       42,913,918       —       42,913,918  
Israel
    —       18,665,030       —       18,665,030  
Italy
    —       310,519,152       —       310,519,152  
Japan
    —       1,297,598,369       4,808       1,297,603,177  

         
30
       

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
  
  ASSET VALUATION INPUTS — continued
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Malta
  $ —     $ 0 *   $ —     $ —  
Netherlands
    —       103,899,358       —       103,899,358  
New Zealand
    —       17,982,961       —       17,982,961  
Norway
    —       14,168,021       —       14,168,021  
Portugal
    —       1,644,172       —       1,644,172  
Singapore
    —       129,119,892       —       129,119,892  
Spain
    —       106,620,007       —       106,620,007  
Sweden
    —       185,639,577       —       185,639,577  
Switzerland
    —       307,922,121       —       307,922,121  
United Kingdom
    —       1,115,450,144       —       1,115,450,144  
                                 
TOTAL COMMON STOCKS
    132,989,994       5,213,584,147       4,808       5,346,578,949  
                                 
Preferred Stocks
                               
Germany
    —       64,777,265       —       64,777,265  
                                 
TOTAL PREFERRED STOCKS
    —       64,777,265       —       64,777,265  
                                 
Rights and Warrants
                               
Austria
    —       —       —       —  
                                 
TOTAL RIGHTS AND WARRANTS
    —       —       —       —  
                                 
Mutual Funds
    52,104,000       —       —       52,104,000  
                                 
TOTAL MUTUAL FUNDS
    52,104,000       —       —       52,104,000  
                                 
Short-Term Investments
    97,174,084       —       —       97,174,084  
                                 
Total Investments
    282,268,078       5,278,361,412       4,808       5,560,634,298  
                                 
Derivatives**
                                
Forward Currency Contracts
                               
Foreign exchange risk
    —       6,575,701       —       6,575,701  
Futures Contracts
                               
Equity risk
    —       13,070,347       —       13,070,347  
                                 
Total Derivatives
    —       19,646,048       —       19,646,048  
                                 
Total
  $ 282,268,078     $ 5,298,007,460     $ 4,808     $ 5,580,280,346  
                                 

         
        31

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
LIABILITY VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Liabilities
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Derivatives**
                                
Forward Currency Contracts
                               
Foreign exchange risk
  $ —     $ (10,490,368 )   $      —     $ (10,490,368 )
Futures Contracts
                               
Equity risk
    (4,602,329 )     (1,707,337 )     —       (6,309,666 )
                                 
Total
  $ (4,602,329 )   $ (12,197,705 )   $ —     $ (16,800,034 )
                                 
 
            * Represents the interest in securities that have no value at February 28, 2011.
 
The risks referenced above are not intended to be inclusive of all risks. Please see the Investment Risks and Derivative Financial Instruments sections below for a further discussion of risks.
 
  **  Because the tables above are based on market values or unrealized appreciation (depreciation) rather than the notional amounts of derivatives, the uncertainties surrounding the valuation inputs for a derivative are likely to be more significant to the Fund’s net asset value than the uncertainties surrounding inputs for a non-derivative security with the same market value.
 
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements. The aggregate net value of the Fund’s direct investments in securities using Level 3 inputs was 0.0% of total net assets.

         
32
       

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a reconciliation of investments and derivatives, if any, in which significant unobservable inputs (Level 3) were used in determining value:
 
                                                                           
 
                                      Net Change in
                                      Unrealized
                                      Appreciation
                                      (Depreciation)
                                      from
    Balances
               Change in
           Balances
     Investments
    as of
   Net
   Accrued
   Total
   Unrealized
   Transfer
   Transfer
   as of
     Held as of
    February 28,
   Purchases/
   Discounts/
   Realized
   Appreciation
   in to
   out of
   February 28,
     February 28,
    2010   Sales   Premiums   Gain/(Loss)   (Depreciation)   level 3*   level 3*   2011     2011
Common Stocks
                                                                         
Japan
  $      —     $ 101,519     $      —     $      —     $ (1,689,730 )   $ 1,593,019 **   $      —     $ 4,808       $ (1,689,730 )
                                                                           
Total
  $ —     $ 101,519     $ —     $ —     $ (1,689,730 )   $ 1,593,019 **   $ —     $ 4,808       $ (1,689,730 )
                                                                           
 
            * The Fund accounts for investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the value at the end of the period.
            ** Financial assets transferred between Level 2 and Level 3 were due to change in observable and/or unobservable inputs.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 pm. Income and expenses denominated in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country’s tax treaty with the United

         
        33

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
States. The foreign withholding rates applicable to a Fund’s investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if paid by the shareholders of the Fund.
 
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Taxes related to capital gains realized during the year ended February 28, 2011, if any, are reflected as part of net realized gain (loss) in the Statement of Operations. Changes in tax liabilities related to capital gain taxes on unrealized investments gains, if any, are reflected as part of Change in net unrealized appreciation (depreciation) in the Statement of Operations. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards, derivative contract transactions, foreign currency transactions, losses on wash sale transactions, passive foreign investment company transactions, redemption in-kind transactions, and post-October capital losses.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 114,635,226     $ 140,110,041  
                 
Total distributions
  $ 114,635,226     $ 140,110,041  
                 

         
34
       

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 62,075,136  
Other Tax Attributes:
       
Capital loss carryforwards
  $ (1,169,257,857 )
Post-October capital loss deferral
  $ (7,185,707 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 28, 2017
  $ (215,235,940 )
February 28, 2018
    (906,840,158 )
February 28, 2019
    (47,181,759 )
         
Total
  $ (1,169,257,857 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 5,015,933,717     $ 804,530,797     $ (259,830,216 )   $ 544,700,581      
 
For the year ended February 28, 2011, the Fund had net realized gains attributed to redemption in-kind transactions of $1,969,978.
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or

         
        35

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, 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 among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class’s operations. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (See Note 5).
 
Brown Brothers Harriman & Co. (“BBH”) serves as the Fund’s custodian and fund accounting agent. State Street Bank and Trust Company (“State Street”) serves as the Fund’s transfer agent. BBH’s and State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the

         
36
       

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund’s investments.
 
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund’s investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund’s investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
 
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund’s foreign currency holdings and investments denominated in foreign currencies.
 
Other principal risks of an investment in the Fund include Market Risk — Value Securities (risk that the price of the Fund’s investments will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund’s securities); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).

         
        37

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by “equitizing” its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically “sell” a portion of the Fund’s portfolio) in combination with a long futures contract on another index (to synthetically “buy” exposure to that index). The Funds also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may

         
38
       

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral (e.g., foreign currency forwards; see “Currency Risk” above), that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.

         
        39

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund’s forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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.
 
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. During the year ended February 28, 2011, the Fund used forward currency contracts to manage against anticipated currency exchange rate changes and adjust exposure to foreign currencies. Forward currency contracts outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because regular trading on many foreign exchanges closes prior to the close of the NYSE, closing prices for these foreign futures contracts (including foreign index futures) do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures contracts using fair value prices, which are based on local closing prices adjusted by a factor, supplied by a third party vendor using that vendor’s proprietary models. As of February 28, 2011, futures contracts representing 0.2% of the net assets of the Fund, directly and through investments in the underlying funds, were valued using fair value prices based on those adjustments. The Fund and those underlying funds classify such securities as Level 2 inputs in the table above. During the period ended February 28, 2011, the Fund used futures

         
40
       

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
contracts to adjust exposure to certain securities markets and maintain the diversity and liquidity of the portfolio. Futures contracts outstanding at the end of the year are listed in the Fund’s Schedule of Investments.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. During the year ended February 28, 2011, the Fund used purchased call option contracts as a substitute for direct equity investment (when paired with written put options). The Fund had no purchased option contracts outstanding at the end of the period.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. During the year ended February 28, 2011, the fund held written put option contracts as a substitute for direct equity investment (when paired with purchased call options). The Fund had no written option contracts outstanding at the end of the period.
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.

         
        41

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
For the year ended February 28, 2011, investment activity in options contracts written by the Fund was as follows:
 
                                                 
    Puts   Calls
    Principal
           Principal
        
    Amount
  Number
      Amount
  Number
   
    of Contracts   of Contracts   Premiums   of Contracts   of Contracts   Premiums
 
Outstanding, beginning of year
    (7,593,720 )     —     $ (3,563,998 )          —       —     $      —  
Options written
    —       —       —       —       —       —  
Options exercised
                                               
Options expired
    7,593,720       —       3,563,998       —       —       —  
Options sold
    —       —       —       —       —       —  
                                                 
Outstanding, end of year
    —       —     $ —       —       —     $ —  
                                                 
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).

         
42
       

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publically traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that

         
        43

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the year ended February 28, 2011, the Fund held swap agreements to achieve returns comparable to holding and lending a direct equity position. The Fund had no swap agreements outstanding at the end of the period.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. During the year ended February 28, 2011, the Fund held rights and warrants received as a result of a corporate action. Rights and warrants held by the Fund at the end of the period are listed in the Fund’s Schedule of Investments.
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of
February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Assets:
                                               
Investments, at value (rights and warrants)
  $      —     $ —     $      —     $ 0     $      —     $ —  
Unrealized appreciation on future contracts *
    —       —       —       13,070,347       —       13,070,347  
Unrealized appreciation on forward currency contracts
    —       6,575,701       —       —       —       6,575,701  
                                                 
Total
  $ —     $ 6,575,701     $ —     $ 13,070,347     $ —     $ 19,646,048  
                                                 
Liabilities:
                                               
Unrealized depreciation on future contracts *
  $ —     $ —     $ —     $ (6,309,666 )   $ —     $ (6,309,666 )
Unrealized depreciation on forward currency contracts
    —       (10,490,368 )     —       —       —       (10,490,368 )
                                                 
Total
  $ —     $ (10,490,368 )   $ —     $ (6,309,666 )   $ —     $ (16,800,034 )
                                                 

         
44
       

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
  
  Fair values of derivative instruments on the Statement of Assets and Liabilities as of
  February 28, 2011Ù: — continued
 
The Effect of Derivative Instruments on the Statement of Operations for the Period Ended February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Investments (rights and warrants)
  $      —     $ —     $      —     $ (2,074,402 )   $      —     $ (2,074,402 )
Investments (purchased options)
    —       —       —       (347,337 )     —       (347,337 )
Future contracts
    —       —       —       6,956,971       —       6,956,971  
Forward currency contracts
    —       7,964,932       —       —       —       7,964,932  
Swap Agreements
    —       —       —       (841,549 )     —       (841,549 )
Written options
    —       —       —       3,563,998       —       3,563,998  
                                                 
Total
  $ —     $ 7,964,932     $ —     $ 7,257,681     $ —     $ 15,222,613  
                                                 
Change in Unrealized Appreciation (Depreciation) on:
                                               
Investments (purchased option)
  $ —     $ —     $ —     $ (1,795,096 )   $ —     $ (1,795,096 )
Written options
    —       —       —       (1,851,883 )     —       (1,851,883 )
Future contracts
    —       —       —       14,237,917       —       14,237,917  
Forward currency contracts
    —       (1,912,831 )     —       —       —       (1,912,831 )
Swap Agreements
    —       —       —       30,452       —       30,452  
                                                 
Total
  $ —     $ (1,912,831 )   $ —     $ 10,621,390     $ —     $ 8,708,559  
                                                 
 
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
            * The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.
 
The volume of derivative activity, based on absolute values (forward currency contracts, futures contracts and rights and warrants), notional amounts (swap agreements), or principal amounts (options) outstanding at each month-end, was as follows for the period ended February 28, 2011:
 
                                         
    Forward
                
    currency
   Futures
   Swap
       Rights/
    contracts   contracts   agreements   Options   Warrants
 
Average amount outstanding
  $ 759,783,403     $ 394,661,251     $ 2,173,278     $ 11,505,246     $ 194,234  
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.38% of average daily net assets. The Fund has adopted a Shareholder Service Plan under

         
        45

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets of each class at the annual rate of 0.15% for Class III shares, 0.09% for Class IV shares and 0.055% for Class VI shares.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.38% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust’s Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund’s Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund’s Expense Reimbursement Amount. These contractual expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $105,886 and $35,486, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations. The Fund paid no remuneration to any other officer of the Trust.
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
             
Indirect Net Expenses
 		           
(excluding shareholder
            
service fees and
    Indirect Shareholder
      
interest expense)     Service Fees     Total Indirect Expenses
< 0.001%
    0.000%     < 0.001%
             

         
46
       

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 aggregated $2,512,853,484 and $1,871,036,275, respectively. Cost of purchases and proceeds from sales of securities for in-kind transactions for the year ended February 28, 2011 were $23,434,850. Securities disposed of through in-kind transactions for the ended February 28, 2010 was $100,215,863.
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 24.89% of the outstanding shares of the Fund were held by one shareholder. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
 
As of February 28, 2011, less than 0.01% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and 53.27% of the Fund’s shares were held by accounts for which the Manager had investment discretion.
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    2,463,046     $ 66,280,281       5,821,799     $ 134,795,005  
Shares issued to shareholders in reinvestment of distributions
    560,802       15,619,160       1,151,413       29,417,970  
Shares repurchased
    (14,833,654 )     (416,820,231 )     (14,431,649 )     (369,527,886 )
                                 
Net increase (decrease)
    (11,809,806 )   $ (334,920,790 )     (7,458,437 )   $ (205,314,911 )
                                 
                                 
                                 

         
        47

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class IV:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    13,529,839     $ 370,185,016       9,373,640     $ 227,088,783  
Shares issued to shareholders in reinvestment of distributions
    844,993       23,555,860       1,230,113       31,139,124  
Shares repurchased
    (5,342,796 )     (156,953,195 )     (43,764,218 )     (1,105,058,306 )
                                 
Net increase (decrease)
    9,032,036     $ 236,787,681       (33,160,465 )   $ (846,830,399 )
                                 
                                 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class VI:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    40,476,055     $ 1,042,988,639       37,566,602     $ 943,897,308  
Shares issued to shareholders in reinvestment of distributions
    2,563,418       71,321,453       2,801,043       72,288,666  
Shares repurchased
    (18,277,138 )     (510,192,072 )     (11,578,500 )     (261,947,861 )
                                 
Net increase (decrease)
    24,762,335     $ 604,118,020       28,789,145     $ 754,238,113  
                                 
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forthbelow:
 
                                                 
    Value,
               Distributions
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   period
 
GMO U.S. Tresury Fund
  $      —     $ 52,104,000     $      —     $ 21,106     $ 839     $ 52,104,000  
                                                 
Totals
  $ —     $ 52,104,000     $ —     $ 21,106     $ 839     $ 52,104,000  
                                                 

         
48
       

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO International Core Equity Fund:
 
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 Equity Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian, brokers, and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
        49

 

GMO International Core Equity Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
50
       

 

 
GMO International Core Equity Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.53 %   $ 1,000.00     $ 1,261.60     $ 2.97  
2) Hypothetical
    0.53 %   $ 1,000.00     $ 1,022.17     $ 2.66  
                                 
Class IV
                               
                                 
1) Actual
    0.47 %   $ 1,000.00     $ 1,262.10     $ 2.64  
2) Hypothetical
    0.47 %   $ 1,000.00     $ 1,022.46     $ 2.36  
                                 
Class VI
                               
                                 
1) Actual
    0.44 %   $ 1,000.00     $ 1,262.20     $ 2.47  
2) Hypothetical
    0.44 %   $ 1,000.00     $ 1,022.61     $ 2.21  
                                 
 
            * Expenses are calculated using each class’s annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
        51

 

GMO International Core Equity Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
During the year ended February 28, 2011, the Fund paid foreign taxes of $12,391,007 and recognized foreign source income of $148,176,409.
 
For taxable, non-corporate shareholders, 100.00% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 represents qualified dividend income subject to the 15% rate category.

         
52
       

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
  Position(s)
   Length of
  During Past
   Complex
    Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
        53

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
  Position(s)
   Length of
  During Past
   Complex
    Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
  Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee;
President and
Chief Executive
Officer of the Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
54
       

 

Other Officers:
 
             
Name and
  Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003 – 2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        55

 

Other Officers: — (Continued)
 
             
Name and
  Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money
Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
56
       

 

 
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO International Equity Allocation Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Asset Allocation Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
GMO International Equity Allocation Fund returned +22.4% for the fiscal year ended February 28, 2011, as compared with +21.1% for the MSCI ACWI (All Country World Index) ex-U.S. Index.
 
Underlying fund implementation added 1.9% to relative performance, as GMO International Growth Equity Fund, GMO International Intrinsic Value Fund, and GMO Emerging Markets Fund all outperformed their respective benchmarks during the period.
 
Asset allocation detracted 0.7% from relative performance.
 
Because some of the securities and instruments held directly or indirectly by the Fund had positive fair value adjustments during the fiscal year (and the performance of indices are not fair valued), the Fund’s absolute and relative performance is better than it otherwise would have been.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice. References to specific securities are not recommendations of such securities and may not be representative of any GMO portfolio’s current or future investments.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO International Equity Allocation Fund Class III Shares and the MSCI ACWI ex-U.S.
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Each performance figure assumes a purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of .21% on the purchase and .21% on the redemption. Transaction fees are retained by the Fund to cover trading costs. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. All information is unaudited.
 
 
MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.

 

GMO International Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary*   % of Total Net Assets  
Common Stocks
    94.2 %
Preferred Stocks
    2.9  
Short-Term Investments
    1.7  
Investment Funds
    0.4  
Debt Obligations
    0.1  
Futures Contracts
    0.1  
Rights and Warrants
    0.0 Ù
Forward Currency Contracts
    (0.0 )Ù
Swap Agreements
    (0.1 )
Other
    0.7  
         
      100.0 %
         
 
         
Country / Region Summary**   % of Investments  
Emerging***
    25.7 %
Japan
    17.9  
United Kingdom
    16.2  
France
    7.0  
Germany
    6.5  
Switzerland
    5.1  
Italy
    3.6  
Sweden
    3.5  
Singapore
    2.5  
Denmark
    1.8  
Hong Kong
    1.6  
Canada
    1.6  
Netherlands
    1.4  
Spain
    1.2  
Australia
    1.0  
Finland
    0.8  
Belgium
    0.7  
Austria
    0.4  
Greece
    0.4  
Ireland
    0.4  
Norway
    0.4  
Israel
    0.2  

         
        1

 

 
GMO International Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2011 (Unaudited)
 
         
Country / Region Summary**   % of Investments  
New Zealand
    0.1 %
Portugal
    0.0 Ù
         
      100.0 %
         
 
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust (“underlying funds”).
** The table above shows indirect country exposure associated with investments in underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative financial instruments. The table excludes exposure through forward currency contracts.
*** The “Emerging” exposure is comprised of Argentina, Brazil, Chile, China, Colombia, Congo, Czech Republic, Dominican Republic, Egypt, Hungary, India, Indonesia, Malaysia, Mexico, Philippines, Poland, Russia, South Africa, South Korea, Taiwan, Thailand, Turkey, Ukraine and Venezuela.
Ù Rounds to 0.0%

         
2
       

 

GMO International Equity Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                 
Shares /
           
Par Value ($)     Description   Value ($)  
        MUTUAL FUNDS — 100.0%        
                 
        Affiliated Issuers — 100.0%        
  22,985,910     GMO Emerging Markets Fund, Class VI     331,226,965  
  1,135,495     GMO Flexible Equities Fund, Class VI     22,278,407  
  19,338,511     GMO International Growth Equity Fund, Class IV     461,803,642  
  19,840,078     GMO International Intrinsic Value Fund, Class IV     462,273,821  
                 
                 
        TOTAL MUTUAL FUNDS (COST $1,125,458,592)     1,277,582,835  
                 
                 
        SHORT-TERM INVESTMENTS — 0.0%        
                 
        Time Deposits — 0.0%        
  28,436     State Street Eurodollar Time Deposit, 0.01%, due 03/01/11     28,436  
                 
                 
        TOTAL SHORT-TERM INVESTMENTS (COST $28,436)     28,436  
                 
                 
        TOTAL INVESTMENTS — 100.0%
(Cost $1,125,487,028) 		    1,277,611,271  
        Other Assets and Liabilities (net) — (0.0%)     (60,359 )
                 
                 
        TOTAL NET ASSETS — 100.0%   $ 1,277,550,912  
                 

         
    See accompanying notes to the financial statements.   3

 

GMO International Equity Allocation Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $28,436) (Note 2)
  $ 28,436  
Investments in affiliated issuers, at value (cost $1,125,458,592) (Notes 2 and 10)
    1,277,582,835  
Receivable for Fund shares sold
    14,429  
Receivable for expenses reimbursed by Manager (Note 5)
    12,880  
Miscellaneous receivable
    30  
         
Total assets
    1,277,638,610  
         
         
Liabilities:
       
Payable for investments purchased
    14,460  
Payable to affiliate for (Note 5):
       
Trustees and Trust Officers or agents unaffiliated with the Manager
    3,095  
Accrued expenses
    70,143  
         
Total liabilities
    87,698  
         
Net assets
  $ 1,277,550,912  
         
Net assets consist of:
       
Paid-in capital
  $ 1,261,854,206  
Accumulated undistributed net investment income
    1,897,735  
Accumulated net realized loss
    (138,325,272 )
Net unrealized appreciation
    152,124,243  
         
    $ 1,277,550,912  
         
Net assets attributable to:
       
Class III shares
  $ 1,277,550,912  
         
Shares outstanding:
       
Class III
    118,311,149  
         
Net asset value per share:
       
Class III
  $ 10.80  
         

         
4
  See accompanying notes to the financial statements.    

 

GMO International Equity Allocation Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends from affiliated issuers (Note 10)
  $ 15,970,014  
Interest
    181  
         
Total investment income
    15,970,195  
         
Expenses:
       
Custodian, fund accounting agent and transfer agent fees
    58,215  
Legal fees
    46,523  
Audit and tax fees
    34,211  
Trustees fees and related expenses (Note 5)
    24,134  
Registration fees
    8,351  
Miscellaneous
    24,195  
         
Total expenses
    195,629  
Fees and expenses reimbursed by Manager (Note 5)
    (163,107 )
Expense reductions (Note 2)
    (1,191 )
         
Net expenses
    31,331  
         
Net investment income (loss)
    15,938,864  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in affiliated issuers
    (52,192,432 )
         
Net realized gain (loss)
    (52,192,432 )
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in affiliated issuers
    281,822,523  
         
Net realized and unrealized gain (loss)
    229,630,091  
         
Net increase (decrease) in net assets resulting from operations
  $ 245,568,955  
         

         
    See accompanying notes to the financial statements.   5

 

GMO International Equity Allocation Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 15,938,864     $ 27,661,703  
Net realized gain (loss)
    (52,192,432 )     (29,625,725 )
Change in net unrealized appreciation (depreciation)
    281,822,523       278,327,502  
                 
                 
Net increase (decrease) in net assets from operations
    245,568,955       276,363,480  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (18,783,271 )     (22,901,437 )
Net realized gains
               
Class III
    —       (9,699,836 )
                 
      (18,783,271 )     (32,601,273 )
                 
Net share transactions (Note 9):
               
Class III
    32,524,189       253,658,379  
Purchase premiums and redemption fees (Notes 2 and 9):
               
Class III
    509,786       647,780  
                 
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees
    33,033,975       254,306,159  
                 
                 
Total increase (decrease) in net assets
    259,819,659       498,068,366  
                 
Net assets:
               
Beginning of period
    1,017,731,253       519,662,887  
                 
End of period (including accumulated undistributed net investment income of $1,897,735 and $4,742,142, respectively)
  $ 1,277,550,912     $ 1,017,731,253  
                 

         
6
  See accompanying notes to the financial statements.    

 

GMO International Equity Allocation Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 8.96     $ 6.17     $ 16.45     $ 17.96     $ 17.13  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)(a)†
    0.13       0.28       0.40       0.31       0.33  
Net realized and unrealized gain (loss)
    1.87       2.81       (7.20 )     1.32       2.85  
                                         
                                         
Total from investment operations
    2.00       3.09       (6.80 )     1.63       3.18  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.16 )     (0.20 )     (0.39 )     (1.00 )     (0.83 )
From net realized gains
    —       (0.10 )     (3.09 )     (2.14 )     (1.52 )
                                         
                                         
Total distributions
    (0.16 )     (0.30 )     (3.48 )     (3.14 )     (2.35 )
                                         
Net asset value, end of period
  $ 10.80     $ 8.96     $ 6.17     $ 16.45     $ 17.96  
                                         
                                         
Total Return(b)
    22.43 %     50.37 %     (48.63 )%     7.81 %     19.33 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 1,277,551     $ 1,017,731     $ 519,663     $ 755,542     $ 758,757  
Net expenses to average daily net assets(c)(d)
    0.00 %(e)     0.00 %(e)     0.00 %(e)     0.00 %(e)     0.00 %
Net investment income (loss) to average daily net assets(a)
    1.39 %     3.21 %     3.46 %     1.66 %     1.87 %
Portfolio turnover rate
    13 %     11 %     33 %     9 %     4 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.01 %     0.02 %     0.02 %     0.01 %     0.01 %
Purchase premiums and redemption fees consisted of the following per share amounts (Note 2):†
  $ 0.00 (f)   $ 0.01     $ 0.01     $ 0.00 (f)   $ 0.00 (f)
 
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(d) Net expenses to average daily net assets were less than 0.01%.
(e) The net expense ratio does not include the effect of expense reductions (Note 2).
(f) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.

         
    See accompanying notes to the financial statements.   7

 

GMO International Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO International Equity Allocation Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund seeks total return greater than that of its benchmark, the MSCI ACWI (All Country World Index) ex-U.S. Index. The Fund is a fund of funds and invests primarily in shares of the GMO International Equity Funds. The Fund also may invest in shares of other GMO Funds, including the GMO Fixed Income Funds, GMO Alpha Only Fund, and GMO Alternative Asset Opportunity Fund (GMO Funds in which the Fund invests are collectively referred to as “underlying funds”). In addition, the Fund may hold securities directly. Although the Fund’s primary exposure is to foreign equity investments (including emerging country equities, both growth and value style equities, and equities of any market capitalization), the Fund also may have exposure to foreign and U.S. fixed income securities (including fixed income securities of any credit quality and having any maturity or duration), as well as to the investment returns of commodities and, from time to time, other alternative asset classes. Under normal circumstances, the Fund invests (including through investment in the underlying funds) at least 80% of its assets in equity investments. The term “equity investments” refers to direct and indirect (e.g., through the underlying funds) investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts.
 
The Manager uses multi-year forecasts of relative value and risk among asset classes (e.g., foreign equity, emerging country equity, emerging country debt, foreign fixed income, U.S. fixed income, and commodities) to select the underlying funds in which the Fund invests and to decide how much to invest in each. The Manager changes the Fund’s holdings of underlying funds in response to changes in its investment outlook and market valuations and may use redemption/purchase activity to rebalance the Fund’s investments.
 
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
 
The financial statements of the underlying funds should be read in conjunction with the Fund’s financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect) or by visiting GMO’s website at www.gmo.com.

         
8
       

 

 
GMO International Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Shares of the underlying funds and other investment funds are generally valued at their net asset value. Investments held by the underlying funds are valued as follows. Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the over-the-counter (“OTC”) market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of February 28, 2011, the total value of securities held indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of GMO trust represented 2.0% of net assets. Those underlying funds classify such securities (as defined below) as Level 3. Additionally, because many foreign securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund and the underlying funds generally value those foreign securities (including futures, derivatives and other securities whose values are based on indices comprised of such securities) as of the NYSE close using fair value prices, which are based on local closing prices adjusted by a factor supplied by a third party vendor using that vendor’s proprietary models. As of February 28, 2011, those foreign equity securities, foreign index futures contracts and swap agreements representing 88.5%, 0.1%, and less than 0.1%, respectively, of the net assets of the Fund, through investments in the underlying funds, were valued using fair value prices based on those adjustments. Those underlying funds classify such securities (as defined below) as Level 2.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The

         
        9

 

 
GMO International Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Mutual Funds
  $ 1,277,582,835     $      —     $      —     $ 1,277,582,835  
Short-Term Investments
    28,436       —       —       28,436  
                                 
Total Investments
    1,277,611,271       —       —       1,277,611,271  
                                 
Total
  $ 1,277,611,271     $ —     $ —     $ 1,277,611,271  
                                 
 
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’

         
10
       

 

 
GMO International Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
portfolio valuation notes in their financial statements. The aggregate net values of the Fund’s indirect investments in securities using Level 3 inputs were 2.0% of total net assets.
 
The Fund held no direct investments or derivative financial instruments directly at either February 28, 2011 or February 28, 2010, whose fair value was categorized using Level 3 inputs.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carry forwards, post-October capital losses and losses on wash sale transactions.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 18,783,271     $ 22,919,561  
Net long-term capital gain
    —       9,681,712  
                 
Total distributions
  $ 18,783,271     $ 32,601,273  
                 

         
        11

 

 
GMO International Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 1,897,735  
         
Other Tax Attributes:
       
Capital loss carryforwards
  $ (3,739,688 )
Post-October capital loss deferral
  $ (15,531,973 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 28, 2018
  $ (165,440 )
February 28, 2019
    (3,574,248 )
         
Total
  $ (3,739,688 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 1,244,540,639     $ 33,070,632     $ —     $ 33,070,632      
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are

         
12
       

 

 
GMO International Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Income dividends and capital gain distributions from the underlying funds are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (Note 5).
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
Purchases and redemptions of Fund shares
Prior to June 30, 2010, the premium on cash purchases and the fee on cash redemptions were each 0.18% of the amount invested or redeemed. Effective June 30, 2010, the premium on cash purchases and the fee on cash redemptions were each 0.21% of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by the Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. Such fees are recorded as a component of the Fund’s net share transactions. The Fund charges purchase premiums and redemption fees based on the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premiums and/or redemption fees, if any, imposed by the underlying Funds in which it invests, provided that, if that weighted average is less than 0.05%, the Fund generally will not charge a purchase premium or redemption fee. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of the Fund regardless of how the shares were acquired

         
        13

 

 
GMO International Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
(e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. All or a portion of the Fund’s purchase premiums and/or redemption fees may be waived at the Manager’s discretion when they are de minimis and/or the Manager deems it equitable to do so, including without limitation when the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premiums and/or redemption fees, if any, imposed by the underlying funds are less than the purchase premiums and/or redemption fees imposed by the Fund. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of a Fund’s shares if the Fund will not incur transaction costs or will incur/reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of a Fund’s shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder’s securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of the Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. References to investments include those held directly by the Fund and indirectly through the Fund’s investments in the underlying funds. Some of the underlying funds are non-diversified investment companies under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by those funds may affect their performance more than if they were diversified. The principal risks of investing in the Fund are summarized below, including those risks to which the Fund is exposed as a result of its investments in the underlying funds. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund and the underlying funds normally do not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund’s investments.
 
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S.

         
14
       

 

 
GMO International Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund or the underlying funds may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund or the underlying funds need to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund or the underlying funds to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund’s investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund’s investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
 
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of foreign currency holdings and investments denominated in foreign currencies.
 
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund or an underlying fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
 
• Derivatives Risk — The use of derivatives involves the risk that their value may not correlate with the value of the relevant underlying assets, rates or indices. Derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk.
 
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in the underlying funds, including the risk that the underlying funds in which it invests do not perform as expected. Because the Fund bears the fees and expenses of the underlying funds in which it invests, new investments in underlying funds with higher fees or expenses than those of the underlying funds in which the Fund is currently invested will increase the Fund’s total expenses. The fees and expenses associated with an investment in the Fund are less predictable and may be higher than fees and expenses associated with an investment in funds that charge a fixed management fee.
 
Other principal risks of an investment in the Fund include Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Market Risk — Value Securities (risk that the price of investments held by the Fund will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Market Risk — Growth Securities (greater price fluctuations resulting from dependence on future earnings expectations); Commodities Risk (value of an underlying fund’s shares may be affected by factors particular to the commodities markets and may fluctuate more than the share value of a fund with a broader range of investments); Leveraging Risk (increased risk of

         
        15

 

 
GMO International Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
loss from use of reverse repurchase agreements and other derivatives and securities lending); Credit and Counterparty Risk (risk of default of an issuer of a portfolio security, a derivatives counterparty, or a borrower of the Fund’s securities); Short Sales Risk (risk that an underlying fund’s loss on the short sale of securities that it does not own is unlimited); Market Risk — Fixed Income Securities (risk that the value of fixed income securities will decline during periods of rising interest rates and widening of credit spreads); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls may cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events may increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
 
4. Derivative financial instruments
 
At February 28, 2011, the Fund held no derivative financial instruments directly. For a listing of derivative financial instruments held by the underlying funds, if any, please refer to the underlying funds’ Schedule of Investments.
 
5. Fees and other transactions with affiliates
 
The Manager decides how to allocate the assets of the Fund among underlying funds. The Manager does not charge the Fund a management fee or shareholder service fee, but it receives management and shareholder service fees from the underlying funds in which the Fund invests. Because those fees vary from fund to fund, the levels of indirect net expenses set forth below are affected by the Manager’s asset allocation decisions.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.00% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). This contractual expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.

         
16
       

 

 
GMO International Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $24,134 and $8,173, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
                   
Indirect Net
 		                 
Expenses
                  
(excluding
                  
shareholder service
     Indirect
            
fees and interest
     Shareholder
     Indirect Interest
     Total Indirect
expense)     Service Fees     Expense     Expenses
0.591%
    0.081%     < 0.001%     0.672%
                   
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments and class exchanges, for the year ended February 28, 2011 aggregated $181,085,115, and $150,891,543, respectively.
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, the Fund had no shareholders who individually held more than 10% of the Fund’s outstanding shares.
 
As of February 28, 2011, 0.01% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and none of the Fund’s shares were held by accounts for which the Manager had investment discretion.

         
        17

 

 
GMO International Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    16,477,257     $ 149,910,732       37,135,791     $ 324,432,360  
Shares issued to shareholders in reinvestment of distributions
    1,752,100       17,463,440       3,381,013       29,900,935  
Shares repurchased
    (13,525,592 )     (134,849,983 )     (11,107,975 )     (100,674,916 )
Purchase premiums
    —       280,115       —       533,167  
Redemption fees
    —       229,671       —       114,613  
                                 
Net increase (decrease)
    4,703,765     $ 33,033,975       29,408,829     $ 254,306,159  
                                 
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                 
    Value,
               Distributions
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   period
 
GMO Asset Allocation Bond Fund, Class VI
  $ —     $ 24,975     $ 24,880     $ —     $      —     $ —  
GMO Emerging Markets Fund, Class VI
    225,157,009       63,505,988       22,204,074       4,453,457       —       331,226,965  
GMO Flexible Equities Fund, Class VI
    20,420,861       1,605,665       1,006,157       296,341       —       22,278,407  
GMO International Growth Equity Fund, Class IV
    378,180,167       57,931,038       58,655,082       4,624,985       —       461,803,642  
GMO International Intrinsic Value Fund, Class IV
    374,634,191       57,816,600       48,969,513       6,394,382       —       462,273,821  
GMO International Small Companies, Class III
    19,366,944       200,849       20,031,837       200,849       —       —  
                                                 
Totals
  $ 1,017,759,172     $ 181,085,115     $ 150,891,543     $ 15,970,014     $ —     $ 1,277,582,835  
                                                 

         
18
       

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO International Equity Allocation Fund:
 
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 (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
        19

 

GMO International Equity Allocation Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including indirect management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
20
       

 

 
GMO International Equity Allocation Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.68 %   $ 1,000.00     $ 1,227.10     $ 3.75  
2) Hypothetical
    0.68 %   $ 1,000.00     $ 1,021.42     $ 3.41  
                                 
 
            * Expenses are calculated using the Class’s annualized net expense ratio (including interest expense and indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
        21

 

GMO International Equity Allocation Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
For taxable, non-corporate shareholders, 100.00% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 represents qualified dividend income subject to the 15% rate category.

         
22        

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with the
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the
Board of Trustees
since March 2005;
Lead Independent
Trustee (September 2004 – March 2005);
Trustee since
December 2000. 		  Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
        23

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with the
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier
Corporation (a book
publisher and manufacturer)
(January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007). 		    63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
    Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee; President
and Chief Executive
Officer of the Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
24        

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003 – 2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        25

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money
Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
26        

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO International Growth Equity Fund
(A Series of GMO Trust)
 
Portfolio Managers
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Quantitative Equity Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
The Class III shares of GMO International Growth Equity Fund returned +22.5% for the fiscal year ended February 28, 2011, as compared with +20.0% for the MSCI EAFE Index and +21.3% for the MSCI EAFE Growth Index.
 
Relative to the benchmark, stock selection was the primary driver of the outperformance. Holdings in Danish pharmaceutical Novo Nordisk and Australian mining company Rio Tinto added value. An overweight position in British pharmaceutical GlaxoSmithKline and an underweight position in German auto maker Daimler detracted from relative performance.
 
Country selection also had a positive impact on relative performance. This was mainly from an overweight to Sweden, which outperformed.
 
Sector selection had a negative impact on performance relative to the benchmark. The Fund’s overweight to Health Care, which underperformed, and underweight to Materials, which outperformed, both detracted from relative performance.
 
Currency selection had a negative impact on relative performance mainly from the Fund’s underweight in the Australian dollar and Swiss franc.
 
Because some of the securities and instruments held directly or indirectly by the Fund had positive fair value adjustments during the fiscal year (and the performance of indices are not fair valued), the Fund’s absolute and relative performance is better than it otherwise would have been.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice. References to specific securities are not recommendations of such securities and may not be representative of any GMO portfolio’s current or future investments.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO International Growth Equity Fund Class III Shares and the MSCI EAFE Growth Index
As of February 28, 2011
 
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited. Performance for classes may vary due to different fees.
 
 
† The Fund is the successor to the GMO International Growth Fund, therefore, performance for the periods prior to September 16, 2005 is that of GMO International Growth Fund.
 
MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.

 

GMO International Growth Equity Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary   % of Total Net Assets  
Common Stocks
    96.1 %
Mutual Funds
    1.5  
Preferred Stocks
    1.0  
Short-Term Investments
    0.9  
Futures Contracts
    0.1  
Rights and Warrants
    0.0 ^
Forward Currency Contracts
    (0.1 )
Other
    0.5  
         
      100.0 %
         
 
         
Country Summary   % of Investments*  
United Kingdom
    25.5 %
Japan
    19.9  
Germany
    9.9  
Switzerland
    9.4  
Sweden
    6.9  
France
    6.8  
Denmark
    3.8  
Singapore
    3.4  
Canada
    3.0  
Hong Kong
    2.8  
Netherlands
    2.2  
Australia
    2.1  
Finland
    1.2  
Belgium
    0.9  
Norway
    0.7  
Spain
    0.6  
Greece
    0.3  
Ireland
    0.3  
Austria
    0.2  
Israel
    0.1  
Italy
    0.0 ^
         
      100.0 %
         
 
* The table above shows country exposure in the Fund. The table excludes short-term investments. The table includes exposure through derivative financial instruments. The table excludes exposure through forward currency contracts. The table takes into account the market value of securities and options and the notional amounts of swap agreements and other derivative financial instruments, if any.
^ Rounds to 0.0%.
 

         
        1

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2011 (Unaudited)
 
         
Industry Group Summary   % of Equity Investments**  
Pharmaceuticals, Biotechnology & Life Sciences
    15.5 %
Capital Goods
    12.6  
Materials
    9.7  
Food, Beverage & Tobacco
    8.5  
Automobiles & Components
    6.6  
Banks
    4.7  
Telecommunication Services
    4.7  
Technology Hardware & Equipment
    4.4  
Retailing
    3.5  
Energy
    3.3  
Consumer Durables & Apparel
    3.0  
Software & Services
    2.9  
Media
    2.5  
Transportation
    2.4  
Household & Personal Products
    2.4  
Food & Staples Retailing
    2.2  
Health Care Equipment & Services
    2.0  
Diversified Financials
    1.9  
Utilities
    1.9  
Commercial & Professional Services
    1.8  
Consumer Services
    1.3  
Semiconductors & Semiconductor Equipment
    0.9  
Real Estate
    0.7  
Insurance
    0.6  
         
      100.0 %
         
 
** Equity investments may consist of common stocks and other stock-related securities, such as preferred stocks. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.

         
2
       

 

GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            COMMON STOCKS — 96.1%        
                     
            Australia — 4.2%        
      665,762     BHP Billiton Ltd     31,460,046  
      102,383     Cochlear Ltd     8,087,884  
      198,959     CSL Ltd     7,227,728  
      228,680     Newcrest Mining Ltd     8,838,543  
      233,138     Rio Tinto Ltd     20,356,604  
      78,366     Sims Metal Management Ltd     1,508,939  
      2,745,087     Telstra Corp Ltd     7,816,520  
      279,650     Wesfarmers Ltd     9,472,922  
      207,771     Westpac Banking Corp     5,014,637  
      334,527     Woodside Petroleum Ltd     14,588,146  
      1,230,630     Woolworths Ltd     33,761,952  
                     
            Total Australia     148,133,921  
                     
                     
            Austria — 0.2%        
      39,776     Andritz AG     3,358,851  
      363,023     Immofinanz AG *     1,603,108  
      946,419     Immofinanz AG (Entitlement Shares) *     —  
      27,324     Raiffeisen International Bank Holding     1,641,069  
                     
            Total Austria     6,603,028  
                     
                     
            Belgium — 0.9%        
      44,144     Anheuser-Busch InBev NV     2,465,345  
      51,174     Bekaert NV     5,551,491  
      67,628     Belgacom SA     2,536,818  
      122,585     Colruyt SA     6,160,644  
      41,750     Delhaize Group     3,224,947  
      69,806     Mobistar SA     4,462,166  
      90,188     Telenet Group Holding NV *     4,045,710  
      92,515     Umicore SA     4,664,446  
                     
            Total Belgium     33,111,567  
                     

         
    See accompanying notes to the financial statements.   3

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Canada — 3.3%        
      52,700     Bank of Montreal     3,360,910  
      394,500     Barrick Gold Corp     20,822,356  
      343,700     Canadian National Railway Co     25,138,513  
      216,300     Eldorado Gold Corp     3,684,592  
      50,300     Enbridge Inc     3,005,419  
      78,300     IGM Financial Inc     3,803,983  
      80,800     Imperial Oil Ltd     4,207,372  
      123,700     Magna International Inc Class A     6,092,373  
      39,000     Metro Inc Class A     1,766,250  
      78,800     Pacific Rubiales Energy Corp     2,640,860  
      61,200     Potash Corp of Saskatchewan Inc     3,770,709  
      220,300     Research In Motion Ltd *     14,546,081  
      172,900     Rogers Communications Inc Class B     6,104,133  
      59,500     Royal Bank of Canada     3,477,953  
      127,700     Shoppers Drug Mart Corp     5,415,305  
      56,900     Silver Wheaton Corp *     2,418,784  
      88,000     Teck Resources Ltd Class B     4,868,509  
      66,979     Valeant Pharmaceuticals International Inc     2,687,984  
                     
            Total Canada     117,812,086  
                     
                     
            Denmark — 3.7%        
      204     AP Moller – Maersk A/S Class A     2,022,440  
      76,709     Carlsberg A/S Class B     8,147,607  
      225,760     Danske Bank A/S *     5,292,096  
      850,876     Novo-Nordisk A/S Class B     107,246,371  
      66,400     Novozymes A/S Class B     9,280,711  
                     
            Total Denmark     131,989,225  
                     
                     
            Finland — 1.2%        
      100,375     Alma Media Corp     1,277,539  
      164,942     Kone Oyj Class B     9,002,243  
      115,015     Metso Oyj     5,949,466  
      68,893     Nokian Renkaat Oyj     2,797,120  
      353,774     Nokia Oyj     3,050,120  

         
4
  See accompanying notes to the financial statements.    

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Finland — continued        
      397,637     Stora Enso Oyj Class R     4,479,372  
      495,478     UPM — Kymmene Oyj     9,839,242  
      93,946     Wartsila Oyj     7,223,664  
                     
            Total Finland     43,618,766  
                     
                     
            France — 6.8%        
      37,598     Air Liquide SA     4,867,644  
      62,909     Arkema     4,599,578  
      303,100     BNP Paribas     23,655,502  
      77,048     Bureau Veritas SA     5,949,720  
      57,999     Carrefour SA     2,848,395  
      19,406     Christian Dior SA     2,797,125  
      57,801     Compagnie de Saint-Gobain     3,452,391  
      177,032     Credit Agricole SA     3,107,838  
      133,721     Danone SA     8,381,267  
      55,638     Dassault Systemes SA     4,261,269  
      73,628     Essilor International SA     5,261,666  
      85,766     Eutelsat Communications     3,422,771  
      58,862     Hermes International     12,804,539  
      30,534     Iliad SA     3,422,985  
      98,477     L’Oreal SA     11,458,059  
      120,296     Legrand SA     5,049,520  
      168,001     LVMH Moet Hennessy Louis Vuitton SA     26,495,727  
      19,922     Neopost SA     1,889,322  
      74,384     Peugeot SA *     2,979,332  
      44,382     PPR     6,733,473  
      74,966     Publicis Groupe SA     4,276,171  
      159,831     Renault SA *     9,801,250  
      86,486     Rhodia SA     2,492,583  
      94,497     Safran SA     3,363,478  
      280,807     Sanofi-Aventis     19,417,220  
      75,878     Schneider Electric SA     12,567,904  
      219,715     SES SA     5,657,140  
      160,742     Societe Generale     11,302,687  

         
    See accompanying notes to the financial statements.   5

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            France — continued        
      253,239     Total SA     15,523,556  
      52,741     Valeo SA *     3,287,083  
      35,424     Vallourec SA     3,677,619  
      24,880     Wendel     2,567,540  
      49,833     Zodiac Aerospace     3,480,863  
                     
            Total France     240,853,217  
                     
                     
            Germany — 6.4%        
      69,960     Adidas AG     4,492,807  
      264,566     BASF AG     22,059,511  
      408,791     Bayerische Motoren Werke AG     33,211,191  
      59,394     Beiersdorf AG     3,564,413  
      633,575     Daimler AG (Registered) *     44,774,202  
      220,298     Deutsche Lufthansa AG (Registered) *     4,513,318  
      18,771     Fielmann AG     1,676,469  
      19,074     Henkel AG & Co KGaA     975,150  
      1,032,933     Infineon Technologies AG     11,347,297  
      49,249     K+S AG     3,807,107  
      157,252     Lanxess AG     11,717,454  
      15,918     Linde AG     2,432,748  
      86,361     MAN SE     11,006,481  
      56,447     MTU Aero Engines Holding AG     3,771,831  
      849,498     SAP AG     51,334,042  
      22,353     Software AG     3,614,082  
      92,255     Stada Arzneimittel AG     3,694,552  
      53,119     Suedzucker AG     1,461,904  
      102,041     Symrise AG     2,680,490  
      20,723     Volkswagen AG     3,152,351  
                     
            Total Germany     225,287,400  
                     
                     
            Greece — 0.3%        
      257,869     Alpha Bank A.E. *     1,704,749  
      213,637     EFG Eurobank Ergasias *     1,364,439  

         
6
  See accompanying notes to the financial statements.    

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Greece — continued        
      381,931     National Bank of Greece SA *     3,550,810  
      248,210     OPAP SA     5,182,442  
                     
            Total Greece     11,802,440  
                     
                     
            Hong Kong — 2.8%        
      508,500     BOC Hong Kong Holdings Ltd     1,581,251  
      1,202,000     Cathay Pacific Airways Ltd     2,803,024  
      1,922,500     CLP Holdings Ltd     15,659,006  
      933,274     Esprit Holdings Ltd     4,593,420  
      452,000     Hang Seng Bank Ltd     7,212,810  
      4,050,340     Hong Kong & China Gas     9,129,110  
      89,200     Hong Kong Aircraft Engineering Co Ltd     1,375,945  
      598,900     Hong Kong Exchanges & Clearing Ltd     13,028,095  
      1,168,000     Hutchison Whampoa Ltd     13,793,955  
      84,400     Jardine Matheson Holdings Ltd     3,899,280  
      1,382,500     Power Assets Holdings Ltd     9,037,822  
      1,391,600     Sands China Ltd *     3,308,022  
      2,671,000     SJM Holdings Ltd     3,954,653  
      132,000     Sun Hung Kai Properties Ltd     2,145,215  
      469,000     Swire Pacific Ltd     6,581,869  
      796,000     Wynn Macau Ltd     2,151,112  
                     
            Total Hong Kong     100,254,589  
                     
                     
            Ireland — 0.3%        
      399,767     CRH Plc     9,244,784  
                     
                     
            Israel — 0.1%        
      169,275     Israel Chemicals Ltd     2,818,844  
                     
                     
            Italy — 0.1%        
      66,940     Assicurazioni Generali SPA     1,514,859  
      139,665     Fiat SPA     1,297,010  
      153,164     Mediobanca SPA     1,621,522  
                     
            Total Italy     4,433,391  
                     

         
    See accompanying notes to the financial statements.   7

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Japan — 19.7%        
      41,300     ABC-Mart Inc     1,648,508  
      274,000     Aeon Co Ltd     3,457,109  
      315,000     Asahi Glass Co Ltd     4,404,419  
      188,400     Astellas Pharma Inc     7,408,092  
      930,550     Canon Inc     45,000,838  
      672     Central Japan Railway Co     6,022,905  
      294,700     Chugai Pharmaceutical Co Ltd     5,678,982  
      123,000     Daihatsu Motor Co Ltd     1,945,299  
      160,700     Daiichi Sankyo Co Ltd     3,451,279  
      579,000     Dainippon Ink and Chemicals Inc     1,544,180  
      146,500     Daito Trust Construction Co Ltd     12,004,717  
      190,500     Dena Co Ltd     7,393,634  
      76,000     Denso Corp     2,855,222  
      252,300     Eisai Co Ltd     9,451,682  
      233,700     Fanuc Ltd     36,506,086  
      55,500     Fast Retailing Co Ltd     8,713,763  
      393,000     Fujitsu Ltd     2,665,020  
      814,000     Fuji Heavy Industries Ltd     7,014,276  
      45,600     Hirose Electric Co Ltd     5,228,422  
      120,500     Hisamitsu Pharmaceutical Co Inc     4,873,746  
      3,816,000     Hitachi Ltd     23,225,782  
      999,700     Honda Motor Co Ltd     43,629,084  
      427,900     Hoya Corp     10,267,047  
      1,605     INPEX Corp     11,278,139  
      613,000     Ishikawajima-Harima Heavy Industries Co Ltd     1,613,031  
      1,606,000     Isuzu Motors Ltd     7,262,327  
      547,100     Itochu Corp     5,689,336  
      87,700     Ito En Ltd     1,557,651  
      768     Japan Tobacco Inc     3,176,911  
      1,323,500     JX Holdings Inc     9,323,364  
      704     Kakaku.com Inc     4,126,114  
      708,700     Kao Corp     19,142,582  
      767,000     Kawasaki Kisen Kaisha Ltd     3,356,732  
      874     KDDI Corp     5,675,810  

         
8
  See accompanying notes to the financial statements.    

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Japan — continued        
      51,830     Keyence Corp     14,188,395  
      1,108,000     Kintetsu Corp     3,502,720  
      1,095,000     Kobe Steel Ltd     2,996,972  
      584,100     Komatsu Ltd     17,919,415  
      142,000     Kuraray Co Ltd     2,016,824  
      113,300     Lawson Inc     5,579,078  
      373,000     Marubeni Corp     2,862,977  
      875,000     Mazda Motor Corp     2,266,106  
      1,552,500     Mitsubishi Chemical Holdings Corp     11,385,629  
      656,000     Mitsubishi Electric Corp     7,794,898  
      985,000     Mitsui OSK Lines Ltd     6,549,760  
      120,700     Murata Manufacturing Co Ltd     8,998,039  
      86,400     Nabtesco Corp     2,059,906  
      269,000     NHK Spring Co Ltd     3,161,150  
      40,100     Nidec Corp     3,740,484  
      49,900     Nintendo Co Ltd     14,674,857  
      1,242,000     Nippon Yusen KK     5,493,084  
      1,123,600     Nissan Motor Co Ltd     11,545,104  
      91,050     Nitori Co Ltd     8,061,541  
      124,000     Nitto Denko Corp     7,519,431  
      148,100     Nomura Research Institute Ltd     3,476,041  
      601     NTT Data Corp     2,147,935  
      9,472     NTT Docomo Inc     17,793,868  
      557,000     Odakyu Electric Railway Co Ltd     5,194,039  
      146,900     Olympus Corp     4,318,058  
      129,100     Omron Corp     3,599,768  
      54,600     Ono Pharmaceutical Co Ltd     2,858,779  
      51,400     Oriental Land Co Ltd     5,146,213  
      12,730     ORIX Corp     1,433,675  
      4,389     Rakuten Inc     3,900,819  
      152,200     Resona Holdings Inc     831,480  
      337,000     Ricoh Company Ltd     4,496,561  
      74,400     Sankyo Co Ltd     4,213,902  
      44,300     Santen Pharmaceutical Co Ltd     1,732,912  

         
    See accompanying notes to the financial statements.   9

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Japan — continued        
      29,500     Sawai Pharmaceuticals Co Ltd     2,768,642  
      138,700     Secom Co Ltd     7,002,229  
      163,200     Sega Sammy Holdings Inc     3,724,073  
      706     Seven Bank Ltd     1,513,588  
      28,000     Shimamura Co Ltd     2,712,281  
      165,600     Shin-Etsu Chemical Co Ltd     9,574,146  
      187,200     Shionogi & Co Ltd     3,556,584  
      284,000     Shiseido Co Ltd     5,795,915  
      51,300     SMC Corp     8,805,717  
      506,100     SoftBank Corp     20,807,841  
      203,400     Stanley Electric Co Ltd     3,746,121  
      546,700     Sumitomo Corp     8,122,433  
      223,000     Sumitomo Trust & Banking Co Ltd     1,420,868  
      69,200     Sysmex Corp     4,504,786  
      536,600     Takeda Pharmaceutical Co Ltd     26,733,388  
      189,700     Terumo Corp     10,417,630  
      109,200     THK Co Ltd     2,887,982  
      374,000     Tobu Railway Co Ltd     1,821,908  
      688,000     Toshiba Corp     4,520,886  
      92,400     Toyota Tsusho Corp     1,754,561  
      107,000     Toyo Suisan Kaisha Ltd     2,425,564  
      158,400     Trend Micro Inc     4,949,534  
      116,500     Tsumura & Co     3,778,723  
      240,300     Unicharm Corp     9,303,451  
      22,420     Yahoo Japan Corp     8,452,484  
      64,280     Yamada Denki Co Ltd     4,910,264  
      61,700     Yamato Kogyo Co Ltd     2,036,648  
                     
            Total Japan     698,100,756  
                     
                     
            Netherlands — 2.2%        
      439,407     Aegon NV *     3,382,278  
      80,900     ASML Holding NV     3,523,667  
      66,838     Fugro NV     5,622,414  
      92,727     Heineken NV     4,782,098  

         
10
  See accompanying notes to the financial statements.    

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Netherlands — continued        
      64,753     Koninklijke Vopak NV     3,130,407  
      942,313     Koninklijke KPN NV     15,256,097  
      179,410     Koninklijke Philips Electronics NV     5,862,572  
      543,143     Reed Elsevier NV     7,164,547  
      909,919     Unilever NV     27,444,930  
                     
            Total Netherlands     76,169,010  
                     
                     
            Norway — 0.7%        
      65,501     Frontline Ltd     1,774,103  
      1,015,622     Golden Ocean Group Ltd     1,312,369  
      303,962     Norsk Hydro ASA     2,507,780  
      23,573     Schibsted ASA     720,677  
      132,967     Seadrill Ltd     5,078,889  
      91,282     Statoil ASA     2,410,222  
      103,715     TGS Nopec Geophysical Co ASA     2,681,536  
      143,483     Yara International ASA     7,618,391  
                     
            Total Norway     24,103,967  
                     
                     
            Singapore — 3.3%        
      2,313,000     Cosco Corp     3,585,523  
      1,559,000     Ezra Holdings Ltd     1,921,539  
      914,000     Fraser & Neave Ltd     4,046,629  
      5,479,000     Genting Singapore Plc *     8,250,246  
      11,242,000     Golden Agri-Resources Ltd     5,766,320  
      1,392,000     Hyflux Ltd     2,109,984  
      1,249,000     Keppel Corp Ltd     11,098,805  
      216,000     Keppel Land Ltd     718,659  
      2,275,000     Midas Holdings Ltd     1,330,710  
      2,075,000     Neptune Orient Lines Ltd *     3,361,655  
      1,079,000     Olam International Ltd     2,366,954  
      874,000     Oversea-Chinese Banking Corp Ltd     6,344,794  
      895,000     Sembcorp Industries Ltd     3,365,702  
      1,540,000     SembCorp Marine Ltd     6,513,706  
      1,093,000     Singapore Airport Terminal Services Ltd     2,196,841  

         
    See accompanying notes to the financial statements.   11

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Singapore — continued        
      1,545,000     Singapore Exchange Ltd     9,627,921  
      2,509,000     Singapore Press Holdings Ltd     7,659,842  
      3,765,000     Singapore Technologies Engineering Ltd     9,473,558  
      6,935,500     Singapore Telecommunications     16,242,316  
      1,975,000     SMRT Corp Ltd     3,047,063  
      1,406,000     StarHub Ltd     2,900,324  
      880,000     Wilmar International Ltd     3,523,744  
      2,008,000     Yangzijiang Shipbuilding Holdings Ltd     2,837,284  
                     
            Total Singapore     118,290,119  
                     
                     
            Spain — 0.6%        
      215,331     Inditex SA     15,604,889  
      32,984     Red Electrica de Espana     1,772,622  
      134,185     Telefonica SA     3,411,546  
                     
            Total Spain     20,789,057  
                     
                     
            Sweden — 6.9%        
      372,814     Alfa Laval AB     7,616,400  
      91,996     Alliance Oil Company Ltd SDR *     1,655,707  
      336,646     Assa Abloy AB Class B     9,428,186  
      648,581     Atlas Copco AB     14,743,241  
      857,854     Atlas Copco AB Class A     21,568,754  
      202,951     Boliden AB     4,339,665  
      182,705     Elekta AB Class B     6,969,097  
      574,414     Ericsson LM B Shares     7,377,769  
      82,833     Getinge AB Class B     2,023,154  
      1,101,423     Hennes & Mauritz AB Class B     35,988,244  
      300,179     Hexagon AB Class B     6,628,858  
      295,355     Investor AB Class B     6,796,555  
      122,440     Kinnevik Investment AB     2,745,965  
      121,374     Lundin Petroleum AB *     1,509,811  
      73,467     Millicom International Cellular SA SDR     6,439,966  
      83,340     Modern Times Group AB Class B     5,577,405  
      37,627     Oriflame Cosmetics SA SDR     2,203,313  
      537,840     Sandvik AB     10,322,568  

         
12
  See accompanying notes to the financial statements.    

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Sweden — continued        
      652,325     Scania AB Class B     14,549,201  
      678,979     Skandinaviska Enskilda Banken AB Class A     6,176,086  
      660,927     SKF AB Class B     18,446,645  
      635,590     Swedbank AB Class A *     11,199,146  
      309,947     Swedish Match AB     9,791,659  
      321,784     Tele2 AB Class B     7,347,232  
      1,288,615     Volvo AB Class B *     22,302,950  
                     
            Total Sweden     243,747,577  
                     
                     
            Switzerland — 9.4%        
      409,252     Compagnie Financiere Richemont SA Class A     23,419,040  
      31,236     Geberit AG (Registered)     6,736,779  
      25,499     Kuehne & Nagel International AG (Registered)     3,429,701  
      1,972,320     Nestle SA (Registered)     111,670,797  
      72,257     Nobel Biocare Holding AG     1,389,669  
      1,108,502     Novartis AG (Registered)     62,294,079  
      559,718     Roche Holding AG (Non Voting)     84,429,242  
      28,284     Schindler Holding AG     3,186,945  
      4,260     SGS SA (Registered)     7,420,237  
      719     Sika AG     1,540,534  
      41,398     Sonova Holding AG (Registered)     5,503,992  
      10,340     Swatch Group AG     4,404,442  
      5,973     Swisscom AG (Registered)     2,637,159  
      55,141     Synthes Inc     7,570,286  
      316,505     UBS AG (Registered) *     6,280,338  
                     
            Total Switzerland     331,913,240  
                     
                     
            United Kingdom — 23.0%        
      400,314     Admiral Group Plc     10,989,678  
      618,590     Aggreko Plc     14,556,176  
      300,267     AMEC Plc     5,682,441  
      1     Anglo American Plc     54  
      236,248     Antofagasta Plc     5,410,496  
      1,560,092     ARM Holdings Plc     15,588,889  

         
    See accompanying notes to the financial statements.   13

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            United Kingdom — continued        
      151,674     ASOS Plc *     4,647,521  
      183,356     Associated British Foods Plc     2,881,548  
      520,550     AstraZeneca Plc     25,471,715  
      517,577     BAE Systems Plc     2,767,844  
      586,692     Balfour Beatty Plc     3,333,753  
      1,631,101     Barclays Plc     8,464,822  
      656,734     BG Group Plc     15,991,885  
      195,920     BHP Billiton Plc     7,766,157  
      1,431,891     British American Tobacco Plc     57,367,300  
      1,347,085     British Sky Broadcasting Group Plc     17,221,129  
      5,026,399     BT Group Plc     14,929,577  
      1,010,658     Burberry Group Plc     19,697,049  
      345,674     Cairn Energy Plc *     2,400,257  
      653,827     Capita Group Plc     7,711,140  
      1     Carnival Plc     45  
      2,285,143     Centrica Plc     12,636,572  
      48,646     Chemring Group Plc     2,593,234  
      1,477,786     Cobham Plc     5,416,141  
      1,100,617     Compass Group Plc     9,903,533  
      332,023     Croda International Plc     8,547,749  
      1,824,625     Diageo Plc     35,672,519  
      343,520     Drax Group Plc     2,204,660  
      274,020     Eurasian Natural Resources Corp     4,299,326  
      552,119     Experian Plc     7,001,783  
      184,813     Fresnillo Plc     4,795,134  
      1,229,254     GKN Plc     4,193,074  
      6,690,076     GlaxoSmithKline Plc     128,425,428  
      602,106     ICAP Plc     5,096,708  
      336,543     IMI Plc     4,864,246  
      722,232     Informa Plc     5,103,133  
      433,147     Inmarsat Plc     4,717,784  
      266,088     InterContinental Hotels Group Plc     5,917,352  
      430,040     International Power Plc     2,337,895  
      276,809     Intertek Group Plc     8,115,639  

         
14
  See accompanying notes to the financial statements.    

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            United Kingdom — continued        
      183,276     Investec Plc     1,408,105  
      2,830,044     ITV Plc *     4,012,347  
      2,792,835     Legal & General Group Plc     5,395,550  
      721,266     LG Group Holdings Plc     5,254,067  
      22,368,567     Lloyds Banking Group Plc *     22,589,309  
      1,030,058     Man Group Plc     4,813,001  
      970,007     Marks & Spencer Group Plc     5,461,652  
      307,887     Micro Focus International Plc     1,417,582  
      242,117     National Grid Plc     2,249,878  
      213,711     Next Plc     6,864,648  
      331,337     Petrofac Ltd     7,502,189  
      103,522     Petropavlovsk Plc     1,825,903  
      27,976     Randgold Resources Ltd *     2,265,553  
      582,844     Reckitt Benckiser Group Plc     30,049,006  
      1,028,647     Reed Elsevier Plc     9,184,374  
      241,297     Rightmove Plc     3,493,310  
      505,851     Rio Tinto Plc     35,620,338  
      512,637     Rolls – Royce Group Plc *     5,145,374  
      658,507     Sage Group Plc (The)     3,043,449  
      81,666     Scottish & Southern Energy Plc     1,644,736  
      388,876     Serco Group Plc     3,443,219  
      205,936     Severn Trent Plc     4,981,348  
      658,884     Shire Plc     18,659,818  
      310,046     Smiths Group Plc     6,740,029  
      986,291     Smith & Nephew Plc     11,424,606  
      70,302     Spectris Plc     1,593,883  
      1,209,978     Standard Chartered Plc     32,002,515  
      502,838     Tesco Plc     3,302,771  
      280,882     TUI Travel Plc     1,107,892  
      346,578     Tullett Prebon Plc     2,292,511  
      196,456     Unilever Plc     5,824,688  
      5,727,585     Vodafone Group Plc     16,261,159  
      388,994     Weir Group Plc (The)     10,843,773  
      414,605     William Hill Plc     1,292,878  

         
    See accompanying notes to the financial statements.   15

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            United Kingdom — continued        
      228,713     Wolseley Plc *     7,963,420  
      492,599     WPP Plc     6,779,339  
      739,377     Xstrata Plc     16,910,377  
                     
            Total United Kingdom     815,385,983  
                     
                     
            TOTAL COMMON STOCKS (COST $2,939,073,992)     3,404,462,967  
                     
                     
            PREFERRED STOCKS — 1.0%        
                     
            Germany — 1.0%        
      55,648     Porsche Automobil Holding SE 0.17%     4,433,287  
      168,386     ProSiebenSat.1 Media AG 4.97%     5,471,806  
      159,288     Volkswagen AG 1.87%     27,087,686  
                     
            Total Germany     36,992,779  
                     
                     
            TOTAL PREFERRED STOCKS (COST $25,938,683)     36,992,779  
                     
                     
            RIGHTS AND WARRANTS — 0.0%        
                     
            Austria — 0.0%        
      363,023     Immofinanz AG Rights, Expires 03/02/11 *     —  
                     
                     
            Canada — 0.0%        
      19,162     Kinross Gold Corp, Expires 09/17/14 *     54,633  
                     
                     
            TOTAL RIGHTS AND WARRANTS (COST $67,723)     54,633  
                     
                     
            MUTUAL FUNDS — 1.5%        
                     
            United States — 1.5%        
            Affiliated Issuers        
      2,084,161     GMO U.S. Treasury Fund     52,104,025  
                     
                     
            TOTAL MUTUAL FUNDS (COST $52,104,025)     52,104,025  
                     

         
16
  See accompanying notes to the financial statements.    

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value     Description   Value ($)  
                     
            SHORT-TERM INVESTMENTS — 0.9%        
                     
            Time Deposits — 0.9%        
JPY
    14,750,960     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.01%, due 03/01/11     180,319  
NOK
    57,513     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.97%, due 03/01/11     10,270  
NZD
    1,461     Brown Brothers Harriman (Grand Cayman) Time Deposit, 2.15%, due 03/01/11     1,099  
AUD
    9,852     Brown Brothers Harriman (Grand Cayman) Time Deposit, 3.84%, due 03/01/11     10,031  
DKK
    54,527     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.05%, due 03/01/11     10,092  
GBP
    570,117     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.09%, due 03/01/11     926,810  
HKD
    77,838     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.01%, due 03/01/11     9,995  
SEK
    64,339     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.55%, due 03/01/11     10,158  
SGD
    184,195     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.01%, due 03/01/11     144,830  
CHF
    9,610     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.01%, due 03/01/11     10,343  
CAD
    97,769     Citibank (New York) Time Deposit, 0.23%, due 03/01/11     100,632  
EUR
    167,095     Citibank (New York) Time Deposit, 0.12%, due 03/01/11     230,583  
USD
    23,357     Citibank (New York) Time Deposit, 0.03%, due 03/01/11     23,357  
USD
    4,700,000     Royal Bank of Canada (Grand Cayman) Time Deposit, 0.15%, due 03/01/11     4,700,000  
USD
    25,000,000     Societe Generale (Grand Cayman) Time Deposit, 0.15%, due 03/01/11     25,000,000  
                     
            Total Time Deposits     31,368,519  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $31,368,519)     31,368,519  
                     
                     
            TOTAL INVESTMENTS — 99.5%
(Cost $3,048,552,942) 		    3,524,982,923  
            Other Assets and Liabilities (net) — 0.5%     18,224,772  
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 3,543,207,695  
                     

         
    See accompanying notes to the financial statements.   17

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
A summary of outstanding financial instruments at February 28, 2011 is as follows:
 
Forward Currency Contracts
 
                                     
                    Net Unrealized
Settlement
 		      Deliver/
 		  Units of
 		      Appreciation
Date   Counterparty   Receive   Currency   Value   (Depreciation)
 
Buys †
                                   
4/20/11
    Brown Brothers Harriman & Co.      AUD     11,320,129     $ 11,453,470     $ 199,111  
4/20/11
    State Street Bank and Trust and Company     AUD     1,127,666       1,140,949       20,049  
4/20/11
    Bank of New York Mellon     EUR     4,712,649       6,499,201       147,587  
4/20/11
    Brown Brothers Harriman & Co.      EUR     2,473,620       3,411,363       80,633  
4/20/11
    Deutsche Bank AG     EUR     2,580,380       3,558,595       94,293  
4/20/11
    Royal Bank of Scotland PLC     EUR     10,682,325       14,731,965       358,876  
4/20/11
    Bank of America, N.A.     GBP     15,129,915       24,584,698       340,190  
4/20/11
    Bank of New York Mellon     GBP     4,714,159       7,660,068       122,458  
4/20/11
    Barclays Bank PLC     GBP     14,524,664       23,601,222       363,938  
4/20/11
    Brown Brothers Harriman & Co.      GBP     20,846,128       33,873,010       509,825  
4/20/11
    JPMorgan Chase Bank, N.A.     GBP     9,222,831       14,986,239       238,406  
4/20/11
    Morgan Stanley Capital Services Inc.      GBP     6,646,795       10,800,421       180,551  
4/20/11
    Royal Bank of Scotland PLC     GBP     2,664,092       4,328,900       68,104  
4/20/11
    State Street Bank and Trust and Company     GBP     7,378,829       11,989,908       91,325  
4/20/11
    Barclays Bank PLC     HKD     114,596,892       14,721,838       7,291  
4/20/11
    Brown Brothers Harriman & Co.      HKD     152,795,856       19,629,117       14,758  
4/20/11
    JPMorgan Chase Bank, N.A.     HKD     56,620,174       7,273,784       3,276  
4/20/11
    Morgan Stanley Capital Services Inc.      HKD     114,596,892       14,721,838       9,633  
4/20/11
    State Street Bank and Trust and Company     HKD     212,847,783       27,343,766       22,663  
4/20/11
    Bank of New York Mellon     JPY     1,985,993,376       24,285,278       444,393  
4/20/11
    Barclays Bank PLC     JPY     423,543,931       5,179,213       95,262  
4/20/11
    Deutsche Bank AG     JPY     1,590,642,662       19,450,820       378,480  
4/20/11
    JPMorgan Chase Bank, N.A.     JPY     1,575,305,877       19,263,277       354,199  
4/20/11
    Morgan Stanley Capital Services Inc.      JPY     599,388,579       7,329,490       135,615  
4/20/11
    Bank of America, N.A.     SGD     14,891,566       11,712,510       94,630  
4/20/11
    Bank of New York Mellon     SGD     14,413,175       11,336,246       94,887  
4/20/11
    Barclays Bank PLC     SGD     12,634,475       9,937,262       81,210  
4/20/11
    Morgan Stanley Capital Services Inc.      SGD     14,413,175       11,336,246       92,099  
4/20/11
    Royal Bank of Scotland PLC     SGD     14,413,174       11,336,246       96,720  
4/20/11
    State Street Bank and Trust and Company     SGD     14,413,175       11,336,246       97,640  
                                 
                        $ 398,813,186     $ 4,838,102  
                                 

         
18
  See accompanying notes to the financial statements.    

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Forward Currency Contracts — continued
 
                                     
                    Net Unrealized
Settlement
 		      Deliver/
 		  Units of
 		      Appreciation
Date   Counterparty   Receive   Currency   Value   (Depreciation)
 
      Sales #                              
4/20/11
    Bank of New York Mellon     CAD     31,287,488     $ 32,168,916     $ (544,310 )
4/20/11
    Deutsche Bank AG     CAD     38,057,437       39,129,588       (674,059 )
4/20/11
    Royal Bank of Scotland PLC     CAD     16,075,226       16,528,096       (283,504 )
4/20/11
    State Street Bank and Trust and Company     CAD     4,859,949       4,996,863       (83,555 )
4/20/11
    Bank of New York Mellon     CHF     17,908,579       19,283,803       (817,543 )
4/20/11
    Barclays Bank PLC     CHF     22,637,086       24,375,419       (1,049,759 )
4/20/11
    Brown Brothers Harriman & Co.      CHF     3,911,914       4,212,315       (181,824 )
4/20/11
    Deutsche Bank AG     CHF     10,892,767       11,729,238       (532,939 )
4/20/11
    JPMorgan Chase Bank, N.A.     CHF     3,124,000       3,363,896       (146,545 )
4/20/11
    Royal Bank of Scotland PLC     CHF     7,069,937       7,612,847       (321,539 )
4/20/11
    State Street Bank and Trust and Company     CHF     31,579,411       34,004,437       (1,451,364 )
4/20/11
    Royal Bank of Scotland PLC     EUR     7,714,000       10,638,357       (135,491 )
4/20/11
    Barclays Bank PLC     NOK     52,149,481       9,287,242       (389,228 )
4/20/11
    Brown Brothers Harriman & Co.      NOK     12,219,539       2,176,164       (91,310 )
4/20/11
    Royal Bank of Scotland     NOK     29,516,216       5,256,510       (226,143 )
4/20/11
    Bank of New York Mellon     SEK     48,727,046       7,674,467       (195,832 )
4/20/11
    Barlclays Bank PLC     SEK     46,389,309       7,306,275       (188,184 )
4/20/11
    Brown Brothers Harriman & Co.      SEK     165,313,119       26,036,670       (672,561 )
4/20/11
    JPMorgan Chase Bank, N.A.     SEK     185,461,964       29,210,095       (799,433 )
4/20/11
    State Street Bank and Trust and Company     SEK     66,282,770       10,439,478       (271,319 )
                                 
                        $ 305,430,676     $ (9,056,442 )
                                 
 
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.

         
    See accompanying notes to the financial statements.   19

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Futures Contracts
 
                             
                Net Unrealized
Number of
 		      Expiration
 		  Contract
 		  Appreciation
Contracts   Type   Date   Value   (Depreciation)
 
Buys
                           
336
    DAX     March 2011   $ 84,533,518     $ 2,788,080  
836
    FTSE 100     March 2011     81,249,975       1,762,491  
44
    MSCI Singapore     March 2011     2,453,712       (4,725 )
1
    OMXS 30     March 2011     17,849       (85 )
                         
                $ 168,255,054     $ 4,545,761  
                         
Sales
                           
27
    FTSE/MIB     March 2011   $ 4,188,717     $ (80,073 )
3
    IBEX 35     March 2011     449,110       (3,621 )
84
    S&P Toronto 60     March 2011     14,051,443       (1,005,812 )
609
    SPI 200     March 2011     75,221,281       (1,080,213 )
                         
                $ 93,910,551     $ (2,169,719 )
                         
 
As of February 28, 2011, for futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
 
Notes to Schedule of Investments:
 
SDR - Swedish Depository Receipt
* Non-income producing security.
 
Currency Abbreviations:
 
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
DKK - Danish Krone
EUR - Euro
GBP - British Pound
HKD - Hong Kong Dollar
JPY - Japanese Yen
NOK - Norwegian Krone
NZD - New Zealand Dollar
SEK - Swedish Krona
SGD - Singapore Dollar
USD - United States Dollar

         
20
  See accompanying notes to the financial statements.    

 

GMO International Growth Equity Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $2,996,448,917) (Note 2)
  $ 3,472,878,898  
Investments in affiliated issuers, at value (cost $52,104,025) (Notes 2 and 10)
    52,104,025  
Receivable for investments sold
    288,814  
Receivable for Fund shares sold
    26,874  
Dividends and interest receivable
    8,186,373  
Foreign taxes receivable
    724,577  
Unrealized appreciation on open forward currency contracts (Note 4)
    4,838,102  
Receivable for collateral on open futures contracts (Note 4)
    16,248,585  
Receivable for variation margin on open futures contracts (Note 4)
    799,900  
Receivable for expenses reimbursed by Manager (Note 5)
    142,296  
Miscellaneous receivable
    4,841  
         
Total assets
    3,556,243,285  
         
         
Liabilities:
       
Payable for investments purchased
    1,273,671  
Payable for Fund shares repurchased
    468,962  
Payable to affiliate for (Note 5):
       
Management fee
    1,348,993  
Shareholder service fee
    275,211  
Trustees and Trust Officers or agents unaffiliated with the Manager
    8,418  
Unrealized depreciation on open forward currency contracts (Note 4)
    9,056,442  
Accrued expenses
    603,893  
         
Total liabilities
    13,035,590  
         
Net assets
  $ 3,543,207,695  
         

         
    See accompanying notes to the financial statements.   21

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011 — (Continued)
 
         
Net assets consist of:
       
Paid-in capital
  $ 3,694,013,730  
Accumulated undistributed net investment income
    24,125,263  
Accumulated net realized loss
    (649,656,328 )
Net unrealized appreciation
    474,725,030  
         
    $ 3,543,207,695  
         
Net assets attributable to:
       
Class III shares
  $ 713,815,134  
         
Class IV shares
  $ 2,829,392,561  
         
Shares outstanding:
       
Class III
    29,911,521  
         
Class IV
    118,506,324  
         
Net asset value per share:
       
Class III
  $ 23.86  
         
Class IV
  $ 23.88  
         

         
22
  See accompanying notes to the financial statements.    

 

GMO International Growth Equity Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends (net of withholding taxes of $6,437,861)
  $ 76,440,665  
Interest
    143,566  
Dividends from affiliated issuers (Note 10)
    17,945  
         
Total investment income
    76,602,176  
         
Expenses:
       
Management fee (Note 5)
    16,070,186  
Shareholder service fee – Class III (Note 5)
    972,881  
Shareholder service fee – Class IV (Note 5)
    2,308,905  
Custodian and fund accounting agent fees
    1,363,453  
Legal fees
    141,049  
Audit and tax fees
    86,377  
Trustees fees and related expenses (Note 5)
    68,743  
Transfer agent fees
    47,378  
Registration fees
    10,900  
Miscellaneous
    83,974  
         
Total expenses
    21,153,846  
Fees and expenses reimbursed by Manager (Note 5)
    (1,699,570 )
Expense reductions (Note 2)
    (95 )
         
Net expenses
    19,454,181  
         
Net investment income (loss)
    57,147,995  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in unaffiliated issuers
    158,999,411  
Realized gains distributions from affiliated issuers (Note 10)
    839  
Futures contracts
    13,054,816  
Foreign currency, forward contracts and foreign currency related transactions
    (5,927,331 )
         
Net realized gain (loss)
    166,127,735  
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in unaffiliated issuers
    455,119,255  
Futures contracts
    2,352,031  
Foreign currency, forward contracts and foreign currency related transactions
    (5,642,620 )
         
Net unrealized gain (loss)
    451,828,666  
         
Net realized and unrealized gain (loss)
    617,956,401  
         
Net increase (decrease) in net assets resulting from operations
  $ 675,104,396  
         

         
    See accompanying notes to the financial statements.   23

 

GMO International Growth Equity Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 57,147,995     $ 48,888,962  
Net realized gain (loss)
    166,127,735       (346,641,383 )
Change in net unrealized appreciation (depreciation)
    451,828,666       1,102,964,055  
                 
                 
Net increase (decrease) in net assets from operations
    675,104,396       805,211,634  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (6,873,838 )     (23,585,622 )
Class IV
    (28,588,429 )     (68,814,208 )
                 
Total distributions from net investment income
    (35,462,267 )     (92,399,830 )
                 
Net share transactions (Note 9):
               
Class III
    (13,932,829 )     (161,885,236 )
Class IV
    97,906,301       284,191,131  
                 
Increase (decrease) in net assets resulting from net share transactions
    83,973,472       122,305,895  
                 
Total increase (decrease) in net assets
    723,615,601       835,117,699  
                 
Net assets:
               
Beginning of period
    2,819,592,094       1,984,474,395  
                 
End of period (including accumulated undistributed net investment income of $24,125,263 and $6,922,911, respectively)
  $ 3,543,207,695     $ 2,819,592,094  
                 

         
24
  See accompanying notes to the financial statements.    

 

GMO International Growth Equity Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 19.68     $ 14.46     $ 27.68     $ 31.37     $ 29.90  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.37       0.37       0.54       0.69       0.77  
Net realized and unrealized gain (loss)
    4.03       5.52       (11.93 )     1.28       4.80  
                                         
                                         
Total from investment operations
    4.40       5.89       (11.39 )     1.97       5.57  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.22 )     (0.67 )     (0.88 )     (0.40 )     (0.49 )
From net realized gains
    —       —       (0.95 )     (5.26 )     (3.61 )
                                         
                                         
Total distributions
    (0.22 )     (0.67 )     (1.83 )     (5.66 )     (4.10 )
                                         
                                         
Net asset value, end of period
  $ 23.86     $ 19.68     $ 14.46     $ 27.68     $ 31.37  
                                         
                                         
Total Return(a)
    22.48 %     41.10 %     (43.54 )%     5.04 %     19.21 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 713,815     $ 599,455     $ 564,067     $ 1,018,040     $ 950,332  
Net expenses to average daily net assets
    0.65 %(b)     0.65 %(b)     0.66 %(c)     0.67 %(c)     0.67 %
Net investment income (loss) to average daily net assets
    1.74 %     2.00 %     2.43 %     2.13 %     2.46 %
Portfolio turnover rate
    59 %     65 %     63 %     92 %     74 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.05 %     0.06 %     0.06 %     0.05 %     0.05 %
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† Calculated using average shares outstanding throughout the period.

         
    See accompanying notes to the financial statements.   25

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class IV share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007(a)
 
Net asset value, beginning of period
  $ 19.69     $ 14.46     $ 27.70     $ 31.38     $ 29.92  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.38       0.35       0.55       0.73       0.20  
Net realized and unrealized gain (loss)
    4.05       5.56       (11.95 )     1.26       4.48  
                                         
                                         
Total from investment operations
    4.43       5.91       (11.40 )     1.99       4.68  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.24 )     (0.68 )     (0.89 )     (0.41 )     (0.50 )
From net realized gains
    —       —       (0.95 )     (5.26 )     (2.72 )
                                         
                                         
Total distributions
    (0.24 )     (0.68 )     (1.84 )     (5.67 )     (3.22 )
                                         
                                         
Net asset value, end of period
  $ 23.88     $ 19.69     $ 14.46     $ 27.70     $ 31.38  
                                         
                                         
Total Return(b)
    22.59 %     41.26 %     (43.53 )%     5.11 %     15.79 %**
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 2,829,393     $ 2,220,138     $ 1,420,407     $ 2,516,653     $ 2,864,791  
Net expenses to average daily net assets
    0.59 %(c)     0.59 %(c)     0.60 %(d)     0.61 %(d)     0.61 %*
Net investment income (loss) to average daily net assets
    1.79 %     1.89 %     2.47 %     2.24 %     1.01 %*
Portfolio turnover rate
    59 %     65 %     63 %     92 %     74 %††
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.05 %     0.06 %     0.06 %     0.05 %     0.05 %*
 
(a) Period from July 12, 2006 (commencement of operations) through February 28, 2007.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(c) The net expense ratio does not include the effect of expense reductions (Note 2).
(d) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the year ended February 28, 2007.
* Annualized.
** Not annualized.

         
26
  See accompanying notes to the financial statements.    

 

GMO International Growth Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO International Growth Equity Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund’s investment objective is high total return. The Manager seeks to achieve the Fund’s investment objective by investing in equities or groups of equities that the Manager believes will provide higher returns than the MSCI EAFE Growth Index. The Manager uses active investment management methods, which means that equities are bought and sold according to the Manager’s evaluation of companies’ published financial information, securities’ prices, equity and bond markets, and the overall economy.
 
In selecting equities for the Fund, the Manager may use a combination of investment methods to identify equities that the Manager believes present positive return potential relative to other equities. Some of these methods evaluate individual equities or a group of equities based on the ratio of their price relative to historical financial information and forecasted financial information provided by industry analysts. Historical financial information may include book value, cash flow and earnings. The Manager may compare these ratios to industry or market averages in order to assess the relative attractiveness of an equity. Other methods focus on evaluating patterns of price movement or volatility of an equity or group of equities relative to the Fund’s investment universe. The Manager also may adjust the Fund’s portfolio for factors such as position size, market capitalization, and exposure to groups such as industry, sector, country or currency.
 
As a substitute for direct investments in equities, the Manager may use exchange-traded and over-the-counter (“OTC”) derivatives. The Manager also may use derivatives: (i) in an attempt to reduce investment exposures (which may result in a reduction below zero); (ii) to effect transactions intended as substitutes for securities lending; and (iii) in an attempt to adjust elements of the Fund’s investment exposure. Derivatives used may include futures, options, forward currency contracts and swap contracts. In addition, the Fund may lend its portfolio securities.
 
The Fund typically invests directly and indirectly (e.g., through underlying funds or derivatives) in equities of companies tied economically to countries other than the U.S. Under normal circumstances, the Fund invests directly and indirectly at least 80% of its assets in equity investments. The terms “equities” and “equity investments” refer to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts. The Manager may make investments tied economically to emerging countries.

         
        27

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
For cash management purposes, the Fund may invest in unaffiliated money market funds and/or GMO U.S. Treasury Fund.
 
Throughout the year ended February 28, 2011, the Fund had two classes of shares outstanding: Class III and Class IV. Each class of shares bears a different shareholder service fee.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the OTC market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. Additionally, because many foreign equity securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices adjusted by a factor supplied by a third party vendor using that vendor’s proprietary models. As of February 28, 2011, 93.8% of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified as using Level 2 inputs in the table below. See Note 4 for a further discussion on valuation of derivative financial instruments.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation

         
28
       

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include: fair value adjustments applied to local closing prices of foreign securities and derivatives due to market events that have occurred since the local market close but before the Fund’s daily NAV calculation.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Common Stocks
                               
Australia
  $ —     $ 148,133,921     $      —     $ 148,133,921  
Austria
    —       6,603,028       —       6,603,028  
Belgium
    —       33,111,567       —       33,111,567  

         
        29

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
  
  ASSET VALUATION INPUTS — continued
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Canada
  $ 117,812,086     $ —     $ —     $ 117,812,086  
Denmark
    —       131,989,225       —       131,989,225  
Finland
    —       43,618,766       —       43,618,766  
France
    —       240,853,217       —       240,853,217  
Germany
    —       225,287,400       —       225,287,400  
Greece
    —       11,802,440       —       11,802,440  
Hong Kong
    —       100,254,589       —       100,254,589  
Ireland
    —       9,244,784       —       9,244,784  
Israel
    —       2,818,844       —       2,818,844  
Italy
    —       4,433,391       —       4,433,391  
Japan
    —       698,100,756       —       698,100,756  
Netherlands
    —       76,169,010       —       76,169,010  
Norway
    —       24,103,967       —       24,103,967  
Singapore
    —       118,290,119       —       118,290,119  
Spain
    —       20,789,057       —       20,789,057  
Sweden
    —       243,747,577       —       243,747,577  
Switzerland
    —       331,913,240       —       331,913,240  
United Kingdom
    —       815,385,983       —       815,385,983  
                                 
TOTAL COMMON STOCKS
    117,812,086       3,286,650,881       —       3,404,462,967  
                                 
Preferred Stocks
                               
Germany
    —       36,992,779       —       36,992,779  
                                 
TOTAL PREFERRED STOCKS
    —       36,992,779       —       36,992,779  
                                 
Rights and Warrants
                               
Austria
    —       0  *     —       0  
Canada
    —       54,633       —       54,633  
                                 
TOTAL RIGHTS AND WARRANTS
    —       54,633       —       54,633  
                                 
Mutual Funds
                               
United States
    52,104,025       —       —       52,104,025  
                                 
TOTAL MUTUAL FUNDS
    52,104,025       —       —       52,104,025  
                                 
Short-Term Investments
    31,368,519       —       —       31,368,519  
                                 
Total Investments
    201,284,630       3,323,698,293       —       3,524,982,923  
                                 

         
30
       

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
  
  ASSET VALUATION INPUTS — continued
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Derivatives **
                               
Forward Currency Contracts
                               
Foreign currency risk
  $ —     $ 4,838,102     $ —     $ 4,838,102  
Futures Contracts
                               
Equity risk
    —       4,550,571       —       4,550,571  
                                 
Total Derivatives
    —       9,388,673       —       9,388,673  
                                 
Total
  $ 201,284,630     $ 3,333,086,966     $ —     $ 3,534,371,596  
                                 
 
LIABILITY VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Liabilities
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Derivatives **
                               
Forward Currency Contracts
                               
Foreign currency risk
  $ —     $ (9,056,442 )   $      —     $ (9,056,442 )
Futures Contracts
                               
Equity risk
    (1,005,812 )     (1,168,717 )     —       (2,174,529 )
                                 
Total Derivatives
    (1,005,812 )     (10,225,159 )     —       (11,230,971 )
                                 
Total
  $ (1,005,812 )   $ (10,225,159 )   $ —     $ (11,230,971 )
                                 
 
            * Represents the interest in securities that have no value at February 28, 2011.
 
The risks referenced above are not intended to be inclusive of all risks. Please see the Investment Risks and Derivative Financial Instruments sections below for a further discussion of risks.
 
            ** Because the tables above are based on market values or unrealized appreciation (depreciation) rather than the notional amounts of derivatives, the uncertainties surrounding the valuation inputs for a derivative are likely to be more significant to the Fund’s net asset value than the uncertainties surrounding inputs for a non-derivative security with the same market value.

         
        31

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements.
 
The Fund held no investments or derivative financial instruments directly at either February 28, 2011 or February 28, 2010, whose fair value was categorized using Level 3 inputs.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 pm. Income and expenses denominated in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country’s tax treaty with the United States. The foreign withholding rates applicable to a Fund’s investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if paid by the shareholders of the Fund.
 
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Taxes related to capital gains realized during

         
32
       

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
the year ended February 28, 2011, if any, are reflected as part of Net realized gain (loss) in the Statement of Operations. Changes in tax liabilities related to capital gain taxes on unrealized investment gains, if any, are reflected as part of Change in net unrealized appreciation (depreciation) in the Statement of Operations. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards, derivative contract transactions, differing treatment of dividend reserves, foreign currency transactions, post-October capital losses, passive foreign investment company transactions, and losses on wash sale transactions.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 35,462,267     $ 92,399,830  
                 
Total distributions
  $ 35,462,267     $ 92,399,830  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 23,364,101  
         
Other Tax Attributes:
       
Capital loss carryforwards
  $ (640,523,555 )

         
        33

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 28, 2017
  $ (50,291,148 )
February 28, 2018
    (590,232,407 )
         
Total
  $ (640,523,555 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 3,058,697,090     $ 553,931,534     $ (87,645,701 )   $ 466,285,833      
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if

         
34
       

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, 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 among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class’s operations. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (Note 5).
 
Brown Brothers Harriman & Co. (“BBH”) serves as the Fund’s custodian and fund accounting agent. State Street Bank and Trust Company (“State Street”) serves as the Fund’s transfer agent. BBH’s and State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund’s investments.
 
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund’s investments. These and other risks (e.g., nationalization,

         
        35

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund’s investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
 
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund’s foreign currency holdings and investments denominated in foreign currencies.
 
• Market Risk — Growth Securities — Because growth securities typically trade at higher multiples of current earnings than other securities, their market values are often more sensitive than other securities to changes in future earnings expectations.
 
Other principal risks of an investment in the Fund include Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund’s securities); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by “equitizing” its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.

         
36
       

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically “sell” a portion of the Fund’s portfolio) in combination with a long futures contract on another index (to synthetically “buy” exposure to that index). The Funds also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral (e.g., foreign currency forwards; see “Currency Risk” above), that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.

         
        37

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
 
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund’s forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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.
 
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. During the year ended February 28, 2011, the Fund used forward currency contracts to manage against anticipated currency exchange rate changes and adjust exposure to foreign

         
38
       

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
currencies. Forward currency contracts outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because regular trading on many foreign exchanges closes prior to the close of the NYSE, closing prices for these foreign futures contracts (including foreign index futures) do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures contracts using fair value prices, which are based on local closing prices adjusted by a factor and supplied by a third party vendor using that vendor’s proprietary models. As of February 28, 2011, futures contracts representing 0.1% of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified using Level 2 inputs in the table above. During the year ended February 28, 2011, the Fund used futures contracts to adjust exposure to certain securities markets and maintain the diversity and liquidity of the portfolio. Futures contracts outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.

         
        39

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or

         
40
       

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.

         
        41

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. During the year ended February 28, 2011, the Fund held rights and warrants as a result of a corporate action. Rights and warrants held by the Fund at the end of the period are listed in the Fund’s Schedule of Investments.

         
42
       

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of
February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Assets:
                                               
Investments, at value (rights and warrants)
  $      —     $ —     $      —     $ 54,633     $      —     $ 54,633  
Unrealized appreciation on futures contracts *
    —       —       —       4,550,571       —       4,550,571  
Unrealized appreciation on forward currency contracts
    —       4,838,102       —       —       —       4,838,102  
                                                 
Total
  $ —     $ 4,838,102     $ —     $ 4,605,204     $ —     $ 9,443,306  
                                                 
Liabilities:
                                               
Unrealized depreciation on futures contracts *
  $ —     $ —     $ —     $ (2,174,529 )   $ —     $ (2,174,529 )
Unrealized depreciation on forward currency contracts
    —       (9,056,442 )     —       —       —       (9,056,442 )
                                                 
Total
  $ —     $ (9,056,442 )   $ —     $ (2,174,529 )   $ —     $ (11,230,971 )
                                                 
 
The Effect of Derivative Instruments on the Statement of Operations for the period ended February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Investments (rights and warrants)
  $      —     $      —     $      —     $ (485,448 )   $      —     $ (485,448 )
Futures contracts
    —       —       —       13,054,816       —       13,054,816  
Forward currency contracts
    —       (6,478,202 )     —       —       —       (6,478,202 )
                                                 
Total
  $ —     $ (6,478,202 )   $ —     $ 12,569,368     $ —     $ 6,091,166  
                                                 
Change in Unrealized Appreciation (Depreciation) on:
                                               
Investments (rights and warrants)
  $ —     $ —     $ —     $ (13,090 )   $ —     $ (13,090 )
Futures contracts
    —       —       —       2,352,031       —       2,352,031  
Forward currency contracts
    —       (5,578,298 )     —       —       —       (5,578,298 )
                                                 
Total
  $ —     $ (5,578,298 )   $ —     $ 2,338,941     $ —     $ (3,239,357 )
                                                 
 
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for

         
        43

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
            * The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.
 
The volume of derivative activity, based on absolute values (forward currency contracts, futures contracts, and rights/warrants) outstanding at each month-end, was as follows for the year ended February 28, 2011:
 
                         
    Forward
        
    currency
   Futures
   Rights/
    contracts   contracts   Warrants
 
Average amount outstanding
  $ 577,702,873     $ 247,878,197     $ 227,478  
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at an annual rate of 0.50% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares and 0.09% for Class IV shares.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.50% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund’s Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund’s Expense Reimbursement Amount. These contractual expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011

         
44
       

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
was $68,743 and $22,886, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
             
Indirect Net
 		           
Expenses
            
(excluding
            
shareholder service
     Indirect
      
fees and interest
     Shareholder
     Total Indirect
expense)     Service Fees     Expenses
< 0.001%
    0.000%     < 0.001%
             
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 aggregated $2,055,147,123 and $1,824,200,291, respectively.
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 36.27% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund’s outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. Three of the shareholders are other funds of the Trust.
 
As of February 28, 2011, 0.01% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and 96.92% of the Fund’s shares were held by accounts for which the Manager had investment discretion.

         
        45

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    3,308,278     $ 68,564,402       3,178,735     $ 55,629,413  
Shares issued to shareholders in reinvestment of distributions
    254,526       5,561,605       1,004,291       18,257,187  
Shares repurchased
    (4,112,235 )     (88,058,836 )     (12,738,058 )     (235,771,836 )
                                 
Net increase (decrease)
    (549,431 )   $ (13,932,829 )     (8,555,032 )   $ (161,885,236 )
                                 
                                 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class IV:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    35,082,074     $ 722,622,353       48,775,661     $ 853,284,883  
Shares issued to shareholders in reinvestment of distributions
    1,299,639       28,446,372       3,733,797       68,447,053  
Shares repurchased
    (30,641,075 )     (653,162,424 )     (37,956,677 )     (637,540,805 )
                                 
Net increase (decrease)
    5,740,638     $ 97,906,301       14,552,781     $ 284,191,131  
                                 
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                 
    Value,
               Distributions
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   end of
Affiliate
  period   Purchases   Proceeds   Income   Gains   period
 
GMO U.S.
Treasury Fund
  $      —     $ 147,241,598     $ 95,137,573     $ 17,945     $ 839     $ 52,104,025  
                                                 
Totals
  $ —     $ 147,241,598     $ 95,137,573     $ 17,945     $ 839     $ 52,104,025  
                                                 

         
46
       

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO International Growth Equity Fund:
 
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 Growth Equity Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian, brokers, and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
        47

 

GMO International Growth Equity Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
48
       

 

 
GMO International Growth Equity Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.65 %   $ 1,000.00     $ 1,239.00     $ 3.61  
2) Hypothetical
    0.65 %   $ 1,000.00     $ 1,021.57     $ 3.26  
                                 
Class IV
                               
                                 
1) Actual
    0.59 %   $ 1,000.00     $ 1,240.00     $ 3.28  
2) Hypothetical
    0.59 %   $ 1,000.00     $ 1,021.87     $ 2.96  
                                 
 
            * Expenses are calculated using each Class’s annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
        49

 

GMO International Growth Equity Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
During the year ended February 28, 2011, the Fund paid foreign taxes of $6,437,681 and recognized foreign source income of $82,878,527.
 
For taxable, non-corporate shareholders, 100% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 represents qualified dividend income subject to the 15% rate category.

         
50
       

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
    Other
Name and
  Position(s)
   Length of
  During Past
   Complex
     Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
                         
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
        51

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
    Other
Name and
  Position(s)
   Length of
  During Past
   Complex
     Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
    Other
Name and
  Position(s)
   Length of
  During Past
   Complex
     Directorships
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Held
 
                         
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee;
President and
Chief Executive
Officer of the Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
52        

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003 – 2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        53

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
54        

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO International Intrinsic Value Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Quantitative Equity Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
The Class III shares of GMO International Intrinsic Value Fund returned +20.9% for the fiscal year ended February 28, 2011, as compared with +20.0% for the MSCI EAFE Index and +18.6% for the MSCI EAFE Value Index.
 
Relative to the benchmark, stock selection was largely responsible for the outperformance. An underweight position in British oil company BP and overweight positions in Canadian auto parts maker Magna International and Japanese oil company JX Holdings were among the biggest contributors. On the negative side, an underweight position in German industrial Siemens and an overweight position in Japanese financial Resona Holdings detracted from relative performance.
 
Country selection had a negative impact on relative performance. An underweight to Germany, which outperformed, and overweight to Ireland, which underperformed, hurt despite the benefit from an underweight to Australia, which underperformed.
 
Sector selection had a positive impact on performance relative to the index. The value added from overweighting Consumer Discretionary, which outperformed, and underweighting Utilities, which underperformed, outweighed the negative impact from overweighting Health Care, which underperformed.
 
Currency selection had a positive impact on relative performance mainly from the Fund’s underweight to the euro and overweight to the Canadian dollar.
 
Because some of the securities and instruments held directly or indirectly by the Fund had positive fair value adjustments during the fiscal year (and the performance of indices are not fair valued), the Fund’s absolute and relative performance is better than it otherwise would have been.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice. References to specific securities are not recommendations of such securities and may not be representative of any GMO portfolio’s current or future investments.

 

 
Comparison of Change in Value of a $35,000,000 Investment in
GMO International Intrinsic Value Fund Class III Shares and the MSCI EAFE Value Index
As of February 28, 2011
 
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited. Performance for classes may vary due to different fees.
 
 
MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.

 

GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary   % of Total Net Assets  
Common Stocks
    97.3 %
Forward Currency Contracts
    0.0 ^
Preferred Stocks
    0.9  
Futures Contracts
    0.1  
Mutual Funds
    0.5  
Short-Term Investments
    0.2  
Rights and Warrants
    0.0 ^
Other
    1.0  
         
      100.0 %
         
 
         
Country Summary*   % of Investments  
Japan
    25.0 %
United Kingdom
    19.0  
France
    12.4  
Italy
    9.9  
Germany
    7.9  
Switzerland
    4.6  
Singapore
    3.4  
Sweden
    2.7  
Spain
    2.6  
Netherlands
    1.8  
Hong Kong
    1.5  
Canada
    1.3  
Denmark
    1.3  
Belgium
    1.1  
Finland
    1.0  
Austria
    0.9  
Greece
    0.8  
Ireland
    0.8  
Australia
    0.7  
Israel
    0.5  
New Zealand
    0.4  
Norway
    0.4  
Malta
    0.0 ^
Portugal
    0.0 ^
         
      100.0 %
         
 
^ Rounds to 0.0%
 
* The table above shows country exposure in the Fund. The table excludes short-term investments. The table includes exposure through derivative financial instruments, if any. The table excludes exposure through forward currency contracts. The table takes into account the market value of securities and options and the notional amounts of swap agreements and other derivative financial instruments, if any.

         
        1

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2011 (Unaudited)
 
         
Industry Group Summary   % of Equity Investments**  
Pharmaceuticals, Biotechnology & Life Sciences
    15.9 %
Energy
    15.0  
Banks
    9.7  
Capital Goods
    8.4  
Telecommunication Services
    7.7  
Materials
    6.6  
Utilities
    5.8  
Automobiles & Components
    5.2  
Retailing
    3.0  
Consumer Durables & Apparel
    2.8  
Real Estate
    2.7  
Food, Beverage & Tobacco
    2.5  
Diversified Financials
    2.4  
Media
    2.0  
Technology Hardware & Equipment
    1.8  
Transportation
    1.7  
Food & Staples Retailing
    1.3  
Software & Services
    1.3  
Insurance
    1.0  
Consumer Services
    1.0  
Household & Personal Products
    0.9  
Health Care Equipment & Services
    0.6  
Semiconductors & Semiconductor Equipment
    0.4  
Commercial & Professional Services
    0.3  
         
      100.0 %
         
 
** Equity investments may consist of common stocks and other stock-related securities, such as preferred stocks. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.

         
2
       

 

GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            COMMON STOCKS — 97.3%        
                     
            Australia — 3.2%        
      2     Australia and New Zealand Banking Group Ltd     50  
      277,973     BHP Billiton Ltd     13,135,390  
      2,907,948     BlueScope Steel Ltd     6,232,052  
      1,910,199     Charter Hall Office (REIT)     6,223,976  
      628,130     Commonwealth Bank of Australia     34,143,594  
      4,814,098     Dexus Property Group (REIT)     4,211,464  
      7,260,431     Goodman Group (REIT)     5,203,574  
      3,060,505     GPT Group (REIT)     9,720,786  
      8,221,532     ING Office Fund     5,130,459  
      879,555     Macquarie Atlas Roads Group *     1,488,824  
      6,112,780     Mirvac Group (REIT)     8,130,452  
      3,210,115     Pacific Brands Ltd *     2,910,383  
      13     Qantas Airways Ltd *     31  
      85,959     Rio Tinto Ltd     7,505,569  
      4,834,188     Stockland (REIT)     18,810,630  
      4     Suncorp-Metway Ltd     34  
      1,026,637     TABCORP Holdings Ltd     7,975,817  
      11,242,666     Telstra Corp Ltd     32,013,018  
      375,457     Wesfarmers Ltd     12,718,308  
      322,816     Westpac Banking Corp     7,791,295  
      231,834     Woodside Petroleum Ltd     10,109,881  
                     
            Total Australia     193,455,587  
                     
                     
            Austria — 0.9%        
      16,452     Andritz AG     1,389,275  
      115,033     Erste Group Bank AG     6,068,374  
      1,206,291     Immofinanz AG *     5,326,976  
      1,167,625     Immofinanz AG (Entitlement Shares) *     —  
      524,912     OMV AG     22,306,129  
      188,844     Raiffeisen International Bank Holding     11,341,899  

         
    See accompanying notes to the financial statements.   3

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Austria — continued        
      125,083     Voestalpine AG     5,783,520  
      166,915     Wienerberger AG *     3,453,829  
                     
            Total Austria     55,670,002  
                     
                     
            Belgium — 1.1%        
      2,034,118     Ageas     6,453,407  
      63,439     Bekaert NV     6,882,031  
      287,344     Belgacom SA     10,778,662  
      148,682     Colruyt SA     7,472,178  
      62,595     Delhaize Group     4,835,104  
      2,292,506     Dexia SA *     10,015,599  
      231,306     KBC Groep NV *     9,673,185  
      56,912     Mobistar SA     3,637,951  
      105,922     Umicore SA     5,340,403  
                     
            Total Belgium     65,088,520  
                     
                     
            Canada — 3.2%        
      90,200     Bank of Montreal     5,752,449  
      253,500     Barrick Gold Corp     13,380,145  
      416,700     BCE Inc     15,449,060  
      116,600     Canadian National Railway Co     8,528,224  
      116,400     Canadian Pacific Railway Ltd     7,900,176  
      1,317,800     EnCana Corp     42,834,773  
      162,700     IGM Financial Inc     7,904,318  
      231,600     Magna International Inc Class A     11,406,577  
      202,300     Methanex Corp     5,886,492  
      91,600     Metro Inc Class A     4,148,423  
      78,900     National Bank of Canada     6,079,413  
      221,400     Penn West Petroleum Ltd     6,401,241  
      797,321     Precision Drilling Corp *     9,396,660  
      171,700     Research In Motion Ltd *     11,337,095  
      338,900     RONA Inc *     5,162,596  
      513,200     Sun Life Financial Inc     17,045,921  

         
4
  See accompanying notes to the financial statements.    

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Canada — continued        
      113,700     Teck Resources Ltd Class B     6,290,335  
      625,900     Yellow Media Inc     3,588,352  
                     
            Total Canada     188,492,250  
                     
                     
            Denmark — 1.3%        
      51,537     Carlsberg A/S Class B     5,473,976  
      418,740     Danske Bank A/S *     9,815,787  
      10,789     Greentech Energy Systems A/S *     33,710  
      473,766     Novo-Nordisk A/S Class B     59,714,558  
                     
            Total Denmark     75,038,031  
                     
                     
            Finland — 1.0%        
      50,316     Cargotec Oyj Class B     2,250,784  
      45,010     Kone Oyj Class B     2,456,566  
      99,327     Metso Oyj     5,137,961  
      305,989     Neste Oil Oyj     5,426,865  
      1,267,635     Nokia Oyj     10,929,120  
      186,674     Sampo Oyj Class A     5,777,671  
      37,913     Stockmann Oyj AB Class A     1,385,477  
      530,469     Stora Enso Oyj Class R     5,975,722  
      88,626     Tieto Oyj     1,701,351  
      473,428     UPM–Kymmene Oyj     9,401,371  
      82,537     Wartsila Oyj     6,346,407  
                     
            Total Finland     56,789,295  
                     
                     
            France — 12.3%        
      55,763     Arkema     4,077,100  
      670,173     BNP Paribas     52,303,791  
      14,541     Bongrain SA     1,374,290  
      96,072     Casino Guichard-Perrachon SA     9,407,453  
      66,891     CNP Assurances     1,484,286  
      66,442     Compagnie de Saint-Gobain     3,968,509  
      282,277     Credit Agricole SA     4,955,438  
      137,102     Dassault Systemes SA     10,500,530  

         
    See accompanying notes to the financial statements.   5

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            France — continued        
      53,313     Essilor International SA     3,809,898  
      765,849     France Telecom SA     16,947,325  
      3,499     Fromageries Bel     734,058  
      35,434     Hermes International     7,708,132  
      84,846     L’Oreal SA     9,872,056  
      217,371     Lagardere SCA     9,783,871  
      153,657     Legrand SA     6,449,875  
      167,740     LVMH Moet Hennessy Louis Vuitton SA     26,454,565  
      606,184     Natixis *     3,616,307  
      32,668     Nexans SA     2,962,226  
      46,215     PPR     7,011,569  
      54,722     Publicis Groupe SA     3,121,424  
      230,280     Renault SA *     14,121,364  
      271,403     Rhodia SA     7,822,010  
      145,740     Safran SA     5,187,394  
      2,819,694     Sanofi-Aventis     194,975,977  
      75,189     Schneider Electric SA     12,453,783  
      494,046     Societe Generale     34,739,194  
      197,537     Technicolor *     1,494,331  
      23,713     Technip SA     2,343,542  
      3,434,671     Total SA     210,545,404  
      47,088     Valeo SA *     2,934,760  
      1,775,645     Vivendi SA     50,607,379  
      100,994     Wendel     10,422,273  
                     
            Total France     734,190,114  
                     
                     
            Germany — 5.2%        
      62,726     Aareal Bank AG *     2,194,866  
      196,356     Aurubis AG     10,462,069  
      257,861     BASF AG     21,500,448  
      313,690     Bayerische Motoren Werke AG     25,484,951  
      616,274     Daimler AG (Registered) *     43,551,555  
      230,269     Deutsche Lufthansa AG (Registered) *     4,717,597  
      197,797     Deutsche Post AG (Registered)     3,636,911  

         
6
  See accompanying notes to the financial statements.    

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Germany — continued        
      2,137,932     E.ON AG     70,219,992  
      192,741     Gildemeister AG     4,280,995  
      462,600     Heidelberger Druckmaschinen AG *     2,273,978  
      1,189,970     Infineon Technologies AG     13,072,429  
      206,445     Kloeckner & Co AG *     6,734,887  
      152,657     Lanxess AG     11,375,063  
      89,650     Leonische Drahtwerke AG *     3,762,256  
      22,292     Linde AG     3,406,886  
      70,270     MAN SE     8,955,725  
      52,211     MTU Aero Engines Holding AG     3,488,778  
      22,686     Puma AG Rudolf Dassler Sport     6,754,269  
      74,838     RWE AG     5,060,849  
      159,417     Salzgitter AG     13,266,064  
      386,252     SAP AG     23,340,698  
      34,398     Siemens AG (Registered)     4,650,778  
      26,993     Software AG     4,364,287  
      62,590     Stada Arzneimittel AG     2,506,553  
      140,546     Symrise AG     3,691,968  
      18,437     Volkswagen AG     2,804,608  
      11,182     Wacker Chemie AG     2,064,084  
                     
            Total Germany     307,623,544  
                     
                     
            Greece — 0.8%        
      1,305,661     Alpha Bank A.E. *     8,631,607  
      296,355     EFG Eurobank Ergasias *     1,892,735  
      1,457,944     National Bank of Greece SA *     13,554,498  
      710,009     OPAP SA     14,824,467  
      1,911,055     Piraeus Bank SA *     4,343,474  
      183,049     Public Power Corp SA     2,830,835  
                     
            Total Greece     46,077,616  
                     
                     
            Hong Kong — 1.5%        
      922,500     BOC Hong Kong Holdings Ltd     2,868,641  
      837,000     Cathay Pacific Airways Ltd     1,951,856  

         
    See accompanying notes to the financial statements.   7

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Hong Kong — continued        
      2,685,098     CLP Holdings Ltd     21,870,463  
      1,020,290     Esprit Holdings Ltd     5,021,698  
      55,000     Guoco Group     685,241  
      540,700     Hong Kong Ferry Co Ltd     514,785  
      5,984,530     Hong Kong & China Gas     13,488,604  
      81,900     Hong Kong Aircraft Engineering Co Ltd     1,263,339  
      552,000     Hutchison Whampoa Ltd     6,519,061  
      11,736,000     Pacific Basin Shipping Ltd     6,890,402  
      2,569,969     Power Assets Holdings Ltd     16,800,668  
      503,000     Swire Pacific Ltd     7,059,020  
      1,891,400     Yue Yuen Industrial Holdings     5,967,324  
                     
            Total Hong Kong     90,901,102  
                     
                     
            Ireland — 0.8%        
      1,147,613     C&C Group Plc     5,594,205  
      714,868     CRH Plc     16,531,631  
      233,464     DCC Plc     7,493,197  
      547,037     Greencore Group Plc     891,726  
      1,492,286     Irish Life & Permanent Group Holdings Plc *     2,006,439  
      135,686     Kerry Group Plc Class A     4,923,753  
      344,919     Kingspan Group Plc     3,332,793  
      81,445     Paddy Power Plc     3,315,882  
      406,597     Smurfit Kappa Group Plc *     5,051,608  
                     
            Total Ireland     49,141,234  
                     
                     
            Israel — 0.5%        
      1,627,479     Bezeq Israeli Telecommunication Corp Ltd     4,416,114  
      203,594     Discount Investment Corp (Registered)     3,857,009  
      344,083     Israel Chemicals Ltd     5,729,825  
      1,226,854     Machteshim-Agan Industries Ltd *     6,125,036  
      208,096     Mizrahi Tefahot Bank Ltd     2,109,712  
      330,942     Partner Communications Co Ltd     6,148,752  
      1,468     The Israel Corp Ltd *     1,740,977  
                     
            Total Israel     30,127,425  
                     

         
8
  See accompanying notes to the financial statements.    

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Italy — 6.9%        
      1,113,746     A2A SPA     1,783,418  
      2     Bulgari SPA     21  
      1,389,942     CIR-Compagnie Industriali Riunite SPA *     2,988,877  
      17,299,507     Enel SPA     103,092,550  
      6,928,351     ENI SPA     168,931,019  
      278,001     Fiat SPA     2,581,678  
      551,026     Fondiaria–Sai SPA     5,215,061  
      209,362     Indesit Company SPA     2,417,761  
      3,956,016     Intesa San Paolo     13,349,519  
      212,430     Italcementi SPA-Di RISP     1,078,640  
      358,671     Maire Tecnimont SPA     1,470,773  
      1,631,351     Mediaset SPA     10,502,472  
      374,130     Mediobanca SPA     3,960,852  
      1,216,858     Milano Assicurazioni SPA     2,023,311  
      94,800     Natuzzi SPA ADR *     437,976  
      498,755     Recordati SPA     4,663,459  
      182,832     Saipem SPA     9,236,377  
      1,716,855     Snam Rete Gas SPA     9,393,777  
      9,626,324     Telecom Italia SPA     15,028,838  
      18,062,724     Telecom Italia SPA-Di RISP     23,907,019  
      1,927,072     Terna SPA     8,889,307  
      8,547,658     UniCredit SPA     21,991,492  
                     
            Total Italy     412,944,197  
                     
                     
            Japan — 24.9%        
      2,840     Advance Residence Investment Corp (REIT)     5,918,313  
      866,700     Aeon Co Ltd     10,935,316  
      405,500     Aeon Credit Service Co Ltd     6,195,443  
      1,865,900     Aiful Corp *     3,932,446  
      129,000     Aisin Seiki Co Ltd     4,940,758  
      700,000     All Nippon Airways Co Ltd *     2,532,011  
      934,800     Alps Electric Co Ltd     12,600,545  
      413,000     Anritsu Corp     3,876,750  
      185,000     Asahi Diamond Industrial Co Ltd     3,577,389  

         
    See accompanying notes to the financial statements.   9

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Japan — continued        
      276,100     Asahi Breweries Ltd     5,337,270  
      1,104,000     Asahi Kasei Corp     7,655,816  
      909,700     Astellas Pharma Inc     35,770,388  
      1,119,000     Bank of Yokohama Ltd (The)     6,040,296  
      123,500     Canon Inc     5,972,386  
      689     Central Japan Railway Co     6,175,270  
      132,700     Circle K Sunkus Co Ltd     2,242,013  
      2,767,000     Cosmo Oil Co Ltd     10,051,136  
      185,400     Credit Saison Co Ltd     3,640,054  
      587,800     CSK Holdings Corp *     2,142,090  
      1,794     CyberAgent Inc     5,756,710  
      565,200     Daiei Inc *     2,304,317  
      216,000     Daihatsu Motor Co Ltd     3,416,134  
      2,343,000     Daikyo Inc *     4,561,151  
      776,000     Dainippon Screen Manufacturing Co Ltd *     7,550,322  
      395,800     Daito Trust Construction Co Ltd     32,433,221  
      182,000     Dai Nippon Printing Co Ltd     2,463,868  
      225,300     Don Quijote Co Ltd     7,877,437  
      331,000     Eisai Co Ltd     12,399,948  
      228,200     Electric Power Development Co Ltd     7,209,731  
      45,200     Fanuc Ltd     7,060,655  
      50,100     Fast Retailing Co Ltd     7,865,937  
      1,565,000     Fuji Electric Holdings Co Ltd     5,312,851  
      1,228,000     Fuji Heavy Industries Ltd     10,581,734  
      265,300     Fuji Oil Co Ltd     3,789,350  
      682,000     Gunze Ltd     2,931,924  
      61,600     Hamamatsu Photonics KK     2,376,119  
      1,307,000     Hanwa Co Ltd     6,096,425  
      8,729,000     Haseko Corp *     8,163,510  
      128,800     Hikari Tsushin Inc     3,155,340  
      3,944,000     Hitachi Ltd     24,004,844  
      738,900     Honda Motor Co Ltd     32,247,204  
      288,800     Hosiden Corp     3,320,683  
      998     INPEX Corp     7,012,824  

         
10
  See accompanying notes to the financial statements.    

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Japan — continued        
      2,146,000     Isuzu Motors Ltd     9,704,206  
      1,683,900     Itochu Corp     17,511,007  
      4,148     Japan Retail Fund Investment Corp (REIT)     7,139,491  
      280,800     JFE Holdings Inc     8,892,756  
      8,422,390     JX Holdings Inc     59,331,326  
      313,100     K’s Holdings Corp     10,574,200  
      2,625,000     Kajima Corp     7,036,700  
      1,076,200     Kao Corp     29,069,065  
      2,982,000     Kawasaki Kisen Kaisha Ltd     13,050,556  
      277,000     Kayaba Industry Co     2,428,559  
      5,426     KDDI Corp     35,236,782  
      465,200     Komatsu Ltd     14,271,720  
      260,000     Konami Corp     5,496,295  
      214,000     Kyowa Exeo Corp     2,048,859  
      97,000     Lawson Inc     4,776,439  
      1,246,300     Leopalace21 Corp *     2,104,191  
      337,000     Makino Milling Machine Co Ltd *     3,176,258  
      1,210,000     Marubeni Corp     9,287,406  
      2,597,000     Mazda Motor Corp     6,725,804  
      228,000     Miraca Holdings Inc     8,821,074  
      2,022,500     Mitsubishi Chemical Holdings Corp     14,832,486  
      553,000     Mitsubishi Electric Corp     6,571,004  
      361,000     Mitsubishi Gas Chemical Co Inc     2,799,669  
      191,080     Mitsubishi UFJ Lease & Finance Co Ltd     8,489,961  
      888,000     Mitsui Chemicals Inc     3,334,960  
      3,306,000     Mitsui Mining & Smelting Co Ltd     13,156,777  
      2,018,000     Mitsui OSK Lines Ltd     13,418,695  
      15,177,500     Mizuho Financial Group Inc     31,285,801  
      139,400     Murata Manufacturing Co Ltd     10,392,101  
      299,700     Nabtesco Corp     7,145,300  
      2,110     Net One Systems Co Ltd     3,398,185  
      200,000     NHK Spring Co Ltd     2,350,297  
      1,065,000     Nichirei Corp     5,018,669  
      46,100     Nintendo Co Ltd     13,557,333  

         
    See accompanying notes to the financial statements.   11

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Japan — continued        
      310,000     Nippon Chemi-Con Corp *     2,203,567  
      2,706,000     Nippon Light Metal Co Ltd *     5,828,051  
      2,186,000     Nippon Steel Corp     7,950,056  
      930,200     Nippon Telegraph & Telephone Corp     45,503,415  
      538,000     Nippon Yakin Koguo Co Ltd *     1,528,947  
      2,714,000     Nippon Yusen KK     12,003,407  
      2,355,800     Nissan Motor Co Ltd     24,206,084  
      742,000     Nisshinbo Holdings Inc     8,156,984  
      38,300     Nitori Co Ltd     3,391,071  
      131,200     Nitto Denko Corp     7,956,044  
      28,591     NTT Docomo Inc     53,710,355  
      1,266,000     Obayashi Corp     5,695,207  
      25,300     Okinawa Electric Power Co     1,265,776  
      350,000     OKUMA Corp *     3,304,646  
      238,400     Omron Corp     6,647,442  
      37,400     Ono Pharmaceutical Co Ltd     1,958,211  
      24,700     Oriental Land Co Ltd     2,472,986  
      134,750     ORIX Corp     15,175,780  
      337     ORIX JREIT Inc (REIT)     1,944,067  
      3,971,000     Osaka Gas Co Ltd     15,121,954  
      339,000     Pacific Metals Co Ltd     3,222,520  
      2,419,800     Pioneer Corp *     13,084,038  
      134,130     Point Inc     6,449,217  
      2,691,600     Resona Holdings Inc     14,704,407  
      540,000     Ricoh Company Ltd     7,205,172  
      846,000     Round One Corp     5,561,041  
      135,000     Ryohin Keikaku Co Ltd     6,421,129  
      122,500     Saizeriya Co Ltd     2,336,339  
      246,700     Sankyo Co Ltd     13,972,710  
      881,600     Sapporo Hokuyo Holdings Inc     4,608,014  
      50,900     Sawai Pharmaceuticals Co Ltd     4,777,080  
      221,200     Secom Co Ltd     11,167,218  
      284,400     Sega Sammy Holdings Inc     6,489,745  
      456,000     Seino Holdings Co Ltd     3,480,656  

         
12
  See accompanying notes to the financial statements.    

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Japan — continued        
      350,800     Seven & I Holdings Co Ltd     9,791,960  
      80,200     Shimamura Co Ltd     7,768,748  
      978,600     Showa Shell Sekiyu KK     8,877,669  
      32,000     SMC Corp     5,492,845  
      365,800     SoftBank Corp     15,039,534  
      5,375,900     Sojitz Corp     12,124,461  
      2,540,600     Sumitomo Corp     37,746,212  
      3,337,286     Sumitomo Trust & Banking Co Ltd     21,263,873  
      6,641,000     Taiheiyo Cement Co Ltd *     9,880,168  
      3,519,000     Taisei Corp     8,347,150  
      94,800     Takata Corp     3,022,602  
      1,988,500     Takeda Pharmaceutical Co Ltd     99,066,981  
      419,650     Takefuji Corp (a) (b)     5,130  
      705,000     Toho Zinc Co Ltd     4,045,773  
      234,800     Tokai Rika Co Ltd     4,575,443  
      1,327,000     Tokyo Gas Co Ltd     5,932,435  
      717,000     Tokyo Steel Manufacturing Co     8,010,592  
      2,283,000     Tokyo Tatemono Co Ltd     10,777,020  
      142     Tokyu REIT Inc (REIT)     976,001  
      628,000     TonenGeneral Sekiyu KK     7,416,077  
      3,012,000     Tosoh Corp     10,826,254  
      1,053,000     Toyota Motor Corp     49,203,962  
      617,300     Toyota Tsusho Corp     11,721,758  
      655,000     Toyo Engineering Corp     2,546,832  
      266,000     Tsugami Corp     2,000,138  
      1,155     United Urban Investment Corp (REIT)     1,511,963  
      997,300     UNY Co Ltd     9,953,010  
      67,090     USS Co Ltd     5,444,105  
      13,409     Yahoo Japan Corp     5,055,279  
      238,680     Yamada Denki Co Ltd     18,232,448  
      146,100     Yamato Kogyo Co Ltd     4,822,599  
      722,000     Zeon Corp     7,407,952  
                     
            Total Japan     1,480,252,171  
                     

         
    See accompanying notes to the financial statements.   13

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Malta — 0.0%        
      15,984,486     BGP Holdings Plc *     —  
                     
                     
            Netherlands — 1.8%        
      173,252     Aalberts Industries NV     3,692,887  
      272,041     CSM     9,673,388  
      96,579     Heineken NV     4,980,752  
      6,002,486     ING Groep NV *     75,298,361  
      1,172,460     Koninklijke BAM Groep NV     7,522,968  
      71,578     Koninklijke DSM NV     4,204,730  
                     
            Total Netherlands     105,373,086  
                     
                     
            New Zealand — 0.4%        
      1,372,036     Fletcher Building Ltd     9,104,929  
      522,555     Sky City Entertainment Group Ltd     1,283,227  
      7,405,827     Telecom Corp of New Zealand     11,658,384  
                     
            Total New Zealand     22,046,540  
                     
                     
            Norway — 0.4%        
      728,157     DnB NOR ASA     11,269,887  
      115,680     Frontline Ltd     3,133,208  
      1,547,307     Golden Ocean Group Ltd     1,999,402  
      157,447     TGS Nopec Geophysical Co ASA     4,070,769  
      60,221     Yara International ASA     3,197,502  
                     
            Total Norway     23,670,768  
                     
                     
            Portugal — 0.0%        
      121,498     Jeronimo Martins SGPS SA     1,947,406  
                     
                     
            Singapore — 2.5%        
      7,279,000     CapitaCommercial Trust (REIT)     7,903,186  
      4,197,000     Cosco Corp     6,506,026  
      4,152,000     Ezra Holdings Ltd     5,117,531  
      1,068,000     Fraser & Neave Ltd     4,728,446  
      31,731,000     Golden Agri-Resources Ltd     16,275,673  
      2,750,000     Ho Bee Investment Ltd     2,890,739  

         
14
  See accompanying notes to the financial statements.    

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Singapore — continued        
      4,037,000     Jaya Holdings Ltd *     1,767,922  
      575,000     Keppel Corp Ltd     5,109,538  
      2,619,000     Midas Holdings Ltd     1,531,926  
      2,968,500     Neptune Orient Lines Ltd *     4,809,192  
      127     Noble Group Ltd     206  
      1,500,000     Oversea-Chinese Banking Corp Ltd     10,889,234  
      2,534,100     Sembcorp Industries Ltd     9,529,639  
      3,364,000     SembCorp Marine Ltd     14,228,641  
      1,161,000     Singapore Exchange Ltd     7,234,962  
      3,151,000     Singapore Press Holdings Ltd     9,619,833  
      2,227,000     Singapore Technologies Engineering Ltd     5,603,616  
      7,558,000     Singapore Telecommunications     17,700,155  
      5,631,000     Suntec Real Estate Investment Trust (REIT)     6,568,107  
      3,519,000     Swiber Holdings Ltd *     2,180,319  
      611,000     Venture Corp Ltd     4,544,955  
      2,723,000     Yangzijiang Shipbuilding Holdings Ltd     3,847,572  
                     
            Total Singapore     148,587,418  
                     
                     
            Spain — 2.6%        
      930,338     Banco Bilbao Vizcaya Argentaria SA     11,468,787  
      2,020,490     Banco Popular Espanol SA     12,220,867  
      3,466,217     Banco Santander SA     42,675,167  
      252,264     Gas Natural SDG SA     4,310,153  
      1,112,549     Iberdrola SA     9,706,987  
      189,909     Inditex SA     13,762,574  
      1,304,207     Repsol YPF SA     43,780,910  
      613,231     Telefonica SA     15,590,908  
                     
            Total Spain     153,516,353  
                     
                     
            Sweden — 2.7%        
      165,224     Alfa Laval AB     3,375,442  
      153,509     Assa Abloy AB Class B     4,299,209  
      317,340     Atlas Copco AB     7,213,625  
      530,978     Atlas Copco AB Class A     13,350,213  

         
    See accompanying notes to the financial statements.   15

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Sweden — continued        
      1     CDON Group AB *     5  
      652,000     Hennes & Mauritz AB Class B     21,303,655  
      374,077     NCC Class B     9,776,747  
      547,517     Sandvik AB     10,508,295  
      273,117     Scania AB Class B     6,091,494  
      1,228,774     Skandinaviska Enskilda Banken AB Class A     11,177,096  
      294,373     SKF AB Class B     8,216,027  
      218,267     Svenska Handelsbanken AB Class A     7,372,895  
      1,529,751     Swedbank AB Class A *     26,954,334  
      218,683     Tele2 AB Class B     4,993,147  
      573,715     Trelleborg AB Class B     5,761,232  
      1,015,902     Volvo AB Class B *     17,582,918  
                     
            Total Sweden     157,976,334  
                     
                     
            Switzerland — 4.5%        
      402,753     Compagnie Financiere Richemont SA Class A     23,047,142  
      1,130,971     Nestle SA (Registered)     64,034,453  
      2,134,300     Novartis AG (Registered)     119,940,472  
      249,883     Roche Holding AG (Non Voting)     37,692,967  
      19,129     Swatch Group AG     8,148,218  
      17,366     Swisscom AG (Registered)     7,667,319  
      75,258     Synthes Inc     10,332,141  
                     
            Total Switzerland     270,862,712  
                     
                     
            United Kingdom — 18.8%        
      1,146,000     3i Group Plc     5,818,038  
      783,918     Amlin Plc     4,937,275  
      121,908     Associated British Foods Plc     1,915,856  
      3,328,558     AstraZeneca Plc     162,874,040  
      8,083,848     Barclays Plc     41,952,238  
      1,016,756     Barratt Developments Plc *     1,775,423  
      1,095,120     BG Group Plc     26,666,859  
      297,675     BHP Billiton Plc     11,799,667  
      4,336,903     BP Plc     34,962,679  

         
16
  See accompanying notes to the financial statements.    

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            United Kingdom — continued        
      318,962     British American Tobacco Plc     12,778,898  
      215,108     British Sky Broadcasting Group Plc     2,749,940  
      13,918,763     BT Group Plc     41,341,972  
      1,157,226     Burberry Group Plc     22,553,562  
      444,270     Catlin Group Ltd     2,717,896  
      1,896,610     Centrica Plc     10,488,030  
      92,893     Charter International Plc     1,145,402  
      2,346,494     Cobham Plc     8,599,989  
      252,688     Compass Group Plc     2,273,728  
      187,920     Cookson Group Plc *     1,998,961  
      689,652     Daily Mail & General Trust Plc     6,298,776  
      1,810,353     Debenhams Plc *     1,846,618  
      308,806     Diageo Plc     6,037,343  
      10,488,127     Dixons Retail Plc *     3,303,169  
      1,811,348     Drax Group Plc     11,624,959  
      279,263     FirstGroup Plc     1,657,151  
      1,352,906     Game Group Plc     1,344,288  
      10,039,125     GlaxoSmithKline Plc     192,715,139  
      373,814     Gulf Keystone Petroleum Ltd *     865,588  
      3,252,252     Home Retail Group Plc     11,669,814  
      628,170     HSBC Holdings Plc     6,918,137  
      1,398,037     Inchcape Plc *     8,824,031  
      814,646     Intermediate Capital Group Plc     4,257,142  
      201,545     Jardine Lloyd Thompson Group Plc     2,131,561  
      180,870     JD Wetherspoon Plc     1,293,586  
      1,779,615     Kesa Electricals Plc     3,705,802  
      531,154     Lancashire Holdings Ltd     5,191,694  
      1,556,546     Legal & General Group Plc     3,007,131  
      19,243,190     Lloyds Banking Group Plc *     19,433,089  
      759,410     Melrose Plc     3,753,798  
      343,619     Michael Page International Plc     2,875,107  
      298,058     Micro Focus International Plc     1,372,327  
      766,297     Mitchells & Butlers Plc *     4,054,887  
      591,268     National Express Group Plc *     2,386,028  

         
    See accompanying notes to the financial statements.   17

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            United Kingdom — continued        
      258,698     Next Plc     8,309,683  
      111,306     Petrofac Ltd     2,520,210  
      2,508,600     Punch Taverns Plc *     2,711,014  
      238,809     Reckitt Benckiser Group Plc     12,311,996  
      6     Reed Elsevier Plc     54  
      427,360     Rio Tinto Plc     30,093,264  
      2,900,821     Royal Dutch Shell Plc A Shares (London)     104,350,772  
      1,922,297     Royal Dutch Shell Plc B Shares (London)     68,718,896  
      1,335,261     Sage Group Plc (The)     6,171,230  
      681,587     Scottish & Southern Energy Plc     13,727,016  
      866,042     Smith & Nephew Plc     10,031,714  
      72,143     Spirax-Sarco Engineering Plc     2,148,167  
      696,949     Standard Chartered Plc     18,433,493  
      5,350,242     Taylor Wimpey Plc *     3,439,578  
      371,530     Travis Perkins Plc     6,011,181  
      548,239     United Utilities Group Plc     5,278,642  
      25,912,498     Vodafone Group Plc     73,568,050  
      247,813     Weir Group Plc (The)     6,908,147  
      2,932,616     William Hill Plc     9,144,883  
      262,643     Wolseley Plc *     9,144,809  
      327,165     WPP Plc     4,502,572  
      525,148     Xstrata Plc     12,010,722  
                     
            Total United Kingdom     1,115,453,711  
                     
                     
            TOTAL COMMON STOCKS (COST $5,386,858,656)     5,785,225,416  
                     
                     
            PREFERRED STOCKS — 0.9%        
                     
            Germany — 0.9%        
      1     Henkel AG & Co KGaA 1.61%     60  
      239,185     Porsche Automobil Holding SE 0.17%     19,055,059  
      313,908     ProSiebenSat.1 Media AG 4.97%     10,200,632  

         
18
  See accompanying notes to the financial statements.    

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
Shares /
 		           
Par Value     Description   Value ($)  
            Germany — continued        
      9,049     Villeroy & Boch AG (Non Voting) *     55,510  
      139,347     Volkswagen AG 1.87%     23,696,623  
                     
            Total Germany     53,007,884  
                     
                     
            TOTAL PREFERRED STOCKS (COST $34,188,401)     53,007,884  
                     
                     
            RIGHTS AND WARRANTS — 0.0%        
                     
            Austria — 0.0%        
      1,206,291     Immofinanz AG Rights, Expires 03/02/11 *     —  
                     
                     
            TOTAL RIGHTS AND WARRANTS (COST $0)     —  
                     
                     
            MUTUAL FUNDS — 0.5%        
                     
            United States — 0.5%        
            Affiliated Issuers        
      1,205,320     GMO U.S. Treasury Fund     30,133,000  
                     
                     
            TOTAL MUTUAL FUNDS (COST $30,133,000)     30,133,000  
                     
                     
            SHORT-TERM INVESTMENTS — 0.2%        
                     
            Time Deposits — 0.2%        
USD
    9,000,000     Royal Bank of Canada (Grand Cayman) Time Deposit, 0.15%, due 03/01/11     9,000,000  
HKD
    77,838     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.01%, due 03/01/11     9,995  
JPY
    12,802,720     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.01%, due 03/01/11     156,503  
NOK
    57,625     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.97%, due 03/01/11     10,290  
NZD
    12,891     Brown Brothers Harriman (Grand Cayman) Time Deposit, 2.15%, due 03/01/11     9,699  
SEK
    64,338     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.55%, due 03/01/11     10,158  
SGD
    475,407     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.01%, due 03/01/11     373,807  
AUD
    1,034,245     Brown Brothers Harriman (Grand Cayman) Time Deposit, 3.84%, due 03/01/11     1,053,017  
CHF
    9,579     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.01%, due 03/01/11     10,310  
DKK
    48,084     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.01%, due 03/01/11     8,899  
GBP
    171,678     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.09%, due 03/01/11     279,088  
CAD
    136,110     Citibank (New York) Time Deposit, 0.93%, due 03/01/11     140,095  

         
    See accompanying notes to the financial statements.   19

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value     Description   Value ($)  
            Time Deposits — continued        
EUR
    168,880     Citibank (New York) Time Deposit, 0.12%, due 03/01/11     233,046  
USD
    21,979     Citibank (New York) Time Deposit, 0.03%, due 03/01/11     21,979  
                     
            Total Time Deposits     11,316,886  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $11,316,886)     11,316,886  
                     
                     
            TOTAL INVESTMENTS — 98.9%
(Cost $5,462,496,943) 		    5,879,683,186  
                     
            Other Assets and Liabilities (net) — 1.1%     67,220,224  
                     
            TOTAL NET ASSETS — 100.0%   $ 5,946,903,410  
                     

         
20
  See accompanying notes to the financial statements.    

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
A summary of outstanding financial instruments at February 28, 2011 is as follows:
 
Forward Currency Contracts
 
                                 
                    Net Unrealized
Settlement
 		          Units of
 		      Appreciation
Date   Counterparty   Deliver/Receive   Currency   Value   (Depreciation)
 
Buys †
                               
4/20/11
  Morgan Stanley Capital Services Inc.    AUD     14,405,820     $ 14,575,508     $ 251,945  
4/20/11
  Bank of New York Mellon   AUD     6,983,767       7,066,030       113,899  
4/20/11
  Brown Brothers Harriman & Co.    AUD     38,869,432       39,327,280       683,680  
4/20/11
  State Street Bank and Trust and Company   AUD     1,616,000       1,635,035       28,731  
4/20/11
  Barclays Bank PLC   HKD     186,164,043       23,915,804       11,844  
4/20/11
  Morgan Stanley Capital Services Inc.    HKD     186,164,043       23,915,804       15,650  
4/20/11
  Brown Brothers Harriman & Co.    HKD     331,552,057       42,593,264       32,024  
4/20/11
  State Street Bank and Trust and Company   HKD     372,328,086       47,831,609       39,644  
4/20/11
  JPMorgan Chase Bank, N.A.   HKD     50,000,000       6,423,315       2,893  
4/20/11
  Barclays Bank PLC   SGD     13,378,199       10,522,217       85,990  
4/20/11
  Bank of New York Mellon   SGD     26,756,398       21,044,434       176,148  
4/20/11
  Morgan Stanley Capital Services Inc.    SGD     26,756,398       21,044,434       170,971  
4/20/11
  Royal Bank of Scotland PLC   SGD     13,378,199       10,522,217       89,774  
4/20/11
  State Street Bank and Trust and Company   SGD     26,756,398       21,044,434       181,257  
4/20/11
  JPMorgan Chase Bank, N.A.   SGD     53,512,796       42,088,867       363,165  
                                 
                    $ 333,550,252     $ 2,247,615  
                                 
Sales #
                               
4/20/11
  Barclays Bank PLC   CAD     23,391,692     $ 24,050,681     $ (411,606 )
4/20/11
  Brown Brothers Harriman & Co.    CAD     15,536,777       15,974,478       (268,389 )
4/20/11
  Morgan Stanley Capital Services Inc.    CAD     38,281,099       39,359,551       (690,563 )
4/20/11
  State Street Bank and Trust and Company   CAD     3,360,670       3,455,346       (57,779 )
4/20/11
  JPMorgan Chase Bank, N.A.   CAD     21,501,595       22,107,336       (352,074 )
4/20/11
  Morgan Stanley Capital Services Inc.    GBP     4,939,000       8,025,413       (134,161 )
4/20/11
  State Street Bank and Trust and Company   JPY     1,798,312,786       21,990,268       (202,452 )
4/20/11
  Brown Brothers Harriman & Co.    JPY     2,186,645,357       26,738,906       (488,977 )
4/20/11
  JPMorgan Chase Bank, N.A.   JPY     2,186,645,357       26,738,906       (491,655 )
                                 
                    $ 188,440,885     $ (3,097,656 )
                                 
 
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.

         
    See accompanying notes to the financial statements.   21

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Futures Contracts
 
                             
                Net Unrealized
Number of
 		      Expiration
 		  Contract
 		  Appreciation
Contracts   Type   Date   Value   (Depreciation)
 
Sales
                           
1,245
    SPI 200     March 2011   $ 153,777,495     $ (2,494,850 )
83
    CAC 40     March 2011     4,708,922       (46,858 )
8
    IBEX 35     March 2011     1,197,628       (4,799 )
9
    Amesterdam IDX     March 2011     917,464       (6,366 )
66
    TOPIX     March 2011     7,706,365       (110,375 )
3
    Hang Seng     March 2011     450,526       (8,268 )
78
    OMXS 30     March 2011     1,392,236       (14,356 )
670
    S&P Toronto 60     March 2011     112,076,990       (7,966,639 )
                         
                $ 282,227,626     $ (10,652,511 )
                         
Buys
                           
17
    FTSE 100     March 2011   $ 1,652,212     $ 29,684  
1,113
    FTSE/MIB     March 2011     172,668,220       13,728,486  
946
    MSCI Singapore     March 2011     52,754,801       (101,592 )
414
    DAX     March 2011     104,157,371       3,882,630  
                         
                $ 331,232,604     $ 17,539,208  
                         
 
As of February 28, 2011, for futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
 
Notes to Schedule of Investments:
 
ADR - American Depositary Receipt
MSCI - Morgan Stanley Capital International
REIT - Real Estate Investment Trust
TOPIX - Tokyo Stock Price Index
 
* Non-income producing security.
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
(b) Bankrupt issuer.

         
22
  See accompanying notes to the financial statements.    

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Currency Abbreviations:
AUD
 
 - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
DKK - Danish Krone
EUR - Euro
GBP - British Pound
HKD - Hong Kong Dollar
JPY - Japanese Yen
NOK - Norwegian Krone
NZD - New Zealand Dollar
SEK - Swedish Krona
SGD - Singapore Dollar
USD - United States Dollar

         
    See accompanying notes to the financial statements.   23

 

GMO International Intrinsic Value Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $5,432,363,943) (Note 2)
  $ 5,849,550,186  
Investments in affiliated issuers, at value (cost $30,133,000) (Notes 2 and 10)
    30,133,000  
Receivable for investments sold
    858,344  
Receivable for Fund shares sold
    2,980,016  
Dividends and interest receivable
    22,456,790  
Foreign taxes receivable
    1,341,029  
Unrealized appreciation on open forward currency contracts (Note 4)
    2,247,615  
Receivable for collateral on open futures contracts (Note 4)
    44,625,130  
Receivable for variation margin on open futures contracts (Note 4)
    758,493  
Receivable for expenses reimbursed by Manager (Note 5)
    236,432  
Miscellaneous receivable
    4,767  
         
Total assets
    5,955,191,802  
         
         
Liabilities:
       
Payable for investments purchased
    909,485  
Payable for Fund shares repurchased
    516,674  
Payable to affiliate for (Note 5):
       
Management fee
    2,276,534  
Shareholder service fee
    530,144  
Administration fee – Class M
    2,217  
Trustees and Trust Officers or agents unaffiliated with the Manager
    14,002  
Payable for 12b-1 fee – Class M
    5,754  
Unrealized depreciation on open forward currency contracts (Note 4)
    3,097,656  
Accrued expenses
    935,926  
         
Total liabilities
    8,288,392  
         
Net assets
  $ 5,946,903,410  
         

         
24
  See accompanying notes to the financial statements.    

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011 — (Continued)
 
         
Net assets consist of:
       
Paid-in capital
  $ 6,790,225,139  
Accumulated undistributed net investment income
    63,981,263  
Accumulated net realized loss
    (1,330,683,827 )
Net unrealized appreciation
    423,380,835  
         
    $ 5,946,903,410  
         
Net assets attributable to:
       
Class II shares
  $ 217,090,351  
         
Class III shares
  $ 2,257,077,864  
         
Class IV shares
  $ 3,458,201,775  
         
Class M shares
  $ 14,533,420  
         
Shares outstanding:
       
Class II
    9,408,477  
         
Class III
    96,824,769  
         
Class IV
    148,432,387  
         
Class M
    632,064  
         
Net asset value per share:
       
Class II
  $ 23.07  
         
Class III
  $ 23.31  
         
Class IV
  $ 23.30  
         
Class M
  $ 22.99  
         

         
    See accompanying notes to the financial statements.   25

 

GMO International Intrinsic Value Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends from unaffiliated issuers (net of withholding taxes of $14,889,478)
  $ 161,202,246  
Interest
    393,566  
Dividends from affiliated issuers (Note 10)
    21,408  
         
Total investment income
    161,617,220  
         
Expenses:
       
Management fee (Note 5)
    27,515,694  
Shareholder service fee – Class II (Note 5)
    602,797  
Shareholder service fee – Class III (Note 5)
    3,035,665  
Shareholder service fee – Class IV (Note 5)
    2,872,887  
12b-1 fee – Class M (Note 5)
    33,171  
Administration fee – Class M (Note 5)
    26,536  
Custodian and fund accounting agent fees
    2,113,339  
Legal fees
    230,057  
Trustees fees and related expenses (Note 5)
    117,306  
Audit and tax fees
    99,955  
Transfer agent fees
    67,067  
Registration fees
    31,654  
Miscellaneous
    145,619  
         
Total expenses
    36,891,747  
Fees and expenses reimbursed by Manager (Note 5)
    (2,635,948 )
Expense reductions (Note 2)
    (582 )
         
Net expenses
    34,255,217  
         
Net investment income (loss)
    127,362,003  
         

         
26
  See accompanying notes to the financial statements.    

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011 — (Continued)
 
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in unaffiliated issuers
  $ (17,390,286 )
Realized gains distributions from affiliated issuers (Note 10)
    839  
Futures contracts
    (4,490,466 )
Written options
    5,303,445  
Swap contracts
    (991,783 )
Foreign currency, forward contracts and foreign currency related transactions
    3,966,382  
         
Net realized gain (loss)
    (13,601,869 )
         
Change in net unrealized appreciation (depreciation) on:
       
Investments
    937,114,509  
Futures contracts
    20,247,642  
Written options
    (2,755,715 )
Swap contracts
    36,091  
Foreign currency, forward contracts and foreign currency related transactions
    4,650,367  
         
Net unrealized gain (loss)
    959,292,894  
         
Net realized and unrealized gain (loss)
    945,691,025  
         
Net increase (decrease) in net assets resulting from operations
  $ 1,073,053,028  
         

         
    See accompanying notes to the financial statements.   27

 

GMO International Intrinsic Value Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 127,362,003     $ 112,766,188  
Net realized gain (loss)
    (13,601,869 )     (854,873,916 )
Change in net unrealized appreciation (depreciation)
    959,292,894       2,406,061,414  
                 
                 
Net increase (decrease) in net assets from operations
    1,073,053,028       1,663,953,686  
                 
Distributions to shareholders from:
               
Net investment income
               
Class II
    (3,181,083 )     (14,988,152 )
Class III
    (29,415,441 )     (64,034,986 )
Class IV
    (48,788,384 )     (84,268,877 )
Class M
    (153,235 )     (381,852 )
                 
Total distributions from net investment income
    (81,538,143 )     (163,673,867 )
                 
Net share transactions (Note 9):
               
Class II
    (222,885,164 )     (155,183,758 )
Class III
    (24,879,740 )     (152,663,373 )
Class IV
    92,416,923       127,643,067  
Class M
    (1,067,222 )     712,594  
                 
Increase (decrease) in net assets resulting from net share transactions
    (156,415,203 )     (179,491,470 )
                 
                 
Total increase (decrease) in net assets
    835,099,682       1,320,788,349  
                 
Net assets:
               
Beginning of period
    5,111,803,728       3,791,015,379  
                 
End of period (including accumulated undistributed net investment income of $63,981,263 and distributions in excess of net investment income of $1,170,235, respectively)
  $ 5,946,903,410     $ 5,111,803,728  
                 

         
28
  See accompanying notes to the financial statements.    

 

GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class II share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 19.35     $ 13.86     $ 29.69     $ 34.99     $ 32.35  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.48       0.41       0.79       0.93       0.79  
Net realized and unrealized gain (loss)
    3.51       5.68       (14.01 )     (0.86 )     5.60  
                                         
                                         
Total from investment operations
    3.99       6.09       (13.22 )     0.07       6.39  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.27 )     (0.60 )     (0.99 )     (0.83 )     (0.54 )
From net realized gains
    —       —       (1.62 )     (4.54 )     (3.21 )
                                         
                                         
Total distributions
    (0.27 )     (0.60 )     (2.61 )     (5.37 )     (3.75 )
                                         
                                         
Net asset value, end of period
  $ 23.07     $ 19.35     $ 13.86     $ 29.69     $ 34.99  
                                         
                                         
Total Return(a)
    20.79 %     44.05 %     (48.04 )%     (1.11 )%     20.46 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 217,090     $ 394,009     $ 394,070     $ 510,006     $ 564,440  
Net expenses to average daily net assets
    0.72 %(b)(c)     0.72 %(b)     0.74 %(d)     0.76 %(d)     0.76 %
Net investment income (loss) to average daily net assets
    2.36 %     2.21 %     3.41 %     2.59 %     2.32 %
Portfolio turnover rate
    40 %     40 %     53 %     47 %     36 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.05 %     0.05 %     0.05 %     0.05 %     0.04 %
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(d) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† Calculated using average shares outstanding throughout the period.

         
    See accompanying notes to the financial statements.   29

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Financial Highlights
 
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 19.56     $ 14.00     $ 29.97     $ 35.28     $ 32.59  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.47       0.42       0.79       0.94       0.81  
Net realized and unrealized gain (loss)
    3.58       5.76       (14.13 )     (0.86 )     5.66  
                                         
                                         
Total from investment operations
    4.05       6.18       (13.34 )     0.08       6.47  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.30 )     (0.62 )     (1.01 )     (0.85 )     (0.57 )
From net realized gains
    —       —       (1.62 )     (4.54 )     (3.21 )
                                         
                                         
Total distributions
    (0.30 )     (0.62 )     (2.63 )     (5.39 )     (3.78 )
                                         
                                         
Net asset value, end of period
  $ 23.31     $ 19.56     $ 14.00     $ 29.97     $ 35.28  
                                         
                                         
Total Return(a)
    20.88 %     44.21 %     (48.01 )%     (1.06 )%     20.54 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 2,257,078     $ 1,925,104     $ 1,487,839     $ 2,615,878     $ 2,703,050  
Net expenses to average daily net assets
    0.65 %(b)(c)     0.65 %(c)     0.67 %(d)     0.69 %(d)     0.69 %
Net investment income (loss) to average daily net assets
    2.30 %     2.19 %     3.38 %     2.61 %     2.36 %
Portfolio turnover rate
    40 %     40 %     53 %     47 %     36 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.05 %     0.05 %     0.05 %     0.05 %     0.04 %
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(c) The net expense ratio does not include the effect of expense reductions (Note 2).
(d) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† Calculated using average shares outstanding throughout the period.

         
30
  See accompanying notes to the financial statements.    

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Financial Highlights
 
(For a Class IV share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 19.55     $ 14.00     $ 29.96     $ 35.26     $ 32.58  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.48       0.43       0.82       0.96       0.80  
Net realized and unrealized gain (loss)
    3.58       5.75       (14.14 )     (0.85 )     5.68  
                                         
                                         
Total from investment operations
    4.06       6.18       (13.32 )     0.11       6.48  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.31 )     (0.63 )     (1.02 )     (0.87 )     (0.59 )
From net realized gains
    —       —       (1.62 )     (4.54 )     (3.21 )
                                         
                                         
Total distributions
    (0.31 )     (0.63 )     (2.64 )     (5.41 )     (3.80 )
                                         
                                         
Net asset value, end of period
  $ 23.30     $ 19.55     $ 14.00     $ 29.96     $ 35.26  
                                         
                                         
Total Return(a)
    20.96 %     44.22 %     (47.95 )%     (0.98 )%     20.61 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 3,458,202     $ 2,779,470     $ 1,900,168     $ 4,131,392     $ 4,566,106  
Net expenses to average daily net assets
    0.59 %(b)(c)     0.59 %(b)     0.61 %(d)     0.63 %(d)     0.63 %
Net investment income (loss) to average daily net assets
    2.32 %     2.25 %     3.47 %     2.67 %     2.32 %
Portfolio turnover rate
    40 %     40 %     53 %     47 %     36 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.05 %     0.05 %     0.05 %     0.05 %     0.04 %
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(d) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† Calculated using average shares outstanding throughout the period.

         
    See accompanying notes to the financial statements.   31

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Financial Highlights
 
(For a Class M share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 19.30     $ 13.83     $ 29.60     $ 34.93     $ 32.28  
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.41       0.35       0.73       0.79       0.68  
Net realized and unrealized gain (loss)
    3.52       5.69       (13.95 )     (0.81 )     5.62  
                                         
                                         
Total from investment operations
    3.93       6.04       (13.22 )     (0.02 )     6.30  
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.24 )     (0.57 )     (0.93 )     (0.77 )     (0.44 )
From net realized gains
    —       —       (1.62 )     (4.54 )     (3.21 )
                                         
                                         
Total distributions
    (0.24 )     (0.57 )     (2.55 )     (5.31 )     (3.65 )
                                         
                                         
Net asset value, end of period
  $ 22.99     $ 19.30     $ 13.83     $ 29.60     $ 34.93  
                                         
                                         
Total Return(a)
    20.50 %     43.72 %     (48.14 )%     (1.36 )%     20.18 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 14,533     $ 13,221     $ 8,938     $ 18,687     $ 17,371  
Net expenses to average daily net assets
    0.95 %(b)(c)     0.95 %(b)     0.97 %(d)     0.99 %(d)     0.99 %
Net investment income (loss) to average daily net assets
    2.01 %     1.84 %     3.13 %     2.22 %     2.00 %
Portfolio turnover rate
    40 %     40 %     53 %     47 %     36 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.05 %     0.05 %     0.05 %     0.05 %     0.04 %
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(d) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† Calculated using average shares outstanding throughout the period.

         
32
  See accompanying notes to the financial statements.    

 

GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO International Intrinsic Value Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund’s investment objective is high total return. The Manager seeks to achieve the Fund’s investment objective by investing in equities or groups of equities that the Manager believes will provide higher returns than the MSCI EAFE Value Index. The Manager uses active investment management methods, which means that equities are bought and sold according to the Manager’s evaluation of companies’ published financial information, securities’ prices, equity and bond markets, and the overall economy.
 
In selecting equities for the Fund, the Manager may use a combination of investment methods to identify equities that the Manager believes present positive return potential relative to other equities. Some of these methods evaluate individual equities or a group of equities based on the ratio of their price relative to historical financial information and forecasted financial information provided by industry analysts. Historical financial information may include book value, cash flow and earnings. The Manager may compare these ratios to industry or market averages in order to assess the relative attractiveness of an equity. Other methods focus on evaluating patterns of price movement or volatility of an equity or group of equities relative to the Fund’s investment universe. The Manager also may adjust the Fund’s portfolio for factors such as position size, market capitalization, and exposure to groups such as industry, sector, country or currency.
 
As a substitute for direct investments in equities, the Manager may use exchange-traded and over-the-counter (“OTC”) derivatives. The Manager also may use derivatives: (i) in an attempt to reduce investment exposures (which may result in a reduction below zero); (ii) to effect transactions intended as substitutes for securities lending; and (iii) in an attempt to adjust elements of the Fund’s investment exposure. Derivatives used may include futures, options, forward currency contracts and swap contracts. In addition, the Fund may lend its portfolio securities.
 
The Fund typically invests directly and indirectly (e.g., through underlying funds or derivatives) in equities of companies tied economically to countries other than the U.S. The term “equities” refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts. The Manager may make investments tied economically to emerging countries.

         
        33

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
For cash management purposes, the Fund may invest in unaffiliated money market funds and/or GMO U.S. Treasury Fund.
 
Throughout the year ended February 28, 2011, the Fund had four classes of shares outstanding: Class II, Class III, Class IV and Class M. Class M shares bear an administration fee and a 12b-1 fee while classes II, III, and IV bear a shareholder service fee (See Note 5). The principal economic difference among the classes of shares is the type and level of fees they bear.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the over-the-counter (“OTC”) market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. See Note 4 for a further discussion on valuation of derivative financial instruments.
 
As of February 28, 2011, the total value of securities held directly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented less than 0.01% of net assets. The Fund classifies such securities (as defined below) as Level 3. Additionally, because many foreign equity securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign equity securities

         
34
       

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
and foreign index futures contracts as of the NYSE close using fair value prices, which are based on local closing prices adjusted by a factor supplied by a third party vendor using that vendor’s proprietary models. As of February 28, 2011, these foreign equity securities and foreign index futures contracts, representing 95.0% and 0.3%, respectively, of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified as using Level 2 inputs in the table below.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include: fair value adjustments applied to local closing prices of foreign securities and derivatives due to market events that have occurred since the local market close but before the Fund’s daily NAV calculation.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund used the following fair value techniques on Level 3 investments: The Fund considered certain bankrupt securities to be near worthless.

         
        35

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Common Stocks
                               
Australia
  $ —     $ 193,455,587     $ —     $ 193,455,587  
Austria
    —       55,670,002       —       55,670,002  
Belgium
    —       65,088,520       —       65,088,520  
Canada
    188,492,250       —       —       188,492,250  
Denmark
    —       75,038,031       —       75,038,031  
Finland
    —       56,789,295       —       56,789,295  
France
    —       734,190,114       —       734,190,114  
Germany
    —       307,623,544       —       307,623,544  
Greece
    —       46,077,616       —       46,077,616  
Hong Kong
    —       90,901,102       —       90,901,102  
Ireland
    —       49,141,234       —       49,141,234  
Israel
    —       30,127,425       —       30,127,425  
Italy
    437,976       412,506,221       —       412,944,197  
Japan
    —       1,480,247,041       5,130       1,480,252,171  
Malta
    —       0 *     —       0  
Netherlands
    —       105,373,086       —       105,373,086  
New Zealand
    —       22,046,540       —       22,046,540  
Norway
    —       23,670,768       —       23,670,768  
Portugal
    —       1,947,406       —       1,947,406  
Singapore
    —       148,587,418       —       148,587,418  
Spain
    —       153,516,353       —       153,516,353  
Sweden
    5       157,976,329       —       157,976,334  
Switzerland
    —       270,862,712       —       270,862,712  
United Kingdom
    —       1,115,453,711       —       1,115,453,711  
                                 
TOTAL COMMON STOCKS
    188,930,231       5,596,290,055       5,130       5,785,225,416  
                                 
Mutual Funds
                               
United States
    30,133,000       —       —       30,133,000  
                                 
TOTAL MUTUAL FUNDS
    30,133,000       —       —       30,133,000  
                                 

         
36
       

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
  
  ASSET VALUATION INPUTS — continued
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Preferred Stocks
                               
Germany
  $ —     $ 53,007,884     $ —     $ 53,007,884  
                                 
TOTAL PREFERRED STOCKS
    —       53,007,884       —       53,007,884  
                                 
Rights and Warrants
                               
Austria
    —       0 *     —       0  
                                 
TOTAL RIGHTS AND WARRANTS
    —       0       —       0  
                                 
Short-Term Investments
                               
Time Deposits
    11,316,886       —       —       11,316,886  
                                 
Total Short-Term Investments
    11,316,886       —       —       11,316,886  
                                 
Total Investments
    230,380,117       5,649,297,939       5,130       5,879,683,186  
                                 
Derivatives **
                               
Forward Currency Contracts
    —       2,247,615       —       2,247,615  
Foreign currency risk
                               
Futures Contracts
                               
Equity Risk
    —       17,640,800       —       17,640,800  
                                 
Total Derivatives
    —       19,888,415       —       19,888,415  
                                 
Total
  $ 230,380,117     $ 5,669,186,354     $ 5,130     $ 5,899,571,601  
                                 
 
            * Represents the interest in securities that have no value at February 28, 2011

         
        37

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
LIABILITY VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Liabilities
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Derivatives **
                               
Forward Currency Contracts
                               
Foreign currency risk
  $ —     $ (3,097,656 )   $      —     $ (3,097,656 )
Futures Contracts
                               
Equity risk
    (7,966,639 )     (2,787,464 )     —       (10,754,103 )
                                 
Total Derivatives
    (7,966,639 )     (5,885,120 )     —       (13,851,759 )
                                 
Total
  $ (7,966,639 )   $ (5,885,120 )   $ —     $ (13,851,759 )
                                 
 
The risks referenced above are not intended to be inclusive of all risks. Please see the Investment Risks and Derivative Financial Instruments sections below for a further discussion of risks.
 
            ** Because the tables above are based on market values or unrealized appreciation (depreciation) rather than the notional amounts of derivatives, the uncertainties surrounding the valuation inputs for a derivative are likely to be more significant to the Fund’s net asset value than the uncertainties surrounding inputs for a non-derivative security with the same market value.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements. The aggregate net value of the Fund’s direct investments in securities using Level 3 inputs was 0.1% of total net assets.

         
38
       

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a reconciliation of investments and derivatives, if any, in which significant unobservable inputs (Level 3) were used in determining value:
 
                                                                           
 
                                      Net Change in
                                      Unrealized
                                      Appreciation
                                      (Depreciation)
                                      from
    Balances
               Change in
           Balances
 		    Investments Still
    as of
   Net
   Accrued
   Total
   Unrealized
           as of
 		    Held as
    February 28,
   Purchases/
   Discounts/
   Realized
   Appreciation
   Transfer into
   Transfer out of
 		  February 28,
 		    February 28,
    2010   (Sales)   Premiums   Gain/(Loss)   (Depreciation)   level 3 *   level 3 *   2011     2011
Common Stocks Japan
  $      —     $ (48,897 )   $      —     $ (231,695 )   $ (1,619,090 )   $ 1,904,812   **   $      —     $ 5,130       $ (1,619,090 )
                                                                           
Total
  $ —     $ (48,897 )   $   —     $ (231,695 )   $ (1,619,090 )   $ 1,904,812     $ —     $ 5,130       $ (1,619,090 )
                                                                           
 
* The Fund accounts for investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the value at the end of the period.
** Financial assets transferred between Level 2 and Level 3 were due to a change in observable and/or unobservable inputs.
 
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 pm. Income and expenses denominated in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country’s tax treaty with the United

         
        39

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
States. The foreign withholding rates applicable to a Fund’s investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if paid by the shareholders of the Fund.
 
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Taxes related to capital gains realized during the year ended February 28, 2011, if any, are reflected as part of Net realized gain (loss) in the Statement of Operations. Changes in tax liabilities related to capital gain taxes on unrealized investment gains, if any, are reflected as part of Change in net unrealized appreciation (depreciation) in the Statement of Operations. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards, derivative contract transactions, foreign currency transactions, losses on wash sale transactions, passive foreign investment company transactions, and post-October capital losses, and redemption in-kind transactions.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 81,538,143     $ 163,673,867  
                 
Total distributions
  $ 81,538,143     $ 163,673,867  
                 

         
40
       

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 109,357,864  
         
Other Tax Attributes:
       
Capital loss carryforwards
  $ (1,266,585,632 )
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 5,573,489,631     $ 697,518,360     $ (391,324,805 )   $ 306,193,555      
 
For the year ended February 28, 2011, the Fund had net realized loss attributed to redemption in-kind transaction of $(7,147,024).
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 28, 2017
  $ (154,259,096 )
February 28, 2018
    (948,787,215 )
February 28, 2019
    (163,539,321 )
         
Total
  $ (1,266,585,632 )
         
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would

         
        41

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, 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 among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service, 12b-1, and administration fees, which are directly attributable to a class of shares, are charged to that class’s operations. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (Note 5).
 
Brown Brothers Harriman & Co. (“BBH”) serves as the Fund’s custodian and fund accounting agent. State Street Bank and Trust Company (“State Street”) serves as the Fund’s transfer agent. BBH’s and State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the

         
42
       

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund’s investments.
 
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund’s investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund’s investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
 
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund’s foreign currency holdings and investments denominated in foreign currencies.
 
• Market Risk — Value Securities — The Fund purchases some equity investments at prices below what the Manager believes to be their fundamental value. The Fund runs the risk that the prices of these investments will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value.
 
Other principal risks of an investment in the Fund include Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund’s securities); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).

         
        43

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by “equitizing” its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically “sell” a portion of the Fund’s portfolio) in combination with a long futures contract on another index (to synthetically “buy” exposure to that index). The Funds also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may

         
44
       

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral (e.g., foreign currency forwards; see “Currency Risk” above), that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.

         
        45

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund’s forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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.
 
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. During the year ended February 28, 2011, the Fund used forward currency contracts to manage against anticipated currency exchange rate changes and adjust exposure to foreign currencies. Forward currency contracts outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because regular trading on many foreign exchanges closes prior to the close of the NYSE, closing prices for these foreign futures contracts (including foreign index futures) do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund and the underlying funds generally value foreign futures contracts using fair value prices, which are based on local closing prices adjusted by a factor, supplied by a third party vendor using that vendor’s proprietary models. As of February 28, 2011, foreign index futures contracts representing 0.3% of the net assets of the Fund were valued using fair value prices. During the year ended February 28, 2011, the Fund used futures contracts to adjust exposure to certain

         
46
       

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
securities markets and maintain the diversity and liquidity of the portfolio. Futures contracts outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. During the year ended February 28, 2011, the Fund used purchased option contracts to as a substitute for direct equity investment (when paired with written put options). The Fund had no purchased option contracts outstanding at the end of the period.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. During the year ended February 28, 2011, the Fund used written put option contracts as a substitute for direct equity investment (when paired with purchased call options). The Fund had no written option contracts outstanding at the end of the period.
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.

         
        47

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
For the year ended February 28, 2011, investment activity in options contracts written by the Fund was as follows:
 
                                                 
    Puts   Calls
    Principal
           Principal
        
    Amount
   Number
       Amount
   Number
    
    of Contracts   of Contracts   Premiums   of Contracts   of Contracts   Premiums
 
Outstanding, beginning of year
    (11,299,914 )          —     $ (5,303,445 )          —            —     $      —  
Options written
    —       —       —       —       —       —  
Options exercised
    11,299,914       —       5,303,445       —       —       —  
Options expired
    —       —       —       —       —       —  
Options sold
    —       —       —       —       —       —  
                                                 
Outstanding, end of year
    —       —     $ —       —       —     $ —  
                                                 
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).

         
48
       

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility

         
        49

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the year ended February 28, 2011, the Fund used swap agreements to achieve returns comparable to holding and lending a direct equity position. Swap agreements outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. During the year ended February 28, 2011, the Fund held rights and warrants received as a result of a corporate action. Rights and warrants held by the Fund at the end of the period are listed in the Fund’s Schedule of Investments.
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of
February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Assets:
                                               
Unrealized appreciation on forward currency contracts
  $      —     $ 2,247,615     $      —     $ —     $      —     $ 2,247,615  
Unrealized appreciation on future contracts *
            —       —       17,640,800       —       17,640,800  
                                                 
Total
  $ —     $ 2,247,615     $ —     $ 17,640,800     $ —     $ 19,888,415  
                                                 
Liabilities:
                                               
Unrealized depreciation on forward currency contracts
  $ —     $ (3,097,656 )   $ —     $ —     $ —     $ (3,097,656 )
Unrealized depreciation on future contracts *
    —       —       —       (10,754,103 )     —       (10,754,103 )
                                                 
Total
  $ —     $ (3,097,656 )   $ —     $ (10,754,103 )   $ —     $ (13,851,759 )
                                                 

         
50
       

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
  
  Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of
  February 28, 2011Ù: — continued
 
 
The Effect of Derivative Instruments on the Statement of Operations for the period ended February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Investments (purchased options, rights and warrants)
  $      —     $ —     $ —     $ (5,322,677 )   $      —     $ (5,322,677 )
Written Options
    —       —       —     $ 5,303,445       —       5,303,445  
Future contracts
    —       —       —       (4,490,466 )     —       (4,490,466 )
Forward currency contracts
            3,796,321       —       —       —       3,796,321  
Swap agreements
    —       —       —       (991,783 )     —       (991,783 )
                                                 
Total
  $ —     $ 3,796,321     $ —     $ (5,501,481 )   $ —     $ (1,705,160 )
                                                 
Change in Unrealized Appreciation (Depreciation) on:
                                               
Investments (purchased options, rights and warrants)
  $ —     $ —     $ —     $ (9,742,472 )   $ —     $ (9,742,472 )
Written options
    —       —       —       (2,755,715 )     —       (2,755,715 )
Future contracts
    —       —       —       20,247,642       —       20,247,642  
Forward currency contracts
    —       4,448,855       —       —       —       4,448,855  
Swap agreements
    —       —       36,091       —       —       36,091  
                                                 
Total
  $ —     $ 4,448,855     $ 36,091     $ 7,749,455     $ —     $ 12,234,401  
                                                 
 
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
 
            * The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.
 
The volume of derivative activity, based on absolute values (forward currency contracts, futures contracts, and rights and warrants), principal amounts (options), or notional amounts (swap agreements) outstanding at each month-end, was as follows for the year ended February 28, 2011:
 
                                         
    Forward
                
    currency
   Futures
   Swap
       Rights/
    contracts   contracts   agreements   Options   warrants
 
Average amount outstanding
  $ 678,309,772     $ 618,204,135     $ 2,529,994     $ 17,120,501     $ 219,933  

         
        51

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for management services provided to the Fund. That fee is paid monthly at the annual rate of 0.50% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets of each class at the annual rate of 0.22% for Class II shares, 0.15% for Class III shares, and 0.09% for Class IV shares.
 
Holders of Class M shares of the Fund pay GMO an administration fee for support services provided to Class M shareholders. That fee is paid monthly at the annual rate of 0.20% of average daily net assets of Class M shares. Pursuant to a Rule 12b-1 distribution plan adopted by the Fund, holders of Class M shares of the Fund may pay a fee, at the annual rate of up to 1.00% of average daily net assets of Class M shares, for any activities or expenses primarily intended to result in the sale of Class M shares of the Fund and/or for the provision of services to Class M shareholders. The Trustees currently limit payments on Class M shares to 0.25% of the Fund’s average daily net assets of Class M shares.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.50% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means administration fees and distribution (12b-1) fees (Class M Shares only), shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund’s Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund’s Expense Reimbursement Amount. These contractual expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ending February 28, 2011 was $117,306 and $40,160, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.

         
52
       

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 aggregated $2,216,635,853 and $2,092,475,935, respectively. Proceeds from sale of securities for in-kind transactions for the year ended February 28, 2011 was $97,748,632.
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, the Fund had no shareholders who individually held more than 10% of the Fund’s outstanding shares.
 
As of February 28, 2011, 0.18% shares of the Fund were held by senior management of the Manager and GMO Trust officers, and 59.90% of the Fund’s shares were held by accounts for which the Manager had investment discretion.
 
9. Share transactions
 
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
 
Share transactions
 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class II:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    438,186     $ 9,041,413       3,477,961     $ 64,158,212  
Shares issued to shareholders in reinvestment of distributions
    144,660       2,982,923       723,485       13,801,459  
Shares repurchased
    (11,535,143 )     (234,909,500 )     (12,277,870 )     (233,143,429 )
                                 
Net increase (decrease)
    (10,952,297 )   $ (222,885,164 )     (8,076,424 )   $ (155,183,758 )
                                 
                                 
                                 

         
        53

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    16,487,506     $ 355,291,715       15,318,786     $ 292,305,658  
Shares issued to shareholders in reinvestment of distributions
    1,276,264       26,674,838       2,780,512       53,834,852  
Shares repurchased
    (19,351,996 )     (406,846,293 )     (25,929,276 )     (498,803,883 )
                                 
Net increase (decrease)
    (1,588,226 )   $ (24,879,740 )     (7,829,978 )   $ (152,663,373 )
                                 
                                 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class IV:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    40,511,908     $ 810,469,313       58,903,501     $ 1,049,593,338  
Shares issued to shareholders in reinvestment of distributions
    2,107,086       44,091,968       3,883,242       75,263,129  
Shares repurchased
    (36,352,651 )     (762,144,358 )     (56,388,246 )     (997,213,400 )
                                 
Net increase (decrease)
    6,266,343     $ 92,416,923       6,398,497     $ 127,643,067  
                                 
                                 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class M:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    122,315     $ 2,490,456       140,341     $ 2,600,335  
Shares issued to shareholders in reinvestment of distributions
    7,447       153,234       20,011       381,852  
Shares repurchased
    (182,698 )     (3,710,912 )     (121,740 )     (2,269,593 )
                                 
Net increase (decrease)
    (52,936 )   $ (1,067,222 )     38,612     $ 712,594  
                                 

         
54
       

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                 
    Value,
               Distributions
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   period
 
GMO U.S. Treasury Fund
  $      —     $ 51,133,000     $ (21,000,000 )   $ 21,408     $ 839     $ 30,133,000  
                                                 
Totals
  $ —     $ 51,133,000     $ (21,000,000 )   $ 21,408     $ 839     $ 30,133,000  
                                                 

         
        55

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO International Intrinsic Value Fund:
 
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 Intrinsic Value Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian, brokers, and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
56
       

 

GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, distribution (12b-1) and/or administration fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
This example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
        57

 

 
GMO International Intrinsic Value Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class II
                               
                                 
1) Actual
    0.72 %   $ 1,000.00     $ 1,246.60     $ 4.01  
2) Hypothetical
    0.72 %   $ 1,000.00     $ 1,021.22     $ 3.61  
                                 
Class III
                               
                                 
1) Actual
    0.65 %   $ 1,000.00     $ 1,247.30     $ 3.62  
2) Hypothetical
    0.65 %   $ 1,000.00     $ 1,021.57     $ 3.26  
                                 
Class IV
                               
                                 
1) Actual
    0.59 %   $ 1,000.00     $ 1,248.00     $ 3.29  
2) Hypothetical
    0.59 %   $ 1,000.00     $ 1,021.87     $ 2.96  
                                 
Class M
                               
                                 
1) Actual
    0.95 %   $ 1,000.00     $ 1,245.20     $ 5.29  
2) Hypothetical
    0.95 %   $ 1,000.00     $ 1,020.08     $ 4.76  
                                 
 
            * Expenses are calculated using each Class’s annualized net expense ratio (including interest expense and indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
58
       

 

GMO International Intrinsic Value Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
During the year ended February 28, 2011, the Fund paid foreign taxes of $14,889,478 and recognized foreign source income of $176,091,724.
 
For taxable, non-corporate shareholders,100.00% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 represents qualified dividend income subject to the 15% rate category.

         
        59

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with the
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
60        

 

Independent Trustees: — continued
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with the
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 –
December 2007). 		    63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
                Portfolios in
      
    Position(s)
           Fund
     Other
Name and
   Held with
   Length of
   Principal Occupation(s)
   Complex
     Directorships
Date of Birth   Trust   Time Served   During Past Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee;
President and
Chief Executive
Officer of the
Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
        61

 

Other Officers:
 
             
Name and
  Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and
Chief Financial
Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance Officer   Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
62
       

 

Other Officers: — (Continued)
 
             
Name and
  Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and Clerk   Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        63

 

 
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Asset Allocation Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
GMO International Opportunities Equity Allocation Fund returned +21.5% for the fiscal year ended February 28, 2011, as compared with +20.0% for the Fund’s benchmark, the MSCI EAFE Index.
 
Underlying fund implementation added 1.6% to relative performance, as GMO International Intrinsic Value Fund and GMO International Growth Equity Fund both outperformed their respective benchmarks during the period.
 
Asset allocation detracted 0.1% from relative performance.
 
Because some of the securities and instruments held directly or indirectly by the Fund had positive fair value adjustments during the fiscal year (and the performance of indices are not fair valued), the Fund’s absolute and relative performance is better than it otherwise would have been.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice. References to specific securities are not recommendations of such securities and may not be representative of any GMO portfolio’s current or future investments.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO International Opportunities Equity Allocation Fund Class III Shares and the
MSCI EAFE Index
As of February 28, 2011
 
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited.
 
 
MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.

 

GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary*   % of Total Net Assets  
Common Stocks
    96.4 %
Short-Term Investments
    1.6  
Preferred Stocks
    1.2  
Futures Contracts
    0.1  
Investment Funds
    0.0 Ù
Debt Obligations
    0.0 Ù
Rights and Warrants
    0.0 Ù
Swap Agreements
    (0.1 )
Forward Currency Contracts
    (0.1 )
Other
    0.9  
         
      100.0 %
         
 
         
Country / Region Summary**   % of Investments  
Japan
    22.9 %
United Kingdom
    21.4  
France
    9.2  
Germany
    8.5  
Switzerland
    6.7  
Italy
    4.8  
Sweden
    4.6  
Singapore
    3.3  
Emerging***
    2.8  
Denmark
    2.4  
Hong Kong
    2.1  
Canada
    2.0  
Netherlands
    1.9  
Spain
    1.5  
Australia
    1.3  
Finland
    1.1  
Belgium
    1.0  
Austria
    0.5  
Greece
    0.5  
Ireland
    0.5  
Norway
    0.5  
Israel
    0.3  
New Zealand
    0.2  
Portugal
    0.0 Ù
         
      100.0 %
         

         
        1

 

 
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2011 (Unaudited)
 
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust (“underlying funds”).
** The table above shows indirect country exposure associated with investments in the underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative financial instruments. The table excludes explosure through forward currency contracts.
*** The “Emerging” exposure is comprised of: Argentina, Brazil, Chile, China, Colombia, Congo, Czech Republic, Dominican Republic, Egypt, Hungary, India, Indonesia, Malaysia, Mexico, Philippines, Poland, Russia, South Africa, South Korea, Taiwan, Thailand, Turkey, Ukraine and Venezuela.
Ù Rounds to 0.0%

         
2
       

 

GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares /
 		           
Par Value ($)     Description   Value ($)  
            MUTUAL FUNDS — 100.0%        
                     
            Affiliated Issuers — 100.0%        
      1,577,201     GMO Emerging Markets Fund, Class VI     22,727,461  
      584,254     GMO Flexible Equities Fund, Class VI     11,463,067  
      15,970,006     GMO International Growth Equity Fund, Class IV     381,363,744  
      16,329,877     GMO International Intrinsic Value Fund, Class IV     380,486,131  
                     
                     
            TOTAL MUTUAL FUNDS (COST $820,783,791)     796,040,403  
                     
                     
            SHORT-TERM INVESTMENTS — 0.0%        
                     
            Time Deposits — 0.0%        
      32,062     State Street Eurodollar Time Deposit, 0.01%, due 03/01/11     32,062  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $32,062)     32,062  
                     
                     
            TOTAL INVESTMENTS — 100.0%
(Cost $820,815,853) 		    796,072,465  
            Other Assets and Liabilities (net) — (0.0%)     (46,196 )
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 796,026,269  
                     

         
    See accompanying notes to the financial statements.   3

 

GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $32,062) (Note 2)
  $ 32,062  
Investments in affiliated issuers, at value (cost $820,783,791) (Notes 2 and 10)
    796,040,403  
Receivable for Fund shares sold
    500  
Receivable for expenses reimbursed by Manager (Note 5)
    10,472  
         
Total assets
    796,083,437  
         
         
Liabilities:
       
Payable to affiliate for (Note 5):
       
Trustees and Trust Officers or agents unaffiliated with the Manager
    1,826  
Accrued expenses
    55,342  
         
Total liabilities
    57,168  
         
Net assets
  $ 796,026,269  
         
Net assets consist of:
       
Paid-in capital
  $ 1,001,466,658  
Accumulated net realized loss
    (180,697,001 )
Net unrealized depreciation
    (24,743,388 )
         
    $ 796,026,269  
         
Net assets attributable to:
       
Class III shares
  $ 796,026,269  
         
Shares outstanding:
       
Class III
    52,253,152  
         
Net asset value per share:
       
Class III
  $ 15.23  
         

         
4
  See accompanying notes to the financial statements.    

 

GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends from affiliated issuers (Note 10)
  $ 9,587,731  
Interest
    5  
         
Total investment income
    9,587,736  
         
Expenses:
       
Custodian, fund accounting agent and transfer agent fees
    52,294  
Audit and tax fees
    34,211  
Legal fees
    28,745  
Trustees fees and related expenses (Note 5)
    14,992  
Registration fees
    4,194  
Miscellaneous
    18,080  
         
Total expenses
    152,516  
Fees and expenses reimbursed by Manager (Note 5)
    (132,233 )
Expense reductions (Note 2)
    (530 )
         
Net expenses
    19,753  
         
Net investment income (loss)
    9,567,983  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in affiliated issuers
    (52,143,275 )
         
Net realized gain (loss)
    (52,143,275 )
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in affiliated issuers
    185,518,128  
         
Net realized and unrealized gain (loss)
    133,374,853  
         
Net increase (decrease) in net assets resulting from operations
  $ 142,942,836  
         

         
    See accompanying notes to the financial statements.   5

 

GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 9,567,983     $ 18,728,754  
Net realized gain (loss)
    (52,143,275 )     (85,397,014 )
Change in net unrealized appreciation (depreciation)
    185,518,128       239,801,080  
                 
                 
Net increase (decrease) in net assets from operations
    142,942,836       173,132,820  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (9,579,484 )     (18,742,240 )
                 
Net share transactions (Note 9):
               
Class III
    1,559,794       97,429,157  
Purchase premiums and redemption fees (Notes 2 and 9):
               
Class III
    —       5,113  
                 
Total increase (decrease) in net assets resulting from net share transactions
    1,559,794       97,434,270  
                 
                 
Total increase (decrease) in net assets
    134,923,146       251,824,850  
                 
Net assets:
               
Beginning of period
    661,103,123       409,278,273  
                 
End of period
  $ 796,026,269     $ 661,103,123  
                 

         
6
  See accompanying notes to the financial statements.    

 

GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007(a)
 
Net asset value, beginning of period
  $ 12.69     $ 9.20     $ 20.63     $ 22.16     $ 20.00  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)(b)†
    0.18       0.41       0.65       0.47       0.53  
Net realized and unrealized gain (loss)
    2.54       3.49       (9.20 )     0.52       2.45  
                                         
                                         
Total from investment operations
    2.72       3.90       (8.55 )     0.99       2.98  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.18 )     (0.41 )     (0.62 )     (1.24 )     (0.72 )
From net realized gains
    —       —       (2.26 )     (1.28 )     (0.10 )
                                         
                                         
Total distributions
    (0.18 )     (0.41 )     (2.88 )     (2.52 )     (0.82 )
                                         
                                         
Net asset value, end of period
  $ 15.23     $ 12.69     $ 9.20     $ 20.63     $ 22.16  
                                         
                                         
Total Return(c)
    21.53 %     42.22 %     (46.05 )%     3.57 %     14.93 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 796,026     $ 661,103     $ 409,278     $ 718,390     $ 440,431  
Net expenses to average daily net assets(d)(e)
    0.00 %(f)     0.00 %(f)     0.00 %(f)     0.00 %(f)     0.00 %*
Net investment income (loss) to average daily net assets(b)
    1.34 %     3.39 %     4.12 %     2.04 %     3.32 %*
Portfolio turnover rate
    14 %     20 %     33 %     4 %     1 %**
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.02 %     0.02 %     0.01 %     0.02 %     0.03 %*
Redemption fees consisted of the following per share amounts (Note 2):†
  $ —     $ 0.00 (g)   $ 0.00 (g)   $ 0.00 (g)   $ 0.01  
 
(a) Period from June 5, 2006 (commencement of operations) through February 28, 2007.
(b) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(c) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(d) Net expenses to average daily net assets were less than 0.01%.
(e) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(f) The net expense ratio does not include the effect of expense reductions (Note 2).
(g) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.

         
    See accompanying notes to the financial statements.   7

 

GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO International Opportunities Equity Allocation Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund seeks total return greater than that of its benchmark, the MSCI EAFE Index (Europe, Australasia, and Far East). The Fund is a fund of funds and invests primarily in shares of the GMO International Equity Funds. The Fund also may invest in shares of other GMO Funds, including the GMO Fixed Income Funds, GMO Alpha Only Fund, and GMO Alternative Asset Opportunity Fund (GMO Funds in which the Fund invests are collectively referred to as “underlying funds”). In addition, the Fund may hold securities directly. Although the Fund’s primary exposure is to foreign equity investments (including emerging country equities, both growth and value style equities, and equities of any market capitalization), the Fund also may have exposure to foreign and U.S. fixed income securities (including fixed income securities of any credit quality and having any maturity or duration), as well as to the investment returns of commodities and, from time to time, other alternative asset classes. Under normal circumstances, the Fund invests (including through investment in the underlying funds) at least 80% of its assets in equity investments. The term “equity investments” refers to direct and indirect (e.g., through the underlying funds) investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts.
 
The Manager uses multi-year forecasts of relative value and risk among asset classes (e.g., foreign equity, emerging country equity, emerging country debt, foreign fixed income, U.S. fixed income, and commodities) to select the underlying funds in which the Fund invests and to decide how much to invest in each. The Manager changes the Fund’s holdings of the underlying funds in response to changes in its investment outlook and market valuations and may use redemption/purchase activity to rebalance the Fund’s investments.
 
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
 
The financial statements of the underlying funds should be read in conjunction with the Fund’s financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect) or by visiting GMO’s website at www.gmo.com.

         
8
       

 

 
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Shares of the underlying funds and other investment funds are generally valued at their net asset value. Investments held by the underlying funds are valued as follows. Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the over-the-counter (“OTC”) market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of February 28, 2011, the total value of securities held indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 0.2% of net assets. The underlying funds classify such securities (as defined below) as Level 3. Additionally, because many foreign securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund and the underlying funds generally value those foreign securities (including futures, derivatives, and other securities whose values are based on indices comprised of such securities) as of the NYSE close using fair value prices, which are based on local closing prices adjusted by a factor supplied by a third party vendor using that vendor’s proprietary models. As of February 28, 2011, those foreign equity securities, foreign index futures contracts and swap agreements representing 93.8%, 0.2% and less than 0.1%, respectively, of the net assets of the Fund through investments in the underlying funds were valued using fair value prices based on those adjustments. Those underlying funds classify such securities (as defined below) as Level 2.

         
        9

 

 
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Mutual Funds
  $ 796,040,403     $      —     $      —     $ 796,040,403  
Short-Term Investments
    32,062       —       —       32,062  
                                 
Total Investments
    796,072,465       —       —       796,072,465  
                                 
Total
  $ 796,072,465     $ —     $ —     $ 796,072,465  
                                 

         
10
       

 

 
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements. The aggregate net values of the Fund’s indirect investments in securities using Level 3 inputs were 0.2% of total net assets.
 
The Fund held no direct investments or derivative financial instruments directly at either February 28, 2011 or February 28, 2010, whose fair value was categorized using Level 3 inputs.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards, losses on wash sale transactions, and post-October capital losses.

         
        11

 

 
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 9,579,484     $ 18,742,240  
                 
Total distributions
  $ 9,579,484     $ 18,742,240  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of February 28, 2011, certain tax attributes consisted of the following:
 
         
Tax Attributes:
       
Capital loss carryforwards
  $ (61,599,918 )
Post-October capital loss deferral
  $ (10,370,659 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 28, 2018
  $ (39,084,586 )
February 28, 2019
  $ (22,515,332 )
         
Total
  $ (61,599,918 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 929,542,276     $ 11,185,419     $ (144,655,230 )   $ (133,469,811 )    
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S.

         
12
       

 

 
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Income dividends and capital gain distributions from the underlying funds are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (Note 5).
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
Purchases and redemptions of Fund shares
Purchase premiums and redemption fees are paid to and retained by the Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. Such fees are recorded as a component of the Fund’s net share transactions. The Fund charges purchase premiums and redemption fees based on the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premiums and/or redemption fees, if any, imposed by the underlying Funds in which it invests, provided that, if that weighted average is less than 0.05%, the Fund generally will not charge a purchase premium or redemption fee. Such fees are recorded as a component of the Fund’s net share transactions. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee at any

         
        13

 

 
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of the Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. All or a portion of the Fund’s purchase premiums and/or redemption fees may be waived at the Manager’s discretion when they are de minimis and/or the Manager deems it equitable to do so, including without limitation when the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premium and/or redemption fees, if any, imposed by the underlying funds are less than the purchase premiums and/or redemption fees imposed by the Fund. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of a Fund’s shares if the Fund will not incur transaction costs or will incur/reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund’s shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder’s securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of the Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. References to investments include those held directly by the Fund and indirectly through the Fund’s investments in the underlying funds. Some of the underlying funds are non-diversified investment companies under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by those funds may affect their performance more than if they were diversified. The principal risks of investing in the Fund are summarized below, including those risks to which the Fund is exposed as a result of its investments in the underlying funds. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund and the underlying funds normally do not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund’s investments.

         
14
       

 

 
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund or the underlying funds may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund or the underlying funds need to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund or the underlying funds to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund’s investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund’s investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
 
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of foreign currency holdings and investments denominated in foreign currencies.
 
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund or an underlying fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
 
• Derivatives Risk — The use of derivatives involves the risk that their value may not correlate with the value of the relevant underlying assets, rates or indices. Derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk.
 
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in the underlying funds, including the risk that the underlying funds in which it invests do not perform as expected. Because the Fund bears the fees and expenses of the underlying funds in which it invests, new investments in underlying funds with higher fees or expenses than those of the underlying funds in which the Fund is currently invested will increase the Fund’s total expenses. The fees and expenses associated with an investment in the Fund are less predictable and may be higher than fees and expenses associated with an investment in funds that charge a fixed management fee.
 
Other principal risks of an investment in the Fund include Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Market Risk — Value Securities (risk that the price of investments held by the Fund will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Market Risk — Growth Securities (greater price fluctuations resulting from dependence on future earnings expectations); Commodities Risk (value of an underlying

         
        15

 

 
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
fund’s shares may be affected by factors particular to the commodities markets and may fluctuate more than the share value of a fund with a broader range of investments); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities lending); Credit and Counterparty Risk (risk of default of an issuer of a portfolio security, a derivatives counterparty, or a borrower of the Fund’s securities); Short Sales Risk (risk that an underlying fund’s loss on the short sale of securities that it does not own is unlimited); Market Risk — Fixed Income Securities (risk that the value of fixed income securities will decline during periods of rising interest rates and/or widening of credit spreads); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
 
4. Derivative financial instruments
 
At February 28, 2011, the Fund held no derivative financial instruments directly. For a listing of derivative financial instruments held by the underlying funds, if any, please refer to the underlying funds’ Schedule of Investments.
 
5. Fees and other transactions with affiliates
 
The Manager decides how to allocate the assets of the Fund among underlying funds. The Manager does not charge the Fund a management fee or shareholder service fee, but it receives management and shareholder service fees from the underlying funds in which the Fund invests. Because those fees vary from fund to fund, the levels of indirect net expenses set forth below are affected by the Manager’s asset allocation decisions.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.00% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes).

         
16
       

 

 
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
This contractual expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $14,992 and $5,138, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
             
Indirect Net Expenses
 		           
(excluding shareholder
     Indirect Shareholder
      
service fees)     Service Fees     Total Indirect Expenses
0.512%
    0.089%     0.601%
             
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments and class exchanges, for the year ended February 28, 2011 aggregated $98,536,379 and $96,987,576, respectively.
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 36.93% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund’s outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
 
As of February 28, 2011, less than 0.01% of the Fund’s shares were held senior management of the Manager and GMO Trust officers and none of the Fund’s shares were held by accounts for which the Manager had investment discretion.

         
        17

 

 
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    5,013,261     $ 66,236,875       14,821,451     $ 184,281,194  
Shares issued to shareholders in reinvestment of distributions
    645,146       9,354,610       1,379,477       18,402,217  
Shares repurchased
    (5,496,705 )     (74,031,691 )     (8,617,216 )     (105,254,254 )
Purchase premiums
    —       —       —       5,113  
Redemption fees
    —       —       —       —  
                                 
Net increase (decrease)
    161,702     $ 1,559,794       7,583,712     $ 97,434,270  
                                 
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                 
    Value,
               Distributions
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   period
 
GMO Emerging Markets Fund, Class VI
  $ —     $ 20,739,682     $ 1,691,197     $ 308,328     $      —     $ 22,727,461  
GMO Flexible Equities Fund, Class VI
    11,525,967       208,044       858,293       152,822       —       11,463,067  
GMO International Growth Equity Fund, Class IV
    318,862,849       40,185,210       44,449,453       3,800,942       —       381,363,744  
GMO International Intrinsic Value Fund, Class IV
    317,602,020       37,266,472       36,442,410       5,188,668       —       380,486,131  
GMO International Small Companies Fund, Class III
    13,125,912       136,971       13,546,223       136,971       —       —  
                                                 
Totals
  $ 661,116,748     $ 98,536,379     $ 96,987,576     $ 9,587,731     $ —     $ 796,040,403  
                                                 

         
18
       

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO International Opportunities Equity Allocation Fund:
 
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 Opportunities Equity Allocation Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
        19

 

GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including indirect management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
20
       

 

 
GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.61 %   $ 1,000.00     $ 1,240.70     $ 3.39  
2) Hypothetical
    0.61 %   $ 1,000.00     $ 1,021.77     $ 3.06  
                                 
 
            * Expenses are calculated using the Class’s annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
        21

 

GMO International Opportunities Equity Allocation Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
For taxable, non-corporate shareholders, 100.00% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 represents qualified dividend income subject to the 15% rate category.

         
22
       

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
   Position(s)
   Length of
   During Past
   Complex
     Other Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
        23

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
   Position(s)
   Length of
   During Past
   Complex
     Other Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee;
President and
Chief Executive
Officer of the
Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
24        

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        25

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
26
       

 

 
GMO International Small Companies Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO International Small Companies Fund
(A Series of GMO Trust)
 
Portfolio Managers
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Quantitative Equity Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
GMO International Small Companies Fund returned +31.1% for the fiscal year ended February 28, 2011, as compared with +28.8% for the MSCI EAFE Small Cap Index.
 
Stock selection contributed to the Fund’s relative performance. Holdings in Belgian electrical equipment maker Bekaert and British machinery company Weir Group were among the most significant contributors to relative performance. On the negative side, holdings of Allied Irish Banks and Japanese auto component maker Futaba Industrial detracted from the Fund’s relative performance.
 
Country selection had a negative impact on the Fund’s relative performance. The Fund’s overweights to Italy and Japan, which both underperformed the benchmark, were mainly responsible.
 
Sector selection had a positive impact on performance relative to the benchmark. The Fund’s underweights to Financials and Utilities, which both underperformed, and overweight to Materials, which outperformed, contributed.
 
Currency selection had a negative impact on relative performance mainly from the Fund’s underweight to the Australian dollar.
 
Because some of the securities and instruments held directly or indirectly by the Fund had positive fair value adjustments during the fiscal year (and the performance of indices are not fair valued), the Fund’s absolute and relative performance is better than it otherwise would have been.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice. References to specific securities are not recommendations of such securities and may not be representative of any GMO portfolio’s current or future investments.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO International Small Companies Fund Class III Shares and the
MSCI EAFE Small Cap Index
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Each performance figure assumes a purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of .50% on the purchase and .50% on the redemption. Transaction fees are retained by the Fund to cover trading costs. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. All information is unaudited.
 
 
* The MSCI EAFE Small Cap + Index represents the S&P Developed ex-U.S. Small Cap Index prior to May 30, 2008 and the MSCI EAFE Small Cap Index thereafter.
 
MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.

 

GMO International Small Companies Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary   % of Total Net Assets  
Common Stocks
    93.5 %
Preferred Stocks
    3.2  
Mutual Funds
    1.8  
Short-Term Investments
    0.6  
Futures Contracts
    0.1  
Forward Currency Contracts
    0.0 ^
Rights and Warrants
    0.0 ^
Swap Agreements
    0.0 ^
Other
    0.8  
         
      100.0 %
         
 
         
Country Summary*   % of Investments  
Japan
    27.9 %
United Kingdom
    22.6  
Germany
    10.0  
France
    6.4  
Italy
    5.4  
Sweden
    4.1  
Singapore
    3.5  
Netherlands
    2.7  
Ireland
    2.6  
Switzerland
    2.4  
Hong Kong
    2.3  
Canada
    1.8  
Australia
    1.5  
Finland
    1.5  
Belgium
    1.2  
South Korea
    0.9  
Austria
    0.6  
Denmark
    0.5  
Greece
    0.5  
Taiwan
    0.4  
India
    0.2  
Turkey
    0.2  
Brazil
    0.1  
China
    0.1  
Malaysia
    0.1  
Norway
    0.1  
Poland
    0.1  

         
        1

 

 
GMO International Small Companies Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2011 (Unaudited)
 
         
Country Summary*   % of Investments  
South Africa
    0.1 %
Spain
    0.1  
Thailand
    0.1  
Egypt
    0.0 ^
Chile
    0.0 ^
Philippines
    0.0 ^
Peru
    0.0 ^
Mexico
    0.0 ^
Czech Republic
    0.0 ^
         
      100.0 %
         
 
* The table above shows country exposure in the Fund. The table excludes short-term investments. The table includes exposure through derivative financial instruments, if any. The table excludes exposure through forward currency contracts. The table takes into account the market value of securities and options and the notional amounts of swap agreements and other derivative financial instruments, if any.
 
         
Industry Group Summary   % of Equity Investments**  
Capital Goods
    17.0 %
Materials
    15.1  
Real Estate
    10.1  
Retailing
    8.0  
Automobiles & Components
    6.8  
Food, Beverage & Tobacco
    4.9  
Transportation
    4.3  
Media
    4.0  
Diversified Financials
    4.0  
Technology Hardware & Equipment
    3.6  
Consumer Durables & Apparel
    3.5  
Health Care Equipment & Services
    3.0  
Consumer Services
    2.8  
Energy
    2.6  
Pharmaceuticals, Biotechnology & Life Sciences
    2.3  
Commercial & Professional Services
    2.0  
Utilities
    1.2  
Software & Services
    1.1  
Food & Staples Retailing
    0.9  
Insurance
    0.8  
Banks
    0.6  
Household & Personal Products
    0.6  

         
2
       

 

 
GMO International Small Companies Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2011 (Unaudited)
 
         
Industry Group Summary   % of Equity Investments**  
Semiconductors & Semiconductor Equipment
    0.5 %
Telecommunication Services
    0.3  
         
      100.0 %
         
 
** Equity investments may consist of common stocks and other stock-related securities, such as preferred stocks. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
Ù Rounds to 0.0%.

         
        3

 

GMO International Small Companies Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            COMMON STOCKS — 93.5%        
                     
            Australia — 4.0%        
      91,631     Ansell Ltd     1,280,056  
      998,946     Australian Infrastructure Fund     1,995,023  
      243,256     Boart Longyear Group     1,154,388  
      895,346     Charter Hall Office (REIT)     2,917,294  
      1,165,856     Commonwealth Property Office Fund (REIT)     1,018,586  
      37,823     Flight Centre Ltd     856,725  
      207,457     Iluka Resources Ltd *     2,263,613  
      2,689,405     ING Industrial Fund Unit     1,455,226  
      4,115,105     ING Office Fund     2,567,937  
      636,905     Macquarie CountryWide Trust     2,086,372  
      916,770     Pacific Brands Ltd *     831,170  
      998,258     PaperlinX Ltd *     462,358  
                     
            Total Australia     18,888,748  
                     
                     
            Austria — 0.6%        
      19,153     AI Airports International Ltd ADC *     7,397  
      15,622     Andritz AG     1,319,187  
      17,355     Flughafen Wien AG     1,166,485  
      1,761,602     Immofinanz AG (Entitlement Shares) (a) *     —  
      3,993     Schoeller-Bleckmann Oilfield Equipment AG     340,601  
                     
            Total Austria     2,833,670  
                     
                     
            Belgium — 1.2%        
      39,581     Euronav SA     668,722  
      10,139     GIMV NV     562,553  
      33,648     Omega Pharma SA     1,625,222  
      29,800     SA D’Ieteren NV     2,018,293  
      17,069     Tessenderlo Chemie     577,250  
                     
            Total Belgium     5,452,040  
                     
                     
            Brazil — 0.0%        
      12,600     Eternit SA     83,909  
                     

         
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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Canada — 4.1%        
      48,557     ACE Aviation Holdings Inc Class A *     604,745  
      82,900     Advantage Oil & Gas Ltd *     649,343  
      78,300     AltaGas Ltd     1,992,256  
      93,400     Colossus Minerals Inc *     801,766  
      30,700     Dorel Industries Inc Class B     998,528  
      72,100     Dundee Corp Class A *     1,778,845  
      46,400     Linamar Corp     1,003,889  
      13,400     Methanex Corp     389,911  
      211,300     Precision Drilling Corp *     2,490,232  
      30,471     Quebecor Inc Class B     1,105,556  
      130,500     RONA Inc *     1,987,957  
      107,600     SEMAFO Inc *     1,127,444  
      54,650     Torstar Corp Class B     808,317  
      115,525     Transcontinental Inc     1,938,199  
      157,600     Trinidad Drilling Ltd     1,328,541  
                     
            Total Canada     19,005,529  
                     
                     
            Chile — 0.0%        
      2,553,247     Madeco SA     150,238  
                     
                     
            China — 0.1%        
      75,000     Hangzhou Steam Turbine Co Class B     155,436  
      298,400     Jiangsu Future Land Co Ltd Class B     230,962  
      64,800     Luthai Textile Co Ltd Class B     63,960  
      111,600     Shanghai Mechanical and Electrical Industry Co Ltd Class B     164,052  
                     
            Total China     614,410  
                     
                     
            Czech Republic — 0.0%        
      1,200     Pegas Nonwovens SA     29,783  
                     
                     
            Denmark — 0.5%        
      44,261     D/S Norden A/S     1,568,222  
      88,467     GN Store Nord A/S *     864,005  
                     
            Total Denmark     2,432,227  
                     

         
    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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Egypt — 0.1%        
      8,402     Alexandria Mineral Oils Co (a)     61,873  
      207,402     Arab Cotton Ginning (a)     95,868  
      123,378     Naeem Holding (a) *     43,676  
                     
            Total Egypt     201,417  
                     
                     
            Finland — 1.5%        
      136,287     Amer Sports Oyj Class A     1,807,032  
      40,751     Cargotec Oyj Class B     1,822,913  
      31,440     Kemira Oyj     457,714  
      452,409     M-real Oyj B shares *     1,891,492  
      17,857     Outotec Oyj     1,003,127  
                     
            Total Finland     6,982,278  
                     
                     
            France — 6.0%        
      76,908     Arkema     5,623,113  
      20,792     Bureau Veritas SA     1,605,578  
      22,981     Faurecia *     894,896  
      6,525     Fonciere des Regions (REIT)     708,924  
      37,646     Groupe Steria SCA     1,188,800  
      71,389     Havas SA     402,647  
      9,078     IMS International Metal Service *     189,737  
      45,767     Lagardere SCA     2,059,973  
      121,152     PagesJaunes Groupe     1,181,493  
      24,448     Peugeot SA *     979,225  
      4,589     Plastic Omnium SA     331,495  
      31,477     Rallye SA     1,389,966  
      125,335     Rhodia SA     3,612,236  
      14,167     Seb SA     1,392,817  
      69,933     Valeo SA *     4,358,575  
      30,097     Zodiac Aerospace     2,102,293  
                     
            Total France     28,021,768  
                     

         
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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Germany — 5.2%        
      54,024     Aareal Bank AG *     1,890,372  
      29,502     Arques Industries AG *     182,624  
      36,508     Aurubis AG     1,945,187  
      4,213     Axel Springer AG     686,494  
      17,209     Bechtle AG     667,445  
      18,625     Bertrandt AG     1,374,165  
      17,877     Bilfinger & Berger AG     1,502,471  
      62,452     Deutsche Lufthansa AG (Registered) *     1,279,475  
      92,254     Gagfah SA     1,092,583  
      22,838     Gerresheimer AG *     1,015,688  
      52,775     Gildemeister AG     1,172,192  
      237,370     Heidelberger Druckmaschinen AG *     1,166,827  
      90,529     Infineon Technologies AG     994,507  
      65,891     Lanxess AG     4,909,793  
      66,065     Leonische Drahtwerke AG *     2,772,487  
      27,225     Stada Arzneimittel AG     1,090,284  
      17,696     Tognum AG     444,313  
                     
            Total Germany     24,186,907  
                     
                     
            Greece — 0.5%        
      550,146     Alapis Holding Industrial and Commercial SA     379,640  
      201,715     Intralot SA     695,159  
      62,344     Jumbo SA     485,762  
      73,847     Motor Oil (Hellas) Corinth Refineries SA     889,105  
                     
            Total Greece     2,449,666  
                     
                     
            Hong Kong — 2.3%        
      1,356,000     Brightoil Petroleum Holdings Ltd     681,500  
      812,000     Dah Chong Hong Holdings Ltd     855,803  
      1,756,000     First Pacific Co     1,399,608  
      840,000     Galaxy Entertainment Group Ltd *     1,086,062  
      486,400     HKR International Ltd     299,795  
      921,000     Kowloon Development Co Ltd     1,243,668  
      776,000     Pacific Basin Shipping Ltd     455,603  

         
    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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Hong Kong — continued        
      5,480,000     Singmas Container Holdings Ltd *     1,852,628  
      1,290,000     Texwinca Holdings Ltd     1,317,052  
      54,300     VTech Holdings Ltd     581,158  
      226,000     Yue Yuen Industrial Holdings     713,025  
                     
            Total Hong Kong     10,485,902  
                     
                     
            India — 0.2%        
      32,400     Gitanjali Gems Ltd     156,231  
      31,560     Gujarat Fluorochemicals     186,718  
      15,400     Gujarat State Fertilisers & Chemicals Ltd     114,747  
      67,177     ICSA India Ltd     192,484  
      107,300     Mercator Lines Ltd     85,301  
      48,100     Syndicate Bank     122,159  
                     
            Total India     857,640  
                     
                     
            Ireland — 2.6%        
      1,580,538     Allied Irish Banks Plc *     582,793  
      163,064     C&C Group Plc     794,879  
      137,724     DCC Plc     4,420,352  
      557,696     Fyffes Plc     318,378  
      131,727     Glanbia Plc     772,568  
      730,773     Irish Life & Permanent Group Holdings Plc *     982,554  
      28,657     Paddy Power Plc     1,166,716  
      189,814     Smurfit Kappa Group Plc *     2,358,271  
      921,861     Total Produce Ltd     535,079  
                     
            Total Ireland     11,931,590  
                     
                     
            Italy — 2.3%        
      99,869     Amplifon SPA     543,150  
      77,128     Autostrada Torino-Milano SPA     1,095,549  
      123,894     Benetton Group SPA     809,590  
      121,900     Cementir SPA     388,243  
      112,678     Danieli & Co SPA-RSP     1,961,653  
      41,788     Indesit Company SPA     482,578  

         
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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Italy — continued        
      126,120     Italcementi SPA-Di RISP     640,390  
      11,455     Italmobiliare SPA     442,856  
      19,880     Italmobiliare SPA-RSP     511,348  
      315,604     Milano Assicurazioni SPA     524,765  
      252,096     Recordati SPA     2,357,148  
      11,013     Tod’s SPA     1,126,297  
                     
            Total Italy     10,883,567  
                     
                     
            Japan — 27.0%        
      49,200     ADEKA Corp     551,836  
      2,124     Advance Residence Investment Corp (REIT)     4,426,231  
      523,500     Aiful Corp *     1,103,294  
      35,700     Alpen Co Ltd     726,612  
      272,600     Alps Electric Co Ltd     3,674,485  
      117,000     Anritsu Corp     1,098,256  
      92,700     AOC Holdings Inc *     686,446  
      97,900     Aoyama Trading Co Ltd     1,712,763  
      120,800     Arnest One Corp     1,527,639  
      79,000     Asahi Diamond Industrial Co Ltd     1,527,642  
      20,800     Autobacs Seven Co Ltd     846,664  
      84,400     Century Tokyo Leasing Corp     1,614,192  
      19,400     Chiba Kogyo Bank Ltd (The) *     140,129  
      168,050     Daiei Inc *     685,139  
      73,200     Daiichikosho Co Ltd     1,428,064  
      414,000     Dainippon Ink and Chemicals Inc     1,104,129  
      84,000     Dainippon Screen Manufacturing Co Ltd *     817,303  
      436     DA Office Investment Corp (REIT)     1,568,579  
      133,300     DCM Japan Holdings Co Ltd     816,429  
      300     Dr Ci:Labo Co Ltd     1,171,835  
      160,200     Edion Corp     1,661,804  
      40,500     Exedy Corp     1,342,315  
      148,000     Fujitsu General Ltd     873,887  
      51,700     Fuji Oil Co Ltd     738,445  
      40,600     Fuji Soft Inc     700,239  

         
    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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Japan — continued        
      223,900     Futaba Industrial Co Ltd *     1,560,508  
      51,100     Fuyo General Lease Co Ltd     1,905,425  
      456,000     Godo Steel     956,307  
      10,270     Gulliver International Co Ltd     458,349  
      173,000     Gunze Ltd     743,729  
      462,000     Hanwa Co Ltd     2,154,972  
      75,600     Itochu Enex Co Ltd     444,726  
      119,000     JACCS Co Ltd     441,715  
      282     Japan Excellent Inc (REIT)     1,668,487  
      346,000     JFE Shoji Holdings Inc     1,656,912  
      164,000     J – Oil Mills Inc     514,598  
      98,700     K’s Holdings Corp     3,333,355  
      19,600     Kaga Electronics Co Ltd     257,913  
      164     Kakaku.com Inc     961,197  
      163,000     Kaken Pharmaceutical Co Ltd     2,081,273  
      221,000     Kayaba Industry Co     1,937,587  
      45,500     Keihin Corp     1,008,941  
      406     Kenedix Realty Investment Corp (REIT)     1,924,389  
      59,000     Kohnan Shoji Co Ltd     809,747  
      86,100     Kojima Co Ltd     607,440  
      227,000     Krosaki Harima Corp     1,022,580  
      198,000     Kurabo Industries Ltd     395,979  
      28,800     Kyoei Steel Ltd     481,828  
      61,000     Kyorin Co Ltd     1,112,315  
      32,000     Kyudenko Corp     204,558  
      129,000     Makino Milling Machine Co Ltd *     1,215,838  
      28,600     Mandom Corp     768,112  
      24,800     Melco Holdings Inc     951,282  
      345,000     Mitsubishi Steel Manufacturing Co Ltd     1,326,926  
      223,000     Mitsui Mining & Smelting Co Ltd     887,466  
      310,000     Morinaga Milk Industry Co Ltd     1,308,119  
      141,000     Nakayama Steel Works Ltd *     193,802  
      171,000     Nichias Corp     1,063,225  
      473,000     Nichirei Corp     2,228,949  

         
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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Japan — continued        
      117,700     Nihon Kohden Corp     2,586,563  
      163,000     Nippon Chemi-Con Corp *     1,158,650  
      805,000     Nippon Coke & Engineering Co Ltd     1,596,763  
      53,000     Nippon Corp     374,064  
      129,000     Nippon Flour Mills Co Ltd     643,195  
      1,683,000     Nippon Light Metal Co Ltd *     3,624,764  
      58,000     Nippon Shokubai Co Ltd     687,225  
      66,000     Nippon Synthetic Chemical Industry Co Ltd     472,461  
      65,700     Nippon System Development Co Ltd     724,897  
      70,800     Nipro Corp     1,495,784  
      141,000     Nissan Shatai Co Ltd     1,195,062  
      175,000     Nisshin Oillio Group Ltd (The)     911,824  
      18,400     Okinawa Electric Power Co     920,565  
      654,000     Orient Corp *     938,629  
      432     ORIX JREIT Inc (REIT)     2,492,098  
      23,300     Osaka Steel Co Ltd     411,579  
      30,900     OSAKA Titanium Technologies Co     2,316,522  
      31,100     PLENUS Co Ltd     528,993  
      324     Premier Investment Corp (REIT)     1,577,877  
      420,000     Press Kogyo Co Ltd *     2,074,455  
      62,800     QP Corp     799,386  
      176,100     Round One Corp     1,157,564  
      393,000     Ryobi Ltd *     1,714,143  
      12,000     Ryosan Co     315,335  
      222,000     Sankyo – Tateyama Holdings Inc *     306,108  
      184,000     Sankyu Inc     872,159  
      27,800     Sanrio Co Ltd     918,417  
      12,800     Sawai Pharmaceuticals Co Ltd     1,201,309  
      99,000     Seino Holdings Co Ltd     755,669  
      156,000     Shinwa Kaiun Kaisha Ltd     381,980  
      143,000     Showa Corp *     1,230,951  
      195,000     Taihei Kogyo Co Ltd     923,302  
      34,800     Takata Corp     1,109,563  
      101,000     TOA Corp     126,404  

         
    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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Japan — continued        
      21,900     Toho Titanium Co Ltd     689,784  
      266     Tokyu REIT Inc (REIT)     1,828,283  
      497,000     Topy Industries Ltd     1,485,654  
      248     Top REIT Inc (REIT)     1,606,897  
      583,000     Toyo Tire & Rubber Co Ltd     1,619,096  
      548     T – Gaia Corp     1,084,056  
      88,000     Uchida Yoko Co Ltd     304,261  
      213,000     Uniden Corp *     778,707  
      78,700     Unipres Corp     1,988,724  
      1,904     United Urban Investment Corp (REIT)     2,492,448  
      179,000     Yokohama Rubber Co     940,952  
      188,000     Zeon Corp     1,928,940  
                     
            Total Japan     126,424,968  
                     
                     
            Malaysia — 0.1%        
      338,800     DRB-Hicom Bhd     208,403  
      763,900     Lion Diversified Holdings     116,685  
      511,900     Ranhill Bhd     121,878  
      679,700     Scomi Group Berhad *     73,941  
      606,500     Zelan Berhad *     98,844  
                     
            Total Malaysia     619,751  
                     
                     
            Mexico — 0.0%        
      38,000     Bio Pappel SAB de CV *     34,758  
                     
                     
            Netherlands — 2.7%        
      135,331     Aalberts Industries NV     2,884,596  
      97,903     CSM     3,481,290  
      302,704     Koninklijke BAM Groep NV     1,942,269  
      70,864     Mediq NV     1,311,215  
      25,456     Nutreco Holding NV     1,883,684  
      18,200     Vastned NV (REIT)     1,299,013  
                     
            Total Netherlands     12,802,067  
                     

         
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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Norway — 0.1%        
      44,636     Atea ASA     492,488  
                     
                     
            Peru — 0.0%        
      50,900     Refineria La Pampilla SA Relapasa     36,698  
                     
                     
            Philippines — 0.0%        
      106,600     Rizal Commercial Banking Corp     63,656  
                     
                     
            Poland — 0.1%        
      2,688,270     Bioton SA *     168,996  
      119,870     Dom Maklerski IDMSA *     125,019  
      7,680     Gant Development SA *     42,147  
      62,640     MCI Management SA *     185,647  
                     
            Total Poland     521,809  
                     
                     
            Singapore — 2.8%        
      1,101,000     CapitaCommercial Trust (REIT)     1,195,413  
      2,463,000     GMG Global Ltd *     524,684  
      954,000     Ho Bee Investment Ltd     1,002,824  
      556,000     Hong Leong Asia Ltd     1,177,172  
      2,416,000     Jaya Holdings Ltd *     1,058,038  
      67,000     Kim Eng Holdings Ltd     160,956  
      251,000     KS Energy Services Ltd *     175,427  
      1,597,159     Mapletree Logistics Trust (REIT)     1,134,541  
      769,000     MobileOne Ltd     1,437,883  
      411,000     Singapore Airport Terminal Services Ltd     826,076  
      826,000     Suntec Real Estate Investment Trust (REIT)     963,462  
      765,000     Swiber Holdings Ltd *     473,983  
      227,000     Venture Corp Ltd     1,688,551  
      255,000     Wheelock Properties Ltd     368,055  
      691,000     Wing Tai Holdings Ltd     807,075  
                     
            Total Singapore     12,994,140  
                     

         
    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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            South Africa — 0.1%        
      29,800     Basil Read Holdings Ltd     45,025  
      77,500     Grindrod Ltd     170,925  
      18,619     Group Five Ltd     75,913  
      16,051     Highveld Steel and Vanadium Corp Ltd *     217,827  
      411,541     Simmer & Jack Mines Ltd *     50,829  
      4,200     Wilson Bayly Holmes-Ovcon Ltd     69,895  
                     
            Total South Africa     630,414  
                     
                     
            South Korea — 0.9%        
      12,200     AtlasBX Co Ltd     279,219  
      5,130     Chong Kun Dang Pharm Corp     104,982  
      4,820     Daegu Department Store     51,129  
      90,560     Daewoo Motor Sales Corp *     173,913  
      3,260     Dong Ah Tire & Rubber Co Ltd     24,451  
      8,800     Dongbu Corp     53,685  
      28,869     Eugene Corp *     104,905  
      34,672     Forhuman Co Ltd *     182,524  
      8,100     Global & Yuasa Battery Co Ltd     265,107  
      3,930     Hankuk Paper Manufacturing Co Ltd     79,618  
      18,848     HARIM & Co Ltd (a) *     85,393  
      1,237     Hyundai Elevator Co Ltd *     110,497  
      32,511     Interpark Corp *     129,223  
      5,779     INTOPS Co Ltd     105,129  
      8,750     ISU Chemical Co Ltd     130,422  
      1,761     KCC Engineering & Construction Co     66,047  
      8,920     Keangnam Enterprises Ltd *     78,840  
      3,050     KISWIRE Ltd     95,995  
      12,451     Kolon Corp     302,687  
      17,040     Kolon Engineering & Construction Co Ltd *     70,968  
      18,000     KTB Securities Co Ltd *     68,850  
      35,020     Kwang Dong Pharmaceutical Co Ltd     92,671  
      11,380     Lotte Midopa Co Ltd     163,447  
      14,070     Moorim Paper Co Ltd     95,932  
      176     Namyang Dairy Products Co Ltd     107,597  

         
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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            South Korea — continued        
      2,940     Poongsan Corp     97,674  
      2,910     Poongsan Corp     107,245  
      6,390     Samwhan Corp *     51,109  
      228     SeAH Holdings Corp     23,715  
      1,680     SeAH Steel Corp     103,684  
      1,060     Shinyoung Securities Co Ltd     33,511  
      4,180     Silla Co Ltd     53,325  
      750     SK Gas Co Ltd     24,961  
      243     Taekwang Industrial Co Ltd     250,942  
      47,230     Taeyoung Engineering & Construction     214,330  
      1,740     Union Steel     32,371  
      131     Yonghyun BM Co Ltd *     1,130  
                     
            Total South Korea     4,017,228  
                     
                     
            Spain — 0.1%        
      20,504     Fomento de Construcciones y Contratas SA     655,553  
                     
                     
            Sweden — 4.1%        
      49,899     Axfood AB     1,916,270  
      14,284     Cardo AB     942,588  
      63,100     D Carnegie & Co. AB (a) *     7,472  
      42,961     Elekta AB Class B     1,638,704  
      141,127     Fabege AB     1,527,740  
      49,998     Hoganas AB Class B     1,752,460  
      255,954     Kungsleden AB     2,505,788  
      92,495     NCC Class B     2,417,417  
      101,809     Peab AB     853,516  
      82,016     SAAB AB Class B     1,695,405  
      299,051     Trelleborg AB Class B     3,003,063  
      81,342     Vostok Gas Ltd (a) *     2,825  
      31,000     Wihlborgs Fastigheter AB     895,413  
                     
            Total Sweden     19,158,661  
                     

         
    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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Switzerland — 2.4%        
      29,763     Aryzta AG     1,391,183  
      95,093     Clariant AG (Registered) *     1,569,622  
      3,482     Fischer (George) AG (Registered) *     1,960,435  
      8,058     Panalpina Welttransport Holding AG *     1,044,977  
      703     Sika AG     1,506,252  
      22,749     Sulzer AG     3,532,650  
                     
            Total Switzerland     11,005,119  
                     
                     
            Taiwan — 0.4%        
      89,000     Ability Enterprise Co Ltd     135,552  
      290,000     China Bills Finance Corp     103,360  
      47,000     Chinese Maritime Transport Ltd     98,238  
      53,000     Chong Hong Construction Co Ltd     130,025  
      202,000     Nien Hsing Textile Co Ltd     155,628  
      430,000     ProMOS Technologies Inc *     30,150  
      134,000     Radiant Opto-Electronics Corp     300,355  
      34,980     Raydium Semiconductor Corp     187,457  
      426,000     Sampo Corp *     143,422  
      172,000     Taiwan Cogeneration Corp     107,336  
      180,000     Taiwan Pulp & Paper Corp *     100,627  
      106,000     ThaiLin Semiconductor Corp *     50,338  
      67,000     Tsann Kuen Enterprises Co Ltd     134,336  
                     
            Total Taiwan     1,676,824  
                     
                     
            Thailand — 0.1%        
      31,000     Electricity Generating Pcl (Foreign Registered) (a)     100,992  
      22,849,600     G Steel Pcl (Foreign Registered) (a) *     526,578  
                     
            Total Thailand     627,570  
                     
                     
            Turkey — 0.2%        
      103,947     Izmir Demir Celik Sanayi AS *     318,099  
      185,400     Kardemir Karabuk Demir Celik Sanayi ve Ticaret AS Class A *     119,701  

         
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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Turkey — continued        
      383,578     Kardemir Karabuk Demir Celik Sanayi ve Ticaret AS Class D *     184,635  
      70,200     Selcuk Ecza Deposu Ticaret ve Sanayi AS     102,010  
                     
            Total Turkey     724,445  
                     
                     
            United Kingdom — 21.2%        
      129,711     Aberdeen Asset Management     442,780  
      75,763     ASOS Plc *     2,321,493  
      141,823     Atkins WS Plc     1,606,238  
      274,374     Balfour Beatty Plc     1,559,072  
      344,831     BBA Aviation Plc     1,247,952  
      238,888     Bodycote Plc     1,186,310  
      154,679     BowLeven Plc *     834,087  
      32,885     Brit Insurance Holdings NV *     570,268  
      140,619     Britvic Plc     833,640  
      358,636     Cape Plc     2,372,384  
      262,272     Catlin Group Ltd     1,604,493  
      98,659     Cookson Group Plc *     1,049,465  
      139,755     Croda International Plc     3,597,915  
      195,393     Daily Mail & General Trust Plc     1,784,576  
      175,652     Dairy Crest Group Plc     1,034,462  
      696,562     Debenhams Plc *     710,515  
      381,391     Drax Group Plc     2,447,710  
      547,374     DS Smith Plc     1,768,323  
      595,832     Electrocomponents Plc     2,676,950  
      930,960     Enterprise Inns Plc *     1,440,564  
      317,290     Filtrona Plc     1,546,369  
      271,927     FirstGroup Plc     1,613,619  
      737,451     Galiform Plc *     1,385,089  
      730,477     Game Group Plc     725,824  
      502,960     GKN Plc     1,715,633  
      74,234     Go – Ahead Group Plc     1,698,775  
      102,990     Greene King Plc     775,762  
      313,862     Halfords Group Plc     1,978,445  
      570,355     Home Retail Group Plc     2,046,562  

         
    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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            United Kingdom — continued        
      340,868     IMI Plc     4,926,758  
      748,040     Inchcape Plc *     4,721,426  
      76,348     Informa Plc     539,458  
      278,517     Intermediate Capital Group Plc     1,455,462  
      108,847     Investec Plc     836,269  
      1,073,914     Johnston Press Plc *     213,294  
      833,495     Kesa Electricals Plc     1,735,638  
      259,970     LG Group Holdings Plc     1,893,753  
      291,930     Luminar Group Holdings Plc *     58,135  
      823,332     Marston’s Plc     1,320,425  
      306,395     Mcbride Plc     716,991  
      804,507     Melrose Plc     3,976,715  
      204,173     Mondi Plc     1,821,563  
      312,882     Morgan Crucible Co Plc     1,474,890  
      651,488     National Express Group Plc *     2,629,042  
      192,796     Northumbrian Water Group Plc     1,020,048  
      378,259     Premier Farnell Plc     1,863,441  
      3,608,216     Premier Foods Plc *     1,597,329  
      1,368,102     Punch Taverns Plc *     1,478,492  
      87,054     Rightmove Plc     1,260,300  
      88,447     Savills Plc     544,189  
      542,056     Senior Plc     1,321,289  
      35,934     Severn Trent Plc     869,201  
      756,883     SIG Plc *     1,597,122  
      86,471     Smith News Plc     132,165  
      39,016     Spectris Plc     884,569  
      256,592     Tate & Lyle Plc     2,419,836  
      517,685     Trinity Mirror Plc *     681,274  
      394,049     Tullett Prebon Plc     2,606,517  
      210,881     United Business Media Ltd     2,443,929  

         
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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            United Kingdom — continued        
      123,474     Weir Group Plc (The)     3,442,017  
      719,648     William Hill Plc     2,244,104  
                     
            Total United Kingdom     99,300,916  
                     
                     
            TOTAL COMMON STOCKS (Cost $370,155,791)     437,278,354  
                     
                     
            PREFERRED STOCKS — 3.2%        
                     
            Brazil — 0.0%        
      69,200     Confab Industrial SA     207,542  
                     
                     
            Germany — 3.2%        
      8,812     Biotest AG 0.87%     559,689  
      27,629     Draegerwerk AG & Co 0.64%     2,268,265  
      18,356     Fuchs Petrolub AG 2.61%     2,564,253  
      42,048     Hugo Boss AG 1.82%     3,163,809  
      34,956     Jungheinrich AG 0.42%     1,404,069  
      21,161     Porsche Automobil Holding SE 0.17%     1,685,825  
      102,888     ProSiebenSat.1 Media AG 4.97%     3,343,409  
                     
            Total Germany     14,989,319  
                     
                     
            TOTAL PREFERRED STOCKS (Cost $9,943,417)     15,196,861  
                     
                     
            RIGHTS AND WARRANTS — 0.0%        
                     
            Singapore — 0.0%        
      61,000     Tat Hong Holdings Ltd Warrants, Expires 02/08/13 *     959  
                     
                     
            TOTAL RIGHTS AND WARRANTS (Cost $0)     959  
                     

         
    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, 2011
 
                     
 
 		           
Shares /
 		           
Par Value     Description   Value ($)  
                     
            MUTUAL FUNDS — 1.8%        
                     
            United States — 1.8%        
            Affiliated Issuers        
      340,200     GMO U.S. Treasury Fund     8,505,000  
                     
                     
            TOTAL MUTUAL FUNDS (Cost $8,505,000)     8,505,000  
                     
                     
            SHORT-TERM INVESTMENTS — 0.6%        
                     
            Time Deposits — 0.6%        
NZD
    14,296     Brown Brothers Harriman (Grand Cayman) Time Deposit, 2.90%, due 03/01/11     10,756  
AUD
    335,459     Brown Brothers Harriman (Grand Cayman) Time Deposit, 4.59%, due 03/01/11     341,548  
CAD
    17,264     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.93%, due 03/01/11     17,769  
CHF
    9,578     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.02%, due 03/01/11     10,309  
DKK
    57,570     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.30%, due 03/01/11     10,655  
GBP
    6,161     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.49%, due 03/01/11     10,016  
HKD
    77,859     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.01%, due 03/01/11     9,997  
JPY
    6,540,520     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.01%, due 03/01/11     79,953  
NOK
    57,627     Brown Brothers Harriman (Grand Cayman) Time Deposit, 1.72%, due 03/01/11     10,290  
SEK
    64,338     Brown Brothers Harriman (Grand Cayman) Time Deposit, 1.30%, due 03/01/11     10,158  
SGD
    85,429     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.03%, due 03/01/11     67,172  
EUR
    36,648     Citibank (New York) Time Deposit, 0.57%, due 03/01/11     50,572  
USD
    2,009,953     Citibank (New York) Time Deposit, 0.19%, due 03/01/11     2,009,953  
                     
            Total Time Deposits     2,639,148  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $2,639,148)     2,639,148  
                     
                     
            TOTAL INVESTMENTS — 99.1%
(Cost $391,243,356) 		    463,620,322  
            Other Assets and Liabilities (net) — 0.9%     4,113,068  
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 467,733,390  
                     

         
20
  See accompanying notes to the financial statements.    

 

GMO International Small Companies Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
A summary of outstanding financial instruments at February 28, 2011 is as follows:
 
Forward Currency Contracts
 
                                     
                    Net Unrealized
Settlement
 		      Deliver/
 		  Units of
 		      Appreciation
Date   Counterparty   Receive   Currency   Value   (Depreciation)
 
Buys †
                                   
4/20/11
    Bank of America, N.A.     CHF     619,362     $ 666,924     $ 28,064  
4/20/11
    Brown Brothers Harriman & Co.      CHF     520,393       560,355       24,188  
4/20/11
    Deutsche Bank AG     CHF     4,145,559       4,463,902       202,825  
4/20/11
    Morgan Stanley Capital Services Inc.      CHF     760,631       819,041       34,367  
4/20/11
    Bank of America, N.A.     GBP     956,338       1,553,960       21,503  
4/20/11
    Bank of New York Mellon     GBP     3,317,265       5,390,246       86,171  
4/20/11
    Deutsche Bank AG     GBP     1,739,759       2,826,946       47,072  
4/20/11
    Morgan Stanley Capital Services Inc.      GBP     1,771,787       2,878,988       48,128  
4/20/11
    Bank of New York Mellon     HKD     13,892,673       1,784,740       1,010  
4/20/11
    Brown Brothers Harriman & Co.      HKD     22,322,913       2,867,742       2,156  
4/20/11
    JPMorgan Chase Bank, N.A.     HKD     12,884,956       1,655,283       745  
4/20/11
    Morgan Stanley Capital Services Inc.      HKD     9,225,235       1,185,132       775  
4/20/11
    State Street Bank and Trust and Company     HKD     22,110,191       2,840,414       2,354  
4/20/11
    Bank of America, N.A.     SEK     47,223,817       7,437,709       191,172  
4/20/11
    Bank of New York Mellon     SEK     3,059,439       481,859       12,296  
4/20/11
    Royal Bank of Scotland PLC     SEK     15,794,643       2,487,642       67,466  
4/20/11
    Bank of America, N.A.     SGD     14,528,668       11,427,083       92,324  
                                 
                        $ 51,327,966     $ 862,616  
                                 
Sales #
                                   
4/20/11
    Bank of America, N.A.     CAD     3,072,096     $ 3,158,643     $ (55,152 )
4/20/11
    Deutsche Bank AG     CAD     7,259,853       7,464,377       (128,584 )
4/20/11
    JPMorgan Chase Bank, N.A.     CAD     2,844,162       2,924,287       (46,571 )
4/20/11
    Royal Bank of Scotland PLC     CAD     3,782,180       3,888,731       (66,703 )
4/20/11
    State Street Bank and Trust and Company     DKK     10,258,665       1,897,930       (45,282 )
4/20/11
    Brown Brothers Harriman & Co.      EUR     1,854,917       2,558,111       (60,465 )
4/20/11
    Deutsche Bank AG     EUR     1,897,000       2,616,148       (69,321 )
4/20/11
    JPMorgan Chase Bank, N.A.     EUR     2,207,077       3,043,774       (75,348 )
4/20/11
    Morgan Stanley Capital Services Inc.      EUR     5,838,630       8,052,039       (191,474 )
4/20/11
    Bank of New York Mellon     JPY     60,859,782       744,210       (13,618 )

         
    See accompanying notes to the financial statements.   21

 

 
GMO International Small Companies Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Forward Currency Contracts — continued
 
                                     
                    Net Unrealized
Settlement
 		      Deliver/
 		  Units of
 		      Appreciation
Date   Counterparty   Receive   Currency   Value   (Depreciation)
 
4/20/11
    Brown Brothers Harriman & Co.      JPY     37,865,387     $ 463,028     $ (8,467 )
4/20/11
    State Street Bank and Trust and Company     JPY     160,681,000       1,964,852       (36,383 )
                                 
                        $ 38,776,130     $ (797,368 )
                                 
 
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.
 
Futures Contracts
 
                                 
                    Net Unrealized
Number of
 		          Expiration
 		  Contract
 		  Appreciation
Contracts       Type   Date   Value   (Depreciation)
 
Buys
                               
30
          DAX   March 2011   $ 7,547,635     $ 251,837  
26
          FTSE 100   March 2011     2,526,913       (22,854 )
91
          FTSE/MIB   March 2011     14,117,527       1,153,191  
34
          CAC 40   March 2011     1,928,956       7,886  
61
          MSCI Singapore   March 2011     3,401,737       (6,551 )
34
          TOPIX   March 2011     3,969,946       90,110  
                             
                    $ 33,492,714     $ 1,473,619  
                             
Sales
                               
63
          S&P Toronto 60   March 2011   $ 10,538,582     $ (627,225 )
97
          SPI 200   March 2011     11,981,058       (199,672 )
                             
                    $ 22,519,640     $ (826,897 )
                             

         
22
  See accompanying notes to the financial statements.    

 

 
GMO International Small Companies Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Swap Agreements
 
Total Return Swaps
 
                                 
Notional
 		  Expiration
 		              Market
Amount   Date   Counterparty   Fund Pays   Fund Receives   Value
 
  196,074     GBP   5/24/2011   Goldman Sachs International   3 Month GBP
LIBOR - 500 bp 		  Return on Yell
Group Plc 		  $ (25,885 )
                                 
Premiums to (Pay) Receive
  $ —  
         
 
As of February 28, 2011, for futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
 
Notes to Schedule of Investments:
 
REIT - Real Estate Investment Trust
* Non-income producing security.
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
 
Currency Abbreviations:
 
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
DKK - Danish Krone
EUR - Euro
GBP - British Pound
HKD - Hong Kong Dollar
JPY - Japanese Yen
NOK - Norwegian Krone
NZD - New Zealand Dollar
SEK - Swedish Krona
SGD - Singapore Dollar
USD - United States Dollar

         
    See accompanying notes to the financial statements.   23

 

GMO International Small Companies Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $382,738,356) (Note 2)
  $ 455,115,322  
Investments in affiliated issuers, at value (cost $8,505,000) (Notes 2 and 10)
    8,505,000  
Foreign currency, at value (cost $142,230) (Note 2)
    143,261  
Dividends receivable
    525,490  
Foreign taxes receivable
    39,936  
Unrealized appreciation on open forward currency contracts (Note 4)
    862,616  
Receivable for collateral on open futures contracts (Note 4)
    3,679,321  
Receivable for variation margin on open futures contracts (Note 4)
    131,984  
Receivable for expenses reimbursed by Manager (Note 5)
    41,132  
Miscellaneous receivable
    675  
         
Total assets
    469,044,737  
         
         
Liabilities:
       
Payable to affiliate for (Note 5):
       
Management fee
    214,240  
Shareholder service fee
    53,560  
Trustees and Trust Officers or agents unaffiliated with the Manager
    1,110  
Payable for foreign currency purchased
    85  
Unrealized depreciation on open forward currency contracts (Note 4)
    797,368  
Payable for open swap contracts (Note 4)
    25,885  
Accrued expenses
    219,099  
         
Total liabilities
    1,311,347  
         
Net assets
  $ 467,733,390  
         
Net assets consist of:
       
Paid-in capital
  $ 433,872,828  
Accumulated undistributed net investment income
    5,911,172  
Accumulated net realized loss
    (45,135,658 )
Net unrealized appreciation
    73,085,048  
         
    $ 467,733,390  
         
Net assets attributable to:
       
Class III shares
  $ 467,733,390  
         
Shares outstanding:
       
Class III
    55,170,077  
         
Net asset value per share:
       
Class III
  $ 8.48  
         

         
24
  See accompanying notes to the financial statements.    

 

GMO International Small Companies Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends (net of withholding taxes of $1,298,097)
  $ 15,272,564  
Interest
    14,375  
Dividends from affiliated issuers (Note 10)
    3,634  
         
Total investment income
    15,290,573  
         
Expenses:
       
Management fee (Note 5)
    3,438,346  
Shareholder service fee – Class III (Note 5)
    859,586  
Custodian and fund accounting agent fees
    503,528  
Audit and tax fees
    90,686  
Legal fees
    30,944  
Transfer agent fees
    26,457  
Trustees fees and related expenses (Note 5)
    12,849  
Registration fees
    8,580  
Miscellaneous
    49,673  
         
Total expenses
    5,020,649  
Fees and expenses reimbursed by Manager (Note 5)
    (682,947 )
Expense reductions (Note 2)
    (33 )
         
Net expenses
    4,337,669  
         
Net investment income (loss)
    10,952,904  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in unaffiliated issuers
    106,583,908  
Realized gains distributions from affiliated issuers (Note 10)
    4  
Futures contracts
    (1,242,477 )
Swap contracts
    (155,674 )
Foreign currency, forward contracts and foreign currency related transactions
    1,044,786  
         
Net realized gain (loss)
    106,230,547  
         
Change in net unrealized appreciation (depreciation) on:
       
Investments
    14,676,143  
Futures contracts
    3,127,041  
Swap contracts
    (25,885 )
Foreign currency, forward contracts and foreign currency related transactions
    1,690,900  
         
Net unrealized gain (loss)
    19,468,199  
         
Net realized and unrealized gain (loss)
    125,698,746  
         
Net increase (decrease) in net assets resulting from operations
  $ 136,651,650  
         

         
    See accompanying notes to the financial statements.   25

 

GMO International Small Companies Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 10,952,904     $ 10,921,170  
Net realized gain (loss)
    106,230,547       (67,531,785 )
Change in net unrealized appreciation (depreciation)
    19,468,199       354,415,388  
                 
                 
Net increase (decrease) in net assets from operations
    136,651,650       297,804,773  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (16,518,658 )     (23,982,418 )
                 
Net share transactions (Note 9):
               
Class III
    (817,031,721 )     496,477,449  
Purchase premiums and redemption fees (Notes 2 and 9):
               
Class III
    4,337,696       3,178,652  
                 
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees
    (812,694,025 )     499,656,101  
                 
                 
Total increase (decrease) in net assets
    (692,561,033 )     773,478,456  
                 
Net assets:
               
Beginning of period
    1,160,294,423       386,815,967  
                 
End of period (including accumulated undistributed net investment income of $5,911,172 and distributions in excess of net investment income of $1,742,122, respectively)
  $ 467,733,390     $ 1,160,294,423  
                 

         
26
  See accompanying notes to the financial statements.    

 

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,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 6.63     $ 4.20     $ 9.29     $ 12.22     $ 14.93  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.14       0.08       0.20       0.24       0.25  
Net realized and unrealized gain (loss)
    1.88       2.50       (4.78 )     (0.34 )     2.68  
                                         
                                         
Total from investment operations
    2.02       2.58       (4.58 )     (0.10 )     2.93  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.17 )     (0.15 )     (0.13 )     (0.51 )     (0.33 )
From net realized gains
    —       —       (0.38 )     (2.32 )     (5.31 )
                                         
                                         
Total distributions
    (0.17 )     (0.15 )     (0.51 )     (2.83 )     (5.64 )
                                         
                                         
Net asset value, end of period
  $ 8.48     $ 6.63     $ 4.20     $ 9.29     $ 12.22  
                                         
                                         
Total Return(a)
    31.11 %     61.64 %     (51.47 )%     (2.04 )%     23.35 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 467,733     $ 1,160,294     $ 386,816     $ 679,536     $ 856,471  
Net expenses to average daily net assets
    0.76 %(b)(c)     0.75 %(b)     0.75 %(d)     0.76 %(d)     0.75 %
Net investment income (loss) to average daily net assets
    1.91 %     1.17 %     2.89 %     1.98 %     1.79 %
Portfolio turnover rate
    55 %     58 %     64 %     72 %     48 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.12 %     0.09 %     0.12 %     0.13 %     0.09 %
Purchase premiums and redemption fees consisted of the following per share amounts (Note 2):†
  $ 0.05     $ 0.02     $ 0.01     $ 0.04     $ 0.03  
 
(a) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(d) The net expense ratio does not include the effect of expense reductions, except for reimbursements related to securities lending transactions.
† Calculated using average shares outstanding throughout the period.

         
    See accompanying notes to the financial statements.   27

 

GMO International Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO International Small Companies Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund’s investment objective is high total return. The Manager seeks to achieve the Fund’s investment objective by investing in equities or groups of equities that the Manager believes will provide higher returns than the MSCI EAFE Small Cap Index. The Manager uses active investment management methods, which means that equities are bought and sold according to the Manager’s evaluation of companies’ published financial information, securities’ prices, equity and bond markets, and the overall economy.
 
In selecting equities for the Fund, the Manager may use a combination of investment methods to identify equities that the Manager believes present positive return potential relative to other equities. Some of these methods evaluate individual equities or a group of equities based on the ratio of their price relative to historical financial information and forecasted financial information provided by industry analysts. Historical financial information may include book value, cash flow and earnings. The Manager may compare these ratios to industry or market averages in order to assess the relative attractiveness of an equity. Other methods focus on evaluating patterns of price movement or volatility of an equity or group of equities relative to the Fund’s investment universe. The Manager also may adjust the Fund’s portfolio for factors such as position size, market capitalization, and exposure to groups such as industry, sector, country or currency.
 
As a substitute for direct investments in equities, the Manager may use exchange-traded and over-the-counter (“OTC”) derivatives. The Manager also may use derivatives: (i) in an attempt to reduce investment exposures (which may result in a reduction below zero); (ii) to effect transactions intended as substitutes for securities lending; and (iii) in an attempt to adjust elements of the Fund’s investment exposure. Derivatives used may include futures, options, forward currency contracts and swap contracts. In addition, the Fund may lend its portfolio securities.
 
The Fund typically invests directly and indirectly (e.g., through underlying funds or derivatives) in equities of non-U.S. small companies. Under normal circumstances, the Fund invests directly and indirectly at least 80% of its assets in securities of small companies. For these purposes, non-U.S. companies are companies tied economically to countries other than the U.S., and include both developed and emerging companies (“Non-U.S. Companies”). Non-U.S. Companies other than (i) the largest 500 companies in developed countries based on full, non-float adjusted market capitalization and (ii) any company in an emerging

         
28
       

 

 
GMO International Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
country with a full, nonfloat adjusted market capitalization that is greater than or equal to that of the smallest excluded developed country companies, are considered by the Manager to be “small companies.” A company’s full, non-float adjusted market capitalization includes all of the company’s outstanding equity securities. For purposes of the Fund’s investments, the term “equities” refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts. The Manager may make investments tiedeconomically to emerging countries.
 
For cash management purposes, the Fund may invest in unaffiliated money market funds and/or GMO U.S. Treasury Fund.
 
The Fund currently limits subscriptions due to capacity considerations.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the OTC market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of February 28, 2011, the total value of securities held directly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 0.2% of net assets. The Fund classifies

         
        29

 

 
GMO International Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
such securities (as defined below) as Level 3. Additionally, because many foreign equity securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices adjusted by a factor supplied by a third party vendor using that vendor’s proprietary models. As of February 28, 2011, 92.4% of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified as using Level 2 inputs in the table below. See Note 4 for a further discussion on valuation of derivative financial instruments.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include: fair value adjustments applied to local closing prices of foreign securities and derivatives due to market events that have occurred since the local market close but before the Fund’s daily NAV calculation.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund used the following fair value techniques on Level 3 investments: With respect to certain securities for which no current market or bid prices were available, the Fund valued those securities at the most recent available market or bid price. Certain of the Fund’s securities in Thailand were valued at the local price as adjusted by applying a premium or discount when the holdings exceed foreign ownership limitations. The Fund

         
30
       

 

 
GMO International Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
valued Egyptian securities based on movements in related GDRs as no observable market prices were available on February 28, 2011, due to the continued suspension of trading and political unrest in Egypt.
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Common Stocks
                               
Australia
  $ —     $ 18,888,748     $ —     $ 18,888,748  
Austria
    —       2,833,670       0 *     2,833,670  
Belgium
    —       5,452,040       —       5,452,040  
Brazil
    83,909       —       —       83,909  
Canada
    19,005,529       —       —       19,005,529  
Chile
    150,238       —       —       150,238  
China
    —       614,410       —       614,410  
Czech Republic
    —       29,783       —       29,783  
Denmark
    —       2,432,227       —       2,432,227  
Egypt
    —       —       201,417       201,417  
Finland
    —       6,982,278       —       6,982,278  
France
    —       28,021,768       —       28,021,768  
Germany
    —       24,186,907       —       24,186,907  
Greece
    —       2,449,666       —       2,449,666  
Hong Kong
    —       10,485,902       —       10,485,902  
India
    —       857,640       —       857,640  
Ireland
    —       11,931,590       —       11,931,590  
Italy
    —       10,883,567       —       10,883,567  
Japan
    —       126,424,968       —       126,424,968  
Malaysia
    —       619,751       —       619,751  
Mexico
    34,758       —       —       34,758  
Netherlands
    —       12,802,067       —       12,802,067  
Norway
    —       492,488       —       492,488  
Peru
    36,698       —       —       36,698  
Philippines
    —       63,656       —       63,656  
Poland
    —       521,809       —       521,809  
Singapore
    —       12,994,140       —       12,994,140  
South Africa
    —       630,414       —       630,414  

         
        31

 

 
GMO International Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
  
  ASSET VALUATION INPUTS — continued
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
South Korea
  $ —     $ 3,931,835     $ 85,393     $ 4,017,228  
Spain
    —       655,553       —       655,553  
Sweden
    —       19,148,364       10,297       19,158,661  
Switzerland
    —       11,005,119       —       11,005,119  
Taiwan
    —       1,676,824       —       1,676,824  
Thailand
    —       —       627,570       627,570  
Turkey
    —       724,445       —       724,445  
United Kingdom
    —       99,300,916       —       99,300,916  
                                 
TOTAL COMMON STOCKS
    19,311,132       417,042,545       924,677       437,278,354  
                                 
Preferred Stocks
                               
Brazil
    207,542       —       —       207,542  
Germany
    —       14,989,319       —       14,989,319  
                                 
TOTAL PREFERRED STOCKS
    207,542       14,989,319       —       15,196,861  
                                 
Rights and Warrants
                               
Singapore
    —       959       —       959  
                                 
TOTAL RIGHTS AND WARRANTS
    —       959       —       959  
                                 
Mutual Funds
                               
United States
                               
Affiliated Issuers
    8,505,000       —       —       8,505,000  
                                 
TOTAL MUTUAL FUNDS
    8,505,000       —       —       8,505,000  
                                 
Short-Term Investments
    2,639,148       —       —       2,639,148  
                                 
Total Investments
    30,662,822       432,032,823       924,677       463,620,322  
                                 
Derivatives**
                               
Forward Currency Contracts
                               
Forward Currency Risk
    —       862,616       —       862,616  
Futures Contracts
                               
Equity Risk
    —       1,503,024       —       1,503,024  
                                 
Total Derivatives
    —       2,365,640       —       2,365,640  
                                 
Total
  $ 30,662,822     $ 434,398,463     $ 924,677     $ 465,985,962  
                                 

         
32
       

 

 
GMO International Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
LIABILITY VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Liabilities
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Derivatives**
                               
Forward Currency Contracts
                               
Foreign Currency Risk
  $ —     $ (797,368 )   $      —     $ (797,368 )
Futures Contracts
                               
Equity Risk
    (627,225 )     (229,077 )     —       (856,302 )
Swap Agreements
                               
Equity Risk
    —       (25,885 )     —       (25,885 )
                                 
Total Derivatives
    (627,225 )     (1,052,330 )     —       (1,679,555 )
                                 
Total
  $ (627,225 )   $ (1,052,330 )   $ —     $ (1,679,555 )
                                 
 
            * Represents the interest in securities that have no value at February 28, 2011.
 
             The risks referenced above are not intended to be inclusive of all risks. Please see the Investment Risks and Derivative Financial Instruments sections below for a further discussion of risks.
 
            ** Because the tables above are based on market values or unrealized appreciation (depreciation) rather than the notional amounts of derivatives, the uncertainties surrounding the valuation inputs for a derivative are likely to be more significant to the Fund’s net asset value than the uncertainties surrounding inputs for a non-derivative security with the same market value.
 
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements. The aggregate net value of the Fund’s direct investments in securities using Level 3 inputs was 0.2% of total net assets.

         
        33

 

 
GMO International Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a reconciliation of investments and derivatives, if any, in which significant unobservable inputs (Level 3) were used in determining value:
 
                                                                           
 
                                      Net Change in
                                      Unrealized
                                      Appreciation
                                      (Depreciation)
    Balances
               Change in
           Balances
     from Investments
    as of
   Net
   Accrued
   Total
   Unrealized
   Transfer
   Transfer
   as of
     Held as of
    February 28,
   Purchases/
   Discounts/
   Realized
   Appreciation
   in to
   out of
   February 28,
     February 28,
    2010   (Sales)   Premiums   Gain/(Loss)   (Depreciation)   Level 3 *   Level 3 *   2011     2011
Common Stocks
                                                                         
Austria
  $      —     $      —     $      —     $      —     $      —     $      —     $      —     $ — **     $      —  
Japan
    4,311,461       (4,755,079 )          —       —       443,618            —            —       —         —  
Egypt
    —       302,514       —       —       (101,097 )     —       —       201,417         (101,097 )
Thailand
    —       629,794       —       —       (2,224 )     —       —       627,570         (2,224 )
South Korea
    —       83,921       —       —       1,472       —       —       85,393         1,472  
Sweden
    9,148       —       —       —       1,149       —       —       10,297         1,149  
                                                                           
Total
  $ 4,320,609     $ (3,738,850 )   $ —     $ —     $ 342,918     $ —     $ —     $ 924,677       $ (100,700 )
                                                                           
 
            * The Fund accounts for investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the value at the end of the period.
 
            ** Represents the interest in securities that have no value at February 28, 2011.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 pm. Income and expenses denominated in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore,

         
34
       

 

 
GMO International Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country’s tax treaty with the United States. The foreign withholding rates applicable to a Fund’s investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if paid by the shareholders of the Fund.
 
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Taxes related to capital gains realized during the year ended February 28, 2011, if any, are reflected as part of Net realized gain (loss) in the Statement of Operations. Changes in tax liabilities related to capital gain taxes on unrealized investment gains, if any, are reflected as part of Change in net unrealized appreciation (depreciation) in the Statement of Operations. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards, derivative contract transactions, foreign currency transactions, passive foreign investment company transactions, post-October capital losses, and losses on wash sale transactions.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 16,518,658     $ 23,982,418  
                 
Total distributions
  $ 16,518,658     $ 23,982,418  
                 

         
        35

 

 
GMO International Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 14,084,844  
         
Other Tax Attributes:
       
Capital loss carryforwards
  $ (34,702,861 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 28, 2018
  $ (34,702,861 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 409,652,253     $ 70,453,878     $ (16,485,809 )   $ 53,968,069      
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.

         
36
       

 

 
GMO International Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (Note 5).
 
Brown Brothers Harriman & Co. (“BBH”) serves as the Fund’s custodian and fund accounting agent. State Street Bank and Trust Company (“State Street”) serves as the Fund’s transfer agent. BBH’s and State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
Purchases and redemptions of Fund shares
For the year ended February 28, 2011, the premium on cash purchases and fee on cash redemptions of Fund shares were each 0.50% of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by the Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. Such fees are recorded as a component of the Fund’s net share transactions. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of the Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund’s shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund’s shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the

         
        37

 

 
GMO International Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
purchasing shareholder’s securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of the Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund’s investments.
 
• Smaller Company Risk — The securities of small companies often are less widely held and trade less frequently and in lesser quantities, and their market prices often fluctuate more, than the securities of companies with larger market capitalizations.
 
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund’s investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund’s investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
 
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund’s foreign currency holdings and investments denominated in foreign currencies.

         
38
       

 

 
GMO International Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind. These risks are particularly pronounced for the Fund because it makes equity investments in small companies and may make investments in companies tied economically to emerging countries.
 
Other principal risks of an investment in the Fund include Market Risk — Value Securities (risk that the price of the Fund’s investments will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund’s securities); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by “equitizing” its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes,

         
        39

 

 
GMO International Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically “sell” a portion of the Fund’s portfolio) in combination with a long futures contract on another index (to synthetically “buy” exposure to that index). The Funds also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral (e.g., foreign currency forwards; see “Currency Risk” above), that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a

         
40
       

 

 
GMO International Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
 
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund’s forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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.
 
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. During the year ended February 28, 2011, the Fund used forward currency contracts to manage against anticipated currency exchange rate changes and adjust exposure to foreign currencies. Forward currency contracts outstanding at the end of the period are listed in the Fund’s Schedule of Investments.

         
        41

 

 
GMO International Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because regular trading on many foreign exchanges closes prior to the close of the NYSE, closing prices for these foreign futures contracts (including foreign index futures) do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures contracts using fair value prices, which are based on local closing prices adjusted by a factor, supplied by a third party vendor using that vendor’s proprietary models. As of February 28, 2011, futures contracts representing 0.3% of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified using Level 2 inputs in the table above. During the year ended February 28, 2011, the Fund used futures contracts to adjust exposure to certain securities markets and maintain the diversity and liquidity of the portfolio. Futures contracts outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash,

         
42
       

 

 
GMO International Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).

         
        43

 

 
GMO International Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility

         
44
       

 

 
GMO International Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. Because regular trading on many foreign exchanges closes prior to the close of the NYSE, closing prices for certain swap agreements on foreign securities and indices do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign swap agreements on foreign securities and indices using fair value prices, which are based on local closing prices, adjusted by a factor supplied by a third party vendor using that vendor’s proprietary models. As of February 28, 2011, swap agreements representing (0.1)% of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified using Level 2 inputs in the table above. During the year ended February 28, 2011, the Fund used total return swap agreements to achieve returns comparable to holding and lending a direct equity position. Swap agreements outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. During the year ended February 28, 2011, the Fund held rights and warrants as a result of a corporate action. Rights and warrants held by the Fund at the end of the period are listed in the Fund’s Schedule of Investments.

         
        45

 

 
GMO International Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of
February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Assets:
                                               
Investments, at value (rights and warrants)
  $      —     $ —     $      —     $ 959     $      —     $ 959  
Unrealized appreciation on futures contracts*
    —       —       —       1,503,024       —       1,503,024  
Unrealized appreciation on forward currency contracts
    —       862,616       —       —       —       862,616  
                                                 
Total
  $ —     $ 862,616     $ —     $ 1,503,983     $ —     $ 2,366,599  
                                                 
Liabilities:
                                               
Unrealized depreciation on futures contracts*
  $ —     $ —     $ —     $ (856,302 )   $ —     $ (856,302 )
Unrealized depreciation on forward currency contracts
    —       (797,368 )     —       —       —       (797,368 )
Unrealized depreciation on swap agreements
    —       —       —       (25,885 )     —       (25,885 )
                                                 
Total
  $ —     $ (797,368 )   $ —     $ (882,187 )   $ —     $ (1,679,555 )
                                                 
 
The Effect of Derivative Instruments on the Statement of Operations for the Period Ended February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign exchange
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Futures contracts
  $      —     $ —     $      —     $ (1,242,477 )   $      —     $ (1,242,477 )
Forward currency contracts
    —       1,627,538       —       —       —       1,627,538  
Swap agreements
    —       —       —       (155,674 )     —       (155,674 )
                                                 
Total
  $ —     $ 1,627,538     $ —     $ (1,398,151 )   $ —     $ 229,387  
                                                 
Change in Unrealized Appreciation (Depreciation) on:
                                               
Investments (rights and warrants)
  $ —     $ —     $ —     $ (8,494 )   $ —     $ (8,494 )
Futures contracts
    —       —       —       3,127,041       —       3,127,041  
Forward currency contracts
    —       1,645,708       —       —       —       1,645,708  
Swap agreements
    —       —       —       (25,885 )     —       (25,885 )
                                                 
Total
  $ —     $ 1,645,708     $ —     $ 3,092,662     $ —     $ 4,738,370  
                                                 

         
46
       

 

 
GMO International Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
 
            * The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.
 
The volume of derivative activity, based on absolute values (forward currency contracts, futures contracts, swap agreements, and rights/warrants), notional amounts (swap agreements), outstanding at each month-end, was as follows for the year ended February 28, 2011:
 
                                 
    Forward
            
    currency
   Futures
   Swap
   Rights/
    contracts   contracts   agreements   Warrants
 
Average amount outstanding
  $ 249,927,058     $ 71,920,098     $ 144,483     $ 21,578  
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.60% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.60% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund’s Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund’s Expense Reimbursement Amount. These contractual expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.

         
        47

 

 
GMO International Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $12,849 and $4,719, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
             
Indirect Net Expenses
 		           
(excluding shareholder service
     Indirect Shareholder
      
fees and interest expense)     Service Fees     Total Indirect Expenses
< 0.001%
    0.000%     < 0.001%
             
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 aggregated $313,769,717 and $1,076,011,941, respectively.
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 45.86% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund’s outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
 
As of February 28, 2011, 2.81% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and 1.00% of the Fund’s shares were held by accounts for which the Manager had investment discretion.

         
48
       

 

 
GMO International Small Companies Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    2,736,484     $ 19,892,462       94,444,920     $ 574,278,622  
Shares issued to shareholders in reinvestment of distributions
    2,233,542       15,169,467       3,299,206       21,330,532  
Shares repurchased
    (124,720,756 )     (852,093,650 )     (14,875,294 )     (99,131,705 )
Purchase premiums
    —       88,579       —       2,786,254  
Redemption fees
    —       4,249,117       —       392,398  
                                 
Net increase (decrease)
    (119,750,730 )   $ (812,694,025 )     82,868,832     $ 499,656,101  
                                 
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                 
    Value,
               Distributions
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   period
 
GMO U.S. Treasury Fund
  $      —     $ 33,646,000     $ 25,141,000     $ 3,634     $ 4     $ 8,505,000  
                                                 
Totals
  $ —     $ 33,646,000     $ 25,141,000     $ 3,634     $ 4     $ 8,505,000  
                                                 

         
        49

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO International Small Companies Fund:
 
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 (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian, brokers, and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
50
       

 

GMO International Small Companies Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including indirect management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
        51

 

 
GMO International Small Companies Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.76 %   $ 1,000.00     $ 1,319.90     $ 4.37  
2) Hypothetical
    0.76 %   $ 1,000.00     $ 1,021.03     $ 3.81  
                                 
 
            * Expenses are calculated using the Class’s annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
52
       

 

GMO International Small Companies Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
During the year ended February 28, 2011, the Fund paid foreign taxes of $1,293,744 and recognized foreign source income of $16,570,661.
 
For taxable, non-corporate shareholders, 74.79% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 represents qualified dividend income subject to the 15% rate category.

         
        53

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with
   Length of
   During Past
   Complex
     Directorships
Date of Birth   the Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
54        

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with
   Length of
   During Past
   Complex
     Directorships
Date of Birth   the Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
   Position(s)
   Length of
   During Past
   Complex
     Other Directorships
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee; President and Chief
Executive Officer of the Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
        55

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
56        

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        57

 

 
GMO Quality Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO Quality Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Quantitative Equity Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
Although GMO Quality Fund does not seek to control risk relative to any securities market index or benchmark, a discussion of the Fund’s performance relative to the S&P 500 Index is included for comparative purposes. Please note that, in GMO’s view, only approximately one-third of the S&P 500 Index is comprised of stocks that GMO considers to be suitable investments for the Fund.
 
The Class III shares of GMO Quality Fund returned +11.7% for the fiscal year ended February 28, 2011, as compared with +22.6% for the S&P 500 Index.
 
Stock selection detracted overall from returns relative to the S&P 500 Index. Selections in Energy, Information Technology, and Health Care were among the detractors. Overweight positions in Microsoft, Wal-Mart, and Johnson & Johnson detracted from relative returns while overweight positions in Oracle, QUALCOMM, and Philip Morris International added.
 
Sector selection also detracted overall from returns relative to the S&P 500 Index. Sector weightings negatively impacting relative performance included overweight positions in Health Care and Consumer Staples and an underweight in Industrials. Sector weightings positively impacting relative performance included not owning Utilities or Financials.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice. References to specific securities are not recommendations of such securities and may not be representative of any GMO portfolio’s current or future investments.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO Quality Fund Class III Shares and the S&P 500 Index
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited. Performance for classes may vary due to different fees.

 

GMO Quality Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary   % of Total Net Assets  
Common Stocks
    96.4 %
Short-Term Investments
    3.1  
Mutual Funds
    0.3  
Other
    0.2  
         
      100.0 %
         
 
         
Country Summary*   % of Investments  
United States
    86.5 %
Switzerland
    5.4  
United Kingdom
    3.2  
France
    2.8  
Netherlands
    0.8  
Japan
    0.7  
Belgium
    0.6  
         
      100.0 %
         
 
* The table above shows country exposure in the Fund. The table excludes short-term investments. The table includes exposure through derivative financial instruments. The table excludes exposure through forward currency contracts, if any. The table takes into account the market value of securities and options and the notional amounts of swap agreements and other derivative financial instruments, if any.
 

         
        1

 

 
GMO Quality Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2011 (Unaudited)
 
         
Industry Group Summary   % of Equity Investments**  
Pharmaceuticals, Biotechnology & Life Sciences
    21.8 %
Software & Services
    20.0  
Food, Beverage & Tobacco
    19.1  
Energy
    9.9  
Technology Hardware & Equipment
    8.5  
Food & Staples Retailing
    5.6  
Household & Personal Products
    5.3  
Health Care Equipment & Services
    5.1  
Capital Goods
    1.8  
Consumer Durables & Apparel
    1.2  
Consumer Services
    1.0  
Telecommunication Services
    0.7  
Retailing
    0.0 ^
         
      100.0 %
         
 
** Equity investments may consist of common stocks and other stock-related securities, such as preferred stocks. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
^ Rounds to 0.0%.

         
2
       

 

GMO Quality Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            COMMON STOCKS — 96.4%        
                     
            Capital Goods — 1.8%        
      1,877,900     3M Co.     173,198,717  
      1,374,600     United Technologies Corp.     114,834,084  
                     
            Total Capital Goods     288,032,801  
                     
                     
            Consumer Durables & Apparel — 1.1%        
      2,097,800     Nike, Inc.-Class B     186,767,134  
                     
                     
            Consumer Services — 1.0%        
      2,184,400     McDonald’s Corp.     165,315,392  
                     
                     
            Energy — 9.5%        
      11,263,473     BP Plc     90,802,263  
      3,210,400     Chevron Corp.     333,079,000  
      6,816,100     Exxon Mobil Corp.     582,981,033  
      6,411,226     Royal Dutch Shell Group-Class A     230,629,717  
      5,093,227     Total SA     312,214,799  
                     
            Total Energy     1,549,706,812  
                     
                     
            Food & Staples Retailing — 5.4%        
      331,700     Costco Wholesale Corp.     24,807,843  
      948,400     CVS Caremark Corp.     31,354,104  
      2,237,700     Sysco Corp.     62,185,683  
      4,075,300     Walgreen Co.     176,623,502  
      11,093,800     Wal–Mart Stores, Inc.     576,655,724  
                     
            Total Food & Staples Retailing     871,626,856  
                     
                     
            Food, Beverage & Tobacco — 18.4%        
      5,906,500     Altria Group, Inc.     149,847,905  
      1,740,233     Anheuser-Busch InBev NV     97,188,095  
      298,200     Brown-Forman Corp.-Class B     20,620,530  
      501,100     Campbell Soup Co.     16,867,026  
      10,425,500     Coca–Cola Co. (The)     666,397,960  
      1,303,700     General Mills, Inc.     48,419,418  

         
    See accompanying notes to the financial statements.   3

 

 
GMO Quality Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Food, Beverage & Tobacco — continued        
      433,500     Hansen Natural Corp. *     24,947,925  
      198,000     Hershey Co. (The)     10,359,360  
      410,800     HJ Heinz Co.     20,630,376  
      761,100     Kellogg Co.     40,764,516  
      838,000     Kraft Foods, Inc.-Class A     26,681,920  
      494,800     Lorillard, Inc.     37,985,796  
      7,932,334     Nestle SA     449,120,546  
      6,397,100     PepsiCo, Inc.     405,704,082  
      13,207,900     Philip Morris International, Inc.     829,191,962  
      684,300     Reynolds American, Inc.     23,485,176  
      3,925,480     Unilever NV     118,400,092  
                     
            Total Food, Beverage & Tobacco     2,986,612,685  
                     
                     
            Health Care Equipment & Services — 5.0%        
      643,300     Baxter International, Inc.     34,191,395  
      2,868,980     Express Scripts, Inc. *     161,294,056  
      296,000     Henry Schein, Inc. *     20,418,080  
      292,000     Laboratory Corp. of America Holdings *     26,317,960  
      4,717,130     Medtronic, Inc.     188,307,830  
      926,500     Quest Diagnostics, Inc.     52,578,875  
      4,751,894     UnitedHealth Group, Inc.     202,335,646  
      679,300     WellPoint, Inc. *     45,153,071  
      1,203,400     Zimmer Holdings, Inc. *     75,019,956  
                     
            Total Health Care Equipment & Services     805,616,869  
                     
                     
            Household & Personal Products — 5.1%        
      742,300     Avon Products, Inc.     20,643,363  
      251,500     Church & Dwight Co., Inc.     18,973,160  
      392,400     Clorox Co.     26,589,024  
      2,379,700     Colgate–Palmolive Co.     186,854,044  
      240,600     Estee Lauder Cos. (The), Inc.-Class A     22,715,046  
      939,400     Kimberly–Clark Corp.     61,906,460  
      7,716,600     Procter & Gamble Co. (The)     486,531,630  
                     
            Total Household & Personal Products     824,212,727  
                     

         
4
  See accompanying notes to the financial statements.    

 

 
GMO Quality Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Pharmaceuticals, Biotechnology & Life Sciences — 21.1%        
      6,957,205     Abbott Laboratories     334,641,560  
      3,672,060     Amgen, Inc. *     188,486,840  
      2,932,300     Bristol–Myers Squibb Co.     75,682,663  
      1,979,900     Gilead Sciences, Inc. *     77,176,502  
      9,385,038     GlaxoSmithKline Plc     180,158,741  
      15,760,500     Johnson & Johnson     968,325,120  
      9,690,100     Merck & Co., Inc.     315,606,557  
      3,808,483     Novartis AG (Registered)     214,023,853  
      38,500,748     Pfizer, Inc.     740,754,391  
      1,269,021     Roche Holding AG     191,422,119  
      1,895,284     Sanofi-Aventis     131,054,925  
      96,600     Thermo Fisher Scientific, Inc. *     5,392,212  
                     
            Total Pharmaceuticals, Biotechnology & Life Sciences     3,422,725,483  
                     
                     
            Retailing — 0.0%        
      5,500     Home Depot, Inc.     206,085  
                     
                     
            Software & Services — 19.3%        
      1,713,873     eBay, Inc. *     57,423,315  
      804,860     Google, Inc.-Class A *     493,701,124  
      2,233,220     International Business Machines Corp.     361,513,654  
      598,640     MasterCard, Inc.-Class A     144,008,838  
      33,937,600     Microsoft Corp.     902,061,408  
      29,142,800     Oracle Corp.     958,798,120  
      2,931,900     Visa, Inc.-Class A     214,175,295  
                     
            Total Software & Services     3,131,681,754  
                     
                     
            Technology Hardware & Equipment — 8.1%        
      1,727,660     Apple, Inc. *     610,226,789  
      14,391,100     Cisco Systems, Inc. *     267,098,816  
      2,907,700     Hewlett-Packard Co.     126,862,951  
      5,381,900     Qualcomm, Inc.     320,653,602  
                     
            Total Technology Hardware & Equipment     1,324,842,158  
                     

         
    See accompanying notes to the financial statements.   5

 

 
GMO Quality Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
Shares/
 		           
Par Value ($)     Description   Value ($)  
                     
            Telecommunication Services — 0.6%        
      55,814     NTT Docomo Inc     104,850,788  
                     
                     
            TOTAL COMMON STOCKS (COST $13,339,645,752)     15,662,197,544  
                     
                     
            MUTUAL FUNDS — 0.3%        
                     
            Affiliated Issuers — 0.3%        
      2,084,160     GMO U.S. Treasury Fund     52,104,000  
                     
                     
            TOTAL MUTUAL FUNDS (COST $52,104,000)     52,104,000  
                     
                     
            SHORT-TERM INVESTMENTS — 3.1%        
                     
            Money Market Funds — 0.5%        
      78,734,455     State Street Institutional Treasury Money Market Fund-Institutional Class     78,734,455  
                     
                     
            U.S. Government — 2.6%        
      130,000,000     U.S. Treasury Bill, 0.22%, due 01/12/12 (a)     129,753,910  
      5,000,000     U.S. Treasury Bill, 0.13%, due 05/05/11 (a)     4,998,870  
      281,600,000     U.S. Treasury Bill, 0.16%, due 03/10/11 (a)     281,587,455  
                     
                  416,340,235  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $495,031,764)     495,074,690  
                     
                     
            TOTAL INVESTMENTS — 99.8%
(COST $13,886,781,516) 		    16,209,376,234  
            Other Assets and Liabilities (net) — 0.2%     27,260,182  
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 16,236,636,416  
                     
 
Notes to Schedule of Investments:
 
* Non-income producing security.
(a) Rate shown represents yield-to-maturity.

         
6
  See accompanying notes to the financial statements.    

 

GMO Quality Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $13,834,677,516) (Note 2)
  $ 16,157,272,234  
Investments in affiliated issuers, at value (cost $52,104,000) (Notes 2 and 10)
    52,104,000  
Foreign currency, at value (cost $39,510) (Note 2)
    40,567  
Receivable for Fund shares sold
    22,451,279  
Dividends and interest receivable
    47,996,866  
Foreign taxes receivable
    7,868,721  
Receivable for expenses reimbursed by Manager (Note 5)
    295,988  
         
Total assets
    16,288,029,655  
         
         
Liabilities:
       
Payable for investments purchased
    971,000  
Payable for Fund shares repurchased
    44,418,764  
Payable to affiliate for (Note 5):
       
Management fee
    4,102,221  
Shareholder service fee
    1,134,100  
Trustees and Trust Officers or agents unaffiliated with the Manager
    39,270  
Accrued expenses
    727,884  
         
Total liabilities
    51,393,239  
         
Net assets
  $ 16,236,636,416  
         

         
    See accompanying notes to the financial statements.   7

 

 
GMO Quality Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011 — (Continued)
 
         
Net assets consist of:
       
Paid-in capital
  $ 15,093,201,336  
Accumulated undistributed net investment income
    50,697,527  
Accumulated net realized loss
    (1,230,678,180 )
Net unrealized appreciation
    2,323,415,733  
         
    $ 16,236,636,416  
         
Net assets attributable to:
       
Class III shares
  $ 5,288,776,466  
         
Class IV shares
  $ 1,662,542,111  
         
Class V shares
  $ 371,927,271  
         
Class VI shares
  $ 8,913,390,568  
         
Shares outstanding:
       
Class III
    254,090,923  
         
Class IV
    79,810,452  
         
Class V
    17,865,940  
         
Class VI
    428,096,995  
         
Net asset value per share:
       
Class III
  $ 20.81  
         
Class IV
  $ 20.83  
         
Class V
  $ 20.82  
         
Class VI
  $ 20.82  
         

         
8
  See accompanying notes to the financial statements.    

 

GMO Quality Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends from unaffiliated issuers (net of withholding taxes of $10,476,839)
  $ 352,683,329  
Interest
    947,634  
Dividends from affiliated issuers (Note 10)
    32,104  
         
Total investment income
    353,663,067  
         
Expenses:
       
Management fee (Note 5)
    49,119,693  
Shareholder service fee – Class III (Note 5)
    6,735,096  
Shareholder service fee – Class IV (Note 5)
    1,403,217  
Shareholder service fee – Class V (Note 5)
    430,154  
Shareholder service fee – Class VI (Note 5)
    4,703,727  
Custodian, fund accounting agent and transfer agent fees
    1,843,424  
Legal fees
    596,666  
Trustees fees and related expenses (Note 5)
    322,926  
Audit and tax fees
    85,250  
Registration fees
    51,200  
Miscellaneous
    217,356  
         
Total expenses
    65,508,709  
Fees and expenses reimbursed by Manager (Note 5)
    (2,676,518 )
Expense reductions (Note 2)
    (160,978 )
         
Net expenses
    62,671,213  
         
Net investment income (loss)
    290,991,854  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in unaffiliated issuers
    192,259,772  
Investments in affiliated issuers
    (6,094 )
Realized gains distributions from affiliated issuers (Note 10)
    2,942  
Futures contracts
    5,961,804  
Foreign currency, forward contracts and foreign currency related transactions
    (365,260 )
         
Net realized gain (loss)
    197,853,164  
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in unaffiliated issuers
    1,245,343,814  
Futures contracts
    (3,683,478 )
Foreign currency, forward contracts and foreign currency related transactions
    985,076  
         
Net unrealized gain (loss)
    1,242,645,412  
         
Net realized and unrealized gain (loss)
    1,440,498,576  
         
Net increase (decrease) in net assets resulting from operations
  $ 1,731,490,430  
         

         
    See accompanying notes to the financial statements.   9

 

GMO Quality Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 290,991,854     $ 239,488,127  
Net realized gain (loss)
    197,853,164       (601,565,636 )
Change in net unrealized appreciation (depreciation)
    1,242,645,412       3,858,807,964  
                 
                 
Net increase (decrease) in net assets from operations
    1,731,490,430       3,496,730,455  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (83,157,601 )     (59,989,429 )
Class IV
    (24,529,451 )     (20,318,942 )
Class V
    (9,752,353 )     (15,664,829 )
Class VI
    (166,119,977 )     (144,439,979 )
                 
Total distributions from net investment income
    (283,559,382 )     (240,413,179 )
                 
Net share transactions (Note 9):
               
Class III
    689,070,770       1,362,907,650  
Class IV
    421,295,506       54,048,273  
Class V
    (228,234,746 )     (308,484,902 )
Class VI
    (1,052,519,127 )     1,942,824,568  
                 
Increase (decrease) in net assets resulting from net share transactions
    (170,387,597 )     3,051,295,589  
                 
                 
Total increase (decrease) in net assets
    1,277,543,451       6,307,612,865  
                 
Net assets:
               
Beginning of period
    14,959,092,965       8,651,480,100  
                 
End of period (including accumulated undistributed net investment income of $50,697,527 and $43,627,261, respectively)
  $ 16,236,636,416     $ 14,959,092,965  
                 

         
10
  See accompanying notes to the financial statements.    

 

GMO Quality Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 18.99     $ 14.17     $ 20.56     $ 21.78     $ 20.81  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.36       0.33       0.37       0.39       0.35  
Net realized and unrealized gain (loss)
    1.82       4.83       (6.30 )     (0.70 )     1.12  
                                         
                                         
Total from investment operations
    2.18       5.16       (5.93 )     (0.31 )     1.47  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.36 )     (0.34 )     (0.34 )     (0.36 )     (0.34 )
From net realized gains
    —       —       (0.12 )     (0.55 )     (0.16 )
                                         
                                         
Total distributions
    (0.36 )     (0.34 )     (0.46 )     (0.91 )     (0.50 )
                                         
                                         
Net asset value, end of period
  $ 20.81     $ 18.99     $ 14.17     $ 20.56     $ 21.78  
                                         
                                         
Total Return(a)
    11.67 %     36.73 %     (29.37 )%     (1.76 )%     7.18 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 5,288,776     $ 4,119,119     $ 1,952,579     $ 2,003,758     $ 1,575,300  
Net expenses to average daily net assets
    0.48 %(b)(c)     0.48 %(b)     0.48 %(b)     0.48 %(b)     0.48 %
Net investment income (loss) to average daily net assets
    1.88 %     1.88 %     2.03 %     1.74 %     1.64 %
Portfolio turnover rate
    32 %     28 %     36 %     46 %     50 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.02 %     0.02 %     0.02 %     0.02 %     0.02 %
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
† Calculated using average shares outstanding throughout the period.

         
    See accompanying notes to the financial statements.   11

 

GMO Quality Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class IV share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 19.01     $ 14.19     $ 20.57     $ 21.80     $ 20.82  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.38       0.34       0.39       0.40       0.37  
Net realized and unrealized gain (loss)
    1.81       4.83       (6.30 )     (0.71 )     1.11  
                                         
                                         
Total from investment operations
    2.19       5.17       (5.91 )     (0.31 )     1.48  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.37 )     (0.35 )     (0.35 )     (0.37 )     (0.34 )
From net realized gains
    —       —       (0.12 )     (0.55 )     (0.16 )
                                         
                                         
Total distributions
    (0.37 )     (0.35 )     (0.47 )     (0.92 )     (0.50 )
                                         
                                         
Net asset value, end of period
  $ 20.83     $ 19.01     $ 14.19     $ 20.57     $ 21.80  
                                         
                                         
Total Return(a)
    11.71 %     36.73 %     (29.27 )%     (1.77 )%     7.19 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 1,662,542     $ 1,132,006     $ 787,276     $ 432,046     $ 800,458  
Net expenses to average daily net assets
    0.44 %(b)(c)     0.44 %(b)     0.44 %(b)     0.44 %(b)     0.44 %
Net investment income (loss) to average daily net assets
    1.95 %     1.97 %     2.11 %     1.78 %     1.79 %
Portfolio turnover rate
    32 %     28 %     36 %     46 %     50 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.02 %     0.02 %     0.02 %     0.02 %     0.02 %
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
† Calculated using average shares outstanding throughout the period.

         
12
  See accompanying notes to the financial statements.    

 

GMO Quality Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class V share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007(a)
 
Net asset value, beginning of period
  $ 19.00     $ 14.17     $ 20.56     $ 21.79     $ 21.91  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.38       0.34       0.39       0.41       0.07  
Net realized and unrealized gain (loss)
    1.81       4.84       (6.30 )     (0.72 )     0.04  
                                         
                                         
Total from investment operations
    2.19       5.18       (5.91 )     (0.31 )     0.11  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.37 )     (0.35 )     (0.36 )     (0.37 )     (0.09 )
From net realized gains
    —       —       (0.12 )     (0.55 )     (0.14 )
                                         
                                         
Total distributions
    (0.37 )     (0.35 )     (0.48 )     (0.92 )     (0.23 )
                                         
                                         
Net asset value, end of period
  $ 20.82     $ 19.00     $ 14.17     $ 20.56     $ 21.79  
                                         
                                         
Total Return(b)
    11.73 %     36.87 %     (29.31 )%     (1.75 )%     0.49 %**
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 371,927     $ 551,272     $ 637,834     $ 663,616     $ 259,430  
Net expenses to average daily net assets
    0.42 %(c)(d)     0.42 %(c)     0.42 %(c)     0.42 %(c)     0.42 %*
Net investment income (loss) to average daily net assets
    1.96 %     1.98 %     2.11 %     1.83 %     1.40 %*
Portfolio turnover rate
    32 %     28 %     36 %     46 %     50 %††
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.02 %     0.02 %     0.02 %     0.02 %     0.02 %*
 
(a) Period from December 8, 2006 (commencement of operations) through February 28, 2007.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(c) The net expense ratio does not include the effect of expense reductions (Note 2).
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the year ended February 28, 2007.
* Annualized.
** Not annualized.

         
    See accompanying notes to the financial statements.   13

 

GMO Quality Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class VI share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007(a)
 
Net asset value, beginning of period
  $ 19.00     $ 14.18     $ 20.57     $ 21.79     $ 21.91  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.38       0.35       0.40       0.41       0.07  
Net realized and unrealized gain (loss)
    1.81       4.82       (6.31 )     (0.70 )     0.04  
                                         
                                         
Total from investment operations
    2.19       5.17       (5.91 )     (0.29 )     0.11  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.37 )     (0.35 )     (0.36 )     (0.38 )     (0.09 )
From net realized gains
    —       —       (0.12 )     (0.55 )     (0.14 )
                                         
                                         
Total distributions
    (0.37 )     (0.35 )     (0.48 )     (0.93 )     (0.23 )
                                         
                                         
Net asset value, end of period
  $ 20.82     $ 19.00     $ 14.18     $ 20.57     $ 21.79  
                                         
                                         
Total Return(b)
    11.77 %     36.81 %     (29.28 )%     (1.67 )%     0.49 %**
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 8,913,391     $ 9,156,696     $ 5,273,791     $ 5,237,363     $ 2,588,116  
Net expenses to average daily net assets
    0.39 %(c)(d)     0.39 %(c)     0.39 %(c)     0.39 %(c)     0.39 %*
Net investment income (loss) to average daily net assets
    1.99 %     2.00 %     2.16 %     1.84 %     1.43 %*
Portfolio turnover rate
    32 %     28 %     36 %     46 %     50 %††
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.02 %     0.02 %     0.02 %     0.02 %     0.02 %*
 
(a) Period from December 8, 2006 (commencement of operations) through February 28, 2007.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(c) The net expense ratio does not include the effect of expense reductions (Note 2).
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the year ended February 28, 2007.
* Annualized.
** Not annualized.

         
14
  See accompanying notes to the financial statements.    

 

GMO Quality Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO Quality Fund is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund’s investment objective is total return. The Manager seeks to achieve the Fund’s investment objective by investing in equities or groups of equities that the Manager believes to be of high quality. The Manager uses active investment management methods, which means that equities are bought and sold according to the Manager’s evaluation of companies’ published financial information, securities’ prices, equity and bond markets, and the overall economy. In assessing a company’s quality, the Manager may consider multiple factors. These factors generally include financial ratios such as high return on equity and low debt to equity, the Manger’s assessment of the positioning of the company relative to its competitors, and other comparable measures.
 
In selecting equities for the Fund, the Manager may use a combination of investment methods to identify equities that the Manager believes present positive return potential relative to other equities. Some of these methods evaluate individual equities or a group of equities based on the ratio of their price relative to historical financial information and forecasted financial information provided by industry analysts. Historical financial information may include book value, cash flow and earnings. The Manager may compare these ratios to industry or market averages in order to assess the relative attractiveness of an equity. Other methods focus on evaluating patterns of price movement or volatility of an equity or group of equities relative to the Fund’s investment universe. The Manager also may adjust the Fund’s portfolio for factors such as position size, market capitalization and exposure to groups such as industry, sector, country or currency.
 
As a substitute for direct investments in equities, the Manager may use exchange-traded and over-the-counter (“OTC”) derivatives. The Manager also may use derivatives: (i) in an attempt to reduce investment exposures (which may result in a reduction below zero); (ii) to effect transactions intended as substitutes for securities lending; and (iii) in an attempt to adjust elements of the Fund’s investment exposure. Derivatives used may include futures, options and swap contracts. In addition, the Fund may lend its portfolio securities.
 
The Fund may hold fewer than 100 stocks. The Fund reserves the right to make tactical allocations of up to 20% of its net assets to investments in cash and high quality debt instruments.
 
The Fund is permitted to invest directly and indirectly (e.g., through underlying funds or derivatives) in equities of companies tied economically to any country in the world, including emerging countries. The

         
        15

 

 
GMO Quality Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
term “equities” refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts.
 
For cash management purposes, the Fund may invest in unaffiliated money market funds and/or GMO U.S. Treasury Fund.
 
Throughout the year ended February 28, 2011, the Fund had four classes of shares outstanding: Class III, Class IV, Class V and Class VI. Each class of shares bears a different shareholder service fee.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the OTC market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. Additionally, because many foreign equity securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices adjusted by a factor supplied by a third party vendor using that vendor’s proprietary models. As of February 28, 2011, 13.1% of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified as using Level 2 inputs in the table below. See Note 4 for a further discussion on valuation of derivative financial instruments.

         
16
       

 

 
GMO Quality Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include: fair value adjustments applied to local closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund’s daily NAV calculation.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant.

         
        17

 

 
GMO Quality Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Common Stocks
                               
Belgium
  $ —     $ 97,188,095     $      —     $ 97,188,095  
France
    —       443,269,724       —       443,269,724  
Japan
    —       104,850,788       —       104,850,788  
Netherlands
    —       118,400,092       —       118,400,092  
Switzerland
    —       854,566,518       —       854,566,518  
United Kingdom
    —       501,590,721       —       501,590,721  
United States
    13,542,331,606       —       —       13,542,331,606  
                                 
TOTAL COMMON STOCKS
    13,542,331,606       2,119,865,938       —       15,662,197,544  
                                 
Mutual Funds
    52,104,000       —       —       52,104,000  
Short-Term Investments
    213,487,235       281,587,455       —       495,074,690  
                                 
Total Investments
    13,807,922,841       2,401,453,393       —       16,209,376,234  
                                 
Total
  $ 13,807,922,841     $ 2,401,453,393     $ —     $ 16,209,376,234  
                                 
 
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements.
 
The Fund held no investments or derivative financial instruments directly at either February 28, 2011 or February 28, 2010, whose fair value was categorized using Level 3 inputs.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 pm. Income and expenses denominated in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized

         
18
       

 

 
GMO Quality Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country’s tax treaty with the United States. The foreign withholding rates applicable to a Fund’s investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, quarterly, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Taxes related to capital gains realized during the year ended February 28, 2011, if any, are reflected as part of Net realized gain (loss) in the Statement of Operations. Changes in tax liabilities related to capital gain taxes on unrealized investment gains, if any, are reflected as part of Change in net unrealized appreciation (depreciation) in the Statement of Operations. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards and losses on wash sale transactions.

         
        19

 

 
GMO Quality Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 283,559,382     $ 240,413,179  
Net long-term capital gain
    —       —  
                 
Total distributions
  $ 283,559,382     $ 240,413,179  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 50,697,527  
         
Other Tax Attributes:
       
Capital loss carryforwards
  $ (849,504,811 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 28, 2017
  $ (81,384,354 )
February 28, 2018
    (768,120,457 )
         
Total
  $ (849,504,811 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 14,267,954,884     $ 2,014,798,476     $ (73,377,126 )   $ 1,941,421,350      
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way

         
20
       

 

 
GMO Quality Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, 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 among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class’s operations. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (Note 5).
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market

         
        21

 

 
GMO Quality Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Declines in stock market prices generally are likely to reduce the market value of the Fund’s investments.
 
• Market Risk — Value Securities — The Fund purchases some equity investments at prices below what the Manager believes to be their fundamental value. The Fund runs the risk that the prices of these investments will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value.
 
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund’s investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund’s investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
 
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund’s foreign currency holdings and investments denominated in foreign currencies.
 
• Focused Investment Risk — Focusing investments in a limited number of companies or in industries with high positive correlations to one another creates additional risk. This risk is particularly pronounced for the Fund, which invests its assets in the securities of a limited number of issuers, and a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund invested in the securities of a larger number of issuers.
 
Other principal risks of an investment in the Fund include Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund’s securities);

         
22
       

 

 
GMO Quality Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Market Risk — Growth Securities (greater price fluctuations resulting from dependence on future earnings expectations); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by “equitizing” its cash balances using futures contracts or other types of derivatives.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero).
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, indices and markets without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically “sell” a portion of the Fund’s portfolio) in combination with a long futures contract on another index (to synthetically “buy” exposure to that index). In addition, the Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives

         
        23

 

 
GMO Quality Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral (e.g., foreign currency forwards; see “Currency Risk” above), that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is

         
24
       

 

 
GMO Quality Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
 
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund’s forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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.
 
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. The Fund had no forward currency contracts outstanding at the end of the period.
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because regular trading on many foreign exchanges closes prior to the close of the NYSE, closing prices for these foreign

         
        25

 

 
GMO Quality Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
futures contracts (including foreign index futures) do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures contracts using fair value prices, which are based on local closing prices adjusted by a factor supplied by a third party vendor using that vendor’s proprietary models. During the year ended February 28, 2011, the Fund used futures contracts to adjust exposure to certain securities markets. The Fund had no futures contracts outstanding at the end of the period.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid

         
26
       

 

 
GMO Quality Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.

         
        27

 

 
GMO Quality Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.

         
28
       

 

 
GMO Quality Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
The Effect of Derivative Instruments on the Statement of Operations for the year ended February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Futures contracts
  $      —     $      —     $      —     $ 5,961,804     $      —     $ 5,961,804  
                                                 
Total
  $ —     $ —     $ —     $ 5,961,804     $ —     $ 5,961,804  
                                                 
Change in Unrealized Appreciation (Depreciation) on:
                                               
Futures contracts
  $ —     $ —     $ —     $ (3,683,478 )   $ —     $ (3,683,478 )
                                                 
Total
  $ —     $ —     $ —     $ (3,683,478 )   $ —     $ (3,683,478 )
                                                 
 
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
 
The volume of derivative activity, based on absolute values (futures contracts) outstanding at each month-end, was as follows for the year ended February 28, 2011:
 
         
    Futures
    contracts
 
Average amount outstanding
  $ 33,852,813  
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets of each class at the annual rate of 0.15% for Class III shares, 0.105% for Class IV shares, 0.085% for Class V shares and 0.055% for Class VI shares.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.33% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the

         
        29

 

 
GMO Quality Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition to the contractual expense reimbursement described above, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund’s Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund’s Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $322,926 and $108,583, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
             
Indirect Net Expenses
 		           
(excluding shareholder
            
service fees and
     Indirect Shareholder
      
interest expense)     Service Fees     Total Indirect Expenses
< 0.001%
    0.000%     < 0.001%
             
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 aggregated $4,891,392,982 and $4,585,701,951, respectively.
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss

         
30
       

 

 
GMO Quality Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 13.33% of the outstanding shares of the Fund were held by one shareholder. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
 
As of February 28, 2011, 0.32% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and 46.60% of the Fund’s shares were held by accounts for which the Manager had investment discretion.
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    88,856,935     $ 1,694,729,284       116,087,050     $ 2,035,385,872  
Shares issued to shareholders in reinvestment of distributions
    3,592,173       67,822,139       2,495,465       42,683,158  
Shares repurchased
    (55,211,086 )     (1,073,480,653 )     (39,478,429 )     (715,161,380 )
                                 
Net increase (decrease)
    37,238,022     $ 689,070,770       79,104,086     $ 1,362,907,650  
                                 
                                 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class IV:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    41,881,875     $ 835,664,891       44,492,727     $ 807,256,064  
Shares issued to shareholders in reinvestment of distributions
    687,101       12,952,102       740,360       12,567,875  
Shares repurchased
    (22,308,314 )     (427,321,487 )     (41,182,732 )     (765,775,666 )
                                 
Net increase (decrease)
    20,260,662     $ 421,295,506       4,050,355     $ 54,048,273  
                                 
                                 
                                 

         
        31

 

 
GMO Quality Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class V:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    842,183     $ 15,799,234       30,547,955     $ 534,053,652  
Shares issued to shareholders in reinvestment of distributions
    463,507       8,758,346       934,051       15,664,829  
Shares repurchased
    (12,459,450 )     (252,792,326 )     (47,461,206 )     (858,203,383 )
                                 
Net increase (decrease)
    (11,153,760 )   $ (228,234,746 )     (15,979,200 )   $ (308,484,902 )
                                 
                                 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class VI:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    76,643,800     $ 1,454,354,242       164,246,691     $ 2,819,414,264  
Shares issued to shareholders in reinvestment of distributions
    8,411,337       158,834,375       8,104,048       138,203,820  
Shares repurchased
    (138,896,296 )     (2,665,707,744 )     (62,414,874 )     (1,014,793,516 )
                                 
Net increase (decrease)
    (53,841,159 )   $ (1,052,519,127 )     109,935,865     $ 1,942,824,568  
                                 
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                 
    Value,
               Distributions
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   period
 
GMO U.S. Treasury Fund
  $      —     $ 93,725,433     $ 41,615,339     $ 32,104     $ 2,942     $ 52,104,000  
                                                 
Totals
  $ —     $ 93,725,433     $ 41,615,339     $ 32,104     $ 2,942     $ 52,104,000  
                                                 

         
32
       

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Quality Fund:
 
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 Quality Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
        33

 

GMO Quality Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
34
       

 

 
GMO Quality Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.48 %   $ 1,000.00     $ 1,194.30     $ 2.61  
2) Hypothetical
    0.48 %   $ 1,000.00     $ 1,022.41     $ 2.41  
                                 
Class IV
                               
                                 
1) Actual
    0.44 %   $ 1,000.00     $ 1,195.00     $ 2.39  
2) Hypothetical
    0.44 %   $ 1,000.00     $ 1,022.61     $ 2.21  
                                 
Class V
                               
                                 
1) Actual
    0.42 %   $ 1,000.00     $ 1,195.20     $ 2.29  
2) Hypothetical
    0.42 %   $ 1,000.00     $ 1,022.71     $ 2.11  
                                 
Class VI
                               
                                 
1) Actual
    0.39 %   $ 1,000.00     $ 1,194.70     $ 2.12  
2) Hypothetical
    0.39 %   $ 1,000.00     $ 1,022.86     $ 1.96  
                                 
 
            * Expenses are calculated using each Class’s annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
        35

 

GMO Quality Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
For taxable, non-corporate shareholders, 100.00% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 represents qualified dividend income subject to the 15% rate category.
 
For corporate shareholders, 96.18% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 qualified for the dividends-received deduction.

         
36
       

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
      
Name and
   Held with the
   Length of
   During Past
   Complex
     Other Directorships
Date of Birth   Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
        37

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
      
Name and
   Held with the
   Length of
   During Past
   Complex
     Other Directorships
Date of Birth   Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee; President
and Chief Executive
Officer of the
Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
38        

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer
since November 2006;
Assistant Treasurer,
September 2004 – November 2006. 		  Head of Fund Administration
(December 2006 – present),
Fund Administration Staff
(June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        39

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money
Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
40
       

 

 
GMO Real Estate Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO Real Estate Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Quantitative Equity Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
GMO Real Estate Fund returned +38.2% for the fiscal year ended February 28, 2011, as compared with +38.9% for the MSCI U.S. REIT Index.
 
Stock selection added to returns relative to the MSCI U.S. REIT Index. Selections in the Office, Retail, and Diversified sub-industries added to relative returns while selections in the Specialized sub-industry detracted. In terms of individual names, an overweight position in Simon Property Group, an underweight in Corporate Office Properties, and not owning General Growth Properties added to relative returns. Underweight positions in Equity Residential and ProLogis and not owning Glimcher Realty Trust detracted from relative returns.
 
Sector selection detracted from returns relative to the MSCI U.S. REIT Index. An underweight position in the Industrial sub-industry was the leading detractor.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice. References to specific securities are not recommendations of such securities and may not be representative of any GMO portfolio’s current or future investments.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO Real Estate Fund Class III Shares and the MSCI U.S. REIT Index
As of February 28, 2011
 
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited.
 
 
MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.

 

GMO Real Estate Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary   % of Total Net Assets  
Common Stocks
    98.7 %
Mutual Funds
    1.3  
Short-Term Investments
    0.4  
Other
    (0.4 )
         
      100.0 %
         
 
         
Industry Summary   % of REIT Investments  
Specialized
    27.7 %
Retail
    26.3  
Residential
    17.5  
Office
    15.7  
Diversified
    7.8  
Industrial
    5.0  
         
      100.0 %
         

         
        1

 

GMO Real Estate Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            REAL ESTATE INVESTMENTS — 98.7%        
                     
            REAL ESTATE INVESTMENT TRUSTS — 98.7%        
                     
            Diversified — 7.7%        
      2,500     CapLease, Inc.     13,425  
      3,200     Colonial Properties Trust     63,072  
      3,500     Liberty Property Trust     118,195  
      700     PS Business Parks, Inc.     44,128  
      9,946     Vornado Realty Trust     928,260  
      900     Washington Real Estate Investment Trust     28,116  
      1,300     Winthrop Realty Trust     15,860  
                     
            Total Diversified     1,211,056  
                     
                     
            Industrial — 4.8%        
      6,300     AMB Property Corp.     229,194  
      2,800     DCT Industrial Trust, Inc.     15,736  
      2,400     DuPont Fabros Technology, Inc.     58,608  
      1,500     EastGroup Properties, Inc.     68,295  
      2,000     First Industrial Realty Trust, Inc. *     22,420  
      22,538     ProLogis     366,468  
                     
            Total Industrial     760,721  
                     
                     
            Office — 15.5%        
      3,170     Alexandria Real Estate Equities, Inc.     254,234  
      7,200     BioMed Realty Trust, Inc.     130,680  
      8,400     Boston Properties, Inc.     805,728  
      4,289     Brandywine Realty Trust     52,754  
      4,225     CommonWealth REIT     121,300  
      1,000     Corporate Office Properties Trust     35,870  
      3,300     Digital Realty Trust, Inc.     194,106  
      4,800     Douglas Emmett, Inc.     90,000  
      2,200     Duke Realty Corp.     30,954  
      2,900     Franklin Street Properties Corp.     43,587  
      1,200     Government Properties Income Trust     32,604  
      2,600     Highwoods Properties, Inc.     88,218  

         
2
  See accompanying notes to the financial statements.    

 

 
GMO Real Estate Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Office — continued        
      2,600     Kilroy Realty Corp.     100,750  
      4,608     Lexington Realty Trust     43,638  
      2,200     Mack-Cali Realty Corp.     74,668  
      4,523     SL Green Realty Corp.     342,527  
                     
            Total Office     2,441,618  
                     
                     
            Residential — 17.3%        
      800     American Campus Communities, Inc.     26,736  
      5,886     Apartment Investment & Management Co.-Class A     150,976  
      5,283     AvalonBay Communities, Inc.     639,401  
      4,000     BRE Properties, Inc.     190,040  
      3,200     Camden Property Trust     189,344  
      3,100     Education Realty Trust, Inc.     25,575  
      1,000     Equity Lifestyle Properties, Inc.     58,040  
      15,000     Equity Residential     826,650  
      1,170     Essex Property Trust, Inc.     144,823  
      1,200     Home Properties, Inc.     70,704  
      1,600     Mid-America Apartment Communities, Inc.     103,952  
      2,500     Post Properties, Inc.     97,500  
      1,000     Sun Communities, Inc.     34,580  
      6,781     UDR, Inc.     164,914  
                     
            Total Residential     2,723,235  
                     
                     
            Retail — 26.0%        
      1,984     Acadia Realty Trust     39,283  
      70     Alexander’s, Inc.     27,701  
      7,731     CBL & Associates Properties, Inc.     137,998  
      11,197     Developers Diversified Realty Corp.     160,117  
      2,200     Equity One, Inc.     42,108  
      2,300     Federal Realty Investment Trust     193,614  
      1,300     Getty Realty Corp.     38,246  
      18,258     Kimco Realty Corp.     353,840  
      7,396     Macerich Co. (The)     374,534  
      3,400     National Retail Properties, Inc.     87,346  

         
    See accompanying notes to the financial statements.   3

 

 
GMO Real Estate Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Retail — continued        
      3,300     Ramco-Gershenson Properties Trust     44,583  
      3,700     Realty Income Corp.     133,089  
      2,300     Regency Centers Corp.     104,075  
      300     Saul Centers, Inc.     13,800  
      17,803     Simon Property Group, Inc.     1,959,042  
      1,400     Tanger Factory Outlet Centers, Inc.     37,310  
      3,000     Taubman Centers, Inc.     166,440  
      1,000     Urstadt Biddle Properties, Inc.     19,390  
      5,900     Weingarten Realty Investors     152,633  
                     
            Total Retail     4,085,149  
                     
                     
            Specialized — 27.4%        
      6,611     DiamondRock Hospitality Co. *     77,745  
      3,300     Entertainment Properties Trust     157,311  
      4,300     Extra Space Storage, Inc.     84,925  
      15,300     HCP, Inc.     581,400  
      3,500     Health Care, Inc.     182,770  
      1,200     Healthcare Realty Trust, Inc.     27,960  
      6,100     Hospitality Properties Trust     140,300  
      32,837     Host Hotels & Resorts, Inc.     604,201  
      3,200     LaSalle Hotel Properties     90,272  
      1,200     LTC Properties, Inc.     35,064  
      6,300     Medical Properties Trust, Inc.     73,899  
      1,400     National Health Investors, Inc.     66,528  
      5,600     Nationwide Health Properties, Inc.     239,344  
      4,100     Omega Healthcare Investors, Inc.     98,277  
      8,194     Public Storage     919,777  
      8,200     Senior Housing Properties Trust     201,228  
      1,400     Sovran Self Storage, Inc.     54,320  
      8,200     Sunstone Hotel Investors, Inc. *     88,068  

         
4
  See accompanying notes to the financial statements.    

 

 
GMO Real Estate Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Specialized — continued        
      800     Universal Health Realty Income Trust     31,816  
      10,000     Ventas, Inc.     554,200  
                     
            Total Specialized     4,309,405  
                     
                     
            TOTAL REAL ESTATE INVESTMENT TRUSTS (COST $11,539,876)     15,531,184  
                     
                     
            TOTAL REAL ESTATE INVESTMENTS (COST $11,539,876)     15,531,184  
                     
                     
            MUTUAL FUNDS — 1.3%        
                     
            Affiliated Issuers — 1.3%        
      8,042     GMO U.S. Treasury Fund     201,043  
                     
                     
            TOTAL MUTUAL FUNDS (COST $201,043)     201,043  
                     
                     
            SHORT-TERM INVESTMENTS — 0.4%        
                     
            Money Market Funds — 0.4%        
      74,269     State Street Institutional Treasury Money Market Fund-Institutional Class     74,269  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $74,269)     74,269  
                     
                     
            TOTAL INVESTMENTS — 100.4%
(Cost $11,815,188) 		    15,806,496  
            Other Assets and Liabilities (net) — (0.4%)     (70,385 )
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 15,736,111  
                     
 
Notes to Schedule of Investments:
 
* Non-income producing security.
REIT - Real Estate Investment Trust

         
    See accompanying notes to the financial statements.   5

 

GMO Real Estate Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $11,614,145) (Note 2)
  $ 15,605,453  
Investments in affiliated issuers, at value (cost $201,043) (Notes 2 and 10)
    201,043  
Receivable for Fund shares sold
    16,160  
Dividends and interest receivable
    10,209  
Receivable for expenses reimbursed by Manager (Note 5)
    6,496  
         
Total assets
    15,839,361  
         
         
Liabilities:
       
Payable for investments purchased
    50,000  
Payable to affiliate for (Note 5):
       
Management fee
    3,860  
Shareholder service fee
    1,755  
Trustees and Trust Officers or agents unaffiliated with the Manager
    40  
Accrued expenses
    47,595  
         
Total liabilities
    103,250  
         
Net assets
  $ 15,736,111  
         
Net assets consist of:
       
Paid-in capital
  $ 18,794,248  
Accumulated undistributed net investment income
    77,413  
Accumulated net realized loss
    (7,126,858 )
Net unrealized appreciation
    3,991,308  
         
    $ 15,736,111  
         
Net assets attributable to:
       
Class III shares
  $ 15,736,111  
         
Shares outstanding:
       
Class III
    1,911,824  
         
Net asset value per share:
       
Class III
  $ 8.23  
         

         
6
  See accompanying notes to the financial statements.    

 

GMO Real Estate Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends from unaffiliated issuers
  $ 421,642  
Dividends from affiliated issuers (Note 10)
    129  
Interest
    61  
         
Total investment income
    421,832  
         
Expenses:
       
Management fee (Note 5)
    46,701  
Shareholder service fee – Class III (Note 5)
    21,228  
Audit and tax fees
    57,455  
Custodian, fund accounting agent and transfer agent fees
    12,723  
Registration fees
    2,666  
Legal fees
    558  
Trustees fees and related expenses (Note 5)
    313  
Miscellaneous
    9,269  
         
Total expenses
    150,913  
Fees and expenses reimbursed by Manager (Note 5)
    (82,613 )
         
Net expenses
    68,300  
         
Net investment income (loss)
    353,532  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in unaffiliated issuers
    (2,011,997 )
Investments in affiliated issuers
    3  
Realized gains distributions from affiliated issuers (Note 10)
    13  
         
Net realized gain (loss)
    (2,011,981 )
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in unaffiliated issuers
    6,314,334  
         
Net realized and unrealized gain (loss)
    4,302,353  
         
Net increase (decrease) in net assets resulting from operations
  $ 4,655,885  
         

         
    See accompanying notes to the financial statements.   7

 

GMO Real Estate Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 353,532     $ 507,169  
Net realized gain (loss)
    (2,011,981 )     (3,620,251 )
Change in net unrealized appreciation (depreciation)
    6,314,334       10,298,815  
                 
                 
Net increase (decrease) in net assets from operations
    4,655,885       7,185,733  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (426,840 )     (341,015 )
                 
Net share transactions (Note 9):
               
Class III
    (2,605,218 )     (1,031,843 )
                 
                 
Total increase (decrease) in net assets
    1,623,827       5,812,875  
                 
Net assets:
               
Beginning of period
    14,112,284       8,299,409  
                 
End of period (including accumulated undistributed net investment income of $77,413 and $222,085, respectively)
  $ 15,736,111     $ 14,112,284  
                 

         
8
  See accompanying notes to the financial statements.    

 

GMO Real Estate Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 6.16     $ 3.34     $ 7.85     $ 12.87     $ 12.27  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.18       0.21       0.31       0.40       0.38  
Net realized and unrealized gain (loss)
    2.11       2.76       (4.40 )     (3.29 )     2.72  
                                         
                                         
Total from investment operations
    2.29       2.97       (4.09 )     (2.89 )     3.10  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.22 )     (0.15 )     (0.29 )     (0.14 )     (0.31 )
From net realized gains
    —       —       (0.13 )     (1.99 )     (2.19 )
                                         
                                         
Total distributions
    (0.22 )     (0.15 )     (0.42 )     (2.13 )     (2.50 )
                                         
                                         
Net asset value, end of period
  $ 8.23     $ 6.16     $ 3.34     $ 7.85     $ 12.87  
                                         
                                         
Total Return(a)
    38.19 %     89.86 %     (54.45 )%     (24.04 )%     29.76 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 15,736     $ 14,112     $ 8,299     $ 19,465     $ 37,650  
Net expenses to average daily net assets
    0.48 %(b)     0.48 %(c)     0.48 %(c)     0.48 %     0.48 %
Net investment income (loss) to average daily net assets
    2.50 %     4.18 %     4.44 %     3.78 %     3.24 %
Portfolio turnover rate
    25 %     34 %     29 %     49 %     43 %
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets:
    0.58 %     0.55 %     0.41 %     0.22 %     0.28 %
 
(a) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions.
(b) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(c) The net expense ratio does not include the effect of expense reductions (Note 2).
† Calculated using average shares outstanding throughout the period.

         
    See accompanying notes to the financial statements.   9

 

GMO Real Estate Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO Real Estate Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund’s investment objective is high total return. The Manager seeks to achieve the Fund’s investment objective by investing in investments or groups of investments that the Manager believes will provide higher returns than the MSCI U.S. REIT Index. The Manager uses active investment management methods, which means that investments are bought and sold according to the Manager’s evaluation of companies’ published financial information, securities’ prices, equity and bond markets, and the overall economy.
 
In selecting investments for the Fund, the Manager may use a combination of investment methods to identify investments that the Manager believes present positive return potential relative to other investments. Some of these methods evaluate individual investments or a group of investments based on the ratio of their price relative to historical financial information and forecasted financial information provided by industry analysts. Historical financial information may include book value, cash flow and earnings. The Manager may compare these ratios to industry or market averages in order to assess the relative attractiveness of an investment. Other methods focus on evaluating patterns of price movement or volatility of an investment or group of investments relative to the Fund’s investment universe. The Manager also may adjust the Fund’s portfolio for factors such as position size, industry and sector exposure, and market capitalization.
 
As a substitute for direct investments, the Manager may use exchange-traded and over-the-counter (“OTC”) derivatives. The Manager also may use derivatives: (i) in an attempt to reduce investment exposures (which may result in a reduction below zero); (ii) to effect transactions intended as substitutes for securities lending; and (iii) in an attempt to adjust elements of the Fund’s investment exposure. Derivatives used may include futures, options and swap contracts. In addition, the Fund may lend its portfolio securities.
 
The Fund has a fundamental policy to concentrate its investments in real estate-related investments. Under normal circumstances, the Fund invests directly and indirectly (e.g., through underlying funds or derivatives) at least 80% of its assets in real estate investment trusts (“REITs”) and other real estate-related investments. REITs are managed vehicles that invest (including both equity and fixed income investments) in real estate or real estate-related investments. The term “real estate-related investment” includes REITs and companies that derive at least 50% of their revenues and profits from, or have at least

         
10
       

 

 
GMO Real Estate Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
50% of their assets invested in, (i) the development, construction, management, or sale of real estate or (ii) real estate holdings.
 
For cash management purposes, the Fund may invest in unaffiliated money market funds and/or GMO U.S. Treasury Fund.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the OTC market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. See Note 4 for a further discussion on valuation of derivative financial instruments.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure

         
        11

 

 
GMO Real Estate Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Common Stocks
  $ 15,531,184     $      —     $      —     $ 15,531,184  
Mutual Funds
    201,043       —       —       201,043  
Short-Term Investments
    74,269       —       —       74,269  
                                 
Total Investments
    15,806,496       —       —       15,806,496  
                                 
Total
  $ 15,806,496     $ —     $ —     $ 15,806,496  
                                 
 
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements.
 
All of the Fund’s common stocks held at period end are classified as Level 1. Please refer to the Schedule of Investments for a more detailed categorization of common stocks.

         
12
       

 

 
GMO Real Estate Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund held no investments or derivative financial instruments directly at either February 28, 2011 or February 28, 2010, whose fair value was categorized using Level 3 inputs.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to adjustments related to real estate investment trust holdings, capital loss carryforwards, losses on wash sale transactions and post-October capital losses.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 426,840     $ 341,015  
                 
Total distributions
  $ 426,840     $ 341,015  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.

         
        13

 

 
GMO Real Estate Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 77,413  
         
Other Tax Attributes:
       
Capital loss carryforwards
  $ (5,964,996 )
Post-October capital loss deferral
  $ (134,674 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 28, 2017
  $ (517,045 )
February 28, 2018
    (3,096,414 )
February 28, 2019
    (2,351,537 )
         
Total
  $ (5,964,996 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 12,842,376     $ 3,101,996     ($ 137,876 )   $ 2,964,120      
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.

         
14
       

 

 
GMO Real Estate Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. Distributions paid by real estate investment trusts (“REITs”) in excess of their income are recorded as reductions of the cost of the related investments when the amount of the return of capital is conclusively determined, which increases/decreases the unrealized/realized gains/losses as applicable. If the Fund no longer owns the applicable securities, any distributions received in excess of income are recorded as realized gains. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (Note 5).
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended (the “1940 Act”), and therefore a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Real Estate Risk — Real estate-related investments may decline in value as a result of factors affecting the real estate industry, such as the supply of real property in particular markets, changes in zoning laws,

         
        15

 

 
GMO Real Estate Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
delays in completion of construction, changes in real estate values, changes in property taxes, levels of occupancy, adequacy of rent to cover operating expenses, and local and regional market conditions. The value of real estate-related investments also may be affected by changes in interest rates and social and economic trends. REITs are subject to the risk of fluctuations in income from underlying real estate assets, the inability of the REIT to effectively manage the cash flows generated by those assets, prepayments and defaults by borrowers, and failing to qualify for the special tax treatment granted to REITs under the Internal Revenue Code of 1986 and/or to maintain exempt status under the 1940 Act.
 
• Focused Investment Risk — Focusing investments in sectors and industries with high positive correlations to one another creates additional risk. This risk is particularly pronounced for the Fund, which concentrates its investments in real estate-related investments, making the Fund’s net asset value more susceptible to economic, market, political, and other developments affecting the real estate industry.
 
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund’s investments.
 
Other principal risks of an investment in the Fund include Market Risk — Value Securities (risk that the price of the Fund’s investments will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Liquidity Risk (difficulty in selling Fund investments and/or increased likelihood of honoring redemption requests in-kind); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, and credit and counterparty risk); Market Risk — Fixed Income Securities (risk that the value of fixed income securities will decline during periods of rising interest rates and/or widening of credit spreads on asset backed and other fixed income securities); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund’s securities); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).

         
16
       

 

 
GMO Real Estate Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by “equitizing” its cash balances using futures contracts or other types of derivatives.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero).
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, indices and markets without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically “sell” a portion of the Fund’s portfolio) in combination with a long futures contract on another index (to synthetically “buy” exposure to that index).
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral, that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not

         
        17

 

 
GMO Real Estate Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is marked to market

         
18
       

 

 
GMO Real Estate Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
daily and an appropriate payable or receivable for the change in value (“variation margin”) is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. The Fund had no futures contracts outstanding at the end of the period.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.

         
        19

 

 
GMO Real Estate Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap

         
20
       

 

 
GMO Real Estate Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.

         
        21

 

 
GMO Real Estate Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.33% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition to the contractual expense reimbursement described above, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund’s Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund’s Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $313 and $50, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.

         
22
       

 

 
GMO Real Estate Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
             
Indirect Net Expenses
 		           
(excluding shareholder
            
service fees and
     Indirect Shareholder
      
interest expense)     Service Fees     Total Indirect Expense
< 0.001%
    0.00%     < 0.001%
             
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 aggregated $3,507,570 and $5,787,672, respectively.
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 95.62% of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund’s outstanding shares.
 
As of February 28, 2011, 0.98% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and 75.45% of the Fund’s shares were held by accounts for which the Manager had investment discretion.

         
        23

 

 
GMO Real Estate Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    17,112     $ 132,325       51,911     $ 233,590  
Shares issued to shareholders in reinvestment of distributions
    2,375       15,703       9,026       43,675  
Shares repurchased
    (399,558 )     (2,753,246 )     (252,985 )     (1,309,108 )
                                 
Net increase (decrease)
    (380,071 )   $ (2,605,218 )     (192,048 )   $ (1,031,843 )
                                 
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                 
    Value,
               Distributions
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   period
 
GMO U.S. Treasury Fund
  $      —     $ 565,040     $ 364,000     $ 129     $ 13     $ 201,043  
                                                 
Totals
  $ —     $ 565,040     $ 364,000     $ 129     $ 13     $ 201,043  
                                                 

         
24
       

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Real Estate Fund:
 
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 Real Estate Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
        25

 

GMO Real Estate Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
26
       

 

 
GMO Real Estate Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.48 %   $ 1,000.00     $ 1,211.10     $ 2.63  
2) Hypothetical
    0.48 %   $ 1,000.00     $ 1,022.41     $ 2.41  
                                 
 
            * Expenses are calculated using the Class’s annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
        27

 

GMO Real Estate Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.

         
28
       

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with the
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
        29

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with the
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
   Position(s)
   Length of
   During Past
   Complex
     Other Directorships
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee; President
and Chief Executive
Officer of the
Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
30        

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        31

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money
Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
32        

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
GMO Short-Duration Collateral Fund (SDCF) returned +9.3% for the fiscal year ended February 28, 2011, as compared with +0.5% for the J.P. Morgan U.S. 3 Month Cash Index.
 
SDCF outperformed its benchmark during the fiscal year by 8.8%, with positive performance attributable to improved pricing in asset-backed security holdings.
 
Asset-backed security spreads tightened and pricing and liquidity conditions in securitized credit markets improved during the fiscal year. SDCF’s asset-backed holdings experienced credit downgrades during the fiscal year: SDCF had 55 downgraded securities, representing 11% of its market value from the beginning of the fiscal year. At fiscal year-end, about 52% of SDCF’s portfolio was rated AAA, and 67% of the portfolio was rated single-A or better.
 
During the fiscal year ended February 28, 2011, the Fund did not pursue an active investment program.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO Short-Duration Collateral Fund and the J.P. Morgan U.S. 3 Month Cash Index
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end please call (617) 330-7500. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited.
 

 

GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary   % of Total Net Assets  
Debt Obligations
    99.1 %
Short-Term Investments
    0.8  
Swap Agreements
    (0.0 )^
Forward Currency Contracts
    (0.1 )
Other
    0.2  
         
      100.0 %
         
 
         
Industry Sector Summary   % of Debt Obligations  
Credit Cards
    19.4 %
Residential Asset-Backed Securities (United States)
    17.8  
Auto Financing
    11.1  
CMBS
    9.7  
Insured Auto Financing
    5.9  
Residential Mortgage-Backed Securities (European)
    5.8  
Student Loans
    5.8  
Business Loans
    4.2  
Residential Mortgage-Backed Securities (Australian)
    4.2  
Insured Other
    3.9  
CMBS Collateralized Debt Obligations
    2.6  
Corporate Collateralized Debt Obligations
    2.0  
U.S. Government Agency
    1.6  
Rate Reduction Bonds
    1.2  
Insured High Yield Collateralized Debt Obligations
    0.9  
Airlines
    0.8  
Insured Residential Mortgage-Backed Securities (United States)
    0.8  
Insured Residential Asset-Backed Securities (United States)
    0.7  
Insured Time Share
    0.7  
Equipment Leases
    0.4  
Insured Transportation
    0.2  
Time Share
    0.1  
Residential Mortgage-Backed Securities (United States)
    0.1  
Insured Business Loans
    0.1  
ABS Collateralized Debt Obligations
    0.0 ^
         
      100.0 %
         
 
Ù Rounds to 0.0%

         
        1

 

GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            DEBT OBLIGATIONS — 99.1%        
                     
            Asset-Backed Securities — 97.5%        
            ABS Collateralized Debt Obligations — 0.0%        
      11,200,000     Paragon CDO Ltd., Series 04-1A, Class A, 144A, 3 mo. LIBOR + .65%, 0.95%, due 10/20/44     —  
                     
                     
            Airlines — 0.8%        
      17,580,803     Aircraft Finance Trust, Series 99-1A, Class A1, 144A, 1 mo. LIBOR + .48%, 0.75%, due 05/15/24     10,372,673  
      5,543,111     Continental Airlines, Inc., Series 99-1A, 6.55%, due 02/02/19     5,850,754  
                     
            Total Airlines     16,223,427  
                     
                     
            Auto Financing — 11.0%        
      13,736,325     Capital Auto Receivable Asset Trust, Series 07-2, Class A4B, 1 mo. LIBOR + .40%, 0.67%, due 02/18/14     13,751,572  
      5,100,000     Capital Auto Receivable Asset Trust, Series 08-1, Class A4B, 1 mo. LIBOR + 1.35%, 1.62%, due 07/15/14     5,146,206  
      24,500,000     Carmax Auto Owner Trust, Series 08-2, Class A4B, 1 mo. LIBOR + 1.65%, 1.92%, due 08/15/13     24,830,750  
      22,300,000     Daimler Chrysler Auto Trust, Series 08-B, Class A4A, 5.32%, due 11/10/14     22,911,020  
      17,400,000     Daimler Chrysler Auto Trust, Series 08-B, Class A4B, 1 mo. LIBOR + 1.85%, 2.11%, due 11/10/14     17,594,706  
      2,761,006     Ford Credit Auto Owner Trust, Series 06-C, Class A4B, 1 mo. LIBOR + .04%, 0.31%, due 02/15/12     2,760,675  
      12,266,508     Ford Credit Auto Owner Trust, Series 07-B, Class A4B, 1 mo. LIBOR + .38%, 0.65%, due 07/15/12     12,276,812  
      31,800,000     Ford Credit Auto Owner Trust, Series 08-B, Class A4B, 1 mo. LIBOR + 2.00%, 2.27%, due 03/15/13     32,200,998  
      61,000,000     Ford Credit Floorplan Master Owner Trust, Series 06-4, Class A, 1 mo. LIBOR + .25%, 0.52%, due 06/15/13     60,734,101  
      8,400,000     Franklin Auto Trust, Series 08-A, Class A4B, 1 mo. LIBOR + 1.95%, 2.21%, due 05/20/16     8,484,000  
      8,306,986     Nissan Auto Receivables Owner Trust, Series 07-A, Class A4, 1 mo. LIBOR, 0.27%, due 06/17/13     8,299,510  

         
2
  See accompanying notes to the financial statements.    

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            Auto Financing — continued        
      12,000,000     Wachovia Auto Owner Trust, Series 08-A, Class A4B, 1 mo. LIBOR + 1.15%, 1.41%, due 03/20/14     12,091,200  
      5,304,852     World Omni Auto Receivables Trust, Series 07-A, Class A4, 1 mo. LIBOR, 0.27%, due 11/15/12     5,292,321  
                     
            Total Auto Financing     226,373,871  
                     
                     
            Business Loans — 4.2%        
      7,320,631     ACAS Business Loan Trust, Series 07-1A, Class A, 144A, 3 mo. LIBOR + .14%, 0.45%, due 08/16/19     7,210,821  
      2,676,018     Bayview Commercial Asset Trust, Series 04-1, Class A, 144A, 1 mo. LIBOR + .36%, 0.62%, due 04/25/34     2,368,275  
      2,208,794     Bayview Commercial Asset Trust, Series 04-3, Class A1, 144A, 1 mo. LIBOR + .37%, 0.63%, due 01/25/35     1,899,563  
      9,243,889     Bayview Commercial Asset Trust, Series 05-4A, Class A2, 144A, 1 mo. LIBOR + .39%, 0.65%, due 01/25/36     7,210,233  
      8,264,130     Bayview Commercial Asset Trust, Series 07-3, Class A1, 144A, 1 mo. LIBOR + .24%, 0.50%, due 07/25/37     6,611,304  
      31,200,000     Bayview Commercial Asset Trust, Series 07-6A, Class A2, 144A, 1 mo. LIBOR + 1.30%, 1.56%, due 12/25/37     25,896,000  
      1,322,590     Capitalsource Commercial Loan Trust, Series 07-1A, Class A, 144A, 1 mo. LIBOR + .13%, 0.39%, due 03/20/17     1,296,139  
      2,855,014     GE Business Loan Trust, Series 04-1, Class A, 144A, 1 mo. LIBOR + .29%, 0.56%, due 05/15/32     2,612,338  
      5,288,376     GE Business Loan Trust, Series 05-2A, Class A, 144A, 1 mo. LIBOR + .24%, 0.51%, due 11/15/33     4,574,445  
      6,989,680     Lehman Brothers Small Balance Commercial, Series 05-1A, Class A, 144A, 1 mo. LIBOR + .25%, 0.51%, due 02/25/30     5,731,537  
      4,082,833     Lehman Brothers Small Balance Commercial, Series 05-2A, Class 1A, 144A, 1 mo. LIBOR + .25%, 0.51%, due 09/25/30     3,347,923  
      19,682,667     Lehman Brothers Small Balance Commercial, Series 07-3A, Class 1A2, 144A, 1 mo. LIBOR + .85%, 1.11%, due 10/25/37     16,730,267  
                     
            Total Business Loans     85,488,845  
                     

         
    See accompanying notes to the financial statements.   3

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
                     
            CMBS — 9.6%        
      3,075,833     Banc of America Commercial Mortgage, Inc., Series 06-3, Class A2, 5.81%, due 07/10/44     3,170,877  
      17,909,962     Citigroup/Deutsche Bank Commercial Mortgage, Series 05-CD1, Class A2FL, 1 mo. LIBOR + .12%, 0.38%, due 07/15/44     17,715,997  
      32,300,000     Commercial Mortgage Pass-Through Certificates, Series 06-FL12, Class AJ, 144A, 1 mo. LIBOR + .13%, 0.40%, due 12/15/20     28,424,000  
      10,357,398     GE Capital Commercial Mortgage Corp., Series 05-C4, Class A2, 5.31%, due 11/10/45     10,357,398  
      16,950,000     GE Capital Commercial Mortgage Corp., Series 06-C1, Class A2, 5.17%, due 03/10/44     16,972,035  
      17,092,274     GS Mortgage Securities Corp., Series 06-GG6, Class A2, 5.51%, due 04/10/38     17,423,437  
      5,793,758     GS Mortgage Securities Corp., Series 07-EOP, Class A1, 144A, 1 mo. LIBOR + .39%, 1.14%, due 03/06/20     5,721,336  
      6,300,000     GS Mortgage Securities Corp., Series 07-EOP, Class A2, 144A, 1 mo. LIBOR + .57%, 1.32%, due 03/06/20     6,197,940  
      36,813,918     J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 06-LDP7, Class A2, 5.85%, due 04/15/45     37,064,252  
      22,638,669     Merrill Lynch Mortgage Trust, Series 06-C1, Class A2, 5.62%, due 05/12/39     23,374,426  
      10,432,460     Morgan Stanley Capital I, Series 06-IQ11, Class A3, 5.69%, due 10/15/42     10,833,484  
      131,688     Morgan Stanley Dean Witter Capital I, Series 03-TOP9, Class A1, 3.98%, due 11/13/36     131,728  
      20,036,215     Wachovia Bank Commercial Mortgage Trust, Series 06-WL7A, Class A1, 144A, 1 mo. LIBOR + .09%, 0.36%, due 09/15/21     19,572,577  
                     
            Total CMBS     196,959,487  
                     
                     
            CMBS Collateralized Debt Obligations — 2.6%        
      4,398,348     American Capital Strategies Ltd. Commercial Real Estate CDO Trust, Series 07-1A, Class A, 144A, 3 mo. LIBOR + .80%, 1.11%, due 11/23/52     43,983  
      7,584,959     Crest Exeter Street Solar, Series 04-1A, Class A1, 144A, 3 mo. LIBOR + .35%, 0.65%, due 06/28/19     7,324,264  
      10,965,032     G-Force LLC, Series 05-RR2, Class A2, 144A, 5.16%, due 12/25/39     7,456,222  
      15,397,671     Guggenheim Structured Real Estate Funding, Series 05-2A, Class A, 144A, 1 mo. LIBOR + .32%, 0.58%, due 08/26/30     14,473,811  
      27,100,000     Marathon Real Estate CDO, Series 06-1A, Class A1, 144A, 1 mo. LIBOR + .33%, 0.59%, due 05/25/46     23,306,000  
                     
            Total CMBS Collateralized Debt Obligations     52,604,280  
                     

         
4
  See accompanying notes to the financial statements.    

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
                     
            Corporate Collateralized Debt Obligations — 2.0%        
      34,200,000     Morgan Stanley ACES SPC, Series 06-13A, Class A, 144A, 3 mo. LIBOR + .29%, 0.59%, due 06/20/13     32,599,440  
      8,400,000     Prism Orso Trust, Series 04-MAPL, Class CERT, 144A, 3 mo. LIBOR + .70%, 1.00%, due 08/01/11     8,396,640  
                     
            Total Corporate Collateralized Debt Obligations     40,996,080  
                     
                     
            Credit Cards — 19.2%        
      20,700,000     American Express Credit Account Master Trust, Series 06-1, Class A, 1 mo. LIBOR + .03%, 0.30%, due 12/15/13     20,693,790  
      4,200,000     Bank of America Credit Card Trust, Series 06-A12, Class A12, 1 mo. LIBOR + .02%, 0.29%, due 03/15/14     4,193,700  
      33,750,000     Cabela’s Master Credit Card Trust, Series 08-4A, Class A2, 144A, 1 mo. LIBOR + 3.00%, 3.27%, due 09/15/14     34,231,612  
      17,875,000     Capital One Multi-Asset Execution Trust, Series 04-A7, Class A7, 3 mo. LIBOR + .15%, 0.46%, due 06/16/14     17,871,068  
      7,700,000     Capital One Multi-Asset Execution Trust, Series 07-A4, Class A4, 1 mo. LIBOR + .03%, 0.30%, due 03/16/15     7,674,282  
      17,500,000     Capital One Multi-Asset Execution Trust, Series 08-A6, Class A6, 1 mo. LIBOR + 1.10%, 1.37%, due 03/17/14     17,532,900  
      39,000,000     Charming Shoppes Master Trust, Series 07-1A, Class A1, 144A, 1 mo. LIBOR + 1.25%, 1.52%, due 09/15/17     39,000,000  
      46,600,000     Chase Issuance Trust, Series 05-A6, Class A6, 1 mo. LIBOR + .07%, 0.34%, due 07/15/14     46,541,750  
      11,200,000     Citibank Credit Card Issuance Trust, Series 01-A7, Class A7, 3 mo. LIBOR + .14%, 0.45%, due 08/15/13     11,199,216  
      8,100,000     Citibank Credit Card Issuance Trust, Series 05-A3, Class A3, 1 mo. LIBOR + .07%, 0.33%, due 04/24/14     8,087,769  
EUR
    33,200,000     Citibank Credit Card Issuance Trust, Series 04-A2, Class A, 3 mo. EUR LIBOR + .10%, 1.18%, due 05/24/13     45,751,570  
      10,600,000     Discover Card Master Trust I, Series 96-4, Class A, 1 mo. LIBOR + .38%, 0.64%, due 10/16/13     10,600,000  
      16,400,000     Discover Card Master Trust I, Series 05-4, Class A2, 1 mo. LIBOR + .09%, 0.36%, due 06/16/15     16,338,500  
      52,700,000     Discover Card Master Trust I, Series 06-2, Class A2, 1 mo. LIBOR + .03%, 0.30%, due 01/16/14     52,652,570  
      11,500,000     MBNA Credit Card Master Note Trust, Series 04-A8, Class A8, 1 mo. LIBOR + .15%, 0.42%, due 01/15/14     11,501,610  

         
    See accompanying notes to the financial statements.   5

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            Credit Cards — continued        
      40,300,000     National City Credit Card Master Trust, Series 08-3, Class A, 1 mo. LIBOR + 1.80%, 2.07%, due 05/15/13     40,451,125  
      10,600,000     World Financial Network Credit Card Master Trust, Series 06-A, Class A, 144A, 1 mo. LIBOR + .13%, 0.40%, due 02/15/17     10,415,666  
                     
            Total Credit Cards     394,737,128  
                     
                     
            Equipment Leases — 0.4%        
      9,034,070     CNH Equipment Trust, Series 08-A, Class A4B, 1 mo. LIBOR + 1.95%, 2.22%, due 08/15/14     9,117,183  
                     
                     
            Insured Auto Financing — 5.8%        
      10,905,063     AmeriCredit Automobile Receivables Trust, Series 07-AX, Class A4, XL, 1 mo. LIBOR + .04%, 0.30%, due 10/06/13     10,845,085  
      10,442,023     AmeriCredit Automobile Receivables Trust, Series 07-BF, Class A4, FSA, 1 mo. LIBOR + .05%, 0.31%, due 12/06/13     10,390,753  
      9,868,991     AmeriCredit Automobile Receivables Trust, Series 07-DF, Class A4B, FSA, 1 mo. LIBOR + .80%, 1.06%, due 06/06/14     9,849,342  
      21,607,033     AmeriCredit Prime Automobile Receivable Trust, Series 07-2M, Class A4B, MBIA, 1 mo. LIBOR + .50%, 0.76%, due 03/08/16     21,565,980  
      3,278,744     Capital One Auto Finance Trust, Series 07-A, Class A4, AMBAC, 1 mo. LIBOR + .02%, 0.29%, due 11/15/13     3,259,727  
      12,282,198     Santander Drive Auto Receivables Trust, Series 07-3, Class A4B, FGIC, 1 mo. LIBOR + .65%, 0.92%, due 10/15/14     12,238,105  
      51,300,000     Triad Auto Receivables Owner Trust, Series 07-B, Class A4B, FSA, 1 mo. LIBOR + 1.20%, 1.46%, due 07/14/14     51,775,551  
                     
            Total Insured Auto Financing     119,924,543  
                     
                     
            Insured Business Loans — 0.1%        
      2,456,191     CNL Commercial Mortgage Loan Trust, Series 03-2A, Class A1, 144A, AMBAC, 1 mo. LIBOR + .44%, 0.70%, due 10/25/30     1,768,458  
                     
                     
            Insured High Yield Collateralized Debt Obligations — 0.8%        
      15,350,000     Augusta Funding Ltd., Series 10A, Class F1, 144A, CapMAC, 3 mo. LIBOR +.25%, 0.55%, due 06/30/17 (a)     13,262,615  
      2,115,934     GSC Partners CDO Fund Ltd., Series 2A, Class A, 144A, FSA, 6 mo. LIBOR + .52%, 0.96%, due 05/22/13     1,862,022  

         
6
  See accompanying notes to the financial statements.    

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            Insured High Yield Collateralized Debt Obligations — continued        
      2,314,704     GSC Partners CDO Fund Ltd., Series 03-4A, Class A3, 144A, AMBAC, 3 mo. LIBOR + .46%, 0.76%, due 12/16/15     2,175,822  
                     
            Total Insured High Yield Collateralized Debt Obligations     17,300,459  
                     
                     
            Insured Other — 3.8%        
      45,300,000     Dominos Pizza Master Issuer LLC, Series 07-1, Class A2, 144A, MBIA, 5.26%, due 04/25/37     46,659,000  
      10,312,198     Henderson Receivables LLC, Series 06-3A, Class A1, 144A, MBIA, 1 mo. LIBOR + .20%, 0.47%, due 09/15/41     9,323,677  
      9,942,166     Henderson Receivables LLC, Series 06-4A, Class A1, 144A, MBIA, 1 mo. LIBOR + .20%, 0.47%, due 12/15/41     9,214,757  
      12,648,302     TIB Card Receivables Fund, 144A, FGIC, 3 mo. LIBOR + .25%, 0.55%, due 01/05/14     10,624,574  
      2,988,000     Toll Road Investment Part II, Series B, 144A, MBIA, Zero Coupon, due 02/15/30     491,944  
      26,300,000     Toll Road Investment Part II, Series C, 144A, MBIA, Zero Coupon, due 02/15/37     2,223,665  
                     
            Total Insured Other     78,537,617  
                     
                     
            Insured Residential Asset-Backed Securities (United States) ◊ — 0.7%        
      2,366,838     Ameriquest Mortgage Securities, Inc., Series 04-R6, Class A1, XL, 1 mo. LIBOR + .21%, 0.47%, due 07/25/34     2,059,149  
      2,707,127     Citigroup Mortgage Loan Trust, Inc., Series 03-HE3, Class A, AMBAC, 1 mo. LIBOR + .38%, 0.64%, due 12/25/33     2,258,420  
      730,240     Quest Trust, Series 04-X1, Class A, 144A, AMBAC, 1 mo. LIBOR + .33%, 0.59%, due 03/25/34     625,064  
      13,938,981     Residential Asset Mortgage Products, Inc., Series 05-RS9, Class AI3, FGIC, 1 mo. LIBOR + .22%, 0.48%, due 11/25/35     9,795,201  
                     
            Total Insured Residential Asset-Backed Securities (United States)     14,737,834  
                     
             
            Insured Residential Mortgage-Backed Securities (United States) — 0.8%
      493,446     Chevy Chase Mortgage Funding Corp., Series 03-4A, Class A1, 144A, AMBAC, 1 mo. LIBOR + .34%, 0.60%, due 10/25/34     345,412  
      999,874     Chevy Chase Mortgage Funding Corp., Series 04-1A, Class A2, 144A, AMBAC, 1 mo. LIBOR + .33%, 0.59%, due 01/25/35     699,912  
      10,570,908     Countrywide Home Equity Loan Trust, Series 07-E, Class A, MBIA, 1 mo. LIBOR + .15%, 0.42%, due 06/15/37     6,897,518  
      5,476,749     GMAC Mortgage Corp. Loan Trust, Series 04-HE3, Class A3, FSA, 1 mo. LIBOR + .23%, 0.49%, due 10/25/34     4,117,420  

         
    See accompanying notes to the financial statements.   7

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            Insured Residential Mortgage-Backed Securities (United States) — continued
      312,820     GreenPoint Home Equity Loan Trust, Series 04-1, Class A, AMBAC, 1 mo. LIBOR + .23%, 0.72%, due 07/25/29     188,099  
      328,024     GreenPoint Home Equity Loan Trust, Series 04-4, Class A, AMBAC, 1 mo. LIBOR + .28%, 0.83%, due 08/15/30     188,177  
      732,997     Lehman ABS Corp., Series 04-2, Class A, AMBAC, 1 mo. LIBOR + .22%, 0.70%, due 06/25/34     425,138  
      165,121     Residential Funding Mortgage Securities II, Series 03-HS1, Class AII, FGIC, 1 mo. LIBOR + .29%, 0.55%, due 12/25/32     72,323  
      4,334,072     SBI Heloc Trust, Series 05-HE1, Class 1A, 144A, FSA, 1 mo. LIBOR + .19%, 0.45%, due 11/25/35     3,181,209  
                     
            Total Insured Residential Mortgage-Backed Securities (United States)     16,115,208  
                     
                     
            Insured Time Share — 0.7%        
      2,483,929     Sierra Receivables Funding Co., Series 06-1A, Class A2, 144A, MBIA, 1 mo. LIBOR + .15%, 0.41%, due 05/20/18     2,350,910  
      2,751,121     Sierra Receivables Funding Co., Series 07-1A, Class A2, 144A, FGIC, 1 mo. LIBOR + .15%, 0.41%, due 03/20/19     2,668,588  
      9,062,148     Sierra Receivables Funding Co., Series 07-2A, Class A2, 144A, MBIA, 1 mo. LIBOR + 1.00%, 1.26%, due 09/20/19     8,571,695  
                     
            Total Insured Time Share     13,591,193  
                     
                     
            Insured Transportation — 0.2%        
      4,085,000     GE Seaco Finance SRL, Series 04-1A, Class A, 144A, AMBAC, 1 mo. LIBOR + .30%, 0.56%, due 04/17/19     3,972,663  
                     
                     
            Rate Reduction Bonds — 1.2%        
      4,960,034     Massachusetts RRB Special Purpose Trust, Series 05-1, Class A3, 4.13%, due 09/15/13     4,998,524  
      19,200,225     PG&E Energy Recovery Funding LLC, Series 05-1, Class A4, 4.37%, due 06/25/14     19,686,182  
                     
            Total Rate Reduction Bonds     24,684,706  
                     
                     
            Residential Asset-Backed Securities (United States) ◊ — 17.7%        
      977,554     Accredited Mortgage Loan Trust, Series 04-4, Class A1B, 1 mo. LIBOR + .39%, 0.65%, due 01/25/35     794,873  
      2,699,950     ACE Securities Corp., Series 06-ASL1, Class A, 1 mo. LIBOR + .14%, 0.40%, due 02/25/36     673,313  

         
8
  See accompanying notes to the financial statements.    

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            Residential Asset-Backed Securities (United States) — continued        
      7,417,565     ACE Securities Corp., Series 06-ASP2, Class A2C, 1 mo. LIBOR + .18%, 0.44%, due 03/25/36     5,294,287  
      4,302,784     ACE Securities Corp., Series 06-ASP4, Class A2B, 1 mo. LIBOR + .10%, 0.36%, due 08/25/36     3,193,741  
      20,300,000     ACE Securities Corp., Series 06-ASP5, Class A2C, 1 mo. LIBOR + .18%, 0.44%, due 10/25/36     6,927,375  
      8,654,392     ACE Securities Corp., Series 06-CW1, Class A2B, 1 mo. LIBOR + .10%, 0.36%, due 07/25/36     7,412,487  
      5,900,000     ACE Securities Corp., Series 06-HE2, Class A2C, 1 mo. LIBOR + .16%, 0.42%, due 05/25/36     3,879,250  
      3,778,909     ACE Securities Corp., Series 06-HE3, Class A2B, 1 mo. LIBOR + .09%, 0.35%, due 06/25/36     3,580,516  
      11,100,000     ACE Securities Corp., Series 06-OP1, Class A2C, 1 mo. LIBOR + .15%, 0.41%, due 04/25/36     7,492,500  
      3,770,250     ACE Securities Corp., Series 06-SL1, Class A, 1 mo. LIBOR + .16%, 0.58%, due 09/25/35     796,465  
      7,759,575     ACE Securities Corp., Series 06-SL3, Class A1, 1 mo. LIBOR + .10%, 0.36%, due 06/25/36     1,319,128  
      9,019,726     ACE Securities Corp., Series 06-SL3, Class A2, 1 mo. LIBOR + .17%, 0.43%, due 06/25/36     1,172,564  
      5,561,605     ACE Securities Corp., Series 07-HE1, Class A2A, 1 mo. LIBOR + .09%, 0.35%, due 01/25/37     2,897,596  
      4,152,472     ACE Securities Corp., Series 07-WM1, Class A2A, 1 mo. LIBOR + .07%, 0.33%, due 11/25/36     2,751,013  
      12,050,263     Alliance Bancorp Trust, Series 07-S1, Class A1, 144A, 1 mo. LIBOR + .20%, 0.46%, due 05/25/37     1,525,563  
      3,448,275     Argent Securities, Inc., Series 04-W8, Class A5, 1 mo. LIBOR + .52%, 0.78%, due 05/25/34     3,266,702  
      51,952,538     Argent Securities, Inc., Series 06-M1, Class A2C, 1 mo. LIBOR + .15%, 0.41%, due 07/25/36     22,794,176  
      7,925,266     Argent Securities, Inc., Series 06-M2, Class A2B, 1 mo. LIBOR + .11%, 0.37%, due 09/25/36     3,051,228  
      10,811,266     Argent Securities, Inc., Series 06-W2, Class A2B, 1 mo. LIBOR + .19%, 0.45%, due 03/25/36     4,432,619  
      298,770     Argent Securities, Inc., Series 06-W4, Class A2B, 1 mo. LIBOR + .11%, 0.37%, due 05/25/36     109,798  

         
    See accompanying notes to the financial statements.   9

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            Residential Asset-Backed Securities (United States) — continued        
      8,511,738     Argent Securities, Inc., Series 06-W5, Class A2C, 1 mo. LIBOR + .15%, 0.41%, due 06/25/36     3,269,039  
      2,114,888     Asset Backed Funding Certificates, Series 06-OPT2, Class A3B, 1 mo. LIBOR + .11%, 0.37%, due 10/25/36     2,108,120  
      10,100,000     Asset Backed Funding Certificates, Series 06-OPT2, Class A3C, 1 mo. LIBOR + .15%, 0.41%, due 10/25/36     7,019,500  
      19,482,638     Asset Backed Funding Certificates, Series 07-NC1, Class A1, 144A, 1 mo. LIBOR + .22%, 0.48%, due 05/25/37     16,453,088  
      5,552,600     Bayview Financial Acquisition Trust, Series 04-B, Class A1, 144A, 1 mo. LIBOR + .50%, 1.26%, due 05/28/39     2,345,974  
      5,788,881     Bayview Financial Acquisition Trust, Series 04-B, Class A2, 144A, 1 mo. LIBOR + .65%, 1.56%, due 05/28/39     2,214,247  
      10,127,875     Bayview Financial Acquisition Trust, Series 05-A, Class A1, 144A, 1 mo. LIBOR + .50%, 1.26%, due 02/28/40     6,279,282  
      3,772,154     Bear Stearns Asset Backed Securities, Inc., Series 07-AQ1, Class A1, 1 mo. LIBOR + .11%, 0.37%, due 11/25/36     3,255,746  
      8,500,000     Bear Stearns Asset Backed Securities, Inc., Series 07-AQ1, Class A2, 1 mo. LIBOR + .20%, 0.46%, due 11/25/36     1,547,850  
      3,060,669     Bear Stearns Mortgage Funding Trust, Series 07-SL2, Class 1A, 1 mo. LIBOR + .16%, 0.42%, due 02/25/37     395,744  
      2,019,968     Carrington Mortgage Loan Trust, Series 07-FRE1, Class A1, 1 mo. LIBOR + .12%, 0.38%, due 02/25/37     1,964,015  
      38,100,000     Carrington Mortgage Loan Trust, Series 07-FRE1, Class A2, 1 mo. LIBOR + .20%, 0.46%, due 02/25/37     22,463,760  
      10,263,345     Centex Home Equity, Series 06-A, Class AV3, 1 mo. LIBOR + .16%, 0.42%, due 06/25/36     9,449,154  
      184,603     Chase Funding Mortgage Loan Trust, Series 03-3, Class 2A2, 1 mo. LIBOR + .27%, 0.80%, due 04/25/33     157,836  
      138,323     Citigroup Mortgage Loan Trust, Inc., Series 04-OPT1, Class A1B, 1 mo. LIBOR + .41%, 0.67%, due 10/25/34     127,257  
      12,100,000     Citigroup Mortgage Loan Trust, Inc., Series 06-HE3, Class A2C, 1 mo. LIBOR + .16%, 0.42%, due 12/25/36     4,840,000  
      36,200,000     Countrywide Asset-Backed Certificates, Series 06-BC3, Class 2A2, 1 mo. LIBOR + .14%, 0.40%, due 02/25/37     30,324,740  
      2,126,156     Countrywide Asset-Backed Certificates, Series 06-BC5, Class 2A1, 1 mo. LIBOR + .08%, 0.34%, due 03/25/37     2,119,352  

         
10
  See accompanying notes to the financial statements.    

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            Residential Asset-Backed Securities (United States) — continued        
      418,649     Equity One ABS, Inc., Series 04-1, Class AV2, 1 mo. LIBOR + .30%, 0.56%, due 04/25/34     332,237  
      12,336,341     First Franklin Mortgage Loan Asset Backed Certificates, Series 06-FF5, Class 2A3, 1 mo. LIBOR + .16%, 0.42%, due 04/25/36     9,109,617  
      3,830,289     Fremont Home Loan Trust, Series 06-A, Class 1A2, 1 mo. LIBOR + .20%, 0.46%, due 05/25/36     2,606,392  
      1,115,342     Fremont Home Loan Trust, Series 06-B, Class 2A2, 1 mo. LIBOR + .10%, 0.36%, due 08/25/36     547,912  
      19,925,000     Fremont Home Loan Trust, Series 06-B, Class 2A3, 1 mo. LIBOR + .16%, 0.42%, due 08/25/36     8,318,688  
      13,608,693     GE-WMC Mortgage Securities, Series 06-1, Class A2B, 1 mo. LIBOR + .15%, 0.41%, due 08/25/36     5,683,807  
      3,053,933     Household Home Equity Loan Trust, Series 05-2, Class A2, 1 mo. LIBOR + .31%, 0.57%, due 01/20/35     2,759,037  
      2,659,040     Household Home Equity Loan Trust, Series 05-3, Class A2, 1 mo. LIBOR + .29%, 0.55%, due 01/20/35     2,482,878  
      9,081,138     Household Home Equity Loan Trust, Series 06-1, Class A1, 1 mo. LIBOR + .16%, 0.42%, due 01/20/36     8,462,486  
      28,207,860     J.P. Morgan Mortgage Acquisition Corp., Series 06-WMC4, Class A3, 1 mo. LIBOR + .12%, 0.38%, due 12/25/36     12,109,634  
      2,163,678     Master Asset-Backed Securities Trust, Series 05-FRE1, Class A4, 1 mo. LIBOR + .25%, 0.51%, due 10/25/35     2,077,131  
      3,367,875     Master Asset-Backed Securities Trust, Series 06-AM3, Class A2, 1 mo. LIBOR + .13%, 0.39%, due 10/25/36     3,266,839  
      17,831,080     Master Asset-Backed Securities Trust, Series 06-FRE2, Class A4, 1 mo. LIBOR + .15%, 0.41%, due 03/25/36     10,431,182  
      11,300,000     Master Asset-Backed Securities Trust, Series 06-HE2, Class A3, 1 mo. LIBOR + .15%, 0.41%, due 06/25/36     4,294,000  
      21,744,486     Master Asset-Backed Securities Trust, Series 06-HE3, Class A3, 1 mo. LIBOR + .15%, 0.41%, due 08/25/36     8,154,182  
      14,400,000     Master Asset-Backed Securities Trust, Series 06-NC3, Class A4, 1 mo. LIBOR + .16%, 0.42%, due 10/25/36     5,472,000  
      5,997,861     Master Second Lien Trust, Series 06-1, Class A, 1 mo. LIBOR + .16%, 0.42%, due 03/25/36     749,733  
      6,217,924     Merrill Lynch Mortgage Investors, Series 07-HE2, Class A2A, 1 mo. LIBOR + .12%, 0.38%, due 02/25/37     3,721,428  

         
    See accompanying notes to the financial statements.   11

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            Residential Asset-Backed Securities (United States) — continued        
      2,362,154     Morgan Stanley Capital, Inc., Series 04-SD1, Class A, 1 mo. LIBOR + .40%, 0.66%, due 08/25/34     1,948,777  
      32,500,000     Morgan Stanley Capital, Inc., Series 07-HE4, Class A2C, 1 mo. LIBOR + .23%, 0.49%, due 02/25/37     12,512,500  
      15,702,046     Morgan Stanley Home Equity Loans, Series 06-3, Class A3, 1 mo. LIBOR + .16%, 0.42%, due 04/25/36     9,853,034  
      4,849,573     Morgan Stanley Home Equity Loans, Series 07-2, Class A1, 1 mo. LIBOR + .10%, 0.36%, due 04/25/37     4,582,847  
      9,500,000     Morgan Stanley IXIS Real Estate Capital Trust, Series 06-2, Class A3, 1 mo. LIBOR + .15%, 0.41%, due 11/25/36     3,633,750  
      6,355,375     People’s Choice Home Loan Securities Trust, Series 05-4, Class 1A2, 1 mo. LIBOR + .26%, 0.52%, due 12/25/35     3,987,998  
      6,605,841     RAAC Series Trust, Series 06-SP1, Class A2, 1 mo. LIBOR + .19%, 0.45%, due 09/25/45     5,881,840  
      1,742,784     Residential Asset Mortgage Products, Inc., Series 05-RS8, Class A2, 1 mo. LIBOR + .29%, 0.55%, due 10/25/33     1,640,831  
      4,526,096     Residential Asset Securities Corp., Series 05-KS12, Class A2, 1 mo. LIBOR + .25%, 0.51%, due 01/25/36     4,185,915  
      1,806,987     Residential Asset Securities Corp., Series 07-KS3, Class AI1, 1 mo. LIBOR + .11%, 0.37%, due 04/25/37     1,779,340  
      236,691     Saxon Asset Securities Trust, Series 04-1, Class A, 1 mo. LIBOR + .27%, 0.80%, due 03/25/35     165,018  
      1,751,526     Securitized Asset Backed Receivables LLC, Series 06-NC1, Class A2, 1 mo. LIBOR + .16%, 0.42%, due 03/25/36     1,660,665  
      914,272     Security National Mortgage Loan Trust, Series 06-2A, Class A1, 144A, 1 mo. LIBOR + .29%, 0.55%, due 10/25/36     895,987  
      1,463,213     SG Mortgage Securities Trust, Series 05-OPT1, Class A2, 1 mo. LIBOR + .26%, 0.52%, due 10/25/35     1,409,220  
      1,332,583     Soundview Home Equity Loan Trust, Series 07-NS1, Class A1, 1 mo. LIBOR + .12%, 0.38%, due 01/25/37     1,305,723  
      17,100,000     Specialty Underwriting & Residential Finance, Series 06-BC3, Class A2C, 1 mo. LIBOR + .15%, 0.41%, due 06/25/37     7,845,480  
      6,726,673     Structured Asset Investment Loan Trust, Series 06-1, Class A3, 1 mo. LIBOR + .20%, 0.46%, due 01/25/36     5,280,439  

         
12
  See accompanying notes to the financial statements.    

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            Residential Asset-Backed Securities (United States) — continued        
      3,634,275     Structured Asset Securities Corp., Series 05-S6, Class A2, 1 mo. LIBOR + .29%, 0.55%, due 11/25/35     3,070,962  
      14,860,918     Yale Mortgage Loan Trust, Series 07-1, Class A, 144A, 1 mo. LIBOR + .40%, 0.66%, due 06/25/37     891,655  
                     
            Total Residential Asset-Backed Securities (United States)     362,811,062  
                     
                     
            Residential Mortgage-Backed Securities (Australian) — 4.2%        
      2,781,831     Crusade Global Trust, Series 04-2, Class A1, 3 mo. LIBOR + .13%, 0.44%, due 11/19/37     2,692,397  
      6,178,898     Crusade Global Trust, Series 06-1, Class A1, 144A, 3 mo. LIBOR + .06%, 0.36%, due 07/20/38     5,939,441  
      10,090,787     Crusade Global Trust, Series 07-1, Class A1, 3 mo. LIBOR + .06%, 0.36%, due 04/19/38     9,700,425  
      1,660,740     Interstar Millennium Trust, Series 03-3G, Class A2, 3 mo. LIBOR + .25%, 0.80%, due 09/27/35     1,565,247  
      15,896,159     Interstar Millennium Trust, Series 04-2G, Class A, 3 mo. LIBOR + .20%, 0.70%, due 03/14/36     15,104,530  
      1,073,421     Interstar Millennium Trust, Series 05-1G, Class A, 3 mo. LIBOR + .12%, 0.70%, due 12/08/36     1,025,117  
      1,847,733     Interstar Millennium Trust, Series 06-2GA, Class A2, 144A, 3 mo. LIBOR + .08%, 0.39%, due 05/27/38     1,746,292  
      1,356,424     Medallion Trust, Series 05-1G, Class A1, 3 mo. LIBOR + .08%, 0.39%, due 05/10/36     1,310,327  
      6,701,444     Medallion Trust, Series 06-1G, Class A1, 3 mo. LIBOR + .05%, 0.35%, due 06/14/37     6,341,865  
      3,342,196     Medallion Trust, Series 07-1G, Class A1, 3 mo. LIBOR + .04%, 0.35%, due 02/27/39     3,223,876  
      8,028,363     National RMBS Trust, Series 06-3, Class A1, 144A, 3 mo. LIBOR + .07%, 0.37%, due 10/20/37     7,798,175  
      10,090,828     Puma Finance Ltd., Series G5, Class A1, 144A, 3 mo. LIBOR + .07%, 0.38%, due 02/21/38     9,664,995  
      10,632,415     Superannuation Members Home Loans Global Fund, Series 07-1, Class A1, 3 mo. LIBOR + .06%, 0.36%, due 06/12/40     10,118,561  
      1,024,703     Superannuation Members Home Loans Global Fund, Series 7, Class A1, 3 mo. LIBOR + .14%, 0.58%, due 03/09/36     998,933  

         
    See accompanying notes to the financial statements.   13

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            Residential Mortgage-Backed Securities (Australian) — continued        
      875,088     Superannuation Members Home Loans Global Fund, Series 8, Class A1, 3 mo. LIBOR + .07%, 0.37%, due 01/12/37     854,086  
      7,517,454     Westpac Securitization Trust, Series 07-1G, Class A2A, 3 mo. LIBOR + .05%, 0.36%, due 05/21/38     7,290,427  
                     
            Total Residential Mortgage-Backed Securities (Australian)     85,374,694  
                     
                     
            Residential Mortgage-Backed Securities (European) — 5.8%        
      10,261,314     Aire Valley Mortgages, Series 06-1A, Class 1A, 144A, 3 mo. LIBOR + .11%, 0.41%, due 09/20/66     8,753,927  
      6,150,000     Arkle Master Issuer Plc, Series 06-1A, Class 4A1, 144A, 3 mo. LIBOR + .09%, 0.40%, due 02/17/52     6,136,470  
      25,549,647     Brunel Residential Mortgages, Series 07-1A, Class A4C, 144A, 3 mo. LIBOR + .10%, 0.40%, due 01/13/39     23,053,447  
      4,311,866     Granite Master Issuer Plc, Series 06-2, Class A4, 1 mo. LIBOR + .04%, 0.30%, due 12/20/54     4,074,713  
      2,412,337     Granite Mortgages Plc, Series 04-3, Class 2A1, 3 mo. LIBOR + .14%, 0.44%, due 09/20/44     2,303,782  
      10,000,000     Holmes Master Issuer Plc, Series 07-2A, Class 3A1, 3 mo. LIBOR + .08%, 0.38%, due 07/15/21     9,950,000  
      10,469,842     Kildare Securities Ltd., Series 07-1A, Class A2, 144A, 3 mo. LIBOR + .06%, 0.36%, due 12/10/43     9,527,557  
      3,344,803     Leek Finance Plc, Series 17A, Class A2B, 144A, 3 mo. LIBOR + .14%, 0.44%, due 12/21/37     3,294,108  
      6,270,882     Paragon Mortgages Plc, Series 7A, Class A1A, 144A, 3 mo. LIBOR + .42%, 0.73%, due 05/15/34     5,438,109  
      10,715,482     Paragon Mortgages Plc, Series 12A, Class A2C, 144A, 3 mo. LIBOR + .11%, 0.42%, due 11/15/38     8,975,288  
      6,245,308     Paragon Mortgages Plc, Series 14A, Class A2C, 144A, 3 mo. LIBOR + .10%, 0.40%, due 09/15/39     5,074,313  
      26,600,000     Permanent Master Issuer Plc, Series 06-1, Class 5A, 3 mo. LIBOR + .11%, 0.41%, due 07/15/33     25,958,940  
      6,400,000     Permanent Master Issuer Plc, Series 07-1, Class 4A, 3 mo. LIBOR + .08%, 0.38%, due 10/15/33     6,334,720  
                     
            Total Residential Mortgage-Backed Securities (European)     118,875,374  
                     

         
14
  See accompanying notes to the financial statements.    

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
                     
            Residential Mortgage-Backed Securities (United States) — 0.1%        
      550,086     Chevy Chase Mortgage Funding Corp., Series 04-3A, Class A2, 144A, 1 mo. LIBOR + .30%, 0.56%, due 08/25/35     376,809  
      2,724,239     Mellon Residential Funding Corp., Series 04-TBC1, Class A, 144A, 1 mo. LIBOR + .25%, 0.51%, due 02/26/34     2,101,496  
                     
            Total Residential Mortgage-Backed Securities (United States)     2,478,305  
                     
                     
            Student Loans — 5.7%        
      20,300,000     College Loan Corp. Trust, Series 07-2, Class A1, 3 mo. LIBOR + .25%, 0.55%, due 01/25/24     20,277,061  
      1,235,276     College Loan Corp. Trust, Series 07-1, Class A1, 3 mo. LIBOR + .01%, 0.31%, due 01/25/23     1,234,164  
      1,384,794     Goal Capital Funding Trust, Series 07-1, Class A1, 3 mo. LIBOR + .02%, 0.32%, due 06/25/21     1,382,717  
      358,653     Montana Higher Education Student Assistance Corp., Series 05-1, Class A, 3 mo. LIBOR + .04%, 0.34%, due 06/20/15     358,588  
      4,444,576     National Collegiate Student Loan Trust, Series 06-1, Class A2, 1 mo. LIBOR + .14%, 0.40%, due 08/25/23     4,355,684  
      9,600,000     Nelnet Student Loan Trust, Series 05-2, Class A4, 3 mo. LIBOR + .08%, 0.38%, due 12/23/19     9,444,192  
      11,582,210     SLM Student Loan Trust, Series 05-1, Class A2, 3 mo. LIBOR + .08%, 0.38%, due 04/27/20     11,394,868  
      24,600,000     SLM Student Loan Trust, Series 05-3, Class A4, 3 mo. LIBOR + .07%, 0.37%, due 04/27/20     24,292,500  
      7,541,125     SLM Student Loan Trust, Series 07-A, Class A1, 3 mo. LIBOR + .03%, 0.33%, due 09/15/22     7,409,155  
      20,712,294     SLM Student Loan Trust, Series 07-2, Class A2, 3 mo. LIBOR, 0.30%, due 07/25/17     20,531,062  
      5,500,000     SLM Student Loan Trust, Series 07-6, Class A2, 3 mo. LIBOR + .25%, 0.55%, due 01/25/19     5,492,300  
      10,800,000     SLM Student Loan Trust, Series 08-6, Class A3, 3 mo. LIBOR + .75%, 1.05%, due 01/25/19     10,879,312  
                     
            Total Student Loans     117,051,603  
                     

         
    See accompanying notes to the financial statements.   15

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($) /
 		           
Shares     Description   Value ($)  
                     
            Time Share — 0.1%        
      2,605,339     Sierra Receivables Funding Co., Series 08-1A, Class A2, 144A, 1 mo. LIBOR + 4.00%, 4.26%, due 02/20/20     2,738,048  
                     
            Total Asset-Backed Securities     2,002,462,068  
                     
                     
            U.S. Government Agency — 1.6%        
      12,000,000     Agency for International Development Floater (Support of Morocco), 6 mo. LIBOR + .15%, 0.62%, due 10/29/26 (a)     11,156,622  
      13,825,000     Agency for International Development Floater (Support of Morocco), 6 mo. LIBOR -0.02%, 0.45%, due 02/01/25 (a)     12,784,423  
      443,391     Agency for International Development Floater (Support of Peru), Series A, 6 mo. U.S. Treasury Bill + .35%, 0.51%, due 05/01/14 (a)     435,727  
      8,812,500     Agency for International Development Floater (Support of Tunisia), 6 mo. LIBOR, 0.47%, due 07/01/23 (a)     8,230,677  
                     
            Total U.S. Government Agency     32,607,449  
                     
                     
            TOTAL DEBT OBLIGATIONS (COST $2,424,855,392)     2,035,069,517  
                     
                     
            SHORT-TERM INVESTMENTS — 0.8%        
                     
            Money Market Funds — 0.8%        
      165,155     State Street Institutional Liquid Reserves Fund-Institutional Class     165,155  
      16,509,937     State Street Institutional Treasury Plus Money Market Fund-Institutional Class     16,509,937  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $16,675,092)     16,675,092  
                     
                     
            TOTAL INVESTMENTS — 99.9%
(Cost $2,441,530,484) 		    2,051,744,609  
            Other Assets and Liabilities (net) — 0.1%     1,839,614  
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 2,053,584,223  
                     

         
16
  See accompanying notes to the financial statements.    

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
A summary of outstanding financial instruments at February 28, 2011 is as follows:
 
Forward Currency Contracts
 
                                     
                    Net Unrealized
Settlement
 		                  Appreciation
Date   Counterparty   Deliver/Receive   Units of Currency   Value   (Depreciation)
 
Sales #
                                   
3/08/11
    Deutsche Bank AG     EUR     30,000,000     $ 41,395,386     $ (1,858,086 )
                                 
 
# Fund sells foreign currency; buys USD.
 
Swap Agreements
 
Credit Default Swaps
 
                                                     
                            Maximum
 		   
                            Potential
 		   
                            Amount of
 		   
                            Future
 		   
                            Payments
 		   
                        Implied
 		      by the Fund
 		   
Notional
 		  Expiration
 		      Receive
 		  Annual
 		  Credit
 		  Deliverable
 		  Under the
 		  Market
Amount   Date   Counterparty   (Pay)Ù   Premium   Spread (1)   on Default   Contract (2)   Value
 
  31,000,000     USD   3/20/2013   Morgan Stanley
Capital
Services Inc. 		  Receive   0.25%   0.67%   MS Synthetic 2006-1     31,000,000     USD  

$ 		(254,652 )
                                                     
Premiums to (Pay) Receive
  $ —  
         
 
Ù Receive - Fund receives premium and sells credit protection. If a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.
(Pay) - Fund pays premium and buys credit protection. If a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) receive from the seller of protection an amount equal to the notional amount of the swap and deliver the referenced obligation or underlying securities comprising the referenced index or (ii) receive a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.
(1) Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on the reference security, as of February 28, 2011, serve as an indicator of the current status of the

         
    See accompanying notes to the financial statements.   17

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
payment/performance risk and reflect the likelihood or risk of default for the reference entity. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection. Wider (i.e. higher) credit spreads represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.
(2) The maximum potential amount the Fund could be required to pay as a seller of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.
 
As of February 28, 2011, for forward currency contracts, futures contracts, swap agreements, written options, and reverse repurchase agreements if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
 
Notes to Schedule of Investments:
 
144A - Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors.
AMBAC - Insured as to the payment of principal and interest by AMBAC Assurance Corporation.
CapMAC - Insured as to the payment of principal and interest by Capital Markets Assurance Corporation.
CDO - Collateralized Debt Obligation
CMBS - Commercial Mortgage Backed Security
EUR LIBOR - London Interbank Offered Rate denominated in Euros.
FGIC - Insured as to the payment of principal and interest by Financial Guaranty Insurance Corporation.
FSA - Insured as to the payment of principal and interest by Financial Security Assurance.
LIBOR - London Interbank Offered Rate
MBIA - Insured as to the payment of principal and interest by MBIA Insurance Corp.
RMBS - Residential Mortgage Backed Security
XL - Insured as to the payment of principal and interest by XL Capital Assurance.
The rates shown on variable rate notes are the current interest rates at February 28, 2011, which are subject to change based on the terms of the security.
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
◊ These securities are primarily backed by subprime mortgages.
 
Currency Abbreviations:
 
EUR - Euro
USD - United States Dollar

         
18
  See accompanying notes to the financial statements.    

 

GMO Short-Duration Collateral Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments, at value (cost $2,441,530,484) (Note 2)
  $ 2,051,744,609  
Dividend and interest receivable
    1,973,648  
Receivable for collateral on open swap contracts (Note 4)
    2,142,000  
Receivable for expenses reimbursed by Manager (Note 5)
    19,517  
         
Total assets
    2,055,879,774  
         
         
Liabilities:
       
Payable to affiliate for (Note 5):
       
Trustees and Trust Officers or agents unaffiliated with the Manager
    5,274  
Unrealized depreciation on open forward currency contracts (Note 4)
    1,858,086  
Payable for open swap contracts (Note 4)
    254,652  
Accrued expenses
    177,539  
         
Total liabilities
    2,295,551  
         
Net assets
  $ 2,053,584,223  
         
Net assets consist of:
       
Paid-in capital
  $ 2,526,996,508  
Accumulated undistributed net investment income
    2,227,907  
Accumulated net realized loss
    (83,741,600 )
Net unrealized depreciation
    (391,898,592 )
         
    $ 2,053,584,223  
         
Net assets
  $ 2,053,584,223  
         
Shares outstanding
    197,912,675  
         
Net asset value per share
  $ 10.38  
         

         
    See accompanying notes to the financial statements.   19

 

GMO Short-Duration Collateral Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Interest
  $ 39,264,045  
Dividends
    87,778  
         
Total investment income
    39,351,823  
         
Expenses:
       
Custodian, fund accounting agent and transfer agent fees
    297,438  
Interest expense (Note 2)
    166,626  
Legal fees
    109,509  
Audit and tax fees
    81,007  
Trustees fees and related expenses (Note 5)
    64,561  
Registration fees
    7,917  
Miscellaneous
    26,357  
         
Total expenses
    753,415  
Fees and expenses reimbursed by Manager (Note 5)
    (489,891 )
Expense reductions (Note 2)
    (4,912 )
         
Net expenses
    258,612  
         
Net investment income (loss)
    39,093,211  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments
    (1,086,473 )
Swap contracts
    (1,199,187 )
Foreign currency, forward contracts and foreign currency related transactions
    1,296,862  
         
Net realized gain (loss)
    (988,798 )
         
Change in net unrealized appreciation (depreciation) on:
       
Investments
    188,907,029  
Swap contracts
    1,563,957  
Foreign currency, forward contracts and foreign currency related transactions
    (1,866,909 )
         
Net unrealized gain (loss)
    188,604,077  
         
Net realized and unrealized gain (loss)
    187,615,279  
         
Net increase (decrease) in net assets resulting from operations
  $ 226,708,490  
         

         
20
  See accompanying notes to the financial statements.    

 

GMO Short-Duration Collateral Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 39,093,211     $ 55,044,211  
Net realized gain (loss)
    (988,798 )     (9,426,626 )
Change in net unrealized appreciation (depreciation)
    188,604,077       740,804,361  
                 
                 
Net increase (decrease) in net assets from operations
    226,708,490       786,421,946  
                 
Distributions to shareholders from:
               
Net investment income
    (38,177,038 )     (52,523,479 )
Return of capital
    (1,149,622,973 )     (1,186,476,530 )
                 
      (1,187,800,011 )     (1,239,000,009 )
                 
Net share transactions (Note 9):
    (174,738,221 )     (34,755,764 )
                 
                 
Total increase (decrease) in net assets
    (1,135,829,742 )     (487,333,827 )
                 
Net assets:
               
Beginning of period
    3,189,413,965       3,676,747,792  
                 
End of period (including accumulated undistributed net investment income of $2,227,907 and $271,344, respectively)
  $ 2,053,584,223     $ 3,189,413,965  
                 

         
    See accompanying notes to the financial statements.   21

 

GMO Short-Duration Collateral Fund
(A Series of GMO Trust)

Financial Highlights
(For a share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 14.98     $ 17.10     $ 24.03     $ 25.66     $ 25.60  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.19       0.26       0.76       1.38       1.43  
Net realized and unrealized gain (loss)
    0.91       3.40       (4.41 )     (1.64 )     0.00 (a)
                                         
                                         
Total from investment operations
    1.10       3.66       (3.65 )     (0.26 )     1.43  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.18 )     (0.24 )     (1.06 )     (1.37 )     (1.37 )
From return on capital
    (5.52 )     (5.54 )     (2.22 )     —       —  
                                         
                                         
Total distributions
    (5.70 )     (5.78 )     (3.28 )     (1.37 )     (1.37 )
                                         
                                         
Net asset value, end of period
  $ 10.38     $ 14.98     $ 17.10     $ 24.03     $ 25.66  
                                         
                                         
Total Return(b)
    9.30 %     25.58 %     (15.97 )%     (1.14 )%     5.68 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 2,053,584     $ 3,189,414     $ 3,676,748     $ 7,671,415     $ 6,603,600  
Net operating expenses to average daily net assets(c)
    0.00 %(d)     0.00 %(d)     0.00 %(d)     0.00 %(d)     0.00 %
Interest expense to average daily net assets
    0.01 %(e)     0.01 %(e)     —       —       0.01 %(e)
                                         
Total net expenses to average daily net assets
    0.01 %(d)     0.01 %(d)     0.00 %(d)(f)     0.00 %(d)(f)     0.01 %
Net investment income (loss) to average daily net assets
    1.52 %     1.60 %     3.46 %     5.41 %     5.50 %
Portfolio turnover rate
    0 %     0 %     16 %     27 %     68 %
Fees and expenses reimbursed by the Manager to average daily net assets
    0.02 %     0.02 %     0.02 %     0.01 %     0.02 %
Redemption fees consisted of the following per share amounts:†
  $ 0.00 (g)   $ 0.00 (g)   $ 0.02       —       —  
 
(a) Net realized and unrealized gain (loss) was less than $0.01 per share.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(c) Net operating expenses were less than 0.01% to average daily net assets.
(d) The net expense ratio does not include the effect of expense reductions (Note 2).
(e) Interest expense incurred as a result of entering into reverse repurchase agreements and/or payables owed to Lehman Brothers in connection with the termination of derivative contracts in 2008 is included in the Fund’s net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income.
(f) Total net expenses were less than 0.01% to average daily net assets.
(g) There were no redemption fees during the period.
† Calculated using average shares outstanding throughout the period.

         
22
  See accompanying notes to the financial statements.    

 

GMO Short-Duration Collateral Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO Short-Duration Collateral Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund’s investment objective is total return comparable to that of its benchmark, the J.P. Morgan U.S. 3 Month Cash Index. The Fund is not currently pursuing an active investment program.
 
The Fund primarily holds asset-backed securities, including, but not limited to, securities backed by pools of residential and commercial mortgages, credit-card receivables, home equity loans, automobile loans, educational loans, corporate and sovereign bonds, and bank loans made to corporations. In addition, the Fund has invested in government securities, corporate debt securities, money market instruments and commercial paper and has entered into credit default swaps, reverse repurchase agreements, and repurchase agreements. The Fund has also used other exchange-traded and over-the-counter (“OTC”) derivatives. Because of the deterioration in credit markets that became acute in 2008, the Fund currently has and may continue to have material exposure to below investment grade securities. The Manager does not seek to maintain a specified interest rate duration for the Fund.
 
Since October 2008, the Fund has declared and paid distributions when it has acquired a meaningful cash position rather than reinvesting that cash in portfolio securities. The Fund currently intends to continue this practice. A substantial portion of any such distributions could constitute a return of capital to shareholders for tax purposes.
 
The Fund currently limits subscriptions.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.

         
        23

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the OTC market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of February 28, 2011, the total value of securities held directly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 2.2% of net assets. The Fund classifies such securities (as defined below) as Level 3. During the year ended February 28, 2011, the Manager has evaluated the Fund’s OTC derivatives contracts and determined that no reduction in value was warranted on account of the creditworthiness of a counterparty. See Note 4 for a further discussion on valuation of derivative financial instruments.
 
Typically the Fund values debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. Although alternative prices are available for securities held by the Fund, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by the Fund. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fund. As of February 28, 2011, the total value of securities held for which no alternative pricing source was available represented 9.9% of the net assets of the Fund.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

         
24
       

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include most recent bid prices, interest rates, prepayment speeds, credit risk, yield curves and similar data.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund utilized a number of fair value techniques on Level 3 investments, including the following: The Fund valued certain debt securities using indicative bids received from primary pricing sources. The Fund valued certain other debt securities by using an estimated specified spread above the LIBOR Rate. The Fund also used third party valuation services to value credit default swaps using unobservable inputs.
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Debt Obligations
                               
Asset-Backed Securities
  $ —     $ 640,677,941     $ 1,361,784,127     $ 2,002,462,068  
U.S. Government Agency
    —       —       32,607,449       32,607,449  
                                 
TOTAL DEBT OBLIGATIONS
    —       640,677,941       1,394,391,576       2,035,069,517  
                                 
Short-Term Investments
    16,675,092       —       —       16,675,092  
                                 
Total Investments
  $ 16,675,092     $ 640,677,941     $ 1,394,391,576     $ 2,051,744,609  
                                 

         
        25

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
LIABILITY VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Liabilities
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Derivatives*
                               
Forward Currency Contracts
Foreign currency risk
  $      —     $ (1,858,086 )   $ —     $ (1,858,086 )
Swap Agreements
Credit risk
    —       —       (254,652 )     (254,652 )
                                 
Total
  $ —     $ (1,858,086 )   $ (254,652 )   $ (2,112,738 )
                                 
 
The risks referenced above are not intended to be inclusive of all risks. Please see the Investment Risks and Derivative Financial Instruments sections below for a further discussion of risks.
 
            * Because the tables above are based on market values or unrealized appreciation (depreciation) rather than the notional amounts of derivatives, the uncertainties surrounding the valuation inputs for a derivative are likely to be more significant to the Fund’s net asset value than the uncertainties surrounding inputs for a non-derivative security with the same market value.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
The aggregate net values of the Fund’s direct investments in securities and derivative financial instruments using Level 3 inputs were 67.9% and (0.1)% of total net assets, respectively.

         
26
       

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a reconciliation of investments and derivatives, if any, in which significant unobservable inputs (Level 3) were used in determining value:
 
                                                                           
 
                                      Net Change in
                                      Unrealized
                                      Appreciation
                                      (Depreciation)
                                      from
    Balances
               Change in
           Balances
     Investments
    as of
   Net
   Accrued
   Total
   Unrealized
   Transfers
   Transfers
   as of
     Held as of
    February 28,
   Purchases/
   Discounts/
   Realized
   Appreciation
   into
   out of
   February 28,
     February 28,
    2010   (Sales)   Premiums   Gain/(Loss)   (Depreciation)   Level 3*   Level 3*   2011     2011
Debt Obligations
                                                                         
Asset-Backed Securities
  $ 1,982,715,415     $ (779,685,744 )   $ 1,131,425     $ (1,699,912 )   $ 181,924,867     $      —     $ (22,601,924 )**   $ 1,361,784,127       $ 169,319,787  
U.S. Government Agency
    34,766,016       (2,569,183 )     40,538       16,475       353,603       —       —       32,607,449         353,603  
Swap Agreements
    (1,818,609 )     (261,028 )     —       261,028       1,563,957       —       —       (254,652 )       1,597,098  
                                                                           
Total
  $ 2,015,662,822     $ (782,515,955 )   $ 1,171,963     $ (1,422,409 )   $ 183,842,427     $ —     $ (22,601,924 )   $ 1,394,136,924       $ 171,270,488  
                                                                           
 
            * The fund recognizes investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the value at the end of the period.
            ** Financial assets transferred between Level 2 and Level 3 were due to a change in observable and/or unobservable inputs.
 
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 pm. Income and expenses denominated in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.
 
Repurchase agreements
The Fund may enter into repurchase agreements. Under a repurchase agreement 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 it acquired under the repurchase agreement. The value of the securities acquired is required by contract to be marked to market daily and additional collateral is required to be transferred so that the market value is at least equal to the amount owed to the Fund by the seller. If the seller of a repurchase agreement defaults or

         
        27

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
enters into insolvency proceedings and/or the value of the securities subject to the repurchase agreement is insufficient, the Fund’s recovery of cash from the seller may be delayed and the Fund may incur a loss equal to the difference between the cash it paid and the value of the securities. The Fund had no repurchase agreements outstanding at the end of the period.
 
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at an agreed upon price and date. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which generally causes the Fund’s portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the event of a buyer’s bankruptcy or insolvency, the Fund’s use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund’s right to repurchase the securities. The Fund had no reverse repurchase agreements outstanding at the end of the period.
 
Inflation-indexed bonds
The Fund may invest in inflation indexed bonds. Inflation indexed bonds are fixed income securities whose principal value is adjusted periodically according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that reflects inflation in the principal value of the bond. Most other issuers pay out any inflation related accruals as part of a semiannual coupon.
 
The value of inflation indexed bonds is expected to change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates (i.e., stated interest rates) and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates (i.e. nominal interest rate minus inflation) might decline, leading to an increase in value of inflation indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation indexed bonds. There can be no assurance, however, that the value of inflation indexed bonds will be directly correlated to changes in nominal interest rates, and short term increases in inflation may lead to a decline in their value. Coupon payments received by the Fund from inflation indexed bonds are included in the Fund’s gross income for the period in which they accrue. In addition, any increase or decrease in the principal amount of an inflation indexed bond will increase or decrease taxable ordinary income to the Fund, even though principal is not paid until maturity. The Fund had no inflation-indexed bonds outstanding at the end of the period.

         
28
       

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. The Fund is permitted to, and will from time to time, declare and pay distributions from net investment income, if any, more frequently (e.g. monthly). All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to derivative contract transactions, foreign currency transactions, capital loss carryforwards and post-October capital losses.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 38,177,038     $ 52,523,479  
Return of capital
    1,149,622,973       1,186,476,530  
                 
Total distributions
  $ 1,187,800,011     $ 1,239,000,009  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.

         
        29

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, certain tax attributes consisted of the following:
 
         
Tax Attributes:
       
Capital loss carryforwards
  $ (81,850,173 )
Post-October capital loss deferral
  $ (1,891,426 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 29, 2012
  $ (142,552 )
February 28, 2014
    (614,650 )
February 28, 2015
    (5,952,458 )
February 29, 2016
    (1,158,601 )
February 28, 2017
    (32,360,541 )
February 28, 2018
    (41,313,788 )
February 28, 2019
    (307,583 )
         
Total
  $ (81,850,173 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 2,440,982,139     $ 16,937,990     $ (406,175,520 )   $ (389,237,530 )    
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.

         
30
       

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (Note 5).
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Fixed Income Securities — Typically, the value of the Fund’s fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
 
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable

         
        31

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
 
• Focused Investment Risk — Focusing investments in countries, regions, sectors or companies with high positive correlations to one another creates additional risk. This risk may be particularly pronounced for the Fund because of its exposure to asset-backed securities secured by different types of consumer debt (e.g., credit-card receivables, automobile loans and home equity loans).
 
• Credit and Counterparty Risk — The Fund runs the risk that the issuer or guarantor of a fixed income security, the counterparty to an over-the-counter derivatives contract, a borrower of the Fund’s securities or the obligor of an obligation underlying an asset-backed security will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations. The risk of counterparty default is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions.
 
Other principal risks of an investment in the Fund include Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, and credit and counterparty risk); Market Disruption and Geopolitical Risk (the risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by redeeming Fund shares in large amounts and/or on a frequent basis); and Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations).
 
The most significant market risk for Funds investing in fixed income securities is that the securities in which they invest experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund because it invests in asset-backed securities. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as “collateralized debt obligations” or “collateralized loan obligations”) and by the fees earned by service providers. Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if

         
32
       

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. Many asset-backed securities owned by the Fund that were once rated investment grade are now rated below investment grade as of the date of this report.
 
The existence of insurance on an asset-backed security does not guarantee that principal and/or interest will be paid because the insurer could default on its obligations. In recent years, a significant number of asset-backed security insurers have defaulted on their obligations.
 
With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.
 
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and a Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.
 
The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution’s business may have a material impact on multiple investments.

         
        33

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps or other derivatives on an index, a single security or a basket of securities to gain investment exposures (e.g., by selling protection under a credit default swap). The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). For example, the Fund may use credit default swaps to take a short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund’s exposure to the credit of an issuer through the debt instrument, but adjust the Fund’s interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed versus variable rates and shorter duration versus longer duration exposure. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the

         
34
       

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral, that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value. At February 28, 2011, amounts reported as a miscellaneous payable include amounts that were calculated by the Fund as being owed to Lehman Brothers upon the termination of the contracts pursuant to the terms of those contracts. The amounts reported as payable are subject to settlement discussions with Lehman Brothers’ bankruptcy estate and may vary significantly upon final settlement with the estate.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.

         
        35

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
 
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund’s forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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.
 
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. During the year ended February 28, 2011, the Fund used forward currency contracts to adjust exposure to foreign currencies and otherwise adjust currency exchange rate risk. Forward currency contracts outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. The Fund had no futures contracts outstanding at the end of the period.

         
36
       

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an

         
        37

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A

         
38
       

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the year ended February 28, 2011, the Fund used swap agreements to achieve exposure to a reference entity’s credit. Swap agreements outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.

         
        39

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of
February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Liabilities:
                                               
Unrealized depreciation on forward currency contracts
  $      —     $ (1,858,086 )   $      —     $      —     $      —     $ (1,858,086 )
Unrealized depreciation on swap agreements
    —       —       (254,652 )     —       —       (254,652 )
                                                 
Total
  $ —     $ (1,858,086 )   $ (254,652 )   $ —     $ —     $ (2,112,738 )
                                                 
 
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Forward currency contracts
  $      —     $ 1,302,630     $      —     $      —     $      —     $ 1,302,630  
Swap agreements
    —       —       (1,199,187 )     —       —       (1,199,187 )
                                                 
Total
  $ —     $ 1,302,630     $ (1,199,187 )   $ —     $ —     $ 103,443  
                                                 
Change in Unrealized Appreciation (Depreciation) on:
                                               
Forward currency contracts
  $ —     $ (1,866,903 )   $ —     $ —     $ —     $ (1,866,903 )
Swap agreements
    —       —       1,563,957       —       —       1,563,957  
                                                 
Total
  $ —     $ (1,866,903 )   $ 1,563,957     $ —     $ —     $ (302,946 )
                                                 
 
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.

         
40
       

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The volume of derivative activity, based on absolute values (forward currency contracts) or notional amounts (swap agreements) outstanding at each month-end, was as follows for the period ended February 28, 2011:
 
                 
    Forward
    
    currency
   Swap
    contracts   agreements
 
Average amount outstanding
  $ 39,601,107     $ 61,000,000  
 
5. Fees and other transactions with affiliates
 
GMO does not charge the Fund any management or service fees for its services. The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.00% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). This expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $64,561 and $19,825, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 aggregated $0 and $1,205,118,627, respectively.
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or

         
        41

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 76.28% of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund’s outstanding shares. On that date, no other shareholders owned more than 10% of the outstanding shares of the Fund. Each of the shareholders are other funds of the Trust.
 
As of February 28, 2011, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and 99.99% of the Fund’s shares were held by accounts for which the Manager had investment discretion.
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
    Shares   Amount   Shares   Amount
                 
 
Shares sold
    9,830,646     $ 114,233,500       662,838     $ 10,389,000  
Shares issued to shareholders in reinvestment of distributions
    4,292       51,533       2,248       35,267  
Shares repurchased
    (24,773,343 )     (289,023,254 )     (2,890,527 )     (45,180,031 )
                                 
Net increase (decrease)
    (14,938,405 )   $ (174,738,221 )     (2,225,441 )   $ (34,755,764 )
                                 

         
42
       

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Short-Duration Collateral Fund:
 
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-Duration Collateral Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
        43

 

GMO Short-Duration Collateral Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
44
       

 

 
GMO Short-Duration Collateral Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
1) Actual
    0.01 %   $ 1,000.00     $ 1,045.70     $ 0.05  
2) Hypothetical
    0.01 %   $ 1,000.00     $ 1,024.74     $ 0.05  
                                 
 
            * Expenses are calculated using the annualized expense ratio (including interest expense) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
        45

 

GMO Short-Duration Collateral Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
The Fund hereby designates as qualified interest income with respect to its taxable year ended February 28, 2011, $39,823,847 or if determined to be different, the qualified interest income of such year.

         
46
       

 

GMO Short-Duration Collateral Fund
(A Series of GMO Trust)


Note Concerning Distributions (Unaudited)
 
For the fiscal year ending February 28, 2011, the Fund previously reported estimated sources of any dividends, short-term capital gains, long-term capital gains and return of capital distributions paid on a per share basis. Pursuant to Rule 19a-1(e) of the Investment Company Act of 1940, the table below serves as a correction as such estimates on a per share basis. The Statement of Changes in Net Assets includes the corrected amounts on a dollar basis.
 
                                         
            Dividend
     Net
     Net
        
            Paid from
     Short-Term
     Long-Term
        
            Current
     Capital
     Capital
        
            and/or
     Gains
     Gains
        
            Prior Years
     From Sale of
     From Sale of
     Distribution
  
            Accumulated
     Securities &
     Securities &
     from
  
            Undistributed
     Other
     Other
     Return of
  
Record Date   Ex-Date   Payable Date   Net Income*     PropertyÙ     PropertyÙ     Capital  
 
February 26, 2010
  March 1, 2010   March 2, 2010   $ 0.01115992     $ 0.00000000     $ 0.00000000     $ 0.33650099  
March 26, 2010
  March 29, 2010   March 30, 2010   $ 0.02664353     $ 0.00000000     $ 0.00000000     $ 0.80337300  
April 27, 2010
  April 28, 2010   April 29, 2010   $ 0.00565485     $ 0.00000000     $ 0.00000000     $ 0.17050879  
May 26, 2010
  May 27, 2010   May 28, 2010   $ 0.01194494     $ 0.00000000     $ 0.00000000     $ 0.36017171  
June 25, 2010
  June 28, 2010   June 29, 2010   $ 0.02758042     $ 0.00000000     $ 0.00000000     $ 0.83162269  
July 27, 2010
  July 28, 2010   July 29, 2010   $ 0.03391890     $ 0.00000000     $ 0.00000000     $ 1.02274453  
August 26, 2010
  August 27, 2010   August 30, 2010   $ 0.00812260     $ 0.00000000     $ 0.00000000     $ 0.24491799  
September 27, 2010
  September 28, 2010   September 29, 2010   $ 0.01013143     $ 0.00000000     $ 0.00000000     $ 0.30548947  
October 27, 2010
  October 28, 2010   October 29, 2010   $ 0.00335684     $ 0.00000000     $ 0.00000000     $ 0.10121761  
January 4, 2011
  January 5, 2011   January 6, 2011   $ 0.02612937     $ 0.00000000     $ 0.00000000     $ 0.78786982  
January 26, 2011
  January 27, 2011   January 28, 2011   $ 0.01030683     $ 0.00000000     $ 0.00000000     $ 0.31077815  
February 24, 2011
  February 25, 2011   February 28, 2011   $ 0.00795061     $ 0.00000000     $ 0.00000000     $ 0.23973203  
 
Notes:
 
            * Net investment income may include amounts derived from dividends, interest, net foreign currency gains and net amounts from transacting in certain derivative contracts.
 
            Ù Short-term and long-term capital gains may include amounts derived from the sale of securities/other property and net amounts from transacting in certain derivative contracts.

         
        47

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
            Principal
   Number of
      
    Position(s)
       Occupation(s)
   Portfolios in
      
Name and
   Held with the
   Length of
   During Past
   Fund Complex
     Other
Date of Birth   Trust   Time Served   Five Years   Overseen     Directorships Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005);
Trustee since December 2000. 		  Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
48        

 

Independent Trustees: — (Continued)
 
                         
            Principal
   Number of
      
    Position(s)
       Occupation(s)
   Portfolios in
      
Name and
   Held with the
   Length of
   During Past
   Fund Complex
     Other
Date of Birth   Trust   Time Served   Five Years   Overseen     Directorships Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
            Principal
   Number of
      
            Occupation(s)
   Portfolios in
      
Name and
   Position(s)
   Length of
   During Past
   Fund Complex
     Other
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Directorships Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee;
President and
Chief Executive
Officer of the
Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
        49

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
50        

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        51

 

 
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
The Class III shares of GMO Short-Duration Collateral Share Fund returned +9.1% for the fiscal year ended February 28, 2011, as compared with +0.5% for the J.P. Morgan U.S. 3 Month Cash Index.
 
The Fund outperformed the benchmark during the fiscal year by 8.6%. The Fund’s outperformance is attributable to increases in the net asset value of the Fund’s holdings of GMO Short-Duration Collateral Fund (SDCF).
 
SDCF returned +9.3% for the fiscal year ended February 28, 2011, as compared with +0.5% for its benchmark, the J.P. Morgan U.S. 3 Month Cash Index. SDCF outperformed its benchmark during the fiscal year by 8.8%, with positive performance attributable to improved pricing in asset-backed security holdings.
 
Asset-backed security spreads tightened and pricing and liquidity conditions in securitized credit markets improved during the fiscal year. SDCF’s asset-backed holdings experienced credit downgrades during the fiscal year: SDCF had 55 downgraded securities, representing 11% of its market value from the beginning of the fiscal year. At fiscal year-end, about 52% of SDCF’s portfolio was rated AAA, and 67% of the portfolio was rated single-A or better.
 
During the fiscal year ended February 28, 2011, the Fund and SDCF did not pursue active investment programs.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO Short-Duration Collateral Share Fund Class III Shares and the
J.P. Morgan U.S. 3 Month Cash Index
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited.
 
 
* Class III performance information represents Class VI performance from March 1, 2006 to December 28, 2006 and Class III performance thereafter.

 

GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary*   % of Total Net Assets  
Debt Obligations
    99.1 %
Short-Term Investments
    0.8  
Swap Agreements
    (0.0 )^
Forward Currency Contracts
    (0.1 )
Other
    0.2  
         
      100.0 %
         
 
* The table above incorporates aggregate indirect asset class exposure associated with investments in GMO Short-Duration Collateral Fund.
 
         
Industry Sector Summary**   % of Debt Obligations  
Credit Cards
    19.4 %
Residential Asset-Backed Securities (United States)
    17.8  
Auto Financing
    11.1  
CMBS
    9.7  
Insured Auto Financing
    5.9  
Residential Mortgage-Backed Securities (European)
    5.8  
Student Loans
    5.8  
Business Loans
    4.2  
Residential Mortgage-Backed Securities (Australian)
    4.2  
Insured Other
    3.9  
CMBS Collateralized Debt Obligations
    2.6  
Corporate Collateralized Debt Obligations
    2.0  
U.S. Government Agency
    1.6  
Rate Reduction Bonds
    1.2  
Insured High Yield Collateralized Debt Obligations
    0.9  
Airlines
    0.8  
Insured Residential Mortgage-Backed Securities (United States)
    0.8  
Insured Residential Asset-Backed Securities (United States)
    0.7  
Insured Time Share
    0.7  
Equipment Leases
    0.4  
Insured Transportation
    0.2  
Time Share
    0.1  
Residential Mortgage-Backed Securities (United States)
    0.1  
Insured Business Loans
    0.1  
ABS Collateralized Debt Obligations
    0.0 ^
         
      100.0 %
         
 
** The table above incorporate aggregate indirect industry sector exposure associated with investments in GMO Short-Duration Collateral Fund.
Ù Rounds to 0.0%.

         
        1

 

GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                 
 
 		           
 
 		           
Shares     Description   Value ($)  
        MUTUAL FUNDS — 100.0%        
                 
        Affiliated Issuers — 100.0%        
  3,370,253     GMO Short-Duration Collateral Fund     34,983,226  
                 
                 
        TOTAL MUTUAL FUNDS (COST $32,419,440)     34,983,226  
                 
                 
        SHORT-TERM INVESTMENTS — 0.1%        
                 
        Money Market Funds — 0.1%        
  19,813     State Street Institutional Treasury Plus Money Market Fund-Institutional Class     19,813  
                 
                 
        TOTAL SHORT-TERM INVESTMENTS (COST $19,813)     19,813  
                 
                 
        TOTAL INVESTMENTS — 100.1%
(Cost $32,439,253) 		    35,003,039  
        Other Assets and Liabilities (net) — (0.1%)     (44,428 )
                 
                 
        TOTAL NET ASSETS — 100.0%   $ 34,958,611  
                 

         
2
  See accompanying notes to the financial statements.    

 

GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $19,813) (Note 2)
  $ 19,813  
Investments in affiliated issuers, at value (cost $32,419,440) (Notes 2 and 10)
    34,983,226  
Receivable for expenses reimbursed by Manager (Note 5)
    7,449  
         
Total assets
    35,010,488  
         
         
Liabilities:
       
Payable to affiliate for (Note 5):
       
Management fee
    1,336  
Shareholder service fee
    4,010  
Trustees and Trust Officers or agents unaffiliated with the Manager
    101  
Accrued expenses
    46,430  
         
Total liabilities
    51,877  
         
Net assets
  $ 34,958,611  
         
Net assets consist of:
       
Paid-in capital
  $ 37,629,051  
Accumulated undistributed net investment income
    67,805  
Accumulated net realized loss
    (5,302,031 )
Net unrealized appreciation
    2,563,786  
         
    $ 34,958,611  
         
Net assets attributable to:
       
Class III shares
  $ 34,958,611  
         
Shares outstanding:
       
Class III
    1,874,479  
         
Net asset value per share:
       
Class III
  $ 18.65  
         

         
    See accompanying notes to the financial statements.   3

 

GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends from affiliated issuers (Note 10)
  $ 481,831  
Dividends from unaffiliated issuers
    16  
         
Total investment income
    481,847  
         
Expenses:
       
Management fee (Note 5)
    16,971  
Shareholder service fee – Class III (Note 5)
    50,912  
Audit and tax fees
    33,917  
Custodian, fund accounting agent and transfer agent fees
    6,441  
Legal fees
    3,192  
Registration fees
    1,718  
Trustees fees and related expenses (Note 5)
    777  
Miscellaneous
    9,802  
         
Total expenses
    123,730  
Fees and expenses reimbursed by Manager (Note 5)
    (54,705 )
         
Net expenses
    69,025  
         
Net investment income (loss)
    412,822  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in affiliated issuers
    (305,352 )
         
Net realized gain (loss)
    (305,352 )
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in affiliated issuers
    2,841,488  
         
Net realized and unrealized gain (loss)
    2,536,136  
         
Net increase (decrease) in net assets resulting from operations
  $ 2,948,958  
         

         
4
  See accompanying notes to the financial statements.    

 

GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 412,822     $ 381,682  
Net realized gain (loss)
    (305,352 )     (136,691 )
Change in net unrealized appreciation (depreciation)
    2,841,488       6,367,227  
                 
                 
Net increase (decrease) in net assets from operations
    2,948,958       6,612,218  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (345,017 )     (381,682 )
Return of capital
               
Class III
    —       (5,563,318 )
                 
      (345,017 )     (5,945,000 )
                 
Net share transactions (Note 9):
               
Class III
    (1,388,981 )     6,196,931  
Redemption fees (Notes 2 and 9):
               
Class III
    —       1,523  
                 
Total increase (decrease) in net assets resulting from net share transactions and redemption fees
    (1,388,981 )     6,198,454  
                 
Total increase (decrease) in net assets
    1,214,960       6,865,672  
                 
Net assets:
               
Beginning of period
    33,743,651       26,877,979  
                 
End of period (including accumulated undistributed net investment income of $67,805 and $0, respectively)
  $ 34,958,611     $ 33,743,651  
                 

         
    See accompanying notes to the financial statements.   5

 

GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007(a)
 
Net asset value, beginning of period
  $ 17.27     $ 17.08     $ 23.39     $ 25.05     $ 24.82  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)(b)†
    0.22       0.21       1.17       1.07       (0.01 )
Net realized and unrealized gain (loss)
    1.34       3.47       (4.92 )     (1.38 )     0.24  
                                         
                                         
Total from investment operations
    1.56       3.68       (3.75 )     (0.31 )     0.23  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.18 )     (0.22 )     (0.81 )     (1.35 )     —  
Return of capital
    —       (3.27 )     (1.75 )     —       —  
                                         
                                         
Total distributions
    (0.18 )     (3.49 )     (2.56 )     (1.35 )     —  
                                         
                                         
Net asset value, end of period
  $ 18.65     $ 17.27     $ 17.08     $ 23.39     $ 25.05  
                                         
                                         
Total Return(c)
    9.08 %     25.13 %     (15.90 )%     (1.33 )%     0.93 %**
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 34,959     $ 33,744     $ 26,878     $ 10,637     $ 40,563  
Net expenses to average daily net assets(d)
    0.20 %     0.20 %(e)     0.20 %     0.20 %     0.21 %*
Net investment income (loss) to average daily net assets(b)
    1.22 %     1.28 %     5.47 %     4.25 %     (0.21 )%*
Portfolio turnover rate
    5 %     2 %     18 %     127 %     125 %**††
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.16 %     0.20 %     0.17 %     0.15 %     0.06 %*
Redemption fees consisted of the following per share amounts (Note 2):†
  $ —     $ 0.00 (f)   $ 0.01     $ —     $ —  
 
(a) Period from December 28, 2006 (commencement of operations) through February 28, 2007.
(b) Net investment income is affected by the timing of the declaration of dividends by GMO Short-Duration Collateral Fund.
(c) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assume the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(d) Net expenses exclude expenses incurred indirectly through investment in Short-Duration Collateral Fund.
(e) The net expense ratio does not include the effect of expense reductions (Note 2).
(f) Redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the period from March 1, 2006 (commencement of operations) through February 28, 2007.
* Annualized.
** Not annualized.

         
6
  See accompanying notes to the financial statements.    

 

GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO Short-Duration Collateral Share Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund’s investment objective is total return comparable to that of its benchmark, the J.P. Morgan U.S. 3 Month Cash Index. The Fund has invested substantially all of its assets in GMO Short-Duration Collateral Fund (“SDCF”) and, to a limited extent, in cash and cash equivalents. Its investment objective and principal investment strategies, therefore, are substantially similar to those of SDCF. The Fund and SDCF are not currently pursuing an active investment program.
 
SDCF primarily holds asset-backed securities, including, but not limited to, securities backed by pools of residential and commercial mortgages, credit-card receivables, home equity loans, automobile loans, educational loans, corporate and sovereign bonds, and bank loans made to corporations. In addition, SDCF has invested in government securities, corporate debt securities, money market instruments, and commercial paper, and has entered into credit default swaps, reverse repurchase agreements, and repurchase agreements. SDCF has also used exchange-traded and over-the-counter (“OTC”) derivatives. Because of the deterioration in credit markets that became acute in 2008, the Fund, through its holdings of SDCF, currently has and may continue to have material exposure to below investment grade securities. In addition, the Fund may invest in unaffiliated money market funds. The Manager does not seek to maintain a specified interest rate duration for SDCF.
 
Since October of 2008, SDCF has declared and paid distributions when it has acquired a meaningful cash position rather than reinvesting that cash in portfolio securities. SDCF currently intends to continue this practice. A substantial portion of any such distributions could constitute a return of capital to SDCF shareholders, including the Fund, for tax purposes. Therefore, if the Fund, in turn, distributes these amounts to its shareholders, the Fund’s distributions similarly could constitute a return of capital to Fund shareholders for tax purposes.
 
The financial statements of SDCF should be read in conjunction with the Fund’s financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect). As of February 28, 2011, shares of SDCF were not publicly available for direct purchase.
 
The Fund currently limits subscriptions.

         
        7

 

 
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Shares of SDCF are generally valued at their net asset value. Investments held by SDCF are valued as follows. Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the OTC market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of February 28, 2011, the total value of securities held indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of GMO trust represented 2.2% of net assets. SDCF classifies such securities (as defined below) as Level 3. During the year ended February 28, 2011, the Manager has evaluated the Fund’s OTC derivatives contracts and determined that no reduction in value was warranted on account of the creditworthiness of a counterparty.
 
Typically SDCF values debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. In addition, although alternative prices are available for other securities held by SDCF, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by SDCF. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used

         
8
       

 

 
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
by the Fund. As of February 28, 2011, the total value of securities held indirectly for which no alternative pricing source was available represented 10.0% of the net assets of the Fund.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund and SDCF disclose the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
 
The following is a summary of the respective levels assigned to the Fund’s investments as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Mutual Funds
  $ 34,983,226     $      —     $      —     $ 34,983,226  
Short-Term Investments
    19,813       —       —       19,813  
                                 
Total Investments
    35,003,039       —       —       35,003,039  
                                 
Total
  $ 35,003,039     $ —     $ —     $ 35,003,039  
                                 

         
        9

 

 
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
SDCF is classified as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of SDCF, please refer to the portfolio valuation notes in SDCF’s financial statements. The aggregate net value of the Fund’s indirect investments in securities and other financial instruments using Level 3 inputs were 67.9% and (0.01)% of total net assets, respectively.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
The Fund held no investments or derivative financial instruments directly at either February 28, 2011 or February 28, 2010, whose fair value was categorized using Level 3 inputs.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. The Fund is permitted to, and will from time to time, declare and pay distributions from net investment income, if any, more frequently (e.g. monthly). All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards and losses on wash sale transactions.

         
10
       

 

 
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 345,017     $ 381,682  
Tax return of capital
    —       5,563,318  
                 
Total distributions
  $ 345,017     $ 5,945,000  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 67,805  
         
Other Tax Attributes:
       
Capital loss carryforwards
  $ (4,262,532 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 29, 2016
  $ (3,400,357 )
February 28, 2017
    (862,175 )
         
Total
  $ (4,262,532 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 33,478,751     $ 1,524,288     $      —     $ 1,524,288      
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way

         
        11

 

 
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Income dividends and capital gain distributions from SDCF are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in SDCF (Note 5).
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
Purchases and redemptions of Fund shares
For the year ended February 28, 2011, the Fund did not charge a premium on cash purchases or fee on cash redemptions of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by a Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. Such fees are recorded as a component of the Fund’s net share transactions. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of the Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment

         
12
       

 

 
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund’s shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund’s shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder’s securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of the Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. Because the Fund invests substantially all of its assets in SDCF, the most significant risks of investing in the Fund are the risks to which the Fund is exposed through SDCF, which include those outlined in the following brief summary of principal risks. The Fund and SDCF are non-diversified investment companies under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund or SDCF may affect the Fund’s performance more than if the Fund or SDCF were diversified. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Fixed Income Securities — Typically, the value of SDCF’s fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
 
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent SDCF from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
 
• Focused Investment Risk — Focusing investments in countries, regions, sectors or companies with high positive correlations to one another creates additional risk. This risk may be particularly pronounced for SDCF because of its exposure to asset-backed securities secured by different types of consumer debt (e.g., credit-card receivables, automobile loans and home equity loans).

         
        13

 

 
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
• Credit and Counterparty Risk — The Fund runs the risk that the issuer or guarantor of a fixed income security, the counterparty to an over-the-counter derivatives contract, a borrower of SDCF’s securities or the obligor of an obligation underlying an asset-backed security will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations. The risk of counterparty default is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions.
 
Other principal risks of an investment in the Fund include Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, and credit and counterparty risk); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
 
The most significant market risk for Funds investing in fixed income securities is that the securities in which they invest experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund because it invests in asset-backed securities. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as “collateralized debt obligations” or “collateralized loan obligations”) and by the fees earned by service providers. Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. Many asset-backed securities owned by SDCF that were once rated investment grade are now rated below investment grade as of the date of this report.

         
14
       

 

 
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The existence of insurance on an asset-backed security does not guarantee that principal and/or interest will be paid because the insurer could default on its obligations. In recent years, a significant number of asset-backed security insurers have defaulted on their obligations.
 
With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.
 
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and a Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.
 
The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution’s business may have a material impact on multiple investments.
 
4. Derivative financial instruments
 
At February 28, 2011, the Fund held no derivative financial instruments directly. For a listing of derivative financial instruments held by SDCF, if any, please refer to SDCF’s Schedule of Investments.
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.05% of average daily net assets. The Fund has adopted a Shareholder service Plan under

         
        15

 

 
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
which the Fund pays GMO a shareholder service fee for client and shareholders service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.05% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition to the contractual expense reimbursement described above, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in other GMO Funds (excluding those Funds’ Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund’s Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $777 and $365, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
The Fund incurs fees and expenses indirectly as a shareholder in SDCF. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
                   
Indirect Net
 		                 
Expenses
                  
(excluding
     Indirect
            
shareholder service
     Shareholder
     Indirect Interest
     Total Indirect
fees and interest expense)     Service Fees     Expense     Expenses
0.004%
    0.000%     0.009%     0.013%
                   

         
16
       

 

 
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 aggregated $15,733,500 and $1,575,000, respectively.
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 85.22% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund’s outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
 
As of February 28, 2011, 89.35% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and none of the Fund’s shares were held by accounts for which the Manager had investment discretion.
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    2,882     $ 49,884       131,522     $ 2,240,650  
Shares issued to shareholders in reinvestment of distributions
    18,836       344,881       308,224       4,940,983  
Shares repurchased
    (101,191 )     (1,783,746 )     (59,040 )     (984,702 )
Redemption fees
    —       —       —       1,523  
                                 
Net increase (decrease)
    (79,473 )   $ (1,388,981 )     380,706     $ 6,198,454  
                                 

         
        17

 

 
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                         
    Value,
               Return
   Distributions
   Value,
    beginning of
       Sales
   Dividend
   of
   of Realized
   end of
Affiliate   period   Purchases   Proceeds   Income   Capital   Gains   period
 
GMO Short-Duration Collateral Fund
  $ 32,817,084     $ 15,733,500     $ 1,575,000     $ 481,831     $ 14,528,493     $      —     $ 34,983,226  
                                                         
Totals
  $ 32,817,084     $ 15,733,500     $ 1,575,000     $ 481,831     $ 14,528,493     $ —     $ 34,983,226  
                                                         

         
18
       

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Short-Duration Collateral Share Fund:
 
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-Duration Collateral Share Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
        19

 

GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including redemption fees; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
20
       

 

 
GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.22 %   $ 1,000.00     $ 1,044.80     $ 1.12  
2) Hypothetical
    0.22 %   $ 1,000.00     $ 1,023.70     $ 1.10  
                                 
 
            * Expenses are calculated using the Class’s annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
        21

 

GMO Short-Duration Collateral Share Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
The Fund hereby designates as qualified interest income with respect to its taxable year ended February 28, 2011, $249,575 or if determined to be different, the qualified interest income of such year.

         
22
       

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
        23

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949
  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee;
President and
Chief Executive
Officer of the
Trust 		  Trustee since
March 2010;
President and
Chief Executive
Officer since March 2009. 		  General Counsel,
Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP
(prior to October 2005). 		    63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
24
       

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006-present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003 – 2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance Officer   Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        25

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money
Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
26
       

 

 
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO Short-Duration Investment Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
GMO Short-Duration Investment Fund returned +4.2% SDIF was 50% exposed to USTF which returned 0.1% for the fiscal year ended February 28, 2011, as compared with +0.5% for the J.P. Morgan U.S. 3 Month Cash Index. The Fund outperformed the benchmark during the fiscal year by 3.8%.
 
The Fund’s outperformance is attributable to increases in the net asset value of the Fund’s 50% investment in GMO Short-Duration Collateral Fund (SDCF). The Fund was also 50% invested in GMO U.S. Treasury Fund, which returned 0.1%.
 
SDCF returned +9.3% for the fiscal year ended February 28, 2011, as compared with 0.5% for its benchmark, the J.P. Morgan U.S. 3 Month Cash Index. SDCF outperformed its benchmark during the fiscal year by 8.8%, with positive performance attributable to improved pricing in asset-backed security holdings.
 
Asset-backed security spreads tightened and pricing and liquidity conditions in securitized credit markets improved during the fiscal year. SDCF’s asset-backed holdings experienced credit downgrades during the fiscal year: SDCF had 55 downgraded securities, representing 11% of its market value from the beginning of the fiscal year. At fiscal year-end, about 52% of SDCF’s portfolio was rated AAA, and 67% of the portfolio was rated single-A or better.
 
During the fiscal year ended February 28, 2011, the Fund and SDCF did not pursue active investment programs.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO Short-Duration Investment Fund Class III Shares and the
J.P. Morgan U.S. 3 Month Cash Index
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited.
 

 

GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary*   % of Total Net Assets  
Debt Obligations
    51.9 %
Short-Term Investments
    48.5  
Forward Currency Contracts
    (0.0 )Ù
Swap Agreements
    (0.0 )Ù
Other
    (0.4 )
         
      100.0 %
         
 
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust (“underlying funds”).
Ù Rounds to 0.0%.

         
        1

 

GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
Par Value ($) /
 		           
Shares     Description   Value ($)  
            DEBT OBLIGATIONS — 12.2%        
                     
            U.S. Government Agency — 12.2%        
      46,667     Agency for International Development Floater (Support of Botswana), 6 mo. U.S. Treasury Bill + .40%, 0.56%, due 10/01/12 (a)     46,011  
      301,950     Agency for International Development Floater (Support of C.A.B.E.I), 6 mo. U.S. Treasury Bill + .40%, 0.56%, due 10/01/12 (a)     299,425  
      171,287     Agency for International Development Floater (Support of Honduras), 3 mo. U.S. Treasury Bill x 117%, 0.16%, due 10/01/11 (a)     170,436  
      20,966     Agency for International Development Floater (Support of Peru), Series B, 6 mo. U.S. Treasury Bill +.35%, 0.51%, due 05/01/14 (a)     20,604  
      194,142     Small Business Administration Pool #502320, Prime −2.19%, 1.06%, due 08/25/18     195,160  
                     
            Total U.S. Government Agency     731,636  
                     
                     
            TOTAL DEBT OBLIGATIONS (COST $734,903)     731,636  
                     
                     
            MUTUAL FUNDS — 87.9%        
                     
            Affiliated Issuers — 87.9%        
      231,576     GMO Short-Duration Collateral Fund     2,403,760  
      9,192     GMO Special Purpose Holding Fund (b)     4,596  
      114,557     GMO U.S. Treasury Fund     2,863,916  
                     
                     
            TOTAL MUTUAL FUNDS (COST $5,735,811)     5,272,272  
                     

         
2
  See accompanying notes to the financial statements.    

 

 
GMO Short-Duration Investment Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
Shares     Description   Value ($)  
                     
            SHORT-TERM INVESTMENTS — 0.4%        
                     
            Money Market Funds — 0.4%        
      22,400     State Street Institutional Treasury Plus Money Market Fund-Institutional Class     22,400  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $22,400)     22,400  
                     
                     
            TOTAL INVESTMENTS — 100.5%
(Cost $6,493,114) 		    6,026,308  
            Other Assets and Liabilities (net) — (0.5%)     (28,910 )
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 5,997,398  
                     
 
Notes to Schedule of Investments:
 
C.A.B.E.I. - Central American Bank for Economic Integration
The rates shown on variable rate notes are the current interest rates at February 28, 2011, which are subject to change based on the terms of the security.
 
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
(b) Underlying investment represents interests in defaulted claims.

         
    See accompanying notes to the financial statements.   3

 

GMO Short-Duration Investment Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $757,303) (Note 2)
  $ 754,036  
Investments in affiliated issuers, at value (cost $5,735,811) (Notes 2 and 10)
    5,272,272  
Receivable for investments sold
    4,189  
Dividends and interest receivable
    1,890  
Receivable for expenses reimbursed by Manager (Note 5)
    7,028  
         
Total assets
    6,039,415  
         
         
Liabilities:
       
Payable for investments purchased
    10,277  
Payable to affiliate for (Note 5):
       
Management fee
    229  
Shareholder service fee
    689  
Trustees and Trust Officers or agents unaffiliated with the Manager
    105  
Accrued expenses
    30,717  
         
Total liabilities
    42,017  
         
Net assets
  $ 5,997,398  
         
Net assets consist of:
       
Paid-in capital
  $ 9,154,571  
Accumulated undistributed net investment income
    339  
Accumulated net realized loss
    (2,690,706 )
Net unrealized depreciation
    (466,806 )
         
    $ 5,997,398  
         
Net assets attributable to:
       
Class III shares
  $ 5,997,398  
         
Shares outstanding:
       
Class III
    717,777  
         
Net asset value per share:
       
Class III
  $ 8.36  
         

         
4
  See accompanying notes to the financial statements.    

 

GMO Short-Duration Investment Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends from affiliated issuers (Note 10)
  $ 45,849  
Interest
    5,132  
Dividends from unaffiliated issuers
    9  
         
Total investment income
    50,990  
         
Expenses:
       
Management fee (Note 5)
    3,177  
Shareholder service fee – Class III (Note 5)
    9,531  
Audit and tax fees
    41,002  
Registration fees
    4,805  
Custodian, fund accounting agent and transfer agent fees
    4,321  
Legal fees
    275  
Trustees fees and related expenses (Note 5)
    262  
Miscellaneous
    9,145  
         
Total expenses
    72,518  
Fees and expenses reimbursed by Manager (Note 5)
    (59,525 )
Expense reductions (Note 2)
    (18 )
         
Net expenses
    12,975  
         
Net investment income (loss)
    38,015  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in unaffiliated issuers
    61  
Investments in affiliated issuers
    (175 )
Realized gains distributions from affiliated issuers (Note 10)
    307  
         
Net realized gain (loss)
    193  
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in unaffiliated issuers
    8,683  
Investments in affiliated issuers
    211,510  
         
Net unrealized gain (loss)
    220,193  
         
Net realized and unrealized gain (loss)
    220,386  
         
Net increase (decrease) in net assets resulting from operations
  $ 258,401  
         

         
    See accompanying notes to the financial statements.   5

 

GMO Short-Duration Investment Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 38,015     $ 54,487  
Net realized gain (loss)
    193       981  
Change in net unrealized appreciation (depreciation)
    220,193       822,565  
                 
                 
Net increase (decrease) in net assets from operations
    258,401       878,033  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (37,704 )     (60,280 )
Return of capital
               
Class III
    —       (28,753 )
                 
      (37,704 )     (89,033 )
                 
Net share transactions (Note 9):
               
Class III
    (850,602 )     (391,353 )
Purchase premiums and redemption fees (Notes 2 and 9):
               
Class III
    —       1,555  
                 
Total increase (decrease) in net assets resulting from net share transactions and redemption fees
    (850,602 )     (389,798 )
                 
                 
Total increase (decrease) in net assets
    (629,905 )     399,202  
                 
Net assets:
               
Beginning of period
    6,627,303       6,228,101  
                 
End of period (including accumulated undistributed net investment income of $339, and distributions in excess of net investment income of $2,619, respectively)
  $ 5,997,398     $ 6,627,303  
                 

         
6
  See accompanying notes to the financial statements.    

 

GMO Short-Duration Investment Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 8.07     $ 7.15     $ 8.45     $ 8.93     $ 8.82  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)(a)†
    0.05       0.06       0.30       0.32       0.47  
Net realized and unrealized gain (loss)
    0.29       0.96       (1.29 )     (0.28 )     0.11  
                                         
                                         
Total from investment operations
    0.34       1.02       (0.99 )     0.04       0.58  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.05 )     (0.07 )     (0.31 )     (0.52 )     (0.47 )
Return of capital
    —       (0.03 )     —       —       —  
                                         
                                         
Total distributions
    (0.05 )     (0.10 )     (0.31 )     (0.52 )     (0.47 )
                                         
                                         
Net asset value, end of period
  $ 8.36     $ 8.07     $ 7.15     $ 8.45     $ 8.93  
                                         
                                         
Total Return(b)
    4.22 %     14.40 %     (11.78 )%     0.40 %     6.62 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 5,997     $ 6,627     $ 6,228     $ 7,375     $ 31,315  
Net expenses to average daily net assets(c)
    0.20 %(d)     0.20 %     0.20 %     0.20 %     0.20 %
Net investment income (loss) to average daily net assets(a)
    0.60 %     0.83 %     3.81 %     3.59 %     5.21 %
Portfolio turnover rate
    20 %     11 %     4 %     5 %     12 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.94 %     0.90 %     0.79 %     0.60 %     0.14 %
Redemption fees consisted of the following per share amounts:†
    —     $ 0.00 (e)   $ 0.00 (e)     —       —  
 
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(d) The net expense ratio does not include the effect of expense reductions (Note 2).
(e) Redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.

         
    See accompanying notes to the financial statements.   7

 

GMO Short-Duration Investment Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO Short-Duration Investment Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund is not currently pursuing an active investment program.
 
Historically, the Fund has sought to provide current income to the extent consistent with the preservation of capital and liquidity. The Fund has invested in asset-backed securities issued by private issuers, U.S. government and agency securities (including securities neither guaranteed nor insured by the U.S. government), corporate debt securities, money market instruments, prime commercial paper and master demand notes, and certificates of deposit, bankers’ acceptances, and other bank obligations. The Fund has invested a substantial portion of its assets in GMO Short-Duration Collateral Fund (“SDCF”) (which invests primarily in asset-backed securities).
 
Because of the deterioration in credit markets that became acute in 2008, the Fund, in particular through its investment in SDCF, currently has and may continue to have material exposure to below investment grade securities. The Manager does not seek to maintain a specified interest rate duration for the Fund. The Fund is not a money market fund and is not subject to the duration, quality, diversification, and other requirements applicable to money market funds.
 
The financial statements of the GMO Funds in which the Fund invests, collectively referred to as the “underlying funds” should be read in conjunction with the Fund’s financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect). As of February 28, 2011, shares of GMO Special Purpose Holding Fund (“SPHF”) and SDCF were not publicly available for direct purchase.
 
The Fund currently limits subscriptions.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures

         
8
       

 

 
GMO Short-Duration Investment Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
in the financial statements. Actual results could differ from those estimates. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the over-the-counter (“OTC”) market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of February 28, 2011, the total value of securities held directly and indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 9.8% of net assets. The Fund and the underlying funds classify such securities (as defined below) as Level 3.
 
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. Although alternative prices are available for securities held by the Fund and the underlying funds, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by the Fund and the underlying funds. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fund and the underlying funds. As of February 28, 2011, the total value of securities held directly and indirectly for which no alternative pricing source was available represented 7.2% of the net assets of the Fund.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

         
        9

 

 
GMO Short-Duration Investment Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include most recent bid prices, interest rates, prepayment speeds, credit risk, yield curves and similar data.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund utilized a number of fair value techniques on Level 3 investments, including the following: The Fund valued certain debt securities using indicative bids received from primary pricing sources. The Fund valued certain other debt securities by using an estimated specified spread above the LIBOR Rate.
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Debt Obligations
                               
U.S. Government Agency
  $ —     $ —     $ 731,636     $ 731,636  
                                 
TOTAL DEBT OBLIGATIONS
    —       —       731,636       731,636  
                                 

         
10
       

 

 
GMO Short-Duration Investment Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
  
  ASSET VALUATION INPUTS — continued
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Mutual Funds
  $ 5,267,676     $ 4,596     $ —     $ 5,272,272  
Short-Term Investments
    22,400       —       —       22,400  
                                 
Total Investments
    5,290,076       4,596       731,636       6,026,308  
                                 
Total
  $ 5,290,076     $ 4,596     $ 731,636     $ 6,026,308  
                                 
 
The underlying funds held at period end are classified above as either Level 1 or Level 2. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements. The aggregate net values of the Fund’s investments (both direct and indirect) in securities and other financial instruments using Level 3 inputs were 39.4% and (0.1)% of total net assets, respectively.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
The following is a reconciliation of investments and derivatives, if any, in which significant unobservable inputs (Level 3) were used in determining value:
 
                                                                           
 
                                      Net Change in
                                      Unrealized
                                      Appreciation
                                      (Depreciation)
                                      from
    Balances
               Change in
           Balances
     Investments
    as of
   Net
   Accrued
   Total
   Unrealized
   Transfer
   Transfer
   as of
     still held as of
    February 28,
   Purchases/
   Discounts/
   Realized
   Appreciation
   into
  out of
   February 28,
     February 28,
    2010   Sales   Premiums   Gain/(Loss)   (Depreciation)   Level 3*   Level 3*   2011     2011
Debt Obligations
                                                                         
U.S. Government Agency
  $ 1,093,387     $ (370,537 )   $ 42     $ 61     $ 8,683     $      —     $      —     $ 731,636       $ 8,683  
                                                                           
Total
  $ 1,093,387     $ (370,537 )   $ 42     $ 61     $ 8,683     $ —     $ —     $ 731,636       $ 8,683  
                                                                           
 
            * The Fund accounts for investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the value at the end of the period.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after

         
        11

 

 
GMO Short-Duration Investment Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, quarterly, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards, partnership interest tax allocations, and losses on wash sale transactions.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 37,704     $ 60,280  
Tax return of capital
    —       28,753  
                 
Total distributions
  $ 37,704     $ 89,033  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 362  
         
Other Tax Attributes:
       
Capital loss carryforwards
  $ (2,075,242 )
Post-October capital loss deferral
  $ (122 )

         
12
       

 

 
GMO Short-Duration Investment Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 29, 2012
  $ (470,143 )
February 28, 2013
    (708 )
February 28, 2014
    (1,377,141 )
February 29, 2016
    (226,383 )
February 28, 2019
    (867 )
         
Total
  $ (2,075,242 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 7,108,476     $ 6,039     $ (1,088,207 )   $ (1,082,168 )    
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is

         
        13

 

 
GMO Short-Duration Investment Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (Note 5).
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
Purchases and redemptions of Fund shares
Purchase premiums and redemption fees are paid to and retained by the Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. Such fees are recorded as a component of the Fund’s net share transactions. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of the Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund’s shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund’s shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder’s securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of the Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to

         
14
       

 

 
GMO Short-Duration Investment Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
transmit orders for purchases and redemptions the day after those orders are received by the broker or agent.
 
Other matters
SPHF, an investment of the Fund, has litigation pending against various entities related to the 2002 fraud and related default of securities previously held by SPHF. The outcome of the lawsuits against the remaining defendants is not known and any potential recoveries are not reflected in the net asset value of SPHF. For the year ended February 28, 2011, the Fund received no distributions from SPHF in connection with the defaulted securities or the related litigation.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund and SDCF are non-diversified investment companies under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund or SDCF may affect the Fund’s performance more than if the Fund or SDCF were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Fixed Income Securities — Typically, the value of the Fund’s fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset backed and other fixed income securities.
 
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
 
• Focused Investment Risk — Focusing investments in countries, regions, sectors or companies with high positive correlations to one another creates additional risk. This risk may be particularly pronounced for the Fund because of its exposure to asset-backed securities secured by different types of consumer debt (e.g., credit-card receivables, automobile loans and home equity loans).
 
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in underlying funds, including the risk that the underlying funds in which it invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments.
 
Other principal risks of an investment in the Fund include Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Credit

         
        15

 

 
GMO Short-Duration Investment Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
and Counterparty Risk (risk of default of an issuer of a portfolio security, a derivatives counterparty, or a borrower of an underlying fund’s securities); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by redeeming Fund shares in large amounts and/or on a frequent basis).
 
The most significant market risk for Funds investing in fixed income securities is that the securities in which they invest experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund because it invests in asset-backed securities. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as “collateralized debt obligations” or “collateralized loan obligations”) and by the fees earned by service providers. Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. Many asset-backed securities owned (directly or indirectly) by the Fund that were once rated investment grade are now rated below investment grade as of the date of this report.
 
The existence of insurance on an asset-backed security does not guarantee that principal and/or interest will be paid because the insurer could default on its obligations. In recent years, a significant number of asset-backed security insurers have defaulted on their obligations.
 
With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income

         
16
       

 

 
GMO Short-Duration Investment Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.
 
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and a Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.
 
The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution’s business may have a material impact on multiple investments.
 
4. Derivative financial instruments
 
At February 28, 2011, the Fund held no derivative contracts.
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.05% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.05% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs

         
        17

 

 
GMO Short-Duration Investment Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
(including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in other GMO Funds (excluding those Funds’ Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund’s Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $262 and $23, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
                   
Indirect Net
 		                 
Expenses
                  
(excluding
                  
shareholder service
     Indirect
            
fees and interest
     Shareholder
     Indirect Interest
     Total Indirect
expense)     Service Fees     Expense     Expenses
0.011%
    0.000%     0.004%     0.015%
                   
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 were as follows:
 
                 
    Purchases   Sales
 
U.S. Government securities
  $ —     $ 370,536  
Investments (non-U.S. Government securities)
    1,709,802       894,000  
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s

         
18
       

 

 
GMO Short-Duration Investment Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 67.61% of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund’s outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. One of the shareholders is another fund of the Trust.
 
As of February 28, 2011, 17.35% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and 80.96% of the Fund’s shares were held by accounts for which the Manager had investment discretion.
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    —     $ —       —     $ —  
Shares issued to shareholders in reinvestment of distributions
    4,340       35,703       6,294       47,784  
Shares repurchased
    (107,603 )     (886,305 )     (56,062 )     (439,137 )
Redemption fees
    —       —       —       1,555  
                                 
Net increase (decrease)
    (103,263 )   $ (850,602 )     (49,768 )   $ (389,798 )
                                 

         
        19

 

 
GMO Short-Duration Investment Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                         
    Value,
               Distributions
   Return
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   of
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   Capital   period
 
GMO Short-Duration Collateral Fund
  $ 3,469,010     $ —     $ —     $ 42,354     $ —     $ 1,277,125     $ 2,403,760  
GMO Special Purpose Holding Fund
    5,056       —       —       —       —       —       4,596  
GMO U.S. Treasury Fund
    2,048,195       1,709,802       894,000       3,495       307       —       2,863,916  
                                                         
Totals
  $ 5,522,261     $ 1,709,802     $ 894,000     $ 45,849     $ 307     $ 1,277,125     $ 5,272,272  
                                                         

         
20
       

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Short-Duration Investment Fund:
 
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-Duration Investment Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
        21

 

GMO Short-Duration Investment Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
22
       

 

 
GMO Short-Duration Investment Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.22 %   $ 1,000.00     $ 1,020.40     $ 1.10  
2) Hypothetical
    0.22 %   $ 1,000.00     $ 1,023.70     $ 1.10  
                                 
 
            * Expenses are calculated using the Class’s annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
        23

 

GMO Short-Duration Investment Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
Of the ordinary income distributions made by the Fund during the fiscal year ended February 28, 2011, 8.86% is derived from investments in U.S. Government and Agency Obligations. All or a portion of the distributions from this income may be exempt from taxation at the state level. Consult your tax advisor for state specific information.

         
24        

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
        25

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March
2010. 		  Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
     
            Occupation(s)
   Fund
     Other
Name and
  Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee; President
and
Chief Executive
Officer of the
Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
26        

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        27

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money
Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
28
       

 

 
GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a private placement memorandum, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The private placement memorandum can be obtained by calling 1-617-346-7646 (collect).
 

 

GMO Special Purpose Holding Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
GMO Special Purpose Holding Fund returned -9.1% for the fiscal year ended February 28, 2011, as compared with +0.5% for the J.P. Morgan U.S. 3 Month Cash Index.
 
The Fund underperformed the benchmark during the fiscal year by 9.6%. The Fund’s underperformance was attributable to its ongoing payment of legal expenses related to the ownership of bankruptcy interests, combined with the lack of further settlements on litigation claims related to those bankruptcy interests.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO Special Purpose Holding Fund and the J.P. Morgan U.S. 3 Month Cash Index
As of February 28, 2011
 
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, please call (617) 330-7500. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees, if any, in effect as of February 28, 2011. All information is unaudited.
 
* This total assumes the effect of reinvested dividends, which are prohibited in this Fund. An investor could not have achieved this return due to this prohibition.

 

GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Investments Concentration Summary (a)
February 28, 2011 (Unaudited)
 
         
Asset Class Summary   % of Total Net Assets  
Short-term Investments
    9.8 %
Debt Obligations
    0.0  
Other
    90.2  
         
      100.0 %
         
 
(a) GMO SPV I, LLC is a 74.9% owned subsidiary of GMO Special Purpose Holding Fund.

         
        1

 

GMO Special Purpose Holding Fund
(A Series of GMO Trust)
Consolidated Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
Par Value /
 		           
Shares     Description   Value ($)  
            DEBT OBLIGATIONS — 0.0% (a)        
                     
            Asset-Backed Securities — 0.0%        
            Health Care Receivables — 0.0%        
            Interest related to the Bankruptcy Estate of NPF VI Inc. Series 02-1 Class A (b) (c)     —  
            Interest related to the Bankruptcy Estate of NPF XII Inc. Series 00-3 Class A (b) (c)     —  
            Interest related to the Bankruptcy Estate of NPF XII Inc. Series 02-1 Class A (b) (c)     —  
                     
            Total Asset-Backed Securities     —  
                     
                     
            TOTAL DEBT OBLIGATIONS (COST $0)     —  
                     
                     
            SHORT-TERM INVESTMENTS — 9.8%        
                     
            Money Market Funds — 9.8%        
      13,600     State Street Institutional Liquid Reserves Fund-Institutional Class     13,600  
      13,600     State Street Institutional Treasury Plus Money Market Fund-Institutional Class     13,600  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $27,200)     27,200  
                     
                     
            TOTAL INVESTMENTS — 9.8%
(COST $27,200) 		    27,200  
            Other Assets and Liabilities (net) — 90.2%     250,347  
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 277,547  
                     
 
Notes to Consolidated Schedule of Investments:
 
(a) Owned by GMO SPV I, LLC. GMO SPV I, LLC is a 74.9% subsidiary of GMO Special Purpose Holding Fund.
(b) Security in default.
(c) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).

         
2
  See accompanying notes to the financial statements.    

 

 
GMO Special Purpose Holding Fund
(A Series of GMO Trust)


Consolidating Statement of Assets and Liabilities — February 28, 2011
 
                                         
    GMO
 		               
    Special Purpose
 		  GMO
 		  Noncontrolling
 		      Consolidated
    Holding Fund   SPV I, LLC   Interest   Eliminations   Totals
Assets:
                                       
Investments in affiliated issuers, at value (cost $0) (Note 2)
  $ 148,319     $ —     $ —     $ (148,319 )   $ —  
Investments in unaffiliated issuers, at value (cost $27,200) (Note 2)
    27,200       —       —       —       27,200  
Cash
    161,271       332,645       —       —       493,916  
Dividends receivable
    3       —       —       —       3  
Receivable for expenses reimbursed by Manager (Note 5)
    16,632       3,640       —       —       20,272  
                                         
Total assets
    353,425       336,285       —       (148,319 )     541,391  
                                         
                                         
Liabilities:
                                       
Accrued expenses
    75,878       135,725       —       —       211,603  
Non controlling interest in subsidiary
    —       —       52,241       —       52,241  
                                         
Total liabilities
    75,878       135,725       52,241       —       263,844  
                                         
Net assets
  $ 277,547     $ 200,560     $ (52,241 )   $ (148,319 )   $ 277,547  
                                         
Shares outstanding
    554,071                               554,071  
                                         
Net asset value per share
  $ 0.50                             $ 0.50  
                                         

         
    See accompanying notes to the financial statements.   3

 

GMO Special Purpose Holding Fund
(A Series of GMO Trust)


Consolidating Statement of Operations — Year Ended February 28, 2011
 
                                         
    GMO
 		               
    Special Purpose
 		  GMO
 		  Noncontrolling
 		      Consolidated
    Holding Fund   SPV I, LLC   Interest   Eliminations   Totals
Investment Income:
                                       
Dividends
  $ 35     $ —     $ —     $ —     $ 35  
                                         
Total income
    35       —       —       —       35  
                                         
Expenses:
                                       
Custodian and transfer agent fees
    4,783       28,138       —       —       32,921  
Audit and tax fees
    59,416       13,595       —       —       73,011  
Legal fees
    184       39,260       —       —       39,444  
Trustees fees and related expenses (Note 5)
    7       —       —       —       7  
Miscellaneous
    7,380       1,388       —       —       8,768  
                                         
Total expenses
    71,770       82,381       —       —       154,151  
                                         
Fees and expenses reimbursed by Manager (Note 5)
    (71,578 )     (43,121 )     —       —       (114,699 )
                                         
Expense Reduction (Note 2)
    (153 )     (304 )     —       —       (457 )
                                         
Net expenses
    39       38,956       —       —       38,995  
                                         
Net income (loss)
    (4 )     (38,956 )     —       —       (38,960 )
Noncontrolling interest in subsidiary net income (loss)
    —       —       9,292       —       9,292  
                                         
Net investment income (loss) after noncontrolling interest
    (4 )     (38,956 )     9,292       —       (29,668 )
                                         
Realized and unrealized gain (loss):
                                       
Net realized gain (loss) on:
                                       
Investments in unaffiliated issuers
    —       —       —       —       —  
Realized gains distributions from affiliated issuers
    —       —       —       —       —  
                                         
Net realized gain (loss)
    —       —       —       —       —  
                                         
Change in net unrealized appreciation (depreciation) on:
                                       
Investments in affiliated issuers
    (29,664 )     —       —       29,664       —  
                                         
Net unrealized gain (loss)
    (29,664 )     —       —       29,664       —  
                                         
Net realized and unrealized gain (loss)
    (29,664 )     —       —       29,664       —  
Noncontrolling interest in subsidiary’s realized and unrealized gain (loss)
    —       —       —       —       —  
                                         
Net increase (decrease) in net assets resulting from operations
  $ (29,668 )   $ (38,956 )   $ 9,292     $ 29,664     $ (29,668 )
                                         

         
4
  See accompanying notes to the financial statements.    

 

GMO Special Purpose Holding Fund
(A Series of GMO Trust)


Consolidated Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss) after noncontrolling interest
  $ (29,668 )   $ (99,620 )
Net realized gain (loss)
    —       —  
Change in net unrealized appreciation (depreciation)
    —       —  
                 
      (29,668 )     (99,620 )
Noncontrolling interest in realized and unrealized gain (loss)
    —       —  
                 
                 
Net increase (decrease) in net assets from operations
    (29,668 )     (99,620 )
                 
Fund share transactions: (Note 9)
               
Proceeds from sale of shares
    —       —  
Cost of shares repurchased
    —       —  
                 
Net increase (decrease) from Fund share transactions
    —       —  
                 
                 
Total increase (decrease) in net assets
    (29,668 )     (99,620 )
                 
                 
Net assets:
               
Beginning of period
    307,215       406,835  
                 
End of period
  $ 277,547     $ 307,215  
                 

         
    See accompanying notes to the financial statements.   5

 

GMO Special Purpose Holding Fund
(A Series of GMO Trust)

Consolidated Financial Highlights
(For a share outstanding throughout each period)
 
                                         
    Year Ended February 28/29
    2011   2010(a)   2009   2008   2007
 
Net asset value, beginning of period
  $ 0.55     $ 0.73     $ 1.26     $ 1.41     $ 8.22  
                                         
                                         
Income from investment operations:
                                       
Net investment income (loss)†
    (0.05 )     (0.18 )     0.00 (b)     0.06       0.02  
Net realized and unrealized gain (loss)
    —       —       1.73       6.28       41.16  
                                         
                                         
Total from investment operations
    (0.05 )     (0.18 )     1.73       6.34       41.18  
                                         
                                         
Less distributions to shareholders:
                                       
From cash distributions
    —       —       (2.26 )     (6.49 )     (47.99 )
                                         
                                         
Total distributions
    —       —       (2.26 )     (6.49 )     (47.99 )
                                         
                                         
Net asset value, end of period
  $ 0.50     $ 0.55     $ 0.73     $ 1.26     $ 1.41  
                                         
                                         
Total Return(c)(d)
    (9.09 )%     (24.66 )%     137.67 %     517.54 %     3613.95 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 278     $ 307     $ 407     $ 697     $ 780  
Net expenses to average daily net assets
    10.18 %(e)     27.55 %(e)     0.81 %     0.00 %(f)     0.85 %
Net investment income (loss) to average daily net assets
    (10.03 )%     (27.38 )%     0.25 %     3.91 %     1.05 %
Portfolio turnover rate
    0 %     0 %     0 %     0 %     0 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    35.58 %     25.66 %     15.56 %     8.84 %     3.74 %
 
(a) For the year ended February 28, 2010, the Fund’s financial results reflect a legal expense adjustment related to pending litigation against various entities related to the default of the NPF Securities. See Note 1.
(b) Net investment income (loss) was less than $0.01 per share.
(c) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(d) Had the effect of reinvested distributions not been assumed and income from investment operations been retained, the total returns would have been (0.05)%, (0.20)%, 1.93%, 7.61%, and 97.84% for the fiscal years ended 2011, 2010, 2009, 2008, and 2007, respectively.
(e) The net expense ratio does not include the effect of expense reductions (Note 2).
(f) Net expenses as a percentage of average daily net assets was less than 0.01%.
† Calculated using average shares outstanding throughout the period.

         
6
  See accompanying notes to the financial statements.    

 

GMO Special Purpose Holding Fund
(A Series of GMO Trust)

Notes to Consolidated Financial Statements
February 28, 2011
 
1. Organization
 
GMO Special Purpose Holding Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund’s investments consist primarily of: (i) units of GMO SPV I, LLC (“SPV”), a special purpose vehicle that holds an interest in liquidating trusts (described below) related to certain defaulted asset-backed securities (the “NPF Securities”) issued by NPF VI, Inc. and NPF XII, Inc. (the “Issuers”), and (ii) cash and cash items. The Fund expects that any new investments will be made primarily in cash, cash items, and high quality debt securities.
 
As noted above, one of the Fund’s principal investments are units of SPV, which in turn holds an interest in liquidating trusts related to the NPF Securities. In November 2002, National Century Financial Enterprises (“NCFE”), which organized and administered the Issuers and the NPF Securities, defaulted on its obligations with respect to the NPF Securities (health care asset-backed receivables). The NPF Securities had been acquired by the Fund prior to this default. NCFE and its affiliates are alleged to have violated the terms of the bonds’ indentures by, among other things, purportedly spending cash collateral, accepting collateral other than permitted receivables, moving receivables between trusts to meet compliance tests and reimbursing health care providers for more than the value of receivables purchased. NCFE, its affiliated operations (including the Issuers), and many of the health care providers declared bankruptcy.
 
In November 2002, the NPF Securities were transferred to SPV to facilitate the redemption of the NPF Securities in-kind, if necessary, to protect the interests of non-redeeming shareholders. In connection with the Fund’s placement of the NPF Securities in SPV, the Fund assigned to SPV the right to any proceeds received in connection with any claims or actions against various parties arising out of the Fund’s purchase of the NPF Securities (including those described below). The Fund’s pro rata portion of the costs associated with the Fund’s attempted recovery of losses associated with the NPF Securities will be borne by the Fund, subject to a priority reimbursement of such costs by SPV in the event SPV receives any proceeds in connection with any claims or actions.
 
In 2003, the Fund joined with certain other holders of the NPF Securities in filing a lawsuit against certain parties related to the NCFE offerings, including the indenture trustees, underwriters, and certain other parties. In April 2004, a plan of liquidation was approved by the bankruptcy court with respect to NCFE and its affiliated operations (including the Issuers). Pursuant to such plan, SPV received cash distributions,

         
        7

 

 
GMO Special Purpose Holding Fund
(A Series of GMO Trust)

Notes to Consolidated Financial Statements — (Continued)
February 28, 2011
 
which were distributed, less expenses, to holders of SPV, including the Fund. SPV also received interests in liquidating trusts, which it continues to hold.
 
The Fund is presently closed to new subscriptions and additional investments from existing shareholders. The Fund’s shares are held by other GMO funds and certain other accredited investors.
 
The Fund has litigation pending against various entities related to the default of certain of the NPF Securities. For the year ended February 28, 2011, the Fund received no distributions in conjunction with a settlement agreement related to the default of those securities. The outcome of the lawsuits against the remaining defendants is not known and any potential recoveries are not reflected in the net asset value of the Fund. To the extent additional recoveries are realized, such recoveries may be material to the net asset value of the Fund.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Basis of presentation and principles of consolidation
The accompanying consolidated financial statements include the accounts of the Fund and its majority owned investment in SPV. The consolidated financial statements include 100% of the assets and liabilities of SPV and the ownership interests of participants in SPV other than the Fund are recorded as a “Noncontrolling Interest”. All significant interfund accounts and transactions have been eliminated in consolidation.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the over-the-counter “OTC” market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair

         
8
       

 

 
GMO Special Purpose Holding Fund
(A Series of GMO Trust)

Notes to Consolidated Financial Statements — (Continued)
February 28, 2011
 
valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund utilized a number of fair value techniques on Level 3 investments, including the following: Consistent with U.S. GAAP, the Fund valued potential litigation recoveries with respect to the bankruptcy proceedings at zero. The Fund considered interests related to bankruptcy proceedings to be worthless.

         
        9

 

 
GMO Special Purpose Holding Fund
(A Series of GMO Trust)

Notes to Consolidated Financial Statements — (Continued)
February 28, 2011
 
The following is a summary of the respective levels assigned to the Fund’s investments as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Debt Obligations
  $ —     $      —     $ 0 *   $ —  
Short-Term Investments
    27,200       —       —       27,200  
                                 
Total Investments
  $ 27,200     $ —     $ 0 *   $ 27,200  
                                 
 
            * Represents the interest in securities that are defaulted and have no value at February 28, 2011 or February 28, 2010.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
Taxes
The Fund has elected to be treated as a partnership for U.S. federal income tax purposes. As a partnership, the Fund is not itself subject to U.S. federal income tax. Instead, each shareholder is required to take into account in determining its tax liability its distributive share of items of Fund income, gain, loss, deduction, credit, and tax preference for each taxable year substantially as though such items have been realized directly by the shareholder and without regard to whether any distribution by the Fund has been or will be received. The Fund trades securities for its own account and, as such, is generally not subject to U.S. tax on such earnings (other than certain withholding taxes). The Manger intends to conduct the business of the Fund to the maximum extent practicable so that the Fund’s activities do not constitute a U.S. trade or business. Accordingly, no provision (benefit) for U.S. federal and state income tax is reflected in the accompanying financial statements. Dividends and other revenue may be subject to withholding or similar taxes imposed by the country in which such dividends or other revenue originate. The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Taxes and associated penalty and interest amounts related to capital gains realized during the year ended February 28, 2011, if any, are reflected as part of Net realized gain (loss) in the Statement of Operations. Changes in tax liabilities related to capital gain taxes on unrealized investment gains, if any, are reflected as part of Change in net unrealized appreciation (depreciation) in the Statement of Operations. Transaction-based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes. SPV is also treated as a partnership for U.S. federal income tax purposes and is subject to the same rules as the Fund with respect to the U.S. federal taxation of partnerships.

         
10
       

 

 
GMO Special Purpose Holding Fund
(A Series of GMO Trust)

Notes to Consolidated Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 27,200     $ —     $ —     $ —      
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Distributions
Because the Fund has elected to be treated as a partnership for U.S. federal income tax purposes, it is not required to make distributions to its shareholders.
 
The Fund will distribute proceeds and other cash receipts received from its underlying investments. Distributions made by the Fund, other than distributions made in partial or complete redemption of shareholder interests in the Fund, are reported in the Fund’s financial statements as cash distributions to shareholders.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if

         
        11

 

 
GMO Special Purpose Holding Fund
(A Series of GMO Trust)

Notes to Consolidated Financial Statements — (Continued)
February 28, 2011
 
any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (Note 5).
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Litigation-Related Risk — The ultimate amount of the Fund’s recovery (through its investment in SPV) of losses on the defaulted NPF Securities and the total costs the Fund may incur with respect to its funding of litigation related to the NPF Securities is unknown at this time. Therefore, the Fund is subject to the risk that SPV may ultimately be unable to recover certain losses related to the NPF Securities.
 
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Liquidity risk is particularly pronounced for the Fund due to the nature and size of its investment in the NPF Securities (through the SPV). The Fund may be exposed (through the SPV) to the NPF Securities for an indefinite period of time and may experience a substantial loss in the event the SPV sells the NPF Securities.
 
• Market Risk — Fixed Income Securities — Typically, the value of fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.

         
12
       

 

 
GMO Special Purpose Holding Fund
(A Series of GMO Trust)

Notes to Consolidated Financial Statements — (Continued)
February 28, 2011
 
• Credit Risk — This is the risk that the issuer or guarantor of a fixed income security will be unable or unwilling to make timely principal, interest, or settlement payments or otherwise honor its obligations. This risk is particularly acute in environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions.
 
Other principal risks of an investment in the Fund include Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally) and Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations).
 
4. Derivative financial instruments
 
At February 28, 2011, the Fund held no derivative contracts.
 
5. Fees and other transactions with affiliates
 
GMO does not charge the Fund any management or service fees for its services. The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s total annual operating expenses that exceed 0.00% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust’s Chief Compliance Officer (excluding any employee benefits), brokerage commissions, securities-lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). The Fund’s contractual expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $7 and $1, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
6. Purchases and sales of securities
 
There were no purchases or sales of securities, excluding short-term investments, for the year ended February 28, 2011.

         
        13

 

 
GMO Special Purpose Holding Fund
(A Series of GMO Trust)

Notes to Consolidated Financial Statements — (Continued)
February 28, 2011
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 61.72% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund’s outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. One of the shareholders are another fund of the Trust.
 
As of February 28, 2011, 91.02% of the Fund’s shares were held by accounts for which the Manager had investment discretion.
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
 
Shares sold
    —       —  
Shares repurchased
    —       —  
                 
Net decrease
    —       —  
                 
Fund shares:
               
Beginning of period
    554,071       554,071  
                 
End of period
    554,071       554,071  
                 

         
14
       

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Special Purpose Holding Fund:
 
In our opinion, the accompanying consolidating statement of assets and liabilities, including the consolidated schedule of investments, and the related consolidating statement of operations and consolidated statement of changes in net assets and the consolidated financial highlights present fairly, in all material respects, the financial position of GMO Special Purpose Holding Fund (the “Fund”) (a series of GMO Trust) and subsidiary at February 28, 2011, the results of their operations for the year then ended, the changes in their net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
        15

 

GMO Special Purpose Holding Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
16
       

 

 
GMO Special Purpose Holding Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
1) Actual
    9.53 %   $ 1,000.00     $ 925.90     $ 45.51  
2) Hypothetical
    9.53 %   $ 1,000.00     $ 977.54     $ 46.73  
                                 
 
            * Expenses are calculated using the annualized expense ratio for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
        17

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with the
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
18        

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with the
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee;
President and
Chief Executive
Officer of the Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham,
Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005). 		    63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
        19

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
20
       

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money
Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        21

 

 
GMO Special Situations Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a private placement memorandum, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The private placement memorandum can be obtained by calling 1-617-346-7646 (collect).
 

 

GMO Special Situations Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Asset Allocation Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
The Class III shares of GMO Special Situations Fund returned +0.2% for the fiscal year ended February 28, 2011, as compared with +0.1% for the Citigroup 3 Month Treasury Bill Index. During the fiscal year the Fund was exposed to currency positions, dividend swaps, and U.S. Treasuries.
 
Long positions in the Korean won and long-dated Euro Stoxx 50 dividend swaps added to relative performance. The Fund’s short position in Japanese yen detracted from performance. The remainder of the Fund was exposed largely to investments in U.S. Treasuries, whose performance was similar to that of the Fund’s benchmark.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO Special Situations Fund Class III Shares and the Citigroup 3 Month Treasury Bill Index
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited. Performance for classes may vary due to different fees.
 
 
* Class III performance information represents Class VI performance from July 31, 2007 to August 13, 2007 and Class III performance thereafter.

 

GMO Special Situations Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary   % of Total Net Assets  
Mutual Funds
    89.2 %
Debt Obligations
    5.0  
Short-Term Investments
    3.6  
Swap Agreements
    2.8  
Common Stocks
    0.6  
Forward Currency Contracts
    (1.2 )
Other
    0.0 Ù
         
      100.0 %
         
 
Ù Rounds to 0.0%.

         
        1

 

GMO Special Situations Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
Shares /
 		           
Par Value ($)     Description   Value ($)  
            COMMON STOCKS — 0.6%        
                     
            Canada — 0.4%        
      702,723     Timberwest Forest Corp *     3,348,884  
                     
                     
            China — 0.2%        
      27,700     China Mobile Ltd Sponsored ADR     1,309,379  
                     
                     
            TOTAL COMMON STOCKS (COST $4,238,050)     4,658,263  
                     
                     
            DEBT OBLIGATIONS — 5.0%        
                     
            Convertible Debt — 0.4%        
CAD
    2,001,147     Timberwest Forest Corp., 9.00%, due 02/11/14     2,904,758  
                     
                     
            Corporate Debt — 4.6%        
      16,276,349     CIT Group, Inc., 7.00%, due 05/01/13     16,601,876  
      16,780,000     CIT Group, Inc., 7.00%, due 05/01/14     17,073,649  
                     
            Total Corporate Debt     33,675,525  
                     
                     
            TOTAL DEBT OBLIGATIONS (COST $35,117,405)     36,580,283  
                     
                     
            MUTUAL FUNDS — 89.2%        
                     
            Affiliated Issuers — 89.2%        
      26,377,972     GMO U.S. Treasury Fund     659,449,307  
                     
                     
            TOTAL MUTUAL FUNDS (COST $659,542,960)     659,449,307  
                     

         
2
  See accompanying notes to the financial statements.    

 

 
GMO Special Situations Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            SHORT-TERM INVESTMENTS — 3.6%        
                     
            Money Market Funds — 3.6%        
      26,153,371     State Street Institutional Treasury Money Market Fund-Institutional Class     26,153,371  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $26,153,371)     26,153,371  
                     
                     
            TOTAL INVESTMENTS — 98.4%
(Cost $725,051,786) 		    726,841,224  
            Other Assets and Liabilities (net) — 1.6%     12,141,961  
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 738,983,185  
                     

         
    See accompanying notes to the financial statements.   3

 

 
GMO Special Situations Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Reverse Repurchase Agreements
 
                     
Average balance outstanding
  $ (98,056,788 )
Average interest rate
    0.24 %
Maximum balance outstanding
  $ (114,905,000 )
 
Average balance outstanding was calculated based on daily face value balances outstanding during the period that the Fund has entered into reverse repurchase agreements. The Fund had no reverse repurchase agreements outstanding at the end of the period.
 
A summary of outstanding financial instruments at February 28, 2011 is as follows:
 
Forward Currency Contracts
                                     
                    Net Unrealized
Settlement
 		                  Appreciation
Date   Counterparty   Deliver/Receive   Units of Currency   Value   (Depreciation)
 
Buys †
                                   
4/26/11
    Royal Bank of Scotland PLC     KRW     179,865,270,000     $ 158,875,368     $ (777,809 )
4/20/11
    Deutsche Bank AG     SGD     104,131,800       81,900,413       634,424  
4/20/11
    Bank of America, N.A.     SGD     46,187,204       36,326,570       292,926  
4/20/11
    Brown Brothers Harriman & Co.      SGD     57,416,745       45,158,685       363,446  
                                 
                        $ 322,261,036     $ 512,987  
                                 
Sales #
                                   
4/20/11
    Barclays Bank PLC     AUD     3,375,000     $ 3,415,493     $ (59,427 )
4/20/11
    Bank of New York Mellon     AUD     3,375,022       3,415,515       (55,782 )
4/20/11
    Barclays Bank PLC     JPY     6,557,541,750       80,186,378       (1,473,837 )
4/20/11
    Bank of America, N.A.     JPY     4,549,308,000       55,629,464       (995,787 )
4/20/11
    Deutsche Bank AG     JPY     8,583,840,000       104,964,187       (2,041,063 )
4/20/11
    Bank of New York Mellon     JPY     6,537,384,000       79,939,887       (1,461,771 )
4/20/11
    Morgan Stanley Capital Services Inc.      JPY     3,292,047,450       40,255,536       (744,313 )
4/20/11
    Royal Bank of Scotland PLC     JPY     3,248,228,250       39,719,710       (737,494 )
4/20/11
    Brown Brothers Harriman & Co.      JPY     3,293,248,500       40,270,223       (735,902 )
4/20/11
    State Street Bank and Trust Company     JPY     3,245,895,000       39,691,179       (734,440 )
                                 
                        $ 487,487,572     $ (9,039,816 )
                                 
 
† Fund buys foreign currency; sells USD.
# Fund sells foreign currency; buys USD.

         
4
  See accompanying notes to the financial statements.    

 

 
GMO Special Situations Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Swap Agreements
 
Forward Starting Dividend Swaps
 
                                     
Notional
 		  Starting
 		  Expiration
 		              Market
Amount   Date   Date   Counterparty   Fund Pays   Fund Receives   Value
 
  1,987,500     EUR   12/19/2014   12/18/2015   Barclays
Bank PLC 		  25,000 EUR for every 1 dividend EURO STOXX 50 Index point decrease in the actual dividends from the Fixed Strike   25,000 EUR for every 1 dividend EURO STOXX 50 Index point increase in the actual dividends from the Fixed Strike     $1,036,414  
  2,020,000     EUR   12/18/2015   12/16/2016   Barclays
Bank PLC 		  25,000 EUR for every 1 dividend EURO STOXX 50 Index point decrease in the actual dividends from the Fixed Strike   25,000 EUR for every 1 dividend EURO STOXX 50 Index point increase in the actual dividends from the Fixed Strike     948,279  
  5,436,000     EUR   12/16/2016   12/15/2017   BNP Paribas   60,000 EUR for every 1 dividend EURO STOXX 50 Index point decrease in the actual dividends from the Fixed Strike   60,000 EUR for every 1 dividend EURO STOXX 50 Index point increase in the actual dividends from the Fixed Strike     1,550,335  
  2,065,000     EUR   12/15/2017   12/21/2018   Barclays
Bank PLC 		  25,000 EUR for every 1 dividend EURO STOXX 50 Index point decrease in the actual dividends from the Fixed Strike   25,000 EUR for every 1 dividend EURO STOXX 50 Index point increase in the actual dividends from the Fixed Strike     840,416  
  2,062,500     EUR   12/15/2017   12/21/2018   BNP Paribas   25,000 EUR for every 1 dividend EURO STOXX 50 Index point decrease in the actual dividends from the Fixed Strike   25,000 EUR for every 1 dividend EURO STOXX 50 Index point increase in the actual dividends from the Fixed Strike     843,101  

         
    See accompanying notes to the financial statements.   5

 

 
GMO Special Situations Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Forward Starting Dividend Swaps — continued
 
                                     
Notional
 		  Starting
 		  Expiration
 		              Market
Amount   Date   Date   Counterparty   Fund Pays   Fund Receives   Value
 
  1,007,000     EUR   12/15/2017   12/21/2018   BNP Paribas   10,000 EUR for every 1 dividend EURO STOXX 50 Index point decrease in the actual dividends from the Fixed Strike   10,000 EUR for every 1 dividend EURO STOXX 50 Index point increase in the actual dividends from the Fixed Strike     $141,770  
  2,072,500     EUR   12/15/2017   12/21/2018   Barclays
Bank PLC 		  25,000 EUR for every 1 dividend EURO STOXX 50 Index point decrease in the actual dividends from the Fixed Strike   25,000 EUR for every 1 dividend EURO STOXX 50 Index point increase in the actual dividends from the Fixed Strike     832,361  
  2,729,225     EUR   12/21/2018   12/20/2019   BNP Paribas   30,000 EUR for every 1 dividend EURO STOXX 50 Index point decrease in the actual dividends from the Fixed Strike   30,000 EUR for every 1 dividend EURO STOXX 50 Index point increase in the actual dividends from the Fixed Strike     366,170  
                                     
                                  $6,558,846  
                                     
Premiums to (Pay) Receive
    $       —  
         
 
Future Swaps
 
                                 
Notional
 		  Expiration
 		              Market
Amount   Date   Counterparty   Fund Pays   Fund Receives   Value
 
  4,400,000     EUR   12/18/2015   Deutsche Bank AG   Depreciation of EURO STOXX 50 December 2015 Dividend Future   Appreciation of EURO STOXX 50 December 2015 Dividend Future   $ 1,780,135  
  8,880,000     EUR   12/16/2016   Morgan Stanley & Co.
International PLC 		  Depreciation of EURO STOXX 50 December 2016 Dividend Future   Appreciation of EURO STOXX 50 December 2016 Dividend Future     3,394,677  

         
6
  See accompanying notes to the financial statements.    

 

 
GMO Special Situations Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Future Swaps — continued
 
                                 
Notional
 		  Expiration
 		              Market
Amount   Date   Counterparty   Fund Pays   Fund Receives   Value
 
  9,125,000     EUR   12/15/2017   Morgan Stanley & Co.
International PLC 		  Depreciation of EURO STOXX 50 December 2017 Dividend Future   Appreciation of EURO STOXX 50 December 2017 Dividend Future   $ 3,097,988  
  2,585,250     EUR   12/15/2017   Deutsche Bank AG   Depreciation of EURO STOXX 50 December 2017 Dividend Future   Appreciation of EURO STOXX 50 December 2017 Dividend Future     668,793  
  547,500     EUR   12/21/2018   Deutsche Bank AG   Depreciation of EURO STOXX 50 December 2018 Dividend Future   Appreciation of EURO STOXX 50 December 2018 Dividend Future     30,359  
  789,000     EUR   12/21/2018   Morgan Stanley & Co.
International PLC 		  Depreciation of EURO STOXX 50 December 2018 Dividend Future   Appreciation of EURO STOXX 50 December 2018 Dividend Future     90,042  
  275,860     EUR   12/21/2018   Morgan Stanley & Co.
International PLC 		  Depreciation of EURO STOXX 50 December 2018 Dividend Future   Appreciation of EURO STOXX 50 December 2018 Dividend Future     27,985  
  2,663,701     EUR   12/21/2018   Morgan Stanley & Co.
International PLC 		  Depreciation of EURO STOXX 50 December 2018 Dividend Future   Appreciation of EURO STOXX 50 December 2018 Dividend Future     567,986  
  904,250     EUR   12/21/2018   Morgan Stanley & Co.
International PLC 		  Depreciation of EURO STOXX 50 December 2018 Dividend Future   Appreciation of EURO STOXX 50 December 2018 Dividend Future     135,331  

         
    See accompanying notes to the financial statements.   7

 

 
GMO Special Situations Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Future Swaps — continued
 
                                 
Notional
 		  Expiration
 		              Market
Amount   Date   Counterparty   Fund Pays   Fund Receives   Value
 
  5,587,500     EUR   12/20/2019   Deutsche Bank AG   Depreciation of EURO STOXX 50 December 2019 Dividend Future   Appreciation of EURO STOXX 50 December 2019 Dividend Future   $ 1,769,786  
  3,037,500     EUR   12/20/2019   Deutsche Bank AG   Depreciation of EURO STOXX 50 December 2019 Dividend Future   Appreciation of EURO STOXX 50 December 2019 Dividend Future     548,530  
  881,250     EUR   12/20/2019   Morgan Stanley & Co.
International PLC 		  Depreciation of EURO STOXX 50 December 2019 Dividend Future   Appreciation of EURO STOXX 50 December 2019 Dividend Future     (31,049 )
  552,500     EUR   12/20/2019   Deutsche Bank AG   Depreciation of EURO STOXX 50 December 2019 Dividend Future   Appreciation of EURO STOXX 50 December 2019 Dividend Future     27,599  
  2,937,000     EUR   12/20/2019   Deutsche Bank AG   Depreciation of EURO STOXX 50 December 2019 Dividend Future   Appreciation of EURO STOXX 50 December 2019 Dividend Future     687,215  
                                 
                            $ 12,795,377  
                                 
Premiums to (Pay) Receive
  $ —  
         

         
8
  See accompanying notes to the financial statements.    

 

 
GMO Special Situations Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Interest Rate Swaps
 
                                     
Notional
 		  Expiration
 		      Receive
 		  Fixed
 		  Variable
 		  Market
Amount   Date   Counterparty   (Pay)#   Rate   Rate   Value
 
  840,000,000     JPY   10/22/2020   Citibank N.A.   (Pay)   0.97%   6 Month JPY BBA
LIBOR 		  $ 295,289  
  840,000,000     JPY   10/26/2020   Citibank N.A.   (Pay)   0.97%   6 Month JPY BBA
LIBOR 		    296,602  
  840,000,000     JPY   10/26/2020   Citibank N.A.   (Pay)   0.97%   6 Month JPY BBA
LIBOR 		    294,755  
  840,000,000     JPY   10/27/2020   Citibank N.A.
Morgan Stanley 		  (Pay)   0.99%   6 Month JPY BBA
LIBOR 		    283,374  
  2,740,000,000     JPY   11/1/2020   Capital Services
Inc. 		  (Pay)   1.04%   6 Month JPY BBA
LIBOR 		    774,637  
                                     
                                $ 1,944,657  
                                     
Premiums to (Pay) Receive
  $  —  
         
 
# Receive - Fund receives fixed rate and pays variable rate.
(Pay) - Fund pays fixed rate and receives variable rate.
 
Total Return Swaps
 
                                 
Notional
 		  Expiration
 		              Market
Amount   Date   Counterparty   Fund Pays   Fund Receives   Value
 
  30,617,585     USD   8/22/2011   BNP Paribas   MSCI Daily Total
Return Net Emerging
Markets China USD 		  3 Month
USD BBA LIBOR
-0.15% 		  $ (240,838 )
                                 
Premiums to (Pay) Receive
  $ —  
         
 
As of February 28, 2011, for futures contracts, swap agreements, written options, and reverse repurchase agreements, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
 
Notes to Schedule of Investments:
 
ADR - American Depositary Receipt
BBA - British Banks Association
LIBOR - London Interbank Offered Rate

         
    See accompanying notes to the financial statements.   9

 

 
GMO Special Situations Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
MSCI - Morgan Stanley Capital International
* Non-income producing security.
 
Currency Abbreviations:
 
AUD - Australian Dollar
CAD - Canadian Dollar
EUR - Euro
JPY - Japanese Yen
KRW - South Korean Won
SGD - Singapore Dollar
USD - United States Dollar

         
10
  See accompanying notes to the financial statements.    

 

GMO Special Situations Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $65,508,826) (Note 2)
  $ 67,391,917  
Investments in affiliated issuers, at value (cost $659,542,960) (Notes 2 and 10)
    659,449,307  
Foreign currency, at value (cost $87,193) (Note 2)
    89,565  
Dividends and interest receivable
    417,220  
Unrealized appreciation on open forward currency contracts (Note 4)
    1,290,796  
Receivable for open swap contracts (Note 4)
    21,329,929  
Receivable for expenses reimbursed by Manager (Note 5)
    38,808  
         
Total assets
    750,007,542  
         
         
Liabilities:
       
Payable for investments purchased
    65,189  
Payable for Fund shares repurchased
    347,697  
Payable to affiliate for (Note 5):
       
Management fee
    213,258  
Shareholder service fee
    33,413  
Trustees and Trust Officers or agents unaffiliated with the Manager
    1,881  
Unrealized depreciation on open forward currency contracts (Note 4)
    9,817,625  
Interest payable for open swap contracts (Note 4)
    148,411  
Payable for open swap contracts (Note 4)
    271,887  
Accrued expenses
    124,996  
         
Total liabilities
    11,024,357  
         
Net assets
  $ 738,983,185  
         
Net assets attributable to:
       
Class III shares
  $ 23,298,908  
         
Class VI shares
  $ 715,684,277  
         
Shares outstanding:
       
Class III
    846,387  
         
Class VI
    25,902,024  
         
Net asset value per share:
       
Class III
  $ 27.53  
         
Class VI
  $ 27.63  
         

         
    See accompanying notes to the financial statements.   11

 

GMO Special Situations Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Interest
  $ 3,436,302  
Dividends from affiliated issuers (Note 10)
    692,446  
Dividends (net of withholding taxes of $6,457)
    58,111  
         
Total investment income
    4,186,859  
         
Expenses:
       
Management fee (Note 5)
    2,442,924  
Shareholder service fee – Class III (Note 5)
    34,774  
Shareholder service fee – Class VI (Note 5)
    350,387  
Custodian, fund accounting agent and transfer agent fees
    111,510  
Audit and tax fees
    94,329  
Interest expense (Note 2)
    88,513  
Legal fees
    40,170  
Trustees fees and related expenses (Note 5)
    13,664  
Miscellaneous
    23,434  
         
Total expenses
    3,199,705  
Fees and expenses reimbursed by Manager (Note 5)
    (252,058 )
Expense reductions (Note 2)
    (65 )
         
Net expenses
    2,947,582  
         
Net investment income (loss)
    1,239,277  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in unaffiliated issuers
    9,903,565  
Realized gains distributions from affiliated issuers (Note 10)
    55,704  
Swap contracts
    426,981  
Foreign currency, forward contracts and foreign currency related transactions
    5,602,268  
         
Net realized gain (loss)
    15,988,518  
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in unaffiliated issuers
    159,030  
Investments in affiliated issuers
    (16 )
Swap contracts
    1,758,349  
Foreign currency, forward contracts and foreign currency related transactions
    (8,524,846 )
         
Net unrealized gain (loss)
    (6,607,483 )
         
Net realized and unrealized gain (loss)
    9,381,035  
         
Net increase (decrease) in net assets resulting from operations
  $ 10,620,312  
         

         
12
  See accompanying notes to the financial statements.    

 

GMO Special Situations Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 1,239,277     $ 4,475,304  
Net realized gain (loss)
    15,988,518       (989,540 )
Change in net unrealized appreciation (depreciation)
    (6,607,483 )     21,204,039  
                 
                 
Net increase (decrease) in net assets from operations
    10,620,312       24,689,803  
                 
Net share transactions (Note 9):
               
Class III
    5,789,457       (4,534,110 )
Class VI
    357,283,727       (1,379,981 )
                 
Increase (decrease) in net assets resulting from net share transactions
    363,073,184       (5,914,091 )
                 
                 
Total increase (decrease) in net assets
    373,693,496       18,775,712  
                 
Net assets:
               
Beginning of period
    365,289,689       346,513,977  
                 
End of period
  $ 738,983,185     $ 365,289,689  
                 

         
    See accompanying notes to the financial statements.   13

 

GMO Special Situations Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                 
    Year Ended February 28/29,
    2011   2010   2009   2008(a)
 
Net asset value, beginning of period
  $ 27.47     $ 25.47     $ 21.32     $ 20.09  
                                 
                                 
Income (loss) from investment operations:
                               
Net investment income (loss)†
    0.04       0.33       0.26       0.31  
Net realized and unrealized gain (loss)
    0.02 (b)     1.67       3.89       0.92  
                                 
                                 
Total from investment operations
    0.06       2.00       4.15       1.23  
                                 
                                 
Net asset value, end of period
  $ 27.53     $ 27.47     $ 25.47     $ 21.32  
                                 
                                 
Total Return(c)
    0.22 %     7.85 %     19.47 %     6.12 %**
                                 
Ratios/Supplemental Data:
                               
Net assets, end of period (000’s)
  $ 23,299     $ 17,332     $ 20,366     $ 88,204  
Net operating expenses to average daily net assets
    0.53 %(d)(e)     0.53 %     0.52 %     0.53 %*
Interest expense to average daily net assets
    0.01 %     0.03 %     —       —  
Total net expenses to average daily net assets
    0.54 %     0.56 %     0.52 %     0.53 %*
Net investment income (loss) to average daily net assets
    0.15 %     1.24 %     1.20 %     2.71 %*
Portfolio turnover rate
    60 %     15 %     62 %     0 %††**
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.04 %     0.04 %     0.03 %     0.05 %*
 
(a) Period from August 13, 2007 (commencement of operations) through February 29, 2008.
(b) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain (loss) on investments due to the timing of purchases and redemptions of Fund shares in relation to fluctuating market values of the investments of the Fund.
(c) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(e) The net expense ratio does not include the effect of expense reductions (Note 2).
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover rate of the Fund for the period from July 31, 2007 (commencement of operations) through February 29, 2008.
* Annualized.
** Not annualized.

         
14
  See accompanying notes to the financial statements.    

 

GMO Special Situations Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class VI share outstanding throughout each period)
 
                                 
    Year Ended February 28/29,
    2011   2010   2009   2008(a)
 
Net asset value, beginning of period
  $ 27.55     $ 25.51     $ 21.33     $ 20.00  
                                 
                                 
Income (loss) from investment operations:
                               
Net investment income (loss)†
    0.05       0.36       0.23       0.34  
Net realized and unrealized gain (loss)
    0.03 (b)     1.68       3.95       0.99  
                                 
                                 
Total from investment operations
    0.08       2.04       4.18       1.33  
                                 
                                 
Net asset value, end of period
  $ 27.63     $ 27.55     $ 25.51     $ 21.33  
                                 
                                 
Total Return(c)
    0.29 %     8.00 %     19.60 %     6.65 %**
                                 
Ratios/Supplemental Data:
                               
Net assets, end of period (000’s)
  $ 715,684     $ 347,957     $ 326,148     $ 593,131  
Net operating expenses to average daily net assets
    0.43 %(d)(e)     0.44 %     0.43 %     0.43 %*
Interest expense to average daily net assets
    0.01 %     0.03 %     —       —  
Total net expenses to average daily net assets
    0.44 %     0.47 %     0.43 %     0.43 %*
Net investment income (loss) to average daily net assets
    0.19 %     1.35 %     1.03 %     2.84 %*
Portfolio turnover rate
    60 %     15 %     62 %     0 %††**
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.04 %     0.05 %     0.03 %     0.05 %*
 
(a) Period from July 31, 2007 (commencement of operations) through February 29, 2008.
(b) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain (loss) on investments due to the timing of purchases and redemptions of Fund shares in relation to fluctuating market values of the investments of the Fund.
(c) The total returns would have been lower had certain expenses not been reimbursed during the periods shown.
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(e) The net expense ratio does not include the effect of expense reductions (Note 2).
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover rate of the Fund for the period from July 31, 2007 (commencement of operations) through February 29, 2008.
* Annualized.
** Not annualized.

         
    See accompanying notes to the financial statements.   15

 

GMO Special Situations Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO Special Situations Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The investment objectives of the Fund are capital appreciation and capital preservation. The Fund is not intended to serve as a standalone investment product and is available only for investment by other GMO Funds and other GMO asset allocation clients.
 
The Manager pursues the Fund’s investment objectives by implementing investment strategies that complement long-only investments in global equities and fixed income instruments. The Fund may have long or short exposure to foreign and U.S. equity securities (including both growth and value style equities and equities of any market capitalization), foreign and U.S. fixed income securities (including fixed income securities of any credit quality and having any maturity or duration), currencies, and, from time to time, other alternative asset classes (e.g., instruments that seek exposure to or reduce risks of market volatility). The Fund is not restricted in its exposure to any particular asset class, and at times may be substantially exposed (long or short) to a single asset class (e.g., equity securities or fixed income securities). In addition, the Fund is not restricted in its exposure (long or short) to any particular market. The Fund may have substantial exposure (long or short) to a particular country or type of country (e.g., emerging countries). The Fund could be subject to material losses from a single investment.
 
In pursuing its investment objectives, the Fund is permitted to use a wide variety of exchange-traded and over-the-counter (“OTC”) derivatives, including reverse repurchase agreements, options, futures, swap contracts, swaptions, and foreign currency derivative transactions. The Fund is not limited in the extent to which it may use derivatives or in the absolute face value of its derivative positions, and, as a result, it may be leveraged in relation to its assets. The Fund does not seek to control risk relative to a particular securities market index or benchmark. In addition, the Fund does not seek to outperform a particular securities market index or blend of market indices (i.e., the Fund does not seek “relative” return).
 
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
 
Throughout the year ended February 28, 2011, the Fund had two classes of shares outstanding: Class III and Class VI. Each class of shares bears a different shareholder service fee.

         
16
       

 

 
GMO Special Situations Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Currently, shares of the Fund are not publicly offered and are principally available for purchase by other GMO Funds and certain other accredited investors.
 
The Fund currently limits subscriptions.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the OTC market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. During the year ended February 28, 2011, the Manager has evaluated the Fund’s OTC derivatives contracts and determined that no reduction in value was warranted on account of the creditworthiness of a counterparty. See Note 4 for a further discussion on valuation of derivative financial instruments.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements.

         
        17

 

 
GMO Special Situations Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include most recent bid prices, interest rates, prepayment speeds, credit risk, yield curves and similar data.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Common Stocks
                               
Canada
  $ 3,348,884     $ —     $      —     $ 3,348,884  
China
    1,309,379       —       —       1,309,379  
                                 
TOTAL COMMON STOCKS
    4,658,263       —       —       4,658,263  
                                 
Debt Obligations
                               
Convertible Debt
    —       2,904,758       —       2,904,758  
Corporate Debt
    —       33,675,525       —       33,675,525  
                                 
TOTAL DEBT OBLIGATIONS
    —       36,580,283       —       36,580,283  
                                 

         
18
       

 

 
GMO Special Situations Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
  
  ASSET VALUATION INPUTS — continued
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Mutual Funds
  $ 659,449,307     $ —     $ —     $ 659,449,307  
Short-Term Investments
    26,153,371       —       —       26,153,371  
                                 
Total Investments
    690,260,941       36,580,283       —       726,841,224  
                                 
Derivatives *
                               
Forward Currency Contracts
                               
Foreign Currency risk
    —       1,290,796       —       1,290,796  
Swap Agreements
                               
Equity risk
    —       19,385,272       —       19,385,272  
Interest rate risk
    —       1,944,657       —       1,944,657  
                                 
Total
  $ 690,260,941     $ 59,201,008     $ —     $ 749,461,949  
                                 
 
LIABILITY VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Liabilities
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Derivatives *
                               
Forward Currency Contracts
                               
Foreign Currency risk
  $      —     $ (9,817,625 )   $      —     $ (9,817,625 )
Swap Agreements
                               
Equity risk
    —       (271,887 )     —       (271,887 )
                                 
Total
  $ —     $ (10,089,512 )   $ —     $ (10,089,512 )
                                 
 
The risks referenced above are not intended to be inclusive of all risks. Please see the Investment Risks and Derivative Financial Instruments sections below for a further discussion of risks.
 
* Because the tables above are based on market values or unrealized appreciation (depreciation) rather than the notional amounts of derivatives, the uncertainties surrounding the valuation inputs for a derivative are likely to be more significant to the Fund’s net asset value than the uncertainties surrounding inputs for a non-derivative security with the same market value.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.

         
        19

 

 
GMO Special Situations Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements.
 
The Fund held no investments or derivative financial instruments directly at either February 28, 2011 or February 28, 2010, whose fair value was categorized using Level 3 inputs.
 
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 pm. Income and expenses denominated in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.
 
Repurchase agreements
The Fund may enter into repurchase agreements. Under a repurchase agreement 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 it acquired under the repurchase agreement. The value of the securities acquired is required by contract to be marked to market daily and additional collateral is required to be transferred so that the market value is at least equal to the amount owed to the Fund by the seller. If the seller of a repurchase agreement defaults or enters into insolvency proceedings and/or the value of the securities subject to the repurchase agreement is insufficient, the Fund’s recovery of cash from the seller may be delayed and the Fund may incur a loss equal to the difference between the cash it paid and the value of the securities. The Fund had no repurchase agreements outstanding at the end of the period.
 
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at an agreed upon price and date. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which generally causes the Fund’s portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the

         
20
       

 

 
GMO Special Situations Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the event of a buyer’s bankruptcy or insolvency, the Fund’s use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund’s right to repurchase the securities. The Fund had no reverse repurchase agreements outstanding at the end of the period.
 
Inflation-indexed bonds
The Fund may invest in inflation indexed bonds. Inflation indexed bonds are fixed income securities whose principal value is adjusted periodically according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that reflects inflation in the principal value of the bond. Most other issuers pay out any inflation related accruals as part of a semiannual coupon.
 
The value of inflation indexed bonds is expected to change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates (i.e., stated interest rates) and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates (i.e. nominal interest rate minus inflation) might decline, leading to an increase in value of inflation indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation indexed bonds. There can be no assurance, however, that the value of inflation indexed bonds will be directly correlated to changes in nominal interest rates, and short term increases in inflation may lead to a decline in their value. Coupon payments received by the Fund from inflation indexed bonds are included in the Fund’s gross income for the period in which they accrue. In addition, any increase or decrease in the principal amount of an inflation indexed bond will increase or decrease taxable ordinary income to the Fund, even though principal is not paid until maturity. The Fund had no inflation-indexed bonds outstanding at the end of the period.
 
Taxes
The Fund has elected to be treated as a partnership for U.S. federal income tax purposes. As a partnership, the Fund is not itself subject to U.S. federal income tax. Instead, each shareholder is required to take into account in determining its tax liability, its distributive share of items of Fund income, gain, loss, deduction, credit, and tax preference for each taxable year substantially as though such items have been realized directly by the shareholder and without regard to whether any distribution by the Fund has been or will be received. The Fund trades securities for its own account and, as such, is generally not subject to U.S. tax on such earnings (other than certain withholding taxes). The Manger intends to conduct the business of the Fund to the maximum extent practicable so that the Fund’s activities do not constitute a U.S. trade or business. Accordingly, no provision (benefit) for U.S. federal and state income tax is reflected in the accompanying financial statements. Dividends and other revenue may be subject to withholding or similar taxes imposed by the country in which such dividends or other revenue originate. The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Taxes and associated penalty and interest

         
        21

 

 
GMO Special Situations Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
amounts related to capital gains realized during the year ended December 31, 2010, if any, are reflected as part of Net realized gain (loss) in the Statement of Operations. Changes in tax liabilities related to capital gain taxes on unrealized investment gains, if any, are reflected as part of Change in net unrealized appreciation (depreciation) in the Statement of Operations. Transaction-based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes. Effective on March 1, 2009, the Fund was required to maintain a tax year-end of December 31.
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 725,051,786     $ 2,050,654     $ (261,216 )   $ 1,789,438      
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the periods ended February 29, 2008 through December 31, 2010.
 
Distributions
Because the Fund has elected to be treated as a partnership for U.S. federal income tax purposes, it is not required to make distributions to its shareholders. It is the policy of the Fund to declare and pay distributions as determined by the Trustees (or their delegates).
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on

         
22
       

 

 
GMO Special Situations Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, 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 among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class’s operations. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (Note 5).
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Customized Investment Program Risk — Because the Fund is intended to complement the Manager’s asset allocation strategies, the risks associated with the Fund’s investments often will be far greater (and investment returns may be far more volatile) than if the Fund served as a stand-alone investment vehicle.
 
• Management and Operational Risk — The Fund runs the risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations. In addition, management risk may be particularly pronounced for the Fund because the Fund does not seek to control risk relative to a particular securities market index or benchmark.

         
        23

 

 
GMO Special Situations Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
• Derivatives Risk — The use of derivatives involves the risk that their value may not correlate with the value of the relevant underlying assets, rates or indices. Derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk. The risks of derivatives are particularly pronounced for Fund because it uses a variety of exchange-traded and over-the-counter derivatives to implement its investment program.
 
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund’s foreign currency holdings and investments denominated in foreign currencies.
 
• Leveraging Risk — The use of reverse repurchase agreements and other derivatives and securities lending may cause the Fund’s portfolio to be leveraged. The Fund is not limited in the extent to which it uses derivatives. Leverage increases the Fund’s portfolio losses when the value of its investments decline.
 
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
 
• Credit and Counterparty Risk — The Fund runs the risk that the issuer or guarantor of a fixed income security, the counterparty to an over-the-counter derivatives contract, a borrower of the Fund’s securities or the obligor of an obligation underlying an asset-backed security will be unable or unwilling to make timely principal, interest, or settlement payments or otherwise honor its obligations. This risk is particularly pronounced for the Fund because it typically uses over-the-counter derivatives, including swap contracts with longer-term maturities, and may have significant exposure to a single counterparty. The risk of counterparty default is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions.
 
• Focused Investment Risk — Focusing investments in countries, regions, sectors or companies with high positive correlations to one another creates additional risk.
 
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund’s investments. These and other risks (e.g., nationalization,

         
24
       

 

 
GMO Special Situations Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund’s investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
 
• Market Risk — Fixed Income Securities — Typically, the value of fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
 
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund’s investments.
 
Other principal risks of an investment in the Fund include Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps or other derivatives on an index, a single security or a basket of securities to gain investment exposures (e.g., by selling protection under a credit default swap). The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). For example, the Fund may use credit default swaps to take a short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.

         
        25

 

 
GMO Special Situations Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund’s exposure to the credit of an issuer through the debt instrument, but adjust the Fund’s interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed versus variable rates and shorter duration versus longer duration exposure. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral (e.g., foreign currency forwards; see “Currency Risk” above), that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a

         
26
       

 

 
GMO Special Situations Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
 
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund’s forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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.
 
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. During the year ended February 28, 2011, the Fund used forward currency contracts to adjust exposure to foreign currencies and manage against anticipated currency exchange rate changes. Forward currency contracts outstanding at the end of the period are listed in the Fund’s Schedule of Investments.

         
        27

 

 
GMO Special Situations Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. The Fund had no futures contracts outstanding at the end of the period.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.

         
28
       

 

 
GMO Special Situations Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic

         
        29

 

 
GMO Special Situations Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
Forward starting dividend swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive the changes in a dividend index point. The Fund gains exposure by either paying or receiving an amount in respect of an increase or decrease in the change of the relevant dividend index point based on a notional amount. For example, if the Fund took a long position on a dividend index swap, the Fund would receive payments if the relevant index point increased in value and would be obligated to pay if that index point decreased in value.
 
Future swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive the changes in an index. The Fund gains exposure by either paying or receiving an amount in respect of an increase or decrease in the change of the index based on a notional amount. For example, if the Fund took a long position on a future swap, the Fund would receive payments if the relevant index increase in value and would be obligated to pay if that index decreased in value.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.

         
30
       

 

 
GMO Special Situations Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that the collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the year ended February 28, 2011, the Fund used swap agreements to adjust exposure to certain securities markets, hedge some or all of the broad market exposure of the assets in which the Fund invests and manage the duration of the portfolio. Swap agreements outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of
February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Assets:
                                               
Unrealized appreciation on forward currency contracts
  $ —     $ 1,290,796     $      —     $ —     $      —     $ 1,290,796  
Unrealized appreciation on swap agreements
    1,944,657       —       —       19,385,272       —       21,329,929  
                                                 
Total
  $ 1,944,657     $ 1,290,796     $ —     $ 19,385,272     $ —     $ 22,620,725  
                                                 

         
        31

 

 
GMO Special Situations Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
  
  Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of
  February 28, 2011Ù: — continued
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
                                                 
Liabilities:
                                               
Unrealized depreciation on forward currency contracts
  $ —     $ (9,817,625 )   $ —     $ —     $ —     $ (9,817,625 )
Unrealized depreciation on swap agreements
    —       —       —       (271,887 )     —       (271,887 )
                                                 
Total
  $ —     $ (9,817,625 )   $ —     $ (271,887 )   $ —     $ (10,089,512 )
                                                 
 
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Forward currency contracts
  $ —     $ 5,945,818     $      —     $ —     $      —     $ 5,945,818  
Swap agreements
    (938,411 )     —       —       1,365,392       —       426,981  
                                                 
Total
  $ (938,411 )   $ 5,945,818     $ —     $ 1,365,392     $ —     $ 6,372,799  
                                                 
Change in Unrealized Appreciation (Depreciation) on:
                                               
Forward currency contracts
  $ —     $ (8,526,829 )   $ —     $ —     $ —     $ (8,526,829 )
Swap agreements
    (7,808,169 )     —       —       9,566,518       —       1,758,349  
                                                 
Total
  $ (7,808,169 )   $ (8,526,829 )   $ —     $ 9,566,518     $ —     $ (6,768,480 )
                                                 
 
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
 
The volume of derivative activity, based on absolute values (forward currency contracts) or notional amounts (swap agreements) outstanding at each month-end, was as follows for the year ended February 28, 2011:
 
                 
    Forward
    
    currency
   Swap
    contracts   agreements
 
Average amount outstanding
    496,212,707       203,796,391  

         
32
       

 

 
GMO Special Situations Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.37% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares and 0.055% for Class VI shares.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s total annual operating expenses that exceed 0.37% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities-lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition to the contractual expense reimbursement described above, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund’s Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Expense Reimbursement Amount. These contractual expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $13,664 and $4,336, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
             
Indirect Net Expenses
 		           
(excluding shareholder
     Indirect Shareholder
      
service fees)     Service Fees     Total Indirect Expenses
0.002%
    0.000%     0.002%
             

         
        33

 

 
GMO Special Situations Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 were as follows:
 
                 
    Purchases   Sales
 
U.S. Government securities
  $ 183,111,312     $ 326,734,640  
Investments (non-U.S. Government securities)
    473,171,481       18,996,559  
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 96.03% of the outstanding shares of the Fund were held by four shareholders, each holding more than 10% of the Fund’s outstanding shares. Three of the shareholders are other funds of the Trust.
 
As of February 28, 2011, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and all of the Fund’s shares were held by accounts for which the Manager had investment discretion.
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    680,954     $ 18,376,962       396,101     $ 10,547,554  
Shares repurchased
    (465,449 )     (12,587,505 )     (564,948 )     (15,081,664 )
                                 
Net increase (decrease)
    215,505     $ 5,789,457       (168,847 )   $ (4,534,110 )
                                 
                                 
                                 

         
34
       

 

 
GMO Special Situations Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class VI:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    16,813,107     $ 453,971,886       2,263,532     $ 61,077,132  
Shares repurchased
    (3,543,278 )     (96,688,159 )     (2,417,320 )     (62,457,113 )
                                 
Net increase (decrease)
    13,269,829     $ 357,283,727       (153,788 )   $ (1,379,981 )
                                 
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                 
    Value,
               Distributions
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   period
 
GMO U.S. Treasury Fund
  $ 234,092,480     $ 425,356,843     $      —     $ 692,446     $ 55,704     $ 659,449,307  
                                                 
Totals
  $ 234,092,480     $ 425,356,843     $ —     $ 692,446     $ 55,704     $ 659,449,307  
                                                 

         
        35

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Special Situations Fund:
 
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations, of changes in net assets, and the financial highlights present fairly, in all material respects, the financial position of GMO Special Situations Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian, brokers, and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
36
       

 

GMO Special Situations Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
        37

 

 
GMO Special Situations Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.53 %   $ 1,000.00     $ 1,035.70     $ 2.68  
2) Hypothetical
    0.53 %   $ 1,000.00     $ 1,022.17     $ 2.66  
                                 
Class VI
                               
                                 
1) Actual
    0.43 %   $ 1,000.00     $ 1,036.00     $ 2.17  
2) Hypothetical
    0.43 %   $ 1,000.00     $ 1,022.66     $ 2.16  
                                 
 
            * Expenses are calculated using each Class’s annualized expense ratio (including interest expense and indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
38
       

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with the
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
        39

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with the
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
        Length of
   Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Time
   During Past
   Complex
     Directorships
Date of Birth   Held with Trust   Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee;
President and
Chief Executive
Officer of the
Trust 		  Trustee since
March 2010;
President and
Chief Executive
Officer since
March 2009. 		  General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
40        

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since
November 2006; Assistant Treasurer, September 2004 –
November 2006. 		  Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006),
Grantham, Mayo, Van
Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        41

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money Laundering
Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
42        

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
The Class III shares of GMO Strategic Fixed Income Fund returned +4.8% for the fiscal year ended February 28, 2011, as compared with +0.5% for the J.P. Morgan U.S. 3 Month Cash Index.
 
The Fund’s investment exposure was achieved directly through swaps and futures and indirectly through its investment in underlying GMO Trust mutual funds, primarily GMO Short-Duration Collateral Fund (SDCF), GMO World Opportunity Overlay Fund (Overlay Fund) and GMO Emerging Country Debt Fund (ECDF).
 
The Fund outperformed the benchmark during the fiscal year by 4.3%. Exposures to asset-backed securities held indirectly through SDCF and Overlay Fund were the largest positive contributors for the year, followed by positive contributions from the exposure to emerging country debt via ECDF and developed markets currency selection (primarily through currency forwards and options). Developed markets interest-rate positioning (primarily through exchange-traded futures and interest-rate swaps) detracted from the Fund’s performance.
 
Spread tightening in the asset-backed securities held indirectly in SDCF and Overlay Fund contributed about 6.8% to the Fund’s performance. Despite improved spreads, both SDCF and Overlay Fund experienced credit downgrades during the fiscal year: SDCF had 55 downgraded securities, and Overlay Fund had 35, representing 11% and 10% of their respective market values from the beginning of the fiscal year. At fiscal year-end, 52% of SDCF’s portfolio was rated AAA, and 72% of Overlay Fund’s was rated AAA.
 
A small exposure to emerging country debt through investment in ECDF added value due to positive contributions from both security and country selection within ECDF.
 
In developed markets currency selection, opportunistic positions also contributed positively. Developed markets interest-rate positioning, however, contributed negatively during the year, as the Australian dollar duration overlay strategy detracted. These exposures were achieved through investments in WOOF.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO Strategic Fixed Income Fund Class III Shares and the
J.P. Morgan U.S. 3 Month Cash Index
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, please call (617) 330-7500. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited. Performance for classes may vary due to different fees.
 
 
* Class III performance information represents Class VI performance from May 31, 2006 to July 13, 2006 and Class III performance thereafter.
 
** J.P. Morgan U.S. 3 Month Cash Index + represents the Barclays Capital U.S. Treasury 1-3 Year Index prior to September 29, 2006 and the J.P. Morgan U.S. 3 Month Cash Index thereafter.

 

GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary*   % of Total Net Assets  
Debt Obligations
    73.6 %
Short-Term Investments
    29.9  
Options Purchased
    0.6  
Loan Participations
    0.2  
Loan Assignments
    0.1  
Rights and Warrants
    0.0  
Promissory Notes
    0.0  
Written Options
    (0.1 )
Forward Currency Contracts
    (0.1 )
Futures Contracts
    (1.4 )
Reverse Repurchase Agreements
    (1.4 )
Swap Agreements
    (2.8 )
Other
    1.4  
         
      100.0 %
         
 
         
Country / Region Summary**   % of Investments  
Australia
    63.0 %
United States
    32.8  
New Zealand
    4.2  
Emerging***
    1.1  
Sweden
    0.0 ^
Euro Region****
    0.0 ^
Canada
    0.0 ^
Japan
    0.0 ^
United Kingdom
    (0.1 )
Switzerland
    (1.0 )
         
      100.0 %
         
 
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust (“underlying funds”).
** The table above incorporates aggregate indirect country exposure associated with investments in the underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative financial instruments. The table excludes exposure through certain currency linked derivatives such as forward currency contracts and currency options. The table is based on duration adjusted exposures, taking into account the market value of securities and the notional amounts of swaps and other derivative financial instruments. For example, U.S. Asset-backed securities represent a relatively small percentage due to their short duration, even though they represent a large percentage of market value (direct and indirectly). Duration is based on the Manager’s models. The greater the duration of a bond, the greater its contribution to the concentration percentage. Credit default swap exposures (both positive and

         
        1

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2011 (Unaudited)
 
negative) are factored into the duration-adjusted exposure using a reference security and applying the same methodology to that security.
*** The “Emerging” exposure is associated only with investments in the GMO Emerging Country Debt Fund, which is exposed to emerging countries primarily comprised of Russia, Argentina, Brazil, Philippines, Mexico, Venezuela, Colombia, Ukraine, Turkey, and Indonesia. Additional information about the fund’s emerging country exposure is available in the financial statements of the GMO Emerging Country Debt Fund.
**** The “Euro Region” is comprised of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.
^ Rounds to 0.0%

         
2
       

 

GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
Par Value ($) /
 		           
Shares /
 		           
Contracts /
 		           
Principal /
 		           
Notional / Amounts     Description   Value ($)  
            DEBT OBLIGATIONS — 8.4%        
                     
            United States — 8.4%        
            U.S. Government — 8.4%        
      76,953,562     U.S. Treasury Inflation Indexed Note, 2.00% , due 04/15/12 (a) (b)     80,368,377  
      50,000,000     U.S. Treasury Note, 0.38% , due 09/30/12     49,908,200  
      33,000,000     U.S. Treasury Note, 1.38% , due 01/15/13 (b)     33,453,750  
      50,000,000     U.S. Treasury Note, 1.75% , due 01/31/14 (b)     50,910,150  
                     
                  214,640,477  
                     
            Total United States     214,640,477  
                     
                     
            TOTAL DEBT OBLIGATIONS (COST $214,005,824)     214,640,477  
                     
                     
            MUTUAL FUNDS — 91.9%        
                     
            United States — 91.9%        
            Affiliated Issuers        
      8,160,326     GMO Emerging Country Debt Fund, Class IV     74,177,360  
      105,394,919     GMO Short-Duration Collateral Fund     1,093,999,261  
      25,584,634     GMO U.S. Treasury Fund     639,615,835  
      23,773,633     GMO World Opportunity Overlay Fund     539,186,004  
                     
            Total United States     2,346,978,460  
                     
                     
            TOTAL MUTUAL FUNDS (COST $2,450,170,745)     2,346,978,460  
                     
                     
            OPTIONS PURCHASED — 0.2%        
                     
            Options on Futures — 0.0%        
      3,000     Euro Dollar Futures Options Call, Expires 06/10/11, Strike 98.88     1,162,500  
                     
                     
            Options on Interest Rate Swaps — 0.2%        
NZD
    500,000,000     NZD Swaption Call, Expires 02/15/12, Strike 4.22%     2,554,980  
USD
       1,000,000,000     USD Swaption Call, Expires 01/25/12, Strike 0.90%     1,444,000  

         
    See accompanying notes to the financial statements.   3

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
Principal /
 		           
Notional /
 		           
Amounts / Shares     Description   Value ($)  
            Options on Interest Rate Swaps — continued        
USD
    500,000,000     USD Swaption Call, Expires 01/22/13, Strike 0.85%     100,000  
USD
    500,000,000     USD Swaption Call, Expires 01/23/12, Strike 0.85%     618,000  
                     
                  4,716,980  
                     
                     
            TOTAL OPTIONS PURCHASED (COST $4,696,350)     5,879,480  
                     
                     
            SHORT-TERM INVESTMENTS — 1.3%        
                     
            Money Market Funds — 0.2%        
      4,046,619     State Street Institutional Treasury Plus Money Market Fund-Institutional Class     4,046,619  
                     
                     
            U.S. Government — 1.1%        
      27,300,000     U.S. Treasury Bill, 0.22%, due 01/12/12 (b) (c)     27,248,321  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $31,287,767)     31,294,940  
                     
                     
            TOTAL INVESTMENTS — 101.8%
(Cost $2,700,160,686) 		    2,598,793,357  
            Other Assets and Liabilities (net) — (1.8%)     (45,636,254 )
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 2,553,157,103  
                     

         
4
  See accompanying notes to the financial statements.    

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
A summary of outstanding financial instruments at February 28, 2011 is as follows:
 
Futures Contracts
 
                                 
                    Net Unrealized
Number of
 		          Expiration
 		  Contract
 		  Appreciation
Contracts       Type   Date   Value   (Depreciation)
 
Buys
                               
12,845
          Australian Government Bond 10 Yr.   March 2011   $ 1,357,599,035     $ 17,745,113  
17,300
          Euro Dollar 90 Day   June 2011     4,309,213,750       8,883,159  
5,530
          Federal Funds 30 Day   March 2011     2,300,894,473       (8,392 )
                             
                    $ 7,967,707,258     $ 26,619,880  
                             
Sales
                               
17,300
          Euro Dollar 90 Day   March 2012   $ 4,287,372,500     $ (44,089,488 )
                             
 
Written Options
 
A summary of open written option contracts for the Fund at February 28, 2011 is as follows:
 
                                     
    Notional
 		  Expiration
 		              Market
    Amount   Date       Description   Premiums   Value
 
Call
    3,000     6/10/2011   USD   Euro Dollar Futures Option Call,
Strike 99.25% 		  $ (219,000 )   $ (131,250 )
Call
    500,000,000     2/15/2012   NZD   NZD Swaption Call,
Strike 3.33% 		    (281,812 )     (803,133 )
Call
    500,000,000     1/23/2012   USD   USD Swaption Call,
Strike 0.85% 		    (200,000 )     (202,500 )
                                     
                        $ (700,812 )   $ (1,136,883 )
                                     

         
    See accompanying notes to the financial statements.   5

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Swap Agreements
 
Interest Rate Swaps
 
                                     
Notional
 		  Expiration
 		      Receive
 		  Fixed
 		      Market
Amount   Date   Counterparty   (Pay)#   Rate   Variable Rate   Value
 
  100,000,000     AUD   8/25/2020   Barclays Bank PLC   Receive   5.27%   6 Month AUD Bank
Bill Rate 		  $ (5,403,403 )
  200,000,000     AUD   8/26/2020   Morgan Stanley
Capital Services Inc. 		  Receive   5.26%   6 Month AUD Bank
Bill Rate 		    (11,009,302 )
  200,000,000     AUD   8/30/2020   Morgan Stanley
Capital Services Inc. 		  Receive   5.25%   6 Month AUD Bank
Bill Rate 		    (11,168,380 )
  300,000,000     AUD   9/20/2020   Morgan Stanley
Capital Services Inc. 		  Receive   5.58%   6 Month AUD Bank
Bill Rate 		    (9,413,825 )
  200,000,000     AUD   9/22/2020   Morgan Stanley
Capital Services Inc. 		  Receive   5.65%   6 Month AUD Bank
Bill Rate 		    (5,236,031 )
  100,000,000     AUD   12/2/2020   Barclays Bank PLC   Receive   5.95%   6 Month AUD Bank
Bill Rate 		    (517,517 )
  100,000,000     AUD   12/9/2020   Credit Suisse International   Receive   6.11%   6 Month AUD Bank
Bill Rate 		    628,859  
  100,000,000     AUD   12/9/2020   Barclays Bank PLC   Receive   6.05%   6 Month AUD Bank
Bill Rate 		    140,489  
  100,000,000     NZD   7/14/2015   Barclays Bank PLC   Receive   4.87%   3 Month NZD Bank
Bill Rate 		    1,908,319  
  100,000,000     NZD   7/15/2015   Barclays Bank PLC   Receive   4.86%   3 Month NZD Bank
Bill Rate 		    1,892,448  
  100,000,000     NZD   7/15/2015   Citibank N.A.   Receive   4.85%   3 Month NZD Bank
Bill Rate 		    1,869,887  
  125,000,000     NZD   7/16/2015   Merrill Lynch
Capital Services 		  Receive   4.86%   3 Month NZD Bank
Bill Rate 		    2,380,620  
  900,000,000     USD   4/21/2013   JPMorgan Chase Bank, N.A.   (Pay)   0.99%   3 Month USD LIBOR     214,482  
  1,530,000,000     USD   5/12/2013   Merrill Lynch
Capital Services 		  (Pay)   0.87%   3 Month USD LIBOR     5,421,847  
  381,000,000     USD   4/21/2016   JPMorgan Chase Bank, N.A.   Receive   2.35%   3 Month USD LIBOR     (2,061,039 )
  630,000,000     USD   5/12/2016   Merrill Lynch
Capital Services 		  Receive   1.88%   3 Month USD LIBOR     (18,917,033 )
  843,000,000     USD   6/13/2016   JPMorgan Chase Bank, N.A.   (Pay)   2.47%   3 Month USD LIBOR     4,583,281  
  581,000,000     USD   6/13/2021   Citibank N.A.   Receive   3.58%   3 Month USD LIBOR     (4,934,771 )

         
6
  See accompanying notes to the financial statements.    

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Interest Rate Swaps — continued
 
                                     
Notional
 		  Expiration
 		      Receive
 		  Fixed
 		      Market
Amount   Date   Counterparty   (Pay)#   Rate   Variable Rate   Value
 
  465,000,000     USD   6/13/2021   JPMorgan Chase Bank, N.A.   Receive   3.57%   3 Month USD LIBOR   $ (4,248,950 )
  289,000,000     USD   6/13/2041   Citibank N.A.   (Pay)   4.20%   3 Month USD LIBOR     6,913,977  
                                     
                                $ (46,956,042 )
                                     
                            Premiums to (Pay) Receive   $ —  
                                     
 
# Receive - Fund receives fixed rate and pays variable rate.
(Pay) - Fund pays fixed rate and receives variable rate.
 
As of February 28, 2011, for forward currency contracts, futures contracts, swap agreements and written options and reverse repurchase agreements if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
 
Notes to Schedule of Investments:
USD LIBOR - London Interbank Offered Rate denominated in United States Dollars.
(a) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
(b) All or a portion of this security has been pledged to cover margin requirements on open financial futures contracts, collateral requirements on swap contracts, forward currency contracts, and written options, if any. (Note 4).
(c) Rate shown represents yield-to-maturity.
 
Currency Abbreviations:
 
AUD - Australian Dollar
NZD - New Zealand Dollar
USD - United States Dollar

         
    See accompanying notes to the financial statements.   7

 

GMO Strategic Fixed Income Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $249,989,941) (Note 2)
  $ 251,814,897  
Investments in affiliated issuers, at value (cost $2,450,170,745) (Notes 2 and 10)
    2,346,978,460  
Dividends and interest receivable
    843,767  
Due from broker (including variation margin on futures contracts) (Note 4)
    57,012,203  
Receivable for open swap contracts (Note 4)
    25,954,209  
Interest receivable for open swap contracts
    2,398,028  
Receivable for expenses reimbursed by Manager (Note 5)
    70,852  
         
Total assets
    2,685,072,416  
         
         
Liabilities:
       
Payable for investments purchased
    3,000,000  
Payable to affiliate for (Note 5):
       
Management fee
    483,210  
Shareholder service fee
    111,853  
Trustees and Trust Officers or agents unaffiliated with the Manager
    6,168  
Payable to broker on futures contracts (Note 4)
    54,106,500  
Payable for open swap contracts (Note 4)
    72,910,251  
Written options outstanding, at value (premiums $700,812) (Note 4)
    1,136,883  
Accrued expenses
    160,448  
         
Total liabilities
    131,915,313  
         
Net assets
  $ 2,553,157,103  
         
Net assets consist of:
       
Paid-in capital
  $ 2,961,869,345  
Distributions in excess of net investment income
    (30,141,374 )
Accumulated net realized loss
    (211,206,803 )
Net unrealized depreciation
    (167,364,065 )
         
    $ 2,553,157,103  
         
Net assets attributable to:
       
Class III shares
  $ 77,084,188  
         
Class VI shares
  $ 2,476,072,915  
         
Shares outstanding:
       
Class III
    5,009,106  
         
Class VI
    160,945,361  
         
Net asset value per share:
       
Class III
  $ 15.39  
         
Class VI
  $ 15.38  
         

         
8
  See accompanying notes to the financial statements.    

 

GMO Strategic Fixed Income Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends from affiliated issuers (Note 10)
  $ 27,349,416  
Interest
    832,285  
Dividends from unaffiliated issuers
    5,256  
         
Total investment income
    28,186,957  
         
Expenses:
       
Management fee (Note 5)
    5,427,956  
Shareholder service fee – Class III (Note 5)
    161,330  
Shareholder service fee – Class VI (Note 5)
    1,134,996  
Custodian, fund accounting agent and transfer agent fees
    248,855  
Legal fees
    85,335  
Audit and tax fees
    60,480  
Trustees fees and related expenses (Note 5)
    53,939  
Registration fees
    13,576  
Miscellaneous
    42,944  
         
Total expenses
    7,229,411  
Fees and expenses reimbursed by Manager (Note 5)
    (428,193 )
Expense reductions (Note 2)
    (28 )
Indirectly incurred fees waived or borne by Manager (Note 5)
    (295,818 )
Shareholder service fee waived (Note 5)
    (69,321 )
         
Net expenses
    6,436,051  
         
Net investment income (loss)
    21,750,906  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in unaffiliated issuers
    (168,954 )
Investments in affiliated issuers
    (7,782 )
Realized gains distributions from affiliated issuers (Note 10)
    10,094  
Futures contracts
    (33,047,443 )
Swap contracts
    48,669,201  
Foreign currency, forward contracts and foreign currency related transactions
    233,164  
         
Net realized gain (loss)
    15,688,280  
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in unaffiliated issuers
    1,458,105  
Investments in affiliated issuers
    127,477,521  
Futures contracts
    (17,469,608 )
Written options
    (436,071 )
Swap contracts
    (40,843,635 )
Foreign currency, forward contracts and foreign currency related transactions
    (1,135,015 )
         
Net unrealized gain (loss)
    69,051,297  
         
Net realized and unrealized gain (loss)
    84,739,577  
         
Net increase (decrease) in net assets resulting from operations
  $ 106,490,483  
         

         
    See accompanying notes to the financial statements.   9

 

GMO Strategic Fixed Income Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 21,750,906     $ 23,534,148  
Net realized gain (loss)
    15,688,280       (43,860,027 )
Change in net unrealized appreciation (depreciation)
    69,051,297       575,749,844  
                 
                 
Net increase (decrease) in net assets from operations
    106,490,483       555,423,965  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (3,957,713 )     (2,903,587 )
Class VI
    (59,707,182 )     (37,134,486 )
                 
Total distributions from net investment income
    (63,664,895 )     (40,038,073 )
                 
Return of capital
               
Class III
    (3,143,823 )     (59,096,731 )
Class VI
    (47,291,285 )     (719,865,203 )
                 
Total distributions from return of capital
    (50,435,108 )     (778,961,934 )
                 
      (114,100,003 )     (819,000,007 )
                 
                 
Net share transactions (Note 9):
               
Class III
    (62,723,736 )     (65,616,763 )
Class VI
    478,030,361       401,982  
                 
Increase (decrease) in net assets resulting from net share transactions
    415,306,625       (65,214,781 )
                 
Redemption fees (Notes 2 and 9):
               
Class III
    —       42,480  
Class VI
    —       558,877  
                 
Increase in net assets resulting from redemption fees
    —       601,357  
                 
Total increase (decrease) in net assets resulting from net share transactions and redemption fees
    415,306,625       (64,613,424 )
                 
Total increase (decrease) in net assets
    407,697,105       (328,189,466 )
                 
Net assets:
               
Beginning of period
    2,145,459,998       2,473,649,464  
                 
End of period (including distributions in excess of net investment income of $30,141,374 and $85,823,364, respectively)
  $ 2,553,157,103     $ 2,145,459,998  
                 

         
10
  See accompanying notes to the financial statements.    

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007(a)
 
Net asset value, beginning of period
  $ 15.51     $ 17.37     $ 23.60     $ 25.22     $ 25.06  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)(b)†
    0.17       0.16       0.71       0.78       0.96  
Net realized and unrealized gain (loss)
    0.54       3.78       (5.70 )     (1.37 )     0.34  
                                         
                                         
Total from investment operations
    0.71       3.94       (4.99 )     (0.59 )     1.30  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.46 )     (0.27 )     (1.24 )     (0.97 )     (1.14 )
From net realized gains
    —       —       —       (0.06 )     —  
Return of capital
    (0.37 )     (5.53 )     —       —       —  
                                         
                                         
Total distributions
    (0.83 )     (5.80 )     (1.24 )     (1.03 )     (1.14 )
                                         
                                         
Net asset value, end of period
  $ 15.39     $ 15.51     $ 17.37     $ 23.60     $ 25.22  
                                         
                                         
Total Return(c)
    4.76 %     27.97 %     (21.20 )%     (2.39 )%     5.23 %**
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 77,084     $ 139,571     $ 227,453     $ 277,879     $ 226,917  
Net expenses to average daily net assets(d)
    0.39 %(e)     0.39 %     0.40 %(e)     0.38 %(e)     0.39 %*
Net investment income (loss) to average daily net assets(b)
    1.09 %     1.01 %     3.32 %     3.12 %     5.96 %*
Portfolio turnover rate
    19 %     35 %     70 %     67 %     7 %††**
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets:
    0.04 %     0.03 %     0.03 %     0.04 %     0.06 %*
Redemption fees consisted of the following per share amounts (Note 2):†
  $ —     $ 0.00 (f)   $ 0.02     $ —     $ —  
 
(a) Period from July 13, 2006 (commencement of operations) through February 28, 2007.
(b) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(c) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(e) The net expense ratio does not include the effect of expense reductions (Note 2).
(f) Redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
†† Calculation represents portfolio turnover of the Fund for the period from May 31, 2006 through February 28, 2007.
* Annualized.
** Not annualized.

         
    See accompanying notes to the financial statements.   11

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class VI share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007(a)
 
Net asset value, beginning of period
  $ 15.49     $ 17.35     $ 23.57     $ 25.22     $ 25.00  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)(b)†
    0.15       0.17       0.68       0.97       0.76  
Net realized and unrealized gain (loss)
    0.57       3.77       (5.64 )     (1.55 )     0.61  
                                         
                                         
Total from investment operations
    0.72       3.94       (4.96 )     (0.58 )     1.37  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.46 )     (0.29 )     (1.26 )     (1.01 )     (1.15 )
From net realized gains
    —       —       —       (0.06 )     —  
Return of capital
    (0.37 )     (5.51 )     —       —       —  
                                         
                                         
Total distributions
    (0.83 )     (5.80 )     (1.26 )     (1.07 )     (1.15 )
                                         
                                         
Net asset value, end of period
  $ 15.38     $ 15.49     $ 17.35     $ 23.57     $ 25.22  
                                         
                                         
Total Return(c)
    4.84 %     28.00 %     (21.09 )%     (2.35 )%     5.52 %**
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 2,476,073     $ 2,005,889     $ 2,246,197     $ 5,121,698     $ 2,224,310  
Net expenses to average daily net assets(d)
    0.29 %(e)     0.30 %     0.30 %(e)     0.29 %(e)     0.29 %*
Net investment income (loss) to average daily net assets(b)
    1.00 %     1.05 %     3.14 %     3.87 %     4.01 %*
Portfolio turnover rate
    19 %     35 %     70 %     67 %     7 %**
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets:
    0.04 %     0.03 %     0.03 %     0.04 %     0.06 %*
Redemption fees consisted of the following per share amounts:†
    —     $ 0.00 (f)   $ 0.02       —       —  
 
(a) Period from May 31, 2006 (commencement of operations) through February 28, 2007.
(b) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(c) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes redemption fees which are borne by the shareholder.
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(e) The net expense ratio does not include the effect of expense reductions (Note 2).
(f) Redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.

         
12
  See accompanying notes to the financial statements.    

 

GMO Strategic Fixed Income Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO Strategic Fixed Income Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund seeks total return in excess of that of its benchmark, the J.P. Morgan U.S. 3 Month Cash Index. The Fund’s investment program has two principal components. One component of the investment program is designed to approximate the return of the Fund’s benchmark. The second component seeks to add value relative to that benchmark by exploiting misvaluations in global markets (e.g., global interest rates, sectors, currencies, credit and emerging country debt markets) beyond those represented in the Fund’s benchmark. As a result, the Fund’s interest rate, sector, credit and currency exposures will differ from those of its benchmark.
 
The Manager seeks to determine the relative values of the interest rate and currency markets, to determine currency and interest rate exposures, and to identify investments the Manager believes are undervalued or are likely to provide downside protection. The Manager selects investments based on an evaluation of various factors including, but not limited to, fundamental factors such as inflation and current account positions, as well as price-based factors such as interest and exchange rates.
 
Under normal circumstances, the Fund invests directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the “underlying funds” or derivatives) at least 80% of its assets in fixed income securities. The term “fixed income security” refers to any fixed income security, which includes (i) obligations of an issuer to make payments of principal and/or interest on future dates and (ii) synthetic debt instruments created by the Manager by using derivatives (e.g., a futures contract, swap contract, currency forward or option).
 
The Fund may implement its investment program by investing in or holding: exchange-traded and over-the-counter (“OTC”) derivatives, including without limitation, futures contracts, currency options, interest rate options, currency forwards, reverse repurchase agreements, credit default swaps, and other swap contracts; bonds denominated in various currencies, including foreign and U.S. government securities, asset-backed securities issued by foreign governments and U.S. government agencies (including securities neither guaranteed nor insured by the U.S. government), corporate bonds, and mortgage-backed and other asset-backed securities issued by private issuers; shares of GMO Short-Duration Collateral Fund (“SDCF”) (a fund that invests primarily in asset-backed securities); shares of GMO World Opportunity Overlay Fund (“Overlay Fund”) (to attempt to exploit misvaluations in world interest rates, currencies and credit markets); shares of GMO Emerging Country Debt Fund (“ECDF”) (to gain exposure to emerging country

         
        13

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
debt markets); shares of GMO High Quality Short-Duration Bond Fund (to seek to generate a return in excess of that of the J.P. Morgan U.S. 3 Month Cash Index by investing in a wide variety of high quality U.S. and foreign debt investments); shares of GMO Debt Opportunities Fund (to seek to generate a positive return by investing in a wide variety of U.S. and foreign debt investments without regard to the credit quality of the investment); and shares of GMO U.S. Treasury Fund (for liquidity management purposes). In addition, the Fund may invest in unaffiliated money market funds.
 
Historically, the Fund has used derivatives and investments in other GMO Funds as the principal means to gain investment exposure. As a result, the Fund has substantial holdings of SDCF (a fund that invests primarily in asset-backed securities) and Overlay Fund (a fund that invests in asset-backed securities and uses derivatives to attempt to exploit misvaluations in world interest rates, currencies and credit markets). Because of the deterioration in credit markets that became acute in 2008, the Fund, including through its investment in SDCF and Overlay Fund, currently has and may continue to have material exposure to below investment grade securities. This is in addition to the Fund’s below investment grade emerging country debt investments. The Fund is not limited in its use of derivatives or in the absolute face value of its derivatives positions, and, as a result, the Fund may be leveraged in relation to its assets.
 
The Manager does not seek to maintain a specified interest rate duration for the Fund, and the Fund’s interest rate duration will change depending on the Fund’s investments and the Manager’s current outlook on different sectors of the bond market. The Fund, if deemed prudent by the Manager, will take temporary defensive measures until the Manager has determined that normal conditions have returned or that it is otherwise prudent to resume investing in accordance with the Fund’s normal investment strategies. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
 
The Fund is not intended to serve as a standalone investment product and is available for investment only by other GMO Funds and other GMO asset allocation clients.
 
As of February 28, 2011, the Fund had two classes of shares outstanding: Class III and Class VI. Each class of shares bears a different shareholder service fee.
 
The financial statements of the series of the underlying funds should be read in conjunction with the Fund’s financial statements. These financial statements are available, without charge, upon request by calling (617) 346-7646 (collect). As of February 28, 2011, shares of Overlay Fund and SDCF were not publicly available for direct purchase.
 
The Fund currently limits subscriptions.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in

         
14
       

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the OTC market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of February 28, 2011, the total value of securities held indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 1.1% of net assets. The underlying funds classify such securities (as defined below) as Level 3. During the year ended February 28, 2011, the Manager has evaluated the Fund’s OTC derivatives contracts and determined that no reduction in value was warranted on account of the creditworthiness of a counterparty. See Note 4 for a further discussion on valuation of derivative financial instruments.
 
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. Although alternative prices are available for securities held by the Fund and the underlying funds, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by the Fund and the underlying funds. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fund and the underlying funds. As of February 28, 2011, the total value of securities held directly and indirectly for which no alternative pricing source was available represented 5.9% of the net assets of the Fund.

         
        15

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include most recent quoted bid prices, interest rates, prepayment speeds, credit risk, yield curves and similar data.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant.

         
16
       

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Debt Obligations
                               
U.S. Government
  $ 134,272,100     $ 80,368,377     $      —     $ 214,640,477  
                                 
TOTAL DEBT OBLIGATIONS
    134,272,100       80,368,377       —       214,640,477  
                                 
Mutual Funds
    2,346,978,460       —       —       2,346,978,460  
Options Purchased
    —       5,879,480       —       5,879,480  
Short-Term Investments
    31,294,940       —       —       31,294,940  
                                 
Total Investments
    2,512,545,500       86,247,857       —       2,598,793,357  
                                 
Derivatives *
                               
Futures Contracts
Interest Rate risk
    26,628,272       —       —       26,628,272  
Swap Agreements
Interest Rate risk
    —       25,954,209       —       25,954,209  
                                 
Total
  $ 2,539,173,772     $ 112,202,066     $ —     $ 2,651,375,838  
                                 
 
LIABILITY VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Liabilities
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Derivatives *
                               
Written Options
Interest Rate Risk
  $      —     $ (1,136,883 )   $      —     $ (1,136,883 )
Futures Contracts
Interest Rate Risk
    (44,097,880 )     —       —       (44,097,880 )
Swap Agreements
Interest Rate Risk
    —       (72,910,251 )     —       (72,910,251 )
                                 
Total
  $ (44,097,880 )   $ (74,047,134 )   $ —     $ (118,145,014 )
                                 

         
        17

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The risks referenced above are not intended to be inclusive of all risks. Please see the Investment Risks and Derivative Financial Instruments sections below for a further discussion of risks.
 
*Because the tables above are based on market values or unrealized appreciation (depreciation) rather than the notional amounts of derivatives, the uncertainties surrounding the valuation inputs for a derivative are likely to be more significant to the Fund’s net asset value than the uncertainties surrounding inputs for a non-derivative security with the same market value.
 
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements. The aggregate net values of the Fund’s indirect investments in securities and derivative financial instruments using Level 3 inputs were 38.4% and 0.0% of total net assets, respectively.
 
The Fund held no investments or other financial instruments directly at either February 28, 2011 or February 28, 2010, whose fair value was categorized using Level 3 inputs.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 pm. Income and expenses denominated in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.
 
Repurchase agreements
The Fund may enter into repurchase agreements. Under a repurchase agreement 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 it acquired under the repurchase agreement. The value of the securities acquired is required by contract to be marked to market daily and additional collateral is required to be transferred so that the market value is at least equal to the amount owed to the Fund by the seller. If the seller of a repurchase agreement defaults or enters into insolvency proceedings and/or the value of the securities subject to the repurchase agreement is insufficient, the Fund’s recovery of cash from the seller may be delayed and the Fund may incur a loss equal to the difference between the cash it paid and the value of the securities. The Fund had no repurchase agreements outstanding at the end of the period.

         
18
       

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at an agreed upon price and date. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which generally causes the Fund’s portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the event of a buyer’s bankruptcy or insolvency, the Fund’s use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund’s right to repurchase the securities. The Fund had no reverse repurchase agreements outstanding at the end of the period.
 
Inflation-indexed bonds
The Fund may invest in inflation indexed bonds. Inflation indexed bonds are fixed income securities whose principal value is adjusted periodically according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that reflects inflation in the principal value of the bond. Most other issuers pay out any inflation related accruals as part of a semiannual coupon.
 
The value of inflation indexed bonds is expected to change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates (i.e., stated interest rates) and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates (i.e. nominal interest rate minus inflation) might decline, leading to an increase in value of inflation indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation indexed bonds. There can be no assurance, however, that the value of inflation indexed bonds will be directly correlated to changes in nominal interest rates, and short term increases in inflation may lead to a decline in their value. Coupon payments received by the Fund from inflation indexed bonds are included in the Fund’s gross income for the period in which they accrue. In addition, any increase or decrease in the principal amount of an inflation indexed bond will increase or decrease taxable ordinary income to the Fund, even though principal is not paid until maturity. Inflation-indexed bonds outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend

         
        19

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
income are generally withheld in accordance with the applicable country’s tax treaty with the United States. The foreign withholding rates applicable to a Fund’s investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Taxes related to capital gains realized during the year ended February 28, 2011, if any, are reflected as part of Net realized gain (loss) in the Statement of Operations. Changes in tax liabilities related to capital gain taxes on unrealized investment gains, if any, are reflected as part of Change in net unrealized appreciation (depreciation) in the Statement of Operations. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards, derivative contract transactions, partnership interest tax allocations, losses on wash sale transactions, post-October currency losses, distribution character reclassifications and foreign currency transactions.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 63,664,895     $ 40,038,073  
Return of capital
    50,435,108       778,961,934  
                 
Total distributions
  $ 114,100,003     $ 819,000,007  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.

         
20
       

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, certain tax attributes consisted of the following:
 
         
Tax Attributes:
       
Capital loss carryforwards
  $ (224,699,415 )
Post-October currency loss deferral
  $ (30,191,877 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 28, 2017
  $ (101,247,961 )
February 28, 2018
    (123,451,454 )
         
Total
  $ (224,699,415 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 2,721,375,540     $ 2,826,155     $ (125,408,338 )   $ (122,582,183 )    
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant

         
        21

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, 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 among the classes of shares of the Fund based on the relative net assets of each class. Shareholder Service Fees, which are directly attributable to a class of shares, are charged to that class’s operations. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (Note 5).
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
Purchases and redemptions of Fund shares
Purchase premiums and redemption fees are paid to and retained by the Fund (and are allocated pro rata among the classes) to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. Such fees are recorded as a component of the Fund’s net share transactions. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of the Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund’s shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund’s shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder’s

         
22
       

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of the Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions the day after those orders are received by the broker or agent.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Fixed Income Securities — Typically, the value of the Fund’s fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
 
• Credit and Counterparty Risk — The Fund runs the risk that the issuer or guarantor of a fixed income security, the counterparty to an over-the-counter derivatives contract, a borrower of the Fund’s securities or the obligor of an obligation underlying an asset-backed security will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations. This risk is particularly pronounced for the Fund because it typically uses over-the-counter derivatives, including swap contracts with longer-term maturities, and may have significant exposure to a single counterparty. The risk of counterparty default is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions.
 
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
 
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in underlying funds, including the risk that the underlying funds in which it invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments.

         
        23

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Other principal risks of an investment in the Fund include Foreign Investment Risk (risk that the market prices of foreign securities will fluctuate more rapidly and to a greater extent than those of U.S. securities); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities lending); Currency Risk (risk that fluctuations in exchange rates will adversely affect the value of the Fund’s foreign currency holdings and investments denominated in foreign currencies); Focused Investment Risk (increased risk from the Fund’s focus on investments in countries, regions, sectors or companies with high positive correlations to one another); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
 
The most significant market risk for Funds investing in fixed income securities is that the securities in which they invest experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund because it invests in asset-backed securities. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as “collateralized debt obligations” or “collateralized loan obligations”) and by the fees earned by service providers. Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. Many asset-backed securities owned (directly or indirectly) by the Fund that were once rated investment grade are now rated below investment grade as of the date of this report.
 
The existence of insurance on an asset-backed security does not guarantee that principal and/or interest will be paid because the insurer could default on its obligations. In recent years, a significant number of asset-backed security insurers have defaulted on their obligations.

         
24
       

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.
 
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and a Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.
 
The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution’s business may have a material impact on multiple investments.
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps or other derivatives on an index, a single security or a basket of securities to gain investment exposures (e.g., by selling protection under a credit default swap). The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.

         
        25

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). For example, the Fund may use credit default swaps to take a short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For instance, the Manager may alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund’s exposure to the credit of an issuer through the debt instrument, but adjust the Fund’s interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed versus variable rates and shorter duration versus longer duration exposure. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral (e.g., foreign currency forwards; see “Currency Risk” above), that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a

         
26
       

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
 
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund’s forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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.
 
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the

         
        27

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
counterparty will be unable or unwilling to meet the terms of the contracts. The Fund had no forward currency contracts outstanding at the end of the period.
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. During the year ended February 28, 2011, the Fund used futures contracts to adjust interest-rate exposure and enhance the diversity and liquidity of the portfolio. Futures contracts outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. During the year ended February 28, 2011, the Fund used purchased option contracts to adjust interest rate exposure. Option contracts purchased by the Fund and outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the

         
28
       

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. During the year ended February 28, 2011, the Fund used written option contracts to adjust interest rate exposure. Written options outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
For the year ended February 28, 2011, investment activity in options contracts written by the Fund was as follows:
 
                                                 
    Puts   Calls
    Principal
   Number
       Principal
   Number
    
    Amount
   of Futures
       Amount
   of Futures
    
    of Contracts   Contracts   Premiums   of Contracts   Contracts   Premiums
 
Outstanding, beginning of year
         —            —     $      —       —       —     $ —  
Options written
    —       —       —       (1,000,000,000 )     (43,000 )     (11,120,812 )
Options exercised
    —       —       —       —       40,000       10,420,000  
Options expired
    —       —       —       —       —       —  
Options sold
    —       —       —       —       —       —  
                                                 
Outstanding, end of year
    —       —     $ —       (1,000,000,000 )     (3,000 )   $ (700,812 )
                                                 
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance

         
        29

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the

         
30
       

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the year ended February 28, 2011, the Fund used swap agreements to adjust interest rate exposure and adjust its exposure to certain markets. Swap agreements outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:

         
        31

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of February 28, 2011Ù:
 
                                                 
    Interest rate
 		  Foreign currency
 		  Credit
 		  Equity
 		  Other
 		   
    contracts   contracts   contracts   contracts   contracts   Total
 
Assets:
                                               
Investments, at value (purchased options)
  $ 5,879,480     $      —     $      —     $      —     $      —     $ 5,879,480  
Unrealized appreciation on futures contracts *
    26,628,272       —       —       —       —       26,628,272  
Unrealized appreciation on swap agreements
    25,954,209       —       —       —       —       25,954,209  
                                                 
Total
  $ 58,461,961     $ —     $ —     $ —     $ —     $ 58,461,961  
                                                 
Liabilities:
                                               
Written options outstanding
  $ (1,136,883 )   $ —     $ —     $ —     $ —     $ (1,136,883 )
Unrealized depreciation on futures contracts *
    (44,097,880 )     —       —       —       —       (44,097,880 )
Unrealized depreciation on swap agreements
    (72,910,251 )     —       —       —       —       (72,910,251 )
                                                 
Total
  $ (118,145,014 )   $ —     $ —     $ —     $ —     $ (118,145,014 )
                                                 
 
            * The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.
 
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended February 28, 2011Ù:
 
                                                 
    Interest rate
 		  Foreign currency
 		  Credit
 		  Equity
 		  Other
 		   
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Investments (purchased options)
  $ (424,500 )   $      —     $      —     $      —     $      —     $ (424,500 )
Written options
    —       —       —       —       —       —  
Futures contracts
    (33,047,443 )     —       —       —       —       (33,047,443 )
Swap contracts
    48,669,201       —       —       —       —       48,669,201  
                                                 
Total
  $ 15,197,258     $ —     $ —     $ —     $ —     $ 15,197,258  
                                                 
Change in Unrealized Appreciation
(Depreciation) on:
                                               
Investments (purchased options)
  $ 1,183,130     $ —     $ —     $ —     $ —     $ 1,183,130  
Written options
    (436,071 )     —       —       —       —       (436,071 )
Futures contracts
    (17,469,608 )     —       —       —       —       (17,469,608 )
Swap contracts
    (40,843,635 )     —       —       —       —       (40,843,635 )
                                                 
Total
  $ (57,566,184 )   $ —     $ —     $ —     $ —     $ (57,566,184 )
                                                 

         
32
       

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
 
The volume of derivative activity, based on absolute values (futures contracts), principal amounts (options) or notional amounts (swap agreements) outstanding at each month-end, was as follows for the year ended February 28, 2011:
 
                         
    Futures contracts   Swap agreements   Options
 
Average amount outstanding
  $ 8,051,329,452     $ 4,292,797,653     $ 565,195,815  
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.25% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares and 0.055% for Class VI shares. The Manager has contractually agreed through at least June 30, 2011 to waive the Fund’s shareholder service fee to the extent that the aggregate of any direct and indirect shareholder service fees borne by a class of shares of the Fund exceeds 0.15% for Class III shares and 0.055% for Class VI shares; provided, however, that the amount of this waiver will not exceed the respective Class’s shareholder service fee.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.25% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in other GMO Funds (excluding those Funds’ Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund’s Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.

         
        33

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $53,939 and $15,395, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
                   
Indirect Net
 		                 
Expenses
                  
(excluding
                  
shareholder service
     Indirect
            
fees and interest
     Shareholder
     Indirect Interest
     Total Indirect
expense)     Service Fees     Expense     Expenses
0.017%
    0.003%     0.014%     0.034%
                   
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 were as follows:
 
                 
    Purchases   Sales
 
U.S. Government securities
  $ 181,328,222     $ 79,317,099  
Investments (non-U.S. Government securities)
    1,055,150,126       322,870,000  
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 83.14% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund’s outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. Two of the shareholders are other funds of the Trust.

         
34
       

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and 99.31% of the Fund’s shares were held by accounts for which the Manager had investment discretion.
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    867,372     $ 13,365,511       3,466,715     $ 53,825,069  
Shares issued to shareholders in reinvestment of distributions
    —       —       —       —  
Shares repurchased
    (4,858,048 )     (76,089,247 )     (7,561,300 )     (119,441,832 )
Redemption fees
    —       —       —       42,480  
                                 
Net increase (decrease)
    (3,990,676 )   $ (62,723,736 )     (4,094,585 )   $ (65,574,283 )
                                 
                                 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class VI:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    42,267,853     $ 643,193,980       5,893,661     $ 93,069,578  
Shares issued to shareholders in reinvestment of distributions
    —       —       —       —  
Shares repurchased
    (10,805,287 )     (165,163,619 )     (5,884,990 )     (92,667,596 )
Redemption fees
    —       —       —       558,877  
                                 
Net increase (decrease)
    31,462,566     $ 478,030,361       8,671     $ 960,859  
                                 

         
        35

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                         
    Value,
               Distributions
   Return
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   of
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   Capital   period
 
GMO Emerging Country Debt Fund, Class IV
  $ 62,656,452     $ 7,000,000     $ —     $ 8,987,169     $ —     $ —     $ 74,177,360  
GMO Short-Duration Collateral Fund
    1,450,953,671       98,500,000       —       18,094,472       —       545,596,227       1,093,999,261  
GMO U.S. Treasury Fund
    17,957,159       931,005,276       309,346,000       267,775       10,094       —       639,615,835  
GMO World Opportunity Overlay Fund
    506,378,390       —       —       —       —       —       539,186,004  
                                                         
Totals
  $ 2,037,945,672     $ 1,036,505,276     $ 309,346,000     $ 27,349,416     $ 10,094     $ 545,596,227     $ 2,346,978,460  
                                                         

         
36
       

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Strategic Fixed Income Fund:
 
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 Strategic Fixed Income Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian, brokers, and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
        37

 

GMO Strategic Fixed Income Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including redemption fees; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
38
       

 

 
GMO Strategic Fixed Income Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.42 %   $ 1,000.00     $ 974.70     $ 2.06  
2) Hypothetical
    0.42 %   $ 1,000.00     $ 1,022.71     $ 2.11  
                                 
Class VI
                               
                                 
1) Actual
    0.33 %   $ 1,000.00     $ 974.70     $ 1.62  
2) Hypothetical
    0.33 %   $ 1,000.00     $ 1,023.16     $ 1.66  
                                 
 
            * Expenses are calculated using each Class’s annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
        39

 

GMO Strategic Fixed Income Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
The Fund hereby designates as qualified interest income with respect to its taxable year ended February 28, 2011, $10,753,491 or if determined to be different, the qualified interest income of such year.
 
Of the ordinary income distributions made by the Fund during the fiscal year ended February 28, 2011, 7.73% is derived from investments in U.S. Government and Agency Obligations. All or a portion of the distributions from this income may be exempt from taxation at the state level. Consult your tax advisor for state specific information.

         
40
       

 

GMO Strategic Fixed Income Fund
(A Series of GMO Trust)


Note Concerning Distributions (Unaudited)
 
For the fiscal year ending February 28, 2011, the Fund previously reported estimated sources of any dividends, short-term capital gains, long-term capital gains and return of capital distributions paid on a per share basis. Pursuant to Rule 19a-1(e) of the Investment Company Act of 1940, the table below serves as a correction of such estimates on a per share basis. The Statement of Changes in Net Assets includes the corrected amounts on a dollar basis.
 
                                             
                Dividend
   Net
   Net
    
                Paid from
   Short-Term
   Long-Term
    
                Current
   Capital
   Capital
    
                and/or
   Gains
   Gains
    
                Prior Years
   From Sale of
   From Sale of
   Distribution
                Accumulated
   Securities &
   Securities &
   from
    Record
           Undistributed
   Other
   Other
   Return of
Class   Date   Ex-Date   Payable Date   Net Income*   PropertyÙ   PropertyÙ   Capital
 
III
  March 2, 2010   March 3, 2010   March 4, 2010   $ 0.13571656     $ 0.00000000     $ 0.00000000     $ 0.10756155  
III
  April 1, 2010   April 5, 2010   April 6, 2010   $ 0.32406976     $ 0.00000000     $ 0.00000000     $ 0.25764957  
VI
  March 2, 2010   March 3, 2010   March 4, 2010   $ 0.13579550     $ 0.00000000     $ 0.00000000     $ 0.10756155  
VI
  April 1, 2010   April 5, 2010   April 6, 2010   $ 0.32534615     $ 0.00000000     $ 0.00000000     $ 0.25764957  
 
Notes:
 
            * Net investment income may include amounts derived from dividends, interest, net foreign currency gains, net amounts from transacting in certain derivative contracts, and fiscal year capital gains recognized as ordinary income.
 
            Ù Short-term and long-term capital gains may include amounts derived from the sale of securities/other property and net amounts from transacting in certain derivative contracts.

         
        41

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with
   Length of
   During Past
   Complex
     Directorships
Date of Birth   the Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
42        

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with
   Length of
   During Past
   Complex
     Directorships
Date of Birth   the Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee;
President and
Chief Executive
Officer of the Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
        43

 

Other Officers:
 
             
            Principal
            Occupation(s)
Name and
   Position(s)
   Length of
   During Past
Date of Birth   Held with Trust   Time Served   Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004  – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
44        

 

Other Officers: — (Continued)
 
             
            Principal
            Occupation(s)
Name and
   Position(s)
   Length of
   During Past
Date of Birth   Held with Trust   Time Served   Five Years3
 
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        45

 

 
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Asset Allocation Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
GMO Strategic Opportunities Allocation Fund returned +14.0% for the fiscal year ended February 28, 2011, as compared with +17.7% for the Fund’s benchmark, the GMO Strategic Opportunities Allocation Index (75% MSCI World Index and 25% Barclays Capital U.S. Aggregate Index).
 
Underlying fund implementation accounted for the majority of the underperformance, detracting 3.5%, as GMO Quality Fund, GMO Alpha Only Fund, and GMO Flexible Equities Fund all underperformed their respective benchmarks.
 
Asset allocation detracted 0.2% from relative performance.
 
Because some of the securities and instruments held directly or indirectly by the Fund had positive fair value adjustments during the fiscal year (and the performance of indices are not fair valued), the Fund’s absolute and relative performance is better than it otherwise would have been.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice. References to specific securities are not recommendations of such securities and may not be representative of any GMO portfolio’s current or future investments.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO Strategic Opportunities Allocation Fund Class III Shares
and the GMO Strategic Opportunities Allocation Index
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited.
 
 
* The GMO Strategic Opportunities Allocation Index is a composite benchmark computed by GMO and comprised of 75% MSCI World Index and 25% Barclays Capital U.S. Aggregate Index.
MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.

 

GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary*   % of Total Net Assets  
Common Stocks
    78.8 %
Debt Obligations
    10.4  
Short-Term Investments
    10.0  
Cash and Cash Equivalents
    3.4  
Preferred Stocks
    0.5  
Investment Funds
    0.2  
Loan Participations
    0.1  
Options Purchased
    0.1  
Loan Assignments
    0.0 Ù
Rights and Warrants
    0.0 Ù
Promissory Notes
    0.0 Ù
Written Options
    (0.0 )Ù
Forward Currency Contracts
    (0.1 )
Reverse Repurchase Agreements
    (0.3 )
Swap Agreements
    (1.0 )
Futures Contracts
    (3.1 )
Other
    1.0  
         
      100.0 %
         
 
         
Country / Region Summary**   % of Investments  
United States
    41.6 %
Japan
    11.4  
United Kingdom
    10.3  
Australia
    5.6  
Emerging***
    5.2  
France
    4.9  
Switzerland
    4.9  
Germany
    3.6  
Italy
    2.0  
Sweden
    2.0  
Singapore
    1.4  
Netherlands
    1.1  
Denmark
    1.0  
Canada
    0.9  
Hong Kong
    0.9  
Belgium
    0.7  
Spain
    0.7  
Finland
    0.5  
New Zealand
    0.4  

         
        1

 

 
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2011 (Unaudited)
 
         
Country / Region Summary**   % of Investments  
Austria
    0.2 %
Greece
    0.2  
Ireland
    0.2  
Norway
    0.2  
Israel
    0.1  
Portugal
    0.0 Ù
         
      100.0 %
         
 
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust (“underlying funds”).
** The table above shows indirect country exposure associated with investments in the underlying funds except for GMO Alpha Only Fund and GMO Special Situations Fund. The table excludes short-term investments. The table includes exposure through the use of derivative financial instruments. The table excludes exposure through forward currency contracts.
*** The “Emerging” exposure is comprised of: Argentina, Brazil, Chile, China, Colombia, Congo, Czech Republic, Dominican Republic, Egypt, Hungary, India, Indonesia, Malaysia, Mexico, Philippines, Poland, Russia, South Africa, South Korea, Taiwan, Thailand, Turkey, Ukraine and Venezuela.
Ù Rounds to 0.00%.

         
2
       

 

GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
Shares /
 		           
Par Value ($)     Description   Value ($)  
            MUTUAL FUNDS — 98.8%        
                     
            Affiliated Issuers — 98.8%        
      3,257,979     GMO Alpha Only Fund, Class IV     76,562,509  
      762,124     GMO Asset Allocation Bond Fund, Class VI     19,060,719  
      6,170,977     GMO Domestic Bond Fund, Class VI     28,263,076  
      1,165,088     GMO Emerging Country Debt Fund, Class IV     10,590,652  
      4,927,944     GMO Emerging Markets Fund, Class VI     71,011,675  
      1,570,523     GMO Flexible Equities Fund, Class VI     30,813,653  
      13,411,672     GMO International Growth Equity Fund, Class IV     320,270,734  
      13,750,423     GMO International Intrinsic Value Fund, Class IV     320,384,848  
      27,819,733     GMO Quality Fund, Class VI     579,206,834  
      3,268,975     GMO Special Situations Fund, Class VI     90,321,776  
      8,005,863     GMO Strategic Fixed Income Fund, Class VI     123,130,167  
      4,403,746     GMO U.S. Core Equity Fund, Class VI     52,712,842  
      384,516     GMO World Opportunity Overlay Fund     8,720,829  
                     
                     
            TOTAL MUTUAL FUNDS (COST $1,471,672,045)     1,731,050,314  
                     
                     
            DEBT OBLIGATIONS — 1.2%        
                     
            Asset-Backed Securities — 1.2%        
            Auto Financing — 0.1%        
      600,000     Capital Auto Receivable Asset Trust, Series 08-1, Class A4B, 1 mo. LIBOR + 1.35%, 1.62%, due 07/15/14     605,436  
      500,000     Daimler Chrysler Auto Trust, Series 08-B, Class A4B, 1 mo. LIBOR + 1.85%, 2.11%, due 11/10/14     505,595  
      700,000     Ford Credit Floorplan Master Owner Trust, Series 06-4, Class A, 1 mo. LIBOR + .25%, 0.52%, due 06/15/13     696,949  
                     
            Total Auto Financing     1,807,980  
                     
                     
            Business Loans — 0.1%        
      904,294     Bayview Commercial Asset Trust, Series 05-4A, Class A2, 144A, 1 mo. LIBOR + .39%, 0.65%, due 01/25/36     705,349  
      331,016     GE Business Loan Trust, Series 04-1, Class A, 144A, 1 mo. LIBOR + .29%, 0.56%, due 05/15/32     302,880  

         
    See accompanying notes to the financial statements.   3

 

 
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            Business Loans — continued        
      598,346     Lehman Brothers Small Balance Commercial, Series 05-2A, Class 1A, 144A, 1 mo. LIBOR + .25%, 0.51%, due 09/25/30     490,644  
                     
            Total Business Loans     1,498,873  
                     
                     
            CMBS — 0.1%        
      600,000     Commercial Mortgage Pass-Through Certificates, Series 06-FL12, Class AJ, 144A, 1 mo. LIBOR + .13%, 0.40%, due 12/15/20     528,000  
      200,725     GE Capital Commercial Mortgage Corp., Series 05-C4, Class A2, 5.31%, due 11/10/45     200,725  
      600,000     GS Mortgage Securities Corp., Series 07-EOP, Class A2, 144A, 1 mo. LIBOR + .57%, 1.32%, due 03/06/20     590,280  
      514,880     J.P. Morgan Chase Commercial Mortgage Securities Corp., Series 06-LDP7, Class A2, 5.85%, due 04/15/45     518,381  
      335,388     Merrill Lynch Mortgage Trust, Series 06-C1, Class A2, 5.62%, due 05/12/39     346,288  
      305,896     Wachovia Bank Commercial Mortgage Trust, Series 06-WL7A, Class A1, 144A, 1 mo. LIBOR + .09%, 0.36%, due 09/15/21     298,818  
                     
            Total CMBS     2,482,492  
                     
                     
            Corporate Collateralized Debt Obligations — 0.1%        
      1,100,000     Morgan Stanley ACES SPC, Series 06-13A, Class A, 144A, 3 mo. LIBOR + .29%, 0.59%, due 06/20/13     1,048,520  
                     
                     
            Credit Cards — 0.2%        
      800,000     Cabela’s Master Credit Card Trust, Series 08-4A, Class A2, 144A, 1 mo. LIBOR + 3.00%, 3.27%, due 09/15/14     811,416  
      1,000,000     Capital One Multi-Asset Execution Trust, Series 04-A7, Class A7, 3 mo. LIBOR + .15%, 0.46%, due 06/16/14     999,780  
      700,000     Charming Shoppes Master Trust, Series 07-1A, Class A1, 144A, 1 mo. LIBOR + 1.25%, 1.52%, due 09/15/17     700,000  
EUR
    600,000     Citibank Credit Card Issuance Trust, Series 04-A2, Class A, 3 mo. EUR LIBOR + .10%, 1.18%, due 05/24/13     826,836  
      100,000     MBNA Credit Card Master Note Trust, Series 04-A8, Class A8, 1 mo. LIBOR + .15%, 0.42%, due 01/15/14     100,014  
      500,000     National City Credit Card Master Trust, Series 08-3, Class A, 1 mo. LIBOR + 1.80%, 2.07%, due 05/15/13     501,875  
                     
            Total Credit Cards     3,939,921  
                     

         
4
  See accompanying notes to the financial statements.    

 

 
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
                     
            Insured Auto Financing — 0.1%        
      742,029     AmeriCredit Automobile Receivables Trust, Series 07-DF, Class A4B, FSA, 1 mo. LIBOR + .80%, 1.06%, due 06/06/14     740,552  
      427,207     Santander Drive Auto Receivables Trust, Series 07-3, Class A4B, FGIC, 1 mo. LIBOR + .65%, 0.92%, due 10/15/14     425,673  
      700,000     Triad Auto Receivables Owner Trust, Series 07-B, Class A4B, FSA, 1 mo. LIBOR + 1.20%, 1.46%, due 07/14/14     706,489  
                     
            Total Insured Auto Financing     1,872,714  
                     
                     
            Insured Other — 0.1%        
      900,000     Dominos Pizza Master Issuer LLC, Series 07-1, Class A2, 144A, MBIA, 5.26%, due 04/25/37     927,000  
                     
             
            Insured Residential Asset-Backed Securities (United States) ◊ — 0.0%
      144,072     Residential Asset Mortgage Products, Inc., Series 05-RS9, Class AI3, FGIC, 1 mo. LIBOR + .22%, 0.48%, due 11/25/35     101,242  
                     
                     
            Insured Residential Mortgage-Backed Securities (United States) — 0.0%        
      475,097     Countrywide Home Equity Loan Trust, Series 07-E, Class A, MBIA, 1 mo. LIBOR + .15%, 0.42%, due 06/15/37     310,001  
                     
                     
            Insured Time Share — 0.0%        
      225,848     Sierra Receivables Funding Co., Series 07-2A, Class A2, 144A, MBIA, 1 mo. LIBOR + 1.00%, 1.26%, due 09/20/19     213,625  
                     
                     
            Residential Asset-Backed Securities (United States) ◊ — 0.3%        
      434,804     ACE Securities Corp., Series 06-SL3, Class A1, 1 mo. LIBOR + .10%, 0.36%, due 06/25/36     73,917  
      379,965     ACE Securities Corp., Series 07-WM1, Class A2A, 1 mo. LIBOR + .07%, 0.33%, due 11/25/36     251,727  
      158,505     Argent Securities, Inc., Series 06-M2, Class A2B, 1 mo. LIBOR + .11%, 0.37%, due 09/25/36     61,025  
      198,009     Argent Securities, Inc., Series 06-W2, Class A2B, 1 mo. LIBOR + .19%, 0.45%, due 03/25/36     81,183  
      133,105     Asset Backed Funding Certificates, Series 06-OPT2, Class A3B, 1 mo. LIBOR + .11%, 0.37%, due 10/25/36     132,679  
      191,758     Asset Backed Funding Certificates, Series 07-NC1, Class A1, 144A, 1 mo. LIBOR + .22%, 0.48%, due 05/25/37     161,940  

         
    See accompanying notes to the financial statements.   5

 

 
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            Residential Asset-Backed Securities (United States) — continued        
      630,082     Bayview Financial Acquisition Trust, Series 04-B, Class A2, 144A, 1 mo. LIBOR + .65%, 1.56%, due 05/28/39     241,006  
      1,200,000     Carrington Mortgage Loan Trust, Series 07-FRE1, Class A2, 1 mo. LIBOR + .20%, 0.46%, due 02/25/37     707,520  
      20,899     Chase Funding Mortgage Loan Trust, Series 03-3, Class 2A2, 1 mo. LIBOR + .27%, 0.80%, due 04/25/33     17,868  
      1,600,000     Countrywide Asset-Backed Certificates, Series 06-BC3, Class 2A2, 1 mo. LIBOR + .14%, 0.40%, due 02/25/37     1,340,320  
      1,055,396     J.P. Morgan Mortgage Acquisition Corp., Series 06-WMC4, Class A3, 1 mo. LIBOR + .12%, 0.38%, due 12/25/36     453,082  
      341,102     Master Asset-Backed Securities Trust, Series 06-FRE2, Class A4, 1 mo. LIBOR + .15%, 0.41%, due 03/25/36     199,544  
      378,178     Morgan Stanley Home Equity Loans, Series 07-2, Class A1, 1 mo. LIBOR + .10%, 0.36%, due 04/25/37     357,378  
      378,820     Residential Asset Securities Corp., Series 05-KS12, Class A2, 1 mo. LIBOR + .25%, 0.51%, due 01/25/36     350,348  
                     
            Total Residential Asset-Backed Securities (United States)     4,429,537  
                     
                     
            Residential Mortgage-Backed Securities (Australian) — 0.0%        
      140,011     Interstar Millennium Trust, Series 05-1G, Class A, 3 mo. LIBOR + .12%, 0.70%, due 12/08/36     133,710  
      119,771     Superannuation Members Home Loans Global Fund, Series 7, Class A1, 3 mo. LIBOR + .14%, 0.58%, due 03/09/36     116,758  
      349,649     Westpac Securitization Trust, Series 07-1G, Class A2A, 3 mo. LIBOR + .05%, 0.36%, due 05/21/38     339,090  
                     
            Total Residential Mortgage-Backed Securities (Australian)     589,558  
                     
                     
            Residential Mortgage-Backed Securities (European) — 0.1%        
      497,720     Brunel Residential Mortgages, Series 07-1A, Class A4C, 144A, 3 mo. LIBOR + .10%, 0.40%, due 01/13/39     449,093  
      476,270     Paragon Mortgages Plc, Series 7A, Class A1A, 144A, 3 mo. LIBOR + .42%, 0.73%, due 05/15/34     413,021  
                     
            Total Residential Mortgage-Backed Securities (European)     862,114  
                     

         
6
  See accompanying notes to the financial statements.    

 

 
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
Par Value ($) /
 		           
Shares     Description   Value ($)  
                     
            Student Loans — 0.0%        
      51,983     National Collegiate Student Loan Trust, Series 06-1, Class A2, 1 mo. LIBOR + .14%, 0.40%, due 08/25/23     50,943  
      600,000     Nelnet Student Loan Trust, Series 05-2, Class A4, 3 mo. LIBOR + .08%, 0.38%, due 12/23/19     590,262  
                     
            Total Student Loans     641,205  
                     
            Total Asset-Backed Securities     20,724,782  
                     
                     
            Corporate Debt — 0.0%        
      147,000     Health Care Property Investors, Inc., Series G, MTN, 5.63%, due 02/28/13     160,230  
                     
                     
            U.S. Government Agency — 0.0%        
      200,000     Agency for International Development Floater (Support of Morocco), 6 mo. U.S. Treasury Bill + .45%, 0.61%, due 11/15/14 (a)     196,345  
      66,667     Agency for International Development Floater (Support of Zimbabwe), 3 mo. U.S. Treasury Bill x 115%, 0.16%, due 01/01/12 (a)     66,108  
                     
            Total U.S. Government Agency     262,453  
                     
                     
            TOTAL DEBT OBLIGATIONS (COST $18,645,068)     21,147,465  
                     
                     
            SHORT-TERM INVESTMENTS — 0.0%        
                     
            Money Market Funds — 0.0%        
      43,667     State Street Institutional U.S. Government Money Market Fund-Institutional Class     43,667  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $43,667)     43,667  
                     
                     
            TOTAL INVESTMENTS — 100.0%
(COST $1,490,360,780) 		    1,752,241,446  
            Other Assets and Liabilities (net) — (0.0%)     (73,656 )
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 1,752,167,790  
                     
 
Notes to Schedule of Investments:
 
144A - Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors.

         
    See accompanying notes to the financial statements.   7

 

 
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
CMBS - Commercial Mortgage Backed Security
EUR LIBOR - London Interbank Offered Rate denominated in Euros.
FGIC - Insured as to the payment of principal and interest by Financial Guaranty Insurance Corporation.
FSA - Insured as to the payment of principal and interest by Financial Security Assurance.
LIBOR - London Interbank Offered Rate
MBIA - Insured as to the payment of principal and interest by MBIA Insurance Corp.
MTN - Medium Term Note
The rates shown on variable rate notes are the current interest rates at February 28, 2011, which are subject to change based on the terms of the security.
◊ These securities are primarily backed by subprime mortgages.
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
 
Currency Abbreviations:
 
EUR - Euro

         
8
  See accompanying notes to the financial statements.    

 

GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $18,688,735) (Note 2)
  $ 21,191,132  
Investments in affiliated issuers, at value (cost $1,471,672,045) (Notes 2 and 10)
    1,731,050,314  
Receivable for Fund shares sold
    12,785,557  
Interest receivable
    18,326  
Receivable for expenses reimbursed by Manager (Note 5)
    28,952  
         
Total assets
    1,765,074,281  
         
         
Liabilities:
       
Payable for investments purchased
    11,618,337  
Payable for Fund shares repurchased
    1,167,220  
Payable to affiliate for (Note 5):
       
Trustees and Trust Officers or agents unaffiliated with the Manager
    4,647  
Accrued expenses
    116,287  
         
Total liabilities
    12,906,491  
         
Net assets
  $ 1,752,167,790  
         
Net assets consist of:
       
Paid-in capital
  $ 1,693,604,290  
Distributions in excess of net investment income
    (791,313 )
Accumulated net realized loss
    (202,525,853 )
Net unrealized appreciation
    261,880,666  
         
    $ 1,752,167,790  
         
Net assets attributable to:
       
Class III shares
  $ 1,752,167,790  
         
Shares outstanding:
       
Class III
    84,338,083  
         
Net asset value per share:
       
Class III
  $ 20.78  
         

         
    See accompanying notes to the financial statements.   9

 

GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends from affiliated issuers (Note 10)
  $ 31,794,811  
Interest
    2,440,050  
Dividends from unaffiliated issuers
    120  
         
Total investment income
    34,234,981  
         
Expenses:
       
Custodian, fund accounting agent and transfer agent fees
    86,484  
Legal fees
    83,749  
Audit and tax fees
    79,470  
Trustees fees and related expenses (Note 5)
    42,511  
Registration fees
    14,629  
Miscellaneous
    37,026  
         
Total expenses
    343,869  
Fees and expenses reimbursed by Manager (Note 5)
    (286,909 )
Expense reductions (Note 2)
    (3,523 )
         
Net expenses
    53,437  
         
Net investment income (loss)
    34,181,544  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in unaffiliated issuers
    988,854  
Investments in affiliated issuers
    (101,238,927 )
Realized gains distributions from affiliated issuers (Note 10)
    4,466,156  
Foreign currency, and foreign currency related transactions
    (30 )
         
Net realized gain (loss)
    (95,783,947 )
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in unaffiliated issuers
    (709,061 )
Investments in affiliated issuers
    333,253,020  
         
Net unrealized gain (loss)
    332,543,959  
         
Net realized and unrealized gain (loss)
    236,760,012  
         
Net increase (decrease) in net assets resulting from operations
  $ 270,941,556  
         

         
10
  See accompanying notes to the financial statements.    

 

GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 34,181,544     $ 43,854,182  
Net realized gain (loss)
    (95,783,947 )     (85,631,922 )
Change in net unrealized appreciation (depreciation)
    332,543,959       420,152,022  
                 
                 
Net increase (decrease) in net assets from operations
    270,941,556       378,374,282  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (37,205,811 )     (52,808,585 )
                 
Net share transactions (Note 9):
               
Class III
    (332,781,041 )     418,367,821  
Purchase premiums and redemption fees (Notes 2 and 9):
               
Class III
    —       21,819  
                 
Total increase (decrease) in net assets resulting from net share transactions and redemption fees
    (332,781,041 )     418,389,640  
                 
                 
Total increase (decrease) in net assets
    (99,045,296 )     743,955,337  
                 
Net assets:
               
Beginning of period
    1,851,213,086       1,107,257,749  
                 
End of period (including distributions in excess of net investment income of $791,313 and $10,979,271, respectively)
  $ 1,752,167,790     $ 1,851,213,086  
                 

         
    See accompanying notes to the financial statements.   11

 

GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 18.54     $ 14.37     $ 22.70     $ 23.71     $ 22.37  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)(a)†
    0.33       0.54       1.57       0.99       0.69  
Net realized and unrealized gain (loss)
    2.26       4.26       (7.23 )     (0.15 )     2.17  
                                         
                                         
Total from investment operations
    2.59       4.80       (5.66 )     0.84       2.86  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.35 )     (0.63 )     (1.61 )     (1.02 )     (0.90 )
From net realized gains
    —       —       (1.06 )     (0.83 )     (0.62 )
                                         
                                         
Total distributions
    (0.35 )     (0.63 )     (2.67 )     (1.85 )     (1.52 )
                                         
                                         
Net asset value, end of period
  $ 20.78     $ 18.54     $ 14.37     $ 22.70     $ 23.71  
                                         
                                         
Total Return(b)
    14.02 %     33.44 %     (26.75 )%     3.15 %     12.98 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 1,752,168     $ 1,851,213     $ 1,107,258     $ 1,100,116     $ 529,374  
Net expenses to average daily net assets(c)(d)
    0.00 %(e)     0.00 %(e)     0.00 %(e)     0.00 %(e)     0.00 %
Net investment income (loss) to average daily net assets(a)
    1.73 %     3.04 %     8.05 %     4.05 %     2.98 %
Portfolio turnover rate
    36 %     14 %     34 %     47 %     23 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.01 %     0.02 %     0.01 %     0.01 %     0.02 %
Purchase premiums and redemption fees consisted of the following per share amounts (Note 2):†
    —     $ 0.00 (f)   $ 0.01     $ 0.01     $ 0.00 (f)
 
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(b) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(d) Net expenses to average daily net assets were less than 0.01%.
(e) The net expense ratio does not include the effect of expense reductions (Note 2).
(f) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.

         
12
  See accompanying notes to the financial statements.    

 

GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO Strategic Opportunities Allocation Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund seeks total return greater than that of its benchmark, the GMO Strategic Opportunities Allocation Index. The GMO Strategic Opportunities Allocation Index is a composite benchmark computed by the Manager for the Fund consisting of (i) the MSCI World Index and (ii) the Barclays Capital U.S. Aggregate Index, in the following proportions: 75% (MSCI World Index) and 25% (Barclays Capital U.S. Aggregate Index). The Fund is a fund of funds and invests primarily in shares of other GMO Funds, which may include the GMO International Equity Funds, the GMO U.S. Equity Funds, the GMO Fixed Income Funds, GMO Alpha Only Fund, GMO Alternative Asset Opportunity Fund, GMO Debt Opportunities Fund, GMO High Quality Short-Duration Bond Fund, GMO Special Situations Fund, and GMO World Opportunity Overlay Fund (GMO Funds in which the Fund invests are collectively referred to as “underlying funds”). In addition, the Fund may hold securities (particularly asset-backed securities) directly or through one or more subsidiaries or other entities. The Fund may have exposure to foreign and U.S. equity investments (including emerging country equities, both growth and value style equities, and equities of any market capitalization), U.S. and foreign fixed income securities (including fixed income securities of any credit quality and having any maturity or duration), the investment returns of commodities and, from time to time, other alternative asset classes.
 
The Manager uses multi-year forecasts of relative value and risk among asset classes (e.g., foreign equity, U.S. equity, emerging country equity, emerging country debt, U.S. fixed income, foreign fixed income, and commodities) to select the underlying funds in which the Fund invests and to decide how much to invest in each. The Manager changes the Fund’s holdings of underlying funds in response to changes in its investment outlook and market valuations and may use redemption/purchase activity to rebalance the Fund’s investments.
 
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
 
The financial statements of the underlying funds in which the Fund invests should be read in conjunction with the Fund’s financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect) or by visiting GMO’s website at www.gmo.com. As of

         
        13

 

 
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
February 28, 2011, shares of GMO Alternative Asset Opportunity Fund, GMO Special Situations Fund, and GMO World Opportunity Overlay Fund were not publicly available for direct purchase.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Shares of the underlying funds and other investment funds are generally valued at their net asset value. Investments held by the Fund and the underlying funds are valued as follows. Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the over-the-counter (“OTC”) market to be a better indicator of market value), at the most recent bid price.
 
Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of February 28, 2011, the total value of securities held directly and indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 0.3% of net assets. The Fund and the underlying funds classify such securities (as defined below) as Level 3. Additionally, because many foreign securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund and the underlying funds generally value those foreign securities (including futures, derivatives and other securities whose values are based on indices comprised of such securities) as of the NYSE close using fair value prices, which are based on local closing prices adjusted by a factor supplied by a third party vendor using that vendor’s proprietary models. As of February 28, 2011, those foreign equity securities, foreign index futures contracts, and swap agreements representing

         
14
       

 

 
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
45.4%, and (0.1)%, respectively, of the net assets of the Fund, through investments in the underlying funds, were valued using fair value prices based on those adjustments. Those underlying funds classify such securities (as defined below) as Level 2.
 
Typically the Fund and the underlying funds value debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. Although alternative prices are available for securities held by the Fund and the underlying funds, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by the Fund and the underlying funds. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fund and the underlying funds. As of February 28, 2011, the total value of securities held directly and indirectly for which no alternative pricing source was available represented 0.8% of the net assets of the Fund.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.

         
        15

 

 
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include most recent bid prices, interest rates, prepayment speeds, credit risk, yield curves and similar data.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund utilized a number of fair value techniques on Level 3 investments, including the following: The Fund valued certain debt securities using indicative bids received from primary pricing sources. The Fund valued certain other debt securities by using an estimated specified spread above the LIBOR Rate.
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Mutual Funds
  $ 1,731,050,314     $ —     $ —     $ 1,731,050,314  
Debt Obligations
                               
Asset-Backed Securities
    —       4,575,326       16,149,456       20,724,782  
Corporate Debt
    —       160,230       —       160,230  
U.S. Government Agency
    —       —       262,453       262,453  
                                 
TOTAL DEBT OBLIGATIONS
    —       4,735,556       16,411,909       21,147,465  
                                 
Short-Term Investments
    43,667       —       —       43,667  
                                 
Total Investments
    1,731,093,981       4,735,556       16,411,909       1,752,241,446  
                                 
Total
  $ 1,731,093,981     $ 4,735,556     $ 16,411,909     $ 1,752,241,446  
                                 
 
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements. The aggregate net values of the Fund’s investments (both direct and indirect) in securities and derivative financial instruments using Level 3 inputs were 5.5% and (0.1)% of total net assets, respectively.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.

         
16
       

 

 
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a reconciliation of investments and derivatives, if any, in which significant unobservable inputs (Level 3) were used in determining value:
 
                                                                           
 
                                      Net Change in
                                      Unrealized
                                      Appreciation
                                      (Depreciation)
                                      from
    Balances
               Change in
   Net
  Net
  Balances
     Investments
    as of
   Net
   Accrued
   Total
   Unrealized
   transfers
   transfers
   as of
     Held as of
    February 28,
   Purchases/
   Discounts/
   Realized
   Appreciation
   into
   out of
   February 28,
     February 28,
    2010   (Sales)   Premiums   Gain/(Loss)   (Depreciation)   Level 3*   Level 3*   2011     2011
Debt Obligations
                                                                         
Asset-Backed Securities
  $ 22,589,158     $ (8,510,015 )   $ 1,040,399     $ 916,746     $ 113,168     $      —     $      —     $ 16,149,456       $ 901,401  
U.S. Government Agency
    376,034       (116,667 )     3,587       3,284       (3,785 )     —       —       262,453         (3,785 )
                                                                           
Total
  $ 22,965,192     $ (8,626,682 )   $ 1,043,986     $ 920,030     $ 109,383     $ —     $ —     $ 16,411,909       $ 897,616  
                                                                           
 
            * The Fund accounts for investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the value at the end of the period.
 
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 pm. Income and expenses denominated in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid

         
        17

 

 
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards, differing treatment of accretion and amortization, differing treatment of mutual fund distributions received, partnership interest tax allocations, losses on wash sale transactions, post-October capital losses and post-October currency losses.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 37,205,811     $ 52,808,585  
                 
Total distributions
  $ 37,205,811     $ 52,808,585  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of February 28, 2011, certain other tax attributes consisted of the following:
 
         
         
Tax Attributes:
       
Capital loss carryforwards
  $ (74,892,316 )
Post-October capital loss deferral
  $ (53,973,722 )
Post-October currency loss deferral
    (789,455 )

         
18
       

 

 
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards, post-October capital and currency losses and future realized losses, if any, subsequent to February 28, 2011 could be subject to limitations imposed by the Code related to share ownership activity. The Fund’s capital loss carryforwards expire as follows:
 
         
February 28, 2018
  $ (49,481,317 )
February 28, 2019
    (25,410,999 )
         
Total
  $ (74,892,316 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 1,564,022,453     $ 201,832,115     $ (13,613,122 )   $ 188,218,993      
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Income dividends and capital gain distributions from the underlying funds are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.

         
        19

 

 
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (Note 5).
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
Purchases and redemptions of Fund shares
Purchase premiums and redemption fees are paid to and retained by the Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. The Fund charges purchase premiums and redemption fees based on the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premiums and/or redemption fees, if any, imposed by the underlying Funds in which it invests, provided that, if that weighted average is less than 0.05%, the Fund generally will not charge a purchase premium or redemption fee. Such fees are recorded as a component of the Fund’s net share transactions. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of the Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. All or a portion of the Fund’s purchase premiums and/or redemption fees may be waived at the Manager’s discretion when they are de minimis and/or the Manager deems it equitable to do so, including without limitation when the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premiums and/or redemption fees, if any, imposed by the underlying funds are less than the purchase premiums and/or redemption fee imposed by the Fund. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund’s shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of a Fund’s shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder’s securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of the Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs.

         
20
       

 

 
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. References to investments include those held directly by the Fund and indirectly through the Fund’s investments in the underlying funds. Some of the underlying funds are non-diversified investment companies under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by those funds may affect their performance more than if they were diversified. The principal risks of investing in the Fund are summarized below, including those risks to which the Fund is exposed as a result of its investments in the underlying funds. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Declines in stock market prices generally are likely to reduce the market value of the Fund’s investments.
 
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund or the underlying funds may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund or the underlying funds need to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund or the underlying funds to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund’s investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund’s investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
 
• Market Risk — Fixed Income Securities — Typically, the value of fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.

         
        21

 

 
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund or an underlying fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
 
• Derivatives Risk — The use of derivatives involves the risk that their value may not correlate with the value of the relevant underlying assets, rates or indices. Derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk.
 
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in the underlying funds, including the risk that the underlying funds in which it invests do not perform as expected. Because the Fund bears the fees and expenses of the underlying funds in which it invests, new investments in underlying funds with higher fees or expenses than those of the underlying funds in which the Fund is currently invested will increase the Fund’s total expenses. The fees and expenses associated with an investment in the Fund are less predictable and may be higher than fees and expenses associated with an investment in funds that charge a fixed management fee.
 
Other principal risks of an investment in the Fund include Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Market Risk — Value Securities (risk that the price of investments held by the Fund will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Market Risk — Growth Securities (greater price fluctuations resulting from dependence on future earnings expectations); Commodities Risk (value of an underlying fund’s shares may be affected by factors particular to the commodities markets and may fluctuate more than the share value of a fund with a broader range of investments); Currency Risk (risk that fluctuations in exchange rates may adversely affect the value of investments denominated in foreign currencies or that the U.S. dollar will decline in value relation to a foreign currency being hedged); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities lending); Credit and Counterparty Risk (risk of default of an issuer of a portfolio security, a derivatives counterparty, or a borrower of the Fund’s securities); Real Estate Risk (risk to an underlying fund that concentrates its assets in real estate-related investments that factors affecting the real estate industry may cause the value of the Fund’s investments to fluctuate more than if it invested in securities of companies in a broader range of industries); Short Sales Risk (risk that an underlying fund’s loss on the short sale of securities that it does not own is unlimited); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).

         
22
       

 

 
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The most significant market risk for Funds investing in fixed income securities is that the securities in which they invest experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund because it invests in asset-backed securities. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as “collateralized debt obligations” or “collateralized loan obligations”) and by the fees earned by service providers. Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. Many asset-backed securities owned (directly or indirectly) by the Fund that were once rated investment grade are now rated below investment grade as of the date of this report.
 
The existence of insurance on an asset-backed security does not guarantee that principal and/or interest will be paid because the insurer could default on its obligations. In recent years, a significant number of asset-backed security insurers have defaulted on their obligations.
 
With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g., sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.
 
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets

         
        23

 

 
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and a Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.
 
The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution’s business may have a material impact on multiple investments.
 
4. Derivative financial instruments
 
At February 28, 2011, the Fund held no derivative financial instruments directly. For a listing of derivative financial instruments held by the underlying funds, if any, please refer to the underlying funds’ Schedule of Investments.
 
5. Fees and other transactions with affiliates
 
The Manager decides how to allocate the assets of the Fund among underlying funds. The Manager does not charge the Fund a management fee or shareholder service fee, but it receives management and shareholder service fees from the underlying funds in which the Fund invests. Because those fees vary from fund to fund, the levels of indirect net expenses set forth below are affected by the Manager’s asset allocation decisions.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.00% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). This contractual expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.

         
24
       

 

 
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $42,511 and $14,143, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
                   
Indirect Net
 		                 
Expenses
                  
(excluding
                  
shareholder service
     Indirect
            
fees and interest
     Shareholder
     Indirect Interest
     Total Indirect
expense)     Service Fees     Expense     Expenses
0.411%
    0.070%     0.003%     0.484%
                   
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments and class exchanges, for the year ended February 28, 2011 aggregated $681,320,200 and $1,001,719,960, respectively.
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 30.05% of the outstanding shares of the Fund were held by one shareholder. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
 
As of February 28, 2011, 0.02% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and 99.96% of the Fund’s shares were held by accounts for which the Manager had investment discretion.

         
        25

 

 
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    22,916,081     $ 434,251,778       28,866,186     $ 530,237,819  
Shares issued to shareholders in reinvestment of distributions
    1,812,018       36,365,288       2,735,629       50,897,400  
Shares repurchased
    (40,255,182 )     (803,398,107 )     (8,781,233 )     (162,767,398 )
Purchase premiums
    —       —       —       16,056  
Redemption fees
    —       —       —       5,763  
                                 
Net increase (decrease)
    (15,527,083 )   $ (332,781,041 )     22,820,582     $ 418,389,640  
                                 

         
26
       

 

 
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                         
    Value,
               Distributions
   Return
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   of
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   Capital   period
 
GMO Alpha Only Fund, Class IV
  $ 112,357,485     $ 50,888,273     $ 82,457,207     $ —     $ —     $ —     $ 76,562,509  
GMO Asset Allocation Bond Fund, Class VI
    68,552,916       36,642,545       83,848,849       1,096,412       2,985,833       —       19,060,719  
GMO Domestic Bond Fund, Class VI
    37,840,849       —       702,527       413,525       —       11,073,279       28,263,076  
GMO Emerging Country Debt Fund, Class IV
    8,875,698       1,289,333       253,014       1,289,333       —       —       10,590,652  
GMO Emerging Markets Fund, Class VI
    —       99,043,047       46,758,607       1,229,744       —       —       71,011,675  
GMO Flexible Equities Fund, Class VI
    46,041,138       705,261       16,776,474       468,888       —       —       30,813,653  
GMO Inflation Indexed Plus Bond Fund, Class VI
    31,566,819       4,191,912       37,054,443       926,504       1,480,323       —       —  
GMO International Growth Equity Fund, Class IV
    287,905,759       102,975,684       145,712,961       4,104,532       —       —       320,270,734  
GMO International Intrinsic Value Fund, Class IV
    286,060,774       112,698,024       145,050,300       5,593,047       —       —       320,384,848  
GMO International Small Companies Fund, Class III
    36,967,704       391,120       38,170,923       391,120       —       —       —  
GMO Quality Fund, Class VI
    691,556,972       133,462,273       304,839,326       12,581,512       —       —       579,206,834  
GMO Special Situations Fund, Class VI
    47,401,017       73,402,558       31,914,173       —       —       —       90,321,776  
GMO Strategic Fixed Income Fund, Class VI
    78,620,566       60,754,523       16,208,860       2,340,370       —       1,853,841       123,130,167  
GMO U.S. Core Equity Fund, Class VI
    75,200,697       4,875,647       36,737,601       1,359,824       —       —       52,712,842  
GMO World Opportunity Overlay Fund
    8,385,725       —       205,260       —       —       —       8,720,829  
                                                         
Totals
  $ 1,817,334,119     $ 681,320,200     $ 986,690,525     $ 31,794,811     $ 4,466,156     $ 12,927,120     $ 1,731,050,314  
                                                         

         
        27

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Strategic Opportunities Allocation Fund:
 
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 Strategic Opportunities Allocation Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian, and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
28
       

 

GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
        29

 

 
GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.49 %   $ 1,000.00     $ 1,169,10     $ 2.64  
2) Hypothetical
    0.49 %   $ 1,000.00     $ 1,022.36     $ 2.46  
                                 
 
            * Expenses are calculated using the Class’s annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
30
       

 

GMO Strategic Opportunities Allocation Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
For taxable, non-corporate shareholders, 68.48% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 represents qualified dividend income subject to the 15% rate category.
 
For corporate shareholders, 36.17% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 qualified for the dividends-received deduction.
 
The Fund hereby designates as qualified interest income with respect to its taxable year ended February 28, 2011, $2,003,704 or if determined to be different, the qualified interest income of such year.
 
Of the ordinary income distributions made by the Fund during the fiscal year ended February 28, 2011, 4.81% is derived from investments in U.S. Government and Agency Obligations. All or a portion of the distributions from this income may be exempt from taxation at the state level. Consult your tax advisor for state specific information.

         
        31

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
  Held with the
  Length of
   During Past
   Complex
     Directorships
Date of Birth   Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
32        

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
  Held with the
  Length of
   During Past
   Complex
     Directorships
Date of Birth   Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
     
            Occupation(s)
   Fund
     Other
Name and
  Position(s)
   Length of
  During Past
   Complex
     Directorships
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee; President
and Chief Executive Officer
of the Trust 		  Trustee since
March 2010; President
and Chief Executive
Officer since
March 2009. 		  General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
        33

 

Other Officers:
 
             
Name and
  Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003–2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance Officer   Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
34        

 

Other Officers: — (Continued)
 
             
Name and
  Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money
Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        35

 

 
GMO Taiwan Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a private placement memorandum, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained by calling 1-617-346-7646 (collect).
 

 

GMO Taiwan Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Emerging Markets Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
GMO Taiwan Fund returned +36.7% for the fiscal year ended February 28, 2011, as compared with +27.3% for the MSCI Taiwan Index.
 
Stock selection in the Information Technology, Materials, and Financials sectors contributed to relative performance. Selections adding to relative returns included overweight positions in HTC Corp, China Petrochemical Development Corp, and Taishin Financial Holding Co.
 
Sector selection detracted from relative performance as the Fund had an underweight to the Industrials sector.
 
Because some of the securities and instruments held directly or indirectly by the Fund had positive fair value adjustments during the fiscal year (and the performance of indices are not fair valued), the Fund’s absolute and relative performance is better than it otherwise would have been.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice. References to specific securities are not recommendations of such securities and may not be representative of any GMO portfolio’s current or future investments.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO Taiwan Fund Class III Shares and the MSCI Taiwan Index
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, please call (617) 330-7500. Performance shown is net of all fees after reimbursement from the Manager. Each performance figure assumes a purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of .15% on the purchase and .45% on the redemption. Transaction fees are retained by the Fund to cover trading costs. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. All information is unaudited.
 
MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.
 

 

GMO Taiwan Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary   % of Total Net Assets  
Common Stocks
    94.3 %
Short-Term Investments
    2.6  
Investment Funds
    1.9  
Other
    1.2  
         
      100.0 %
         
 
         
Industry Summary   % of Equity Investments*  
Semiconductors & Semiconductor Equipment
    21.3 %
Computers & Peripherals
    17.9  
Communications Equipment
    10.9  
Chemicals
    9.6  
Electronic Equipment, Instruments & Components
    8.6  
Diversified Telecommunication Services
    8.6  
Commerical Banks
    8.4  
Metals & Mining
    4.0  
Wireless Telecommunication Services
    3.3  
Marine
    3.0  
Miscellaneous
    2.1  
Building Products
    1.0  
Oil, Gas & Consumable Fuels
    0.6  
Airlines
    0.5  
Machinery
    0.2  
         
      100.0 %
         
 
* Equity investments may consist of common stocks and other stock-related securities, such as preferred stocks. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.

         
        1

 

GMO Taiwan Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            COMMON STOCKS — 94.3%        
                     
            Taiwan — 94.3%        
      573,593     Asustek Computer Inc     5,233,245  
      521,448     Catcher Technology Co Ltd     2,195,260  
      3,499,500     China Petrochemical Development Corp. *     4,016,453  
      5,012,418     China Steel Corp     5,677,058  
      4,833,996     Chinatrust Financial Holding Co Ltd     3,809,826  
      3,682,812     Chunghwa Telecom Co Ltd     10,948,363  
      39,500     Chunghwa Telecom Co Ltd ADR     1,165,645  
      4,736,886     Compal Electronics Inc     5,582,447  
      729,952     Compeq Manufacturing Co Ltd *     441,169  
      327,000     Delta Electronics Inc     1,367,136  
      1,470,991     E.Sun Financial Holdings Co Ltd     907,115  
      688,000     Eva Airways Corp *     624,661  
      2,380,664     Evergreen Marine Corp *     2,110,652  
      1,863,773     Far Eastone Telecommunications Co Ltd     2,668,679  
      2,196,900     First Financial Holding Co Ltd     1,796,444  
      263,660     Formosa Petrochemical Corp     798,209  
      89,983     Gintech Energy Corp     285,873  
      1,400,306     Hon Hai Precision Industry Co Ltd     5,195,937  
      427,884     HTC Corp     15,455,426  
      48,485     Largan Precision Co Ltd     1,332,875  
      1,280,376     Lite-On Technology Corp     1,606,070  
      2,772,000     Macronix International Co Ltd     2,026,055  
      4,283,000     Mega Financial Holding Co Ltd     3,108,903  
      3,311,180     Nan Ya Plastics Corp     9,608,813  
      562,500     Nanya Technology Corp *     303,125  
      561,375     Novatek Microelectronics Corp Ltd     1,730,511  
      845,888     Pegatron Corp *     1,007,282  
      526,750     Powertech Technology Inc     1,848,015  
      2,822,656     Quanta Computer Inc     5,553,790  
      4,351,884     Taishin Financial Holding Co Ltd *     2,271,702  
      1,172,500     Taiwan Glass Industrial Corp     1,432,759  
      873,065     Taiwan Mobile Co Ltd     1,955,672  
      82,200     Taiwan Semiconductor Manufacturing Co Ltd Sponsored ADR     1,010,238  

         
2
  See accompanying notes to the financial statements.    

 

 
GMO Taiwan Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
Shares /
 		           
Par Value     Description   Value ($)  
            Taiwan — continued        
      8,644,828     Taiwan Semiconductor Manufacturing Co Ltd     20,598,396  
      66,200     TPK Holding Co Ltd *     1,820,405  
      4,154,000     United Microelectronics Corp     2,161,111  
      58,500     United Microelectronics Corp Sponsored ADR     163,800  
      552,000     Wintek Corp *     1,073,739  
      2,273,414     Wistron Corp     4,077,258  
      561,879     WPG Holdings Co Ltd     974,555  
      2,968,195     Ya Hsin Industrial Co Ltd * (a) (b)     —  
      2,561,000     Yang Ming Marine Transport *     2,176,723  
      256,460     Yungtay Engineering Co Ltd     337,997  
                     
            Total Taiwan     138,459,392  
                     
                     
            TOTAL COMMON STOCKS (COST $119,041,095)     138,459,392  
                     
                     
            INVESTMENT FUNDS — 1.9%        
                     
            United States — 1.9%        
      197,018     iShares MSCI Taiwan Index Fund (c)     2,904,045  
                     
                     
            TOTAL INVESTMENT FUNDS (COST $2,888,952)     2,904,045  
                     
                     
            SHORT-TERM INVESTMENTS — 2.6%        
                     
            Time Deposits — 2.6%        
USD
    1,000,000     Bank of America (Charlotte) Time Deposit, 0.03%, due 03/01/11     1,000,000  
USD
    786,156     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.03%, due 03/01/11     786,156  

         
    See accompanying notes to the financial statements.   3

 

 
GMO Taiwan Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value     Description   Value ($)  
            Time Deposits — continued        
USD
    1,000,000     Citibank (New York) Time Deposit, 0.03%, due 03/01/11     1,000,000  
USD
    1,000,000     HSBC Bank (New York) Time Deposit, 0.03%, due 03/01/11     1,000,000  
                     
            Total Time Deposits     3,786,156  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $3,786,156)     3,786,156  
                     
                     
            TOTAL INVESTMENTS — 98.8%
(Cost $125,716,203) 		    145,149,593  
            Other Assets and Liabilities (net) — 1.2%     1,707,635  
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 146,857,228  
                     
 
Notes to Schedule of Investments:
 
ADR - American Depositary Receipt
MSCI - Morgan Stanley Capital International
 
* Non-income producing security.
(a) Bankrupt issuer.
(b) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees of GMO Trust (Note 2).
(c) Represents an investment to equitize cash in the iShares® MSCI Taiwan Index Fund, which is a separate investment portfolio of iShares, Inc., a registered investment company. The iShares® MSCI Taiwan Index Fund invests in the Taiwanese market and seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the MSCI Taiwan Index. iShares® is a registered trademark of BlackRock. Neither BlackRock nor the iShares® Funds make any representations regarding the advisability of investing in the iShares® MSCI Taiwan Index Fund.
 
Currency Abbreviations:
 
USD - United States Dollar

         
4
  See accompanying notes to the financial statements.    

 

GMO Taiwan Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments, at value (cost $125,716,203) (Note 2)
  $ 145,149,593  
Foreign currency, at value (cost $1,049,183) (Note 2)
    1,048,758  
Receivable for investments sold
    1,146,760  
         
Total assets
    147,345,111  
         
         
Liabilities:
       
Payable for investments purchased
    231,254  
Payable to affiliate for (Note 5):
       
Management fee
    90,728  
Shareholder service fee
    16,802  
Trustees and Trust Officers or agents unaffiliated with the Manager
    309  
Accrued expenses
    148,790  
         
Total liabilities
    487,883  
         
Net assets
  $ 146,857,228  
         
Net assets consist of:
       
Paid-in capital
  $ 139,805,098  
Distributions in excess of net investment income
    (41,483 )
Accumulated net realized loss
    (12,340,026 )
Net unrealized appreciation
    19,433,639  
         
    $ 146,857,228  
         
Net assets attributable to:
       
Class III shares
  $ 146,857,228  
         
Shares outstanding:
       
Class III
    6,157,437  
         
Net asset value per share:
       
Class III
  $ 23.85  
         

         
    See accompanying notes to the financial statements.   5

 

GMO Taiwan Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends (net of withholding taxes of $553,953)
  $ 1,835,374  
Interest
    451  
         
Total investment income
    1,835,825  
         
Expenses:
       
Management fee (Note 5)
    704,051  
Shareholder service fee – Class III (Note 5)
    130,380  
Custodian and fund accounting agent fees
    182,451  
Audit and tax fees
    88,784  
Transfer agent fees
    26,752  
Registration fees
    5,599  
Legal fees
    2,970  
Trustees fees and related expenses (Note 5)
    1,717  
Miscellaneous
    13,306  
         
Total expenses
    1,156,010  
         
Net investment income (loss)
    679,815  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments
    18,638,151  
Foreign currency, forward contracts and foreign currency related transactions
    36,516  
         
Net realized gain (loss)
    18,674,667  
         
Change in net unrealized appreciation (depreciation) on:
       
Investments
    11,331,410  
Foreign currency, forward contracts and foreign currency related transactions
    461  
         
Net unrealized gain (loss)
    11,331,871  
         
Net realized and unrealized gain (loss)
    30,006,538  
         
Net increase (decrease) in net assets resulting from operations
  $ 30,686,353  
         

         
6
  See accompanying notes to the financial statements.    

 

GMO Taiwan Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 679,815     $ 1,873,434  
Net realized gain (loss)
    18,674,667       24,661,277  
Change in net unrealized appreciation (depreciation)
    11,331,871       35,935,530  
                 
                 
Net increase (decrease) in net assets from operations
    30,686,353       62,470,241  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (1,696,633 )     (3,367,217 )
                 
Net share transactions (Note 9):
               
Class III
    26,324,872       (68,529,947 )
                 
Purchase premiums and redemption fees (Notes 2 and 9):
               
Class III
    367,043       426,456  
                 
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees
    26,691,915       (68,103,491 )
                 
                 
Total increase (decrease) in net assets
    55,681,635       (9,000,467 )
                 
Net assets:
               
Beginning of period
    91,175,593       100,176,060  
                 
End of period (including distributions in excess of net investment income of $41,483 and accumulated undistributed net investment income of $875,531, respectively)
  $ 146,857,228     $ 91,175,593  
                 

         
    See accompanying notes to the financial statements.   7

 

GMO Taiwan Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 17.75     $ 11.06     $ 22.42     $ 30.98     $ 28.34  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.16       0.25       0.59       0.61       0.46  
Net realized and unrealized gain (loss)
    6.30       6.89 (a)     (10.80 )     1.50       4.32  
                                         
                                         
Total from investment operations
    6.46       7.14       (10.21 )     2.11       4.78  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.36 )     (0.45 )     (0.30 )     (0.85 )     (0.39 )
From net realized gains
    —       —       (0.85 )     (9.82 )     (1.75 )
                                         
                                         
Total distributions
    (0.36 )     (0.45 )     (1.15 )     (10.67 )     (2.14 )
                                         
                                         
Net asset value, end of period
  $ 23.85     $ 17.75     $ 11.06     $ 22.42     $ 30.98  
                                         
                                         
Total Return(b)
    36.71 %     64.80 %     (47.14 )%     6.97 %(c)     17.12 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 146,857     $ 91,176     $ 100,176     $ 220,359     $ 316,887  
Net expenses to average daily net assets
    1.33 %     1.35 %(d)(e)     1.32 %(d)     1.29 %(d)     1.26 %
Net investment income (loss) to average daily net assets
    0.78 %     1.55 %     3.42 %     1.98 %     1.56 %
Portfolio turnover rate
    129 %     106 %     88 %     94 %     41 %
Purchase premiums and redemption fees consisted of the following per share amounts (Note 2):†
  $ 0.09     $ 0.06     $ 0.03     $ 0.06     $ 0.03  
 
(a) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain/loss for the period due to the timing of purchases and redemptions of Fund shares in relation to the fluctuating market values of the Fund.
(b) Calculation excludes purchase premiums and redemption fees which are borne by the shareholder and assumes the effect of reinvested distributions.
(c) The effect of losses in the amount of $56,687, resulting from compliance violations and the Manager’s reimbursement of such losses, had no effect on the total return.
(d) The net expense ratio does not include the effect of expense reductions (Note 2).
(e) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
† Calculated using average shares outstanding throughout the period.

         
8
  See accompanying notes to the financial statements.    

 

GMO Taiwan Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO Taiwan Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund seeks total return in excess of that of its benchmark, the MSCI Taiwan Index. The Fund typically makes equity investments directly and indirectly (e.g., through the GMO Funds in which the Fund invests, collectively referred to as the “underlying funds” or derivatives) in companies doing business in, or otherwise tied economically to, Taiwan. The Fund may invest in companies of any market capitalization. The term “equity investments” refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts. Under normal circumstances, the Fund invests directly and indirectly at least 80% of its assets in investments tied economically to Taiwan.
 
The Manager uses proprietary quantitative techniques and fundamental analysis to evaluate and select sectors and equity investments.
 
From time to time, the Fund may invest a significant portion of its assets in securities of issuers in industries with high positive correlations to one another (e.g., different industries within broad sectors, such as technology or financial services).
 
In pursuing its investment objective, the Fund is permitted to (but is not obligated to) use a wide variety of exchange-traded and over-the-counter (“OTC”) derivatives (including options, futures, warrants, swap contracts, and reverse repurchase agreements) and exchange-traded funds (“ETFs”) (i) as a substitute for direct investment; (ii) in an attempt to reduce investment exposures (which may result in a reduction below zero); (iii) to effect transactions intended as substitutes for securities lending; and/or (iv) in an attempt to adjust elements of its investment and/or foreign currency exposure. The Fund’s foreign currency exposure may differ significantly from the currency exposure represented by its equity investments. In addition, the Fund may take active overweighted or underweighted positions in particular currencies relative to its benchmark. In addition, the Fund may lend its portfolio securities.
 
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.

         
        9

 

 
GMO Taiwan Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the OTC market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of February 28, 2011, the total value of securities held directly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 0.0% of net assets. The Fund classifies such securities (as defined below) as Level 3. Additionally, because many foreign equity securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices adjusted by a factor supplied by a third party vendor using that vendor’s proprietary models. As of February 28, 2011, 91.5% of the net assets of the Fund were valued using fair value prices based on those adjustments and are classified as using Level 2 inputs in the table below. See Note 4 for a further discussion on valuation of derivative financial instruments.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

         
10
       

 

 
GMO Taiwan Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include: fair value adjustments applied to local closing prices of foreign securities due to market events that have occurred since the local market close but before the Fund’s daily NAV calculation.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund utilized a number of fair value techniques on Level 3 investments, including the following: The Fund deemed certain bankrupt securities to be worthless.
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Common Stocks
                               
Taiwan
  $ 4,160,088     $ 134,299,304     $ 0 *   $ 138,459,392  
                                 
TOTAL COMMON STOCKS
    4,160,088       134,299,304       0       138,459,392  
                                 

         
        11

 

 
GMO Taiwan Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
  
  ASSET VALUATION INPUTS — continued
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Investment Funds
                               
United States
  $ 2,904,045     $ —     $ —     $ 2,904,045  
                                 
TOTAL INVESTMENT FUNDS
    2,904,045       —       —       2,904,045  
                                 
Short-Term Investments
    3,786,156       —       —       3,786,156  
                                 
Total Investments
    10,850,289       134,299,304       0       145,149,593  
                                 
Total
  $ 10,850,289     $ 134,299,304     $ 0     $ 145,149,593  
                                 
 
            * Represents the interest in securities that are bankrupt and have no value at February 28, 2011.
 
The aggregate net value of the Fund’s direct investments in securities using Level 3 inputs was less than 0.0% of total net assets.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
The following is a reconciliation of investments and derivatives, if any, in which significant unobservable inputs (Level 3) were used in determining value:
 
                                                                           
 
                                      Net Changed
                                      in Unrealized
                                      Appreciation
    Balances
               Change in
           Balances
     (Depreciation)
    as of
   Net
   Accrued
   Total
   Unrealized
   Transfers
   Transfers
   as of
     from Investments
    February 28,
   Purchases/
   Discounts/
   Realized
   Appreciation
   into
   out of
   February 28,
     Still Held as of
    2010   (Sales)   Premiums   Gain/(Loss)   (Depreciation)   Level 3*   Level 3*   2011     February 28, 2011
Common Stocks
                                                                         
Taiwan
  $ 928     $ —     $ —     $ (2 )   $ (926 )   $ —     $ —     $ — **     $ (926 )
                                                                           
Total
  $ 928     $ —     $ —     $ (2 )   $ (926 )   $ —     $ —     $ —       $ (926 )
                                                                           
 
            * The Fund accounts for investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the value at the end of the period.
            ** Represents the interest in securities that are bankrupt and have no value at February 28, 2011.
 
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 pm. Income and expenses denominated in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE on the business day the income and expenses are accrued or incurred. Fluctuations in the

         
12
       

 

 
GMO Taiwan Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on Taiwan-source interest and dividend income are withheld in accordance with applicable Taiwanese law.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if paid by the shareholders of the Fund.
 
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction based taxes imposed by certain countries in which it invests. Taxes related to capital gains realized during the year ended February 28, 2011, if any, are reflected as part of Net realized gain (loss) in the Statement of Operations. Changes in tax liabilities related to capital gain taxes on unrealized investment gains, if any, are reflected as part of Change in net unrealized appreciation (depreciation) in the Statement of Operations. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.

         
        13

 

 
GMO Taiwan Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards, losses on wash sale transactions, and foreign currency transactions and Post October currency losses.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 1,696,633     $ 3,367,217  
                 
Total distributions
  $ 1,696,633     $ 3,367,217  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of February 28, 2011, certain tax attributes consisted of the following:
 
         
Capital loss carryforwards
  $ (11,177,352 )
Post-October currency loss deferral
  $ (41,483 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 28, 2018
  $ (11,177,352 )
         
Total
  $ (11,177,352 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 126,878,877     $ 22,243,443     $ (3,972,727 )   $ 18,270,716      
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did

         
14
       

 

 
GMO Taiwan Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis. Taiwanese companies typically declare dividends in the third calendar quarter of each year.
 
Dividend and interest income generated in Taiwan is subject to a 20% withholding tax. Stock dividends received (except those which have resulted from capitalization of capital surplus) are taxable at 20% of the par value of the stock dividends received.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds.
 
Brown Brothers Harriman & Co. (“BBH”) serves as the Fund’s custodian and fund accounting agent. State Street Bank and Trust Company (“State Street”) serves as the Fund’s transfer agent. BBH’s and State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
Purchases and redemptions of Fund shares
For the year ended February 28, 2011, the premium on cash purchases of Fund shares was 0.15% of the amount invested and the fee on cash redemptions was 0.45% of the amount redeemed. Purchase premiums and redemption fees are paid to and retained by the Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. Such fees are recorded as a component of the Fund’s net share transactions. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of

         
        15

 

 
GMO Taiwan Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
distributions. Redemption fees apply to all shares of the Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund’s shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund’s shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder’s securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of the Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with the Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund’s investments.
 
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund to credit and other risks with respect to

         
16
       

 

 
GMO Taiwan Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund’s investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund’s investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries. Certain characteristics of Taiwan’s economy and geographic location also make foreign investment risk particularly pronounced for the Fund. For example, Taiwan is a small island state with few raw material resources and limited land area and is reliant on imports for its commodity needs. Any fluctuations or shortages in the commodity markets could have a negative impact on the Taiwanese economy. Also, rising labor costs and increasing environmental consciousness have led some labor-intensive industries to relocate to countries with cheaper work forces, and continued labor outsourcing may adversely affect the Taiwanese economy. Taiwan’s economy also is intricately linked with economies of other Asian countries, which, similar to emerging market economies, are often characterized by over-extension of credit, frequent and pronounced currency fluctuations, devaluations and restrictions, rising unemployment, rapid fluctuation in, among other things, inflation, reliance on exports, and less efficient markets. Currency devaluations in any one country can have a significant effect on the entire region. Recently, the markets in some Asian countries have suffered significant downturns as well as significant volatility. Furthermore, increased political and social unrest in some Asian countries could cause further economic and market uncertainty in the entire region. In particular, the Taiwanese economy is dependent on the economies of Asia, mainly those of Japan and China, but also the United States as key trading partners. Reduction in spending by any of these countries on Taiwanese products and services or negative changes in any of these economies may have an adverse impact on the Taiwanese economy. Taiwan’s geographic proximity to the People’s Republic of China and Taiwan’s history of political contention with China have resulted in ongoing tensions with China, including the continual risk of war with China. These tensions may materially affect the Taiwanese economy and securities markets. All of these risks could reduce the value of an investment in Taiwan Fund.
 
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund’s foreign currency holdings and investments denominated in foreign currencies.
 
• Focused Investment Risk — Focusing investments in countries, regions, sectors or companies with high positive correlations to one another creates additional risk. This risk is particularly pronounced for the Fund because it principally invests in investments tied economically to a single country.
 
• Market Disruption and Geopolitical Risk — Geopolitical events may disrupt securities markets and adversely affect global economies and markets. Those events as well as other changes in foreign and domestic economic and political conditions could adversely affect the value of the Fund’s investments.
 
• Large Shareholder Risk — To the extent that shares of the Fund are held by large shareholders (e.g., institutional investors, asset allocation funds, or other GMO Funds), the Fund is subject to the risk that

         
        17

 

 
GMO Taiwan Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
these shareholders will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis.
 
Other principal risks of an investment in the Fund include Liquidity Risk (difficulty in selling Fund investments at desirable prices and/or increased likelihood of honoring redemption requests in-kind); Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund’s securities); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities lending); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by “equitizing” its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform

         
18
       

 

 
GMO Taiwan Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically “sell” a portion of the Fund’s portfolio) in combination with a long futures contract on another index (to synthetically “buy” exposure to that index). The Funds also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral (e.g., foreign currency forwards; see “Currency Risk” above), that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed

         
        19

 

 
GMO Taiwan Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
 
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund’s forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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.
 
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. The Fund had no forward currency contracts outstanding at the end of the period.
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is marked to market daily and an appropriate payable or receivable for the change in value (“variation margin”) is recorded by

         
20
       

 

 
GMO Taiwan Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because regular trading on many foreign exchanges closes prior to the close of the NYSE, closing prices for these foreign futures contracts (including foreign index futures) do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures contracts using fair value prices, which are based on local closing prices adjusted by a factor supplied by a third party vendor using that vendor’s proprietary models. The Fund had no futures contracts outstanding at the end of the period.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a

         
        21

 

 
GMO Taiwan Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.

         
22
       

 

 
GMO Taiwan Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated

         
        23

 

 
GMO Taiwan Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.81% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares.
 
The Manager has contractually agreed to reimburse the Fund for an amount equal to the fees and expenses incurred indirectly by the Fund through its investment in other GMO Funds (excluded those Funds’ Excluded Fund Fees and Expenses). “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay any compensation and expenses of the Trust’s Chief Compliance Officer (CCO) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). This expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $1,717 and $575, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 aggregated $133,611,461 and $112,531,946, respectively.
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s

         
24
       

 

 
GMO Taiwan Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, all of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund’s outstanding shares.
 
As of February 28, 2011, none of the Fund was held by senior management of the Manager and GMO Trust officers and all of the Fund’s shares were held by accounts for which the Manager had investment discretion.
 
9. Share transactions
 
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
 
Share transactions
 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    3,812,495     $ 79,643,637       1,414,619     $ 22,313,972  
Shares issued to shareholders in reinvestment of distributions
    81,938       1,696,633       202,585       3,367,217  
Shares repurchased
    (2,872,301 )     (55,015,398 )     (5,537,531 )     (94,211,136 )
Purchase premiums
    —       119,645       —       25,853  
Redemption fees
    —       247,398       —       400,603  
                                 
Net increase (decrease)
    1,022,132     $ 26,691,915       (3,920,327 )   $ (68,103,491 )
                                 

         
        25

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Taiwan Fund:
 
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 Taiwan Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
26
       

 

GMO Taiwan Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
This example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
        27

 

 
GMO Taiwan Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    1.20 %   $ 1,000.00     $ 1,297.50     $ 6.84  
2) Hypothetical
    1.20 %   $ 1,000.00     $ 1,018.84     $ 6.01  
                                 
 
            * Expenses are calculated using the Class’s annualized net expense ratio for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
28
       

 

GMO Taiwan Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
During the year ended February 28, 2011, the Fund paid foreign taxes of $553,927 and recognized foreign source income of $2,389,327.

         
        29

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
   Position(s)
   Length of
   During Past
   Complex
     Other Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
30        

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
   Position(s)
   Length of
   During Past
   Complex
     Other Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since
March 2010. 		  Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Held
 
                         
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee;
President and
Chief Executive
Officer of the Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
        31

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
32
       

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        33

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
 
Portfolio Managers
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Quantitative Equity Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
GMO Tax-Managed International Equities Fund returned +21.5% for the fiscal year ended February 28, 2011, as compared with +20.0% for the MSCI EAFE Index.
 
Stock selection was the primary driver behind the Fund’s outperformance of the benchmark for the period. Selection was positive within the majority of sectors, and was most pronounced within Energy and Health Care stocks. Within Energy, the Fund benefited from underweight exposure to BP, which declined following the Deepwater Horizon oil spill. Within Health Care stocks, overweight exposure to Novo Nordisk, which outpaced the market, also added positively to results.
 
Sector selection was a neutral factor for the period. The Fund benefited from overweight exposure to Energy stocks, which outperformed, and from underweight exposure to Financial Services stocks, which lagged the market. However, these gains were offset by overweight exposure to Health Care stocks, which also lagged the market.
 
Country selection was also a neutral factor for the period.
 
Exposure to cash detracted from the Fund’s relative returns as the market advanced 20%.
 
Because some of the securities and instruments held directly or indirectly by the Fund had positive fair value adjustments during the fiscal year (and the performance of indices are not fair valued), the Fund’s absolute and relative performance is better than it otherwise would have been.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice. References to specific securities are not recommendations of such securities and may not be representative of any GMO portfolio’s current or future investments.

 

 
Comparison of Change in Value of a $5,000,000 Investment in
GMO Tax-Managed International Equities Fund Class III Shares and the MSCI EAFE Index
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Return would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited.
 
 
MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.

 

GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary   % of Total Net Assets  
Common Stocks
    97.0 %
Short-Term Investments
    1.4  
Preferred Stocks
    1.3  
Mutual Funds
    0.0 ^
Rights and Warrants
    0.0 ^
Other
    0.3  
         
      100.0 %
         
 
         
Country Summary*   % of Equity Investments**  
Japan
    23.8 %
United Kingdom
    21.3  
France
    11.5  
Germany
    7.8  
Italy
    6.6  
Switzerland
    5.6  
Sweden
    3.7  
Singapore
    3.0  
Australia
    2.9  
Canada
    2.0  
Denmark
    1.9  
Spain
    1.8  
Netherlands
    1.7  
Hong Kong
    1.3  
Finland
    1.2  
Austria
    0.9  
Belgium
    0.9  
Ireland
    0.9  
Greece
    0.5  
Norway
    0.4  
New Zealand
    0.3  
Malta
    0.0 ^
         
      100.0 %
         
 
* The table above shows country exposure in the Fund. The table excludes short-term investments. The table includes exposure through derivative financial instruments, if any. The table excludes exposure through forward currency contracts. The table takes into account the market value of securities and options and the notional amounts of swap agreements and other derivative financial instruments, if any.
 

         
        1

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2011 (Unaudited)
 
         
Industry Group Summary   % of Equity Investments**  
Pharmaceuticals, Biotechnology & Life Sciences
    15.4 %
Energy
    13.4  
Capital Goods
    10.7  
Materials
    7.9  
Telecommunication Services
    6.8  
Automobiles & Components
    6.3  
Banks
    5.7  
Utilities
    5.2  
Food, Beverage & Tobacco
    3.6  
Consumer Durables & Apparel
    3.3  
Retailing
    3.3  
Real Estate
    2.4  
Media
    2.3  
Diversified Financials
    2.2  
Technology Hardware & Equipment
    1.9  
Food & Staples Retailing
    1.4  
Transportation
    1.4  
Software & Services
    1.3  
Household & Personal Products
    1.2  
Consumer Services
    1.1  
Semiconductors & Semiconductor Equipment
    1.0  
Insurance
    0.8  
Commercial & Professional Services
    0.7  
Health Care Equipment & Services
    0.7  
         
      100.0 %
         
 
** Equity investments may consist of common stocks and other stock-related securities, such as preferred stocks. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
^ Rounds to 0.0%.

         
2
       

 

GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
Shares     Description   Value ($)  
            COMMON STOCKS — 97.0%        
            Australia — 2.9%        
      17,043     BHP Billiton Ltd     805,353  
      301,186     BlueScope Steel Ltd     645,475  
      174,362     Charter Hall Office (REIT)     568,121  
      40,131     Commonwealth Bank of Australia     2,181,422  
      484,938     Dexus Property Group (REIT)     424,233  
      1,147,737     Goodman Group (REIT)     822,587  
      343,612     GPT Group (REIT)     1,091,382  
      302,836     Mirvac Group (REIT)     402,794  
      118,719     Qantas Airways Ltd *     284,443  
      33,351     QBE Insurance Group Ltd     617,842  
      11,318     Rio Tinto Ltd     988,239  
      276,386     Stockland (REIT)     1,075,464  
      87,104     Suncorp-Metway Ltd     747,752  
      77,420     TABCORP Holdings Ltd     601,466  
      982,472     Telstra Corp Ltd     2,797,548  
      33,812     Wesfarmers Ltd     1,145,355  
      32,916     Westfield Group (REIT)     328,177  
      33,113     Woodside Petroleum Ltd     1,444,001  
      14,458     Woolworths Ltd     396,651  
                     
            Total Australia     17,368,305  
                     
                     
            Austria — 0.9%        
      8,606     Erste Group Bank AG     453,995  
      153,570     Immofinanz AG *     678,165  
      88,088     Immofinanz AG (Entitlement Shares) *     —  
      52,920     OMV AG     2,248,835  
      15,218     Raiffeisen International Bank Holding     913,987  
      20,435     Voestalpine AG     944,862  
                     
            Total Austria     5,239,844  
                     
                     
            Belgium — 0.8%        
      99,807     Ageas     316,646  
      4,987     Bekaert NV     541,003  
      34,388     Belgacom SA     1,289,940  

         
    See accompanying notes to the financial statements.   3

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
Shares     Description   Value ($)  
            Belgium — continued        
      19,580     Colruyt SA     984,015  
      9,590     Delhaize Group     740,772  
      1     Dexia SA *     4  
      6,642     Mobistar SA     424,573  
      16,435     Umicore SA     828,624  
                     
            Total Belgium     5,125,577  
                     
                     
            Canada — 1.9%        
      33,800     Barrick Gold Corp     1,784,019  
      30,600     BCE Inc     1,134,488  
      108,400     EnCana Corp     3,523,516  
      23,800     Magna International Inc Class A     1,172,178  
      7,300     Metro Inc Class A     330,606  
      28,100     Penn West Petroleum Ltd     812,443  
      16,400     Research In Motion Ltd *     1,082,868  
      44,300     Sun Life Financial Inc     1,471,423  
      61,200     Yellow Media Inc     350,866  
                     
            Total Canada     11,662,407  
                     
                     
            Denmark — 1.9%        
      9,366     Carlsberg A/S Class B     994,805  
      31,613     Danske Bank A/S *     741,048  
      75,054     Novo-Nordisk A/S Class B     9,459,979  
      1,272     Novozymes A/S Class B     177,787  
                     
            Total Denmark     11,373,619  
                     
                     
            Finland — 1.2%        
      10,529     Kone Oyj Class B     574,654  
      24,298     Metso Oyj     1,256,881  
      125,427     Nokia Oyj     1,081,389  
      11,128     Rautaruukki Oyj     258,506  
      12,300     Sampo Oyj Class A     380,692  
      90,578     Stora Enso Oyj Class R     1,020,359  
      11,652     Tieto Oyj     223,683  

         
4
  See accompanying notes to the financial statements.    

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
Shares     Description   Value ($)  
            Finland — continued        
      68,045     UPM–Kymmene Oyj     1,351,243  
      11,644     Wartsila Oyj     895,327  
                     
            Total Finland     7,042,734  
                     
                     
            France — 11.3%        
      4,067     Air Liquide SA     526,536  
      6,462     Arkema     472,468  
      57,265     BNP Paribas     4,469,259  
      2,944     Bongrain SA     278,242  
      9,357     Casino Guichard-Perrachon SA     916,246  
      12,581     Dassault Systemes SA     963,569  
      12,316     Essilor International SA     880,136  
      1,613     Esso SAF     233,040  
      10,133     Eutelsat Communications     404,390  
      60,913     France Telecom SA     1,347,932  
      16,002     GDF Suez VVPR Strip *     22  
      6,902     Hermes International     1,501,426  
      7,958     L’Oreal SA     925,934  
      20,102     Lagardere SCA     904,791  
      21,678     Legrand SA     909,951  
      25,662     LVMH Moet Hennessy Louis Vuitton SA     4,047,198  
      3,100     Nexans SA     281,098  
      4,045     NYSE Euronext     149,345  
      36,124     PagesJaunes Groupe     352,287  
      10,826     PPR     1,642,481  
      10,209     Publicis Groupe SA     582,336  
      32,694     Renault SA *     2,004,881  
      58,430     Rhodia SA     1,683,991  
      22,853     Safran SA     813,418  
      237,703     Sanofi-Aventis     16,436,668  
      9,232     Schneider Electric SA     1,529,124  
      25,742     Societe Generale     1,810,067  
      3,204     Technip SA     316,649  
      273,947     Total SA     16,792,957  
      4,296     Valeo SA *     267,748  

         
    See accompanying notes to the financial statements.   5

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
Shares     Description   Value ($)  
            France — continued        
      4,183     Vallourec SA     434,267  
      140,156     Vivendi SA     3,994,564  
                     
            Total France     67,873,021  
                     
                     
            Germany — 6.4%        
      16,187     Aurubis AG     862,462  
      36,053     BASF AG     3,006,099  
      47,206     Bayerische Motoren Werke AG     3,835,132  
      5,547     Beiersdorf AG     332,892  
      93,512     Daimler AG (Registered) *     6,608,413  
      42,627     Deutsche Lufthansa AG (Registered) *     873,313  
      13,832     Deutsche Post AG (Registered)     254,330  
      186,959     E.ON AG     6,140,635  
      230,544     Infineon Technologies AG     2,532,644  
      8,692     K+S AG     671,920  
      15,194     Kloeckner & Co AG *     495,676  
      25,633     Lanxess AG     1,910,014  
      14,089     MAN SE     1,795,606  
      17,999     MTU Aero Engines Holding AG     1,202,707  
      7,796     RWE AG     527,197  
      14,923     Salzgitter AG     1,241,834  
      44,511     SAP AG     2,689,741  
      7,692     Siemens AG (Registered)     1,039,996  
      6,911     Software AG     1,117,385  
      5,059     Stada Arzneimittel AG     202,599  
      29,341     Suedzucker AG     807,502  
                     
            Total Germany     38,148,097  
                     
                     
            Greece — 0.5%        
      60,941     Alpha Bank A.E. *     402,875  
      14,294     EFG Eurobank Ergasias *     91,292  
      73,690     National Bank of Greece SA *     685,096  
      69,302     OPAP SA     1,446,975  
      20,009     Public Power Corp SA     309,437  
                     
            Total Greece     2,935,675  
                     

         
6
  See accompanying notes to the financial statements.    

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
Shares     Description   Value ($)  
                     
            Hong Kong — 1.3%        
      101,000     BOC Hong Kong Holdings Ltd     314,073  
      258,400     CLP Holdings Ltd     2,104,701  
      160,365     Esprit Holdings Ltd     789,290  
      188,000     Hong Kong & China Gas     423,735  
      61,000     Hutchison Whampoa Ltd     720,404  
      715,000     Pacific Basin Shipping Ltd     419,788  
      260,000     Power Assets Holdings Ltd     1,699,699  
      55,000     Swire Pacific Ltd     771,861  
      175,000     Yue Yuen Industrial Holdings     552,121  
                     
            Total Hong Kong     7,795,672  
                     
                     
            Ireland — 0.9%        
      121,946     C&C Group Plc     594,443  
      105,452     CRH Plc     2,438,623  
      24,226     DCC Plc     777,551  
      29,096     Kerry Group Plc Class A     1,055,831  
      28,048     Smurfit Kappa Group Plc *     348,472  
                     
            Total Ireland     5,214,920  
                     
                     
            Italy — 6.5%        
      16,309     Benetton Group SPA     106,572  
      34,982     Bulgari SPA     370,830  
      1,413,959     Enel SPA     8,426,173  
      614,090     ENI SPA     14,973,094  
      62,016     Fiat SPA     575,917  
      22,972     Fondiaria–Sai SPA     217,413  
      254,826     Intesa San Paolo     859,907  
      42,591     Maire Tecnimont SPA     174,649  
      187,413     Mediaset SPA     1,206,546  
      65,932     Mediobanca SPA     698,011  
      118,581     Milano Assicurazioni SPA     197,169  
      80,720     Parmalat SPA     247,486  
      41,959     Recordati SPA     392,325  
      43,434     Saipem SPA     2,194,215  
      250,459     Snam Rete Gas SPA     1,370,387  

         
    See accompanying notes to the financial statements.   7

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
Shares     Description   Value ($)  
            Italy — continued        
      1,017,201     Telecom Italia SPA     1,588,078  
      1,553,914     Telecom Italia SPA-Di RISP     2,056,692  
      355,286     Terna SPA     1,638,883  
      726,043     UniCredit SPA     1,867,970  
                     
            Total Italy     39,162,317  
                     
                     
            Japan — 23.4%        
      5,200     ABC-Mart Inc     207,560  
      295     Advance Residence Investment Corp (REIT)     614,754  
      113,000     Aeon Co Ltd     1,425,742  
      24,400     Aisin Seiki Co Ltd     934,531  
      78,000     All Nippon Airways Co Ltd *     282,138  
      76,800     Alps Electric Co Ltd     1,035,218  
      13,000     Asahi Breweries Ltd     251,302  
      67,000     Asahi Glass Co Ltd     936,813  
      104,000     Asahi Kasei Corp     721,200  
      81,400     Astellas Pharma Inc     3,200,736  
      19,000     Canon Inc     918,829  
      35     Central Japan Railway Co     313,693  
      205,000     Cosmo Oil Co Ltd     744,663  
      127     CyberAgent Inc     407,526  
      49,500     Daiei Inc *     201,811  
      184,000     Daikyo Inc *     358,195  
      86,000     Dainippon Screen Manufacturing Co Ltd *     836,763  
      47,200     Daito Trust Construction Co Ltd     3,867,731  
      31,900     Dena Co Ltd     1,238,094  
      132,000     Denki Kagaku Kogyo K K     711,258  
      20,700     Don Quijote Co Ltd     723,759  
      39,000     Dowa Holdings Co Ltd     275,645  
      34,600     Eisai Co Ltd     1,296,188  
      22,600     Electric Power Development Co Ltd     714,022  
      26,700     Fanuc Ltd     4,170,785  
      7,600     Fast Retailing Co Ltd     1,193,236  
      178,000     Fuji Electric Holdings Co Ltd     604,273  
      157,000     Fuji Heavy Industries Ltd     1,352,876  

         
8
  See accompanying notes to the financial statements.    

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
Shares     Description   Value ($)  
            Japan — continued        
      23,500     Fuji Oil Co Ltd     335,657  
      113,000     Hanwa Co Ltd     527,082  
      577,000     Hitachi Ltd     3,511,865  
      90,600     Honda Motor Co Ltd     3,953,981  
      30,800     Hosiden Corp     354,145  
      79     INPEX Corp     555,123  
      353,000     Isuzu Motors Ltd     1,596,265  
      252,000     Itochu Corp     2,620,568  
      407     Japan Retail Fund Investment Corp (REIT)     700,524  
      27,800     JFE Holdings Inc     880,408  
      631,600     JX Holdings Inc     4,449,291  
      22,460     K’s Holdings Corp     758,533  
      365,000     Kajima Corp     978,436  
      62,000     Kamigumi Co Ltd     546,546  
      88,900     Kao Corp     2,401,264  
      229,000     Kawasaki Kisen Kaisha Ltd     1,002,206  
      418     KDDI Corp     2,714,518  
      187,000     Kobe Steel Ltd     511,812  
      62,900     Komatsu Ltd     1,929,689  
      13,000     Kyudenko Corp     83,102  
      7,700     Lawson Inc     379,161  
      231,000     Marubeni Corp     1,773,050  
      325,000     Mazda Motor Corp     841,697  
      254,000     Mitsubishi Chemical Holdings Corp     1,862,770  
      37,300     Mitsubishi Corp     1,037,770  
      116,000     Mitsubishi Electric Corp     1,378,366  
      20,350     Mitsubishi UFJ Lease & Finance Co Ltd     904,180  
      329,000     Mitsui Mining & Smelting Co Ltd     1,309,310  
      217,000     Mitsui OSK Lines Ltd     1,442,942  
      440,000     Mizuho Financial Group Inc     906,984  
      19,500     Murata Manufacturing Co Ltd     1,453,701  
      21,000     Nagase & Co     273,287  
      178     Net One Systems Co Ltd     286,672  
      4,200     Nintendo Co Ltd     1,235,158  
      19,000     Nippon Corp     134,099  

         
    See accompanying notes to the financial statements.   9

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
Shares     Description   Value ($)  
            Japan — continued        
      174,000     Nippon Steel Corp     632,804  
      68,000     Nippon Telegraph & Telephone Corp     3,326,416  
      288,000     Nippon Yusen KK     1,273,759  
      254,700     Nissan Motor Co Ltd     2,617,068  
      24,000     Nisshinbo Holdings Inc     263,838  
      9,550     Nitori Co Ltd     845,554  
      20,900     Nitto Denko Corp     1,267,388  
      2,114     NTT Docomo Inc     3,971,309  
      111,000     Obayashi Corp     499,343  
      19,300     Omron Corp     538,153  
      12,000     Ono Pharmaceutical Co Ltd     628,303  
      25,470     ORIX Corp     2,868,476  
      368,000     Osaka Gas Co Ltd     1,401,380  
      31,000     Pacific Metals Co Ltd     294,685  
      169,100     Pioneer Corp *     914,336  
      10,440     Point Inc     501,974  
      116,800     Resona Holdings Inc     638,087  
      54,400     Ricoh Company Ltd     725,854  
      80,100     Round One Corp     526,524  
      14,200     Ryohin Keikaku Co Ltd     675,408  
      7,600     Ryosan Co     199,712  
      25,000     Sankyo Co Ltd     1,415,962  
      26,700     Secom Co Ltd     1,347,942  
      30,500     Sega Sammy Holdings Inc     695,982  
      39,100     Seven & I Holdings Co Ltd     1,091,407  
      4,600     Shimamura Co Ltd     445,589  
      5,700     SMC Corp     978,413  
      43,800     SoftBank Corp     1,800,797  
      344,500     Sojitz Corp     776,963  
      272,400     Sumitomo Corp     4,047,102  
      305,423     Sumitomo Trust & Banking Co Ltd     1,946,035  
      434,000     Taiheiyo Cement Co Ltd *     645,685  
      375,000     Taisei Corp     889,509  
      19,000     Taisho Pharmaceutical Co Ltd     416,325  
      167,700     Takeda Pharmaceutical Co Ltd     8,354,806  

         
10
  See accompanying notes to the financial statements.    

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
Shares     Description   Value ($)  
            Japan — continued        
      112,000     Tokyo Gas Co Ltd     500,703  
      74,500     Tokyo Steel Manufacturing Co     832,342  
      165,000     Tokyo Tatemono Co Ltd     778,891  
      69,000     TonenGeneral Sekiyu KK     814,824  
      150,000     Tosoh Corp     539,156  
      101,900     Toyota Motor Corp     4,761,523  
      68,600     Toyota Tsusho Corp     1,302,629  
      20,700     Unicharm Corp     801,421  
      81,800     UNY Co Ltd     816,360  
      6,990     USS Co Ltd     567,213  
      1,632     Yahoo Japan Corp     615,274  
      27,070     Yamada Denki Co Ltd     2,067,841  
      64,500     Yamaha Motor Co Ltd *     1,147,290  
      46,000     Zeon Corp     471,975  
                     
            Total Japan     140,649,833  
                     
                     
            Malta — 0.0%        
      1,718,063     BGP Holdings Plc *     —  
                     
                     
            Netherlands — 1.6%        
      3,322     Boskalis Westminster     172,645  
      27,844     CSM     990,093  
      3,771     Fugro NV     317,217  
      4,124     Heineken Holding NV     189,443  
      21,047     Heineken NV     1,085,431  
      451,268     ING Groep NV *     5,660,944  
      56,813     Koninklijke BAM Groep NV     364,535  
      16,632     Koninklijke DSM NV     977,019  
                     
            Total Netherlands     9,757,327  
                     
                     
            New Zealand — 0.3%        
      109,281     Fletcher Building Ltd     725,197  
      658,907     Telecom Corp of New Zealand     1,037,263  
                     
            Total New Zealand     1,762,460  
                     

         
    See accompanying notes to the financial statements.   11

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
Shares     Description   Value ($)  
                     
            Norway — 0.4%        
      23,130     Acergy SA     595,850  
      30,400     DnB NOR ASA     470,509  
      15,844     Frontline Ltd     429,137  
      11,446     Statoil ASA     302,222  
      8,264     Yara International ASA     438,786  
                     
            Total Norway     2,236,504  
                     
                     
            Singapore — 2.9%        
      712,000     CapitaCommercial Trust (REIT)     773,055  
      228,000     Cosco Corp     353,437  
      346,000     Ezra Holdings Ltd     426,461  
      106,000     Fraser & Neave Ltd     469,303  
      921,000     Genting Singapore Plc *     1,386,836  
      4,598,000     Golden Agri-Resources Ltd     2,358,436  
      223,000     Ho Bee Investment Ltd     234,413  
      370,200     Jaya Holdings Ltd *     162,122  
      154,000     Keppel Corp Ltd     1,368,468  
      81,000     Keppel Land Ltd     269,497  
      667,500     Neptune Orient Lines Ltd *     1,081,400  
      160,000     Noble Group Ltd     259,545  
      161,000     Oversea-Chinese Banking Corp Ltd     1,168,778  
      407,000     SembCorp Marine Ltd     1,721,479  
      20,000     Singapore Airlines Ltd     214,761  
      186,000     Singapore Exchange Ltd     1,159,089  
      313,000     Singapore Press Holdings Ltd     955,572  
      829,670     Singapore Telecommunications     1,943,012  
      546,001     Suntec Real Estate Investment Trust (REIT)     636,866  
      391,000     Swiber Holdings Ltd *     242,258  
      42,000     Venture Corp Ltd     312,419  
                     
            Total Singapore     17,497,207  
                     
                     
            Spain — 1.8%        
      90,290     Banco Popular Espanol SA     546,116  
      164,861     Banco Santander SA     2,029,726  
      50,417     Gas Natural SDG SA     861,419  

         
12
  See accompanying notes to the financial statements.    

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
Shares     Description   Value ($)  
            Spain — continued        
      87,870     Iberdrola SA     766,666  
      22,039     Inditex SA     1,597,151  
      104,342     Repsol YPF SA     3,502,655  
      55,964     Telefonica SA     1,422,840  
                     
            Total Spain     10,726,573  
                     
                     
            Sweden — 3.6%        
      41,320     Alfa Laval AB     844,147  
      39,690     Assa Abloy AB Class B     1,111,567  
      42,420     Atlas Copco AB     964,272  
      93,076     Atlas Copco AB Class A     2,340,181  
      73,298     Hennes & Mauritz AB Class B     2,394,962  
      6,996     Modern Times Group AB Class B     468,197  
      95,323     Sandvik AB     1,829,500  
      42,403     Scania AB Class B     945,740  
      168,930     Skandinaviska Enskilda Banken AB Class A     1,536,610  
      48,983     SKF AB Class B     1,367,128  
      11,563     Svenska Handelsbanken AB Class A     390,589  
      161,311     Swedbank AB Class A *     2,842,313  
      25,856     Swedish Match AB     816,827  
      29,390     Tele2 AB Class B     671,056  
      56,462     Trelleborg AB Class B     566,990  
      146,994     Volvo AB Class B *     2,544,127  
                     
            Total Sweden     21,634,206  
                     
                     
            Switzerland — 5.5%        
      2,523     Bobst Group AG (Registered) *     116,888  
      72,126     Compagnie Financiere Richemont SA Class A     4,127,339  
      129,941     Nestle SA (Registered)     7,357,130  
      211,856     Novartis AG (Registered)     11,905,594  
      26,587     Roche Holding AG (Non Voting)     4,010,448  
      6,641     Swatch Group AG     2,828,810  
      2,252     Swisscom AG (Registered)     994,288  
      10,518     Synthes Inc     1,444,012  
                     
            Total Switzerland     32,784,509  
                     

         
    See accompanying notes to the financial statements.   13

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
Shares     Description   Value ($)  
                     
            United Kingdom — 21.0%        
      47,044     3i Group Plc     238,834  
      44,297     Aggreko Plc     1,042,362  
      79,832     Amlin Plc     502,798  
      26,816     Antofagasta Plc     614,134  
      255,800     ARM Holdings Plc     2,556,027  
      22,385     Associated British Foods Plc     351,794  
      316,375     AstraZeneca Plc     15,480,960  
      56,991     BAE Systems Plc     304,770  
      510,179     Barclays Plc     2,647,644  
      153,272     BG Group Plc     3,732,269  
      42,870     BHP Billiton Plc     1,699,342  
      419,744     BP Plc     3,383,837  
      52,050     British American Tobacco Plc     2,085,332  
      72,247     British Sky Broadcasting Group Plc     923,605  
      1,334,209     BT Group Plc     3,962,912  
      120,692     Burberry Group Plc     2,352,206  
      39,353     Capita Group Plc     464,124  
      284,183     Centrica Plc     1,571,499  
      197,295     Cobham Plc     723,094  
      131,875     Compass Group Plc     1,186,633  
      26,105     Cookson Group Plc *     277,687  
      13,123     Croda International Plc     337,844  
      46,636     Diageo Plc     911,762  
      147,071     Drax Group Plc     943,880  
      60,184     Eurasian Natural Resources Corp     944,277  
      39,184     Experian Plc     496,918  
      73,151     FirstGroup Plc     434,079  
      18,336     Fresnillo Plc     475,743  
      934,788     GlaxoSmithKline Plc     17,944,572  
      259,984     Home Retail Group Plc     932,881  
      52,842     HSBC Holdings Plc     581,957  
      45,792     ICAP Plc     387,620  
      41,712     IMI Plc     602,887  
      92,859     Inchcape Plc *     586,101  
      26,347     Intertek Group Plc     772,456  

         
14
  See accompanying notes to the financial statements.    

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
Shares     Description   Value ($)  
            United Kingdom — continued        
      40,448     J Sainsbury Plc     249,887  
      35,045     Kazakhmys Plc     823,738  
      242,975     Legal & General Group Plc     469,410  
      1,390,039     Lloyds Banking Group Plc *     1,403,756  
      206,704     Man Group Plc     965,836  
      55,775     Next Plc     1,791,558  
      35,724     Petrofac Ltd     808,869  
      243,834     Punch Taverns Plc *     263,509  
      34,328     Reckitt Benckiser Group Plc     1,769,809  
      57,698     Reed Elsevier Plc     515,162  
      74,581     Rio Tinto Plc     5,251,745  
      70,203     Rolls–Royce Group Plc *     704,633  
      178,548     Royal Dutch Shell Group Class A (Amsterdam)     6,427,672  
      87,292     Royal Dutch Shell Plc A Shares (London)     3,140,141  
      183,501     Royal Dutch Shell Plc B Shares (London)     6,559,853  
      156,433     Sage Group Plc (The)     722,993  
      63,700     Scottish & Southern Energy Plc     1,282,904  
      39,291     Shire Plc     1,112,734  
      128,530     Smith & Nephew Plc     1,488,815  
      72,945     Standard Chartered Plc     1,929,311  
      71,541     Travis Perkins Plc     1,157,500  
      14,465     Unilever Plc     428,870  
      2,703,170     Vodafone Group Plc     7,674,557  
      44,654     Weir Group Plc (The)     1,244,795  
      253,927     William Hill Plc     791,830  
      62,961     Wolseley Plc *     2,192,201  
      82,850     WPP Plc     1,140,214  
      49,729     Xstrata Plc     1,137,358  
                     
            Total United Kingdom     125,904,500  
                     
                     
            TOTAL COMMON STOCKS (COST $456,319,017)     581,895,307  
                     

         
    See accompanying notes to the financial statements.   15

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
Shares /
 		           
Par Value     Description   Value ($)  
                     
            PREFERRED STOCKS — 1.3%        
                     
            Germany — 1.3%        
      13,919     Henkel AG & Co KGaA 1.61%     838,648  
      25,650     Porsche Automobil Holding SE 0.17%     2,043,449  
      36,657     ProSiebenSat.1 Media AG 4.97%     1,191,192  
      21,154     Volkswagen AG 1.87%     3,597,339  
                     
            Total Germany     7,670,628  
                     
                     
            TOTAL PREFERRED STOCKS (COST $5,628,156)     7,670,628  
                     
                     
            RIGHTS AND WARRANTS — 0.0%        
                     
            Austria — 0.0%        
      153,570     Immofinanz AG Rights, Expires 03/02/11 *     —  
                     
                     
            TOTAL RIGHTS AND WARRANTS (COST $0)     —  
                     
                     
            MUTUAL FUNDS — 0.0%        
                     
            United States — 0.0%        
            Affiliated Issuers        
      10,521     GMO U.S. Treasury Fund     263,025  
                     
                     
            TOTAL MUTUAL FUNDS (COST $263,025)     263,025  
                     
                     
            SHORT-TERM INVESTMENTS — 1.4%        
                     
            Time Deposits — 1.4%        
AUD
    94,518     Brown Brothers Harriman (Grand Cayman) Time Deposit, 3.84%, due 03/01/11     96,234  
CAD
    12,735     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.23%, due 03/01/11     13,108  
CHF
    9,576     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.01%, due 03/01/11     10,306  
JPY
    2,579,450     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.01%, due 03/01/11     31,532  
NOK
    218,711     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.97%, due 03/01/11     39,054  
NZD
    37,260     Brown Brothers Harriman (Grand Cayman) Time Deposit, 2.15%, due 03/01/11     28,033  
SEK
    143,388     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.55%, due 03/01/11     22,639  
SGD
    67,722     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.01%, due 03/01/11     53,249  
GBP
    27,821     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.09%, due 03/01/11     45,227  
HKD
    77,836     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.01%, due 03/01/11     9,994  

         
16
  See accompanying notes to the financial statements.    

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
Par Value     Description   Value ($)  
            Time Deposits — continued        
DKK
    55,971     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.05%, due 03/01/11     10,359  
EUR
    3,371,041     Brown Brothers Harriman (Grand Cayman) Time Deposit, 0.12%, due 03/01/11     4,651,869  
EUR
    2,171,946     Citibank (New York) Time Deposit, 0.12%, due 03/01/11     2,997,176  
USD
    298,217     HSBC Bank (New York) Time Deposit, 0.03%, due 03/01/11     298,217  
                     
            Total Time Deposits     8,306,997  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $8,306,997)     8,306,997  
                     
                     
            TOTAL INVESTMENTS — 99.7%
(Cost $470,517,195) 		    598,135,957  
            Other Assets and Liabilities (net) — 0.3%     1,739,636  
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 599,875,593  
                     
 
Notes to Schedule of Investments:
 
REIT - Real Estate Investment Trust
* Non-income producing security.
 
Currency Abbreviations:
 
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
DKK - Danish Krone
EUR - Euro
GBP - British Pound
HKD - Hong Kong Dollar
JPY - Japanese Yen
NOK - Norwegian Krone
NZD - New Zealand Dollar
SEK - Swedish Krona
SGD - Singapore Dollar
USD - United States Dollar

         
    See accompanying notes to the financial statements.   17

 

GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $470,254,170) (Note 2)
  $ 597,872,932  
Investments in affiliated issuers, at value (cost $263,025) (Notes 2 and 10)
    263,025  
Foreign currency, at value (cost $1,345) (Note 2)
    1,358  
Dividends receivable
    2,057,146  
Foreign taxes receivable
    144,580  
Receivable for expenses reimbursed by Manager (Note 5)
    50,204  
Miscellaneous receivable
    28  
         
Total assets
    600,389,273  
         
         
Liabilities:
       
Payable to affiliate for (Note 5):
       
Management fee
    228,099  
Shareholder service fee
    68,430  
Trustees and Trust Officers or agents unaffiliated with the Manager
    1,413  
Accrued expenses
    215,738  
         
Total liabilities
    513,680  
         
Net assets
  $ 599,875,593  
         
Net assets consist of:
       
Paid-in capital
  $ 589,509,080  
Distributions in excess of net investment income
    (2,250,363 )
Accumulated net realized loss
    (115,112,371 )
Net unrealized appreciation
    127,729,247  
         
    $ 599,875,593  
         
Net assets attributable to:
       
Class III shares
  $ 599,875,593  
         
Shares outstanding:
       
Class III
    38,929,206  
         
Net asset value per share:
       
Class III
  $ 15.41  
         

         
18
  See accompanying notes to the financial statements.    

 

GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends (net of withholding taxes of $1,440,746)
  $ 15,888,514  
Interest
    14,982  
Dividends from affiliated issuers (Note 10)
    169  
         
Total investment income
    15,903,665  
         
Expenses:
       
Management fee (Note 5)
    2,785,950  
Shareholder service fee – Class III (Note 5)
    835,785  
Custodian and fund accounting agent fees
    406,763  
Audit and tax fees
    89,848  
Transfer agent fees
    33,913  
Legal fees
    22,118  
Trustees fees and related expenses (Note 5)
    11,929  
Registration fees
    1,012  
Miscellaneous
    54,693  
         
Total expenses
    4,242,011  
Fees and expenses reimbursed by Manager (Note 5)
    (594,364 )
Expense reductions (Note 2)
    (248 )
         
Net expenses
    3,647,399  
         
Net investment income (loss)
    12,256,266  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in unaffiliated issuers
    4,979,859  
Futures contracts
    248,283  
Written options
    491,823  
Foreign currency, forward contracts and foreign currency related transactions
    (34,034 )
         
Net realized gain (loss)
    5,685,931  
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in unaffiliated issuers
    93,401,227  
Futures contracts
    308,049  
Written options
    (255,555 )
Foreign currency, forward contracts and foreign currency related transactions
    269,458  
         
Net unrealized gain (loss)
    93,723,179  
         
Net realized and unrealized gain (loss)
    99,409,110  
         
Net increase (decrease) in net assets resulting from operations
  $ 111,665,376  
         

         
    See accompanying notes to the financial statements.   19

 

GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 12,256,266     $ 11,114,190  
Net realized gain (loss)
    5,685,931       (73,948,723 )
Change in net unrealized appreciation (depreciation)
    93,723,179       238,686,937  
                 
                 
Net increase (decrease) in net assets from operations
    111,665,376       175,852,404  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (12,622,343 )     (15,061,272 )
                 
                 
Net share transactions (Note 9):
               
Class III
    (46,345,846 )     (27,636,783 )
                 
                 
Total increase (decrease) in net assets
    52,697,187       133,154,349  
                 
Net assets:
               
Beginning of period
    547,178,406       414,024,057  
                 
End of period (including distributions in excess of net investment income of $2,250,363 and $2,405,751, respectively)
  $ 599,875,593     $ 547,178,406  
                 

         
20
  See accompanying notes to the financial statements.    

 

GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 12.97     $ 9.28     $ 18.73     $ 20.76     $ 18.31  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.30       0.26       0.48       0.51       0.36  
Net realized and unrealized gain (loss)
    2.47       3.80       (8.92 )     0.20 (a)     3.28  
                                         
                                         
Total from investment operations
    2.77       4.06       (8.44 )     0.71       3.64  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.33 )     (0.37 )     (0.49 )     (0.57 )     (0.40 )
From net realized gains
    —       —       (0.52 )     (2.17 )     (0.79 )
                                         
                                         
Total distributions
    (0.33 )     (0.37 )     (1.01 )     (2.74 )     (1.19 )
                                         
                                         
Net asset value, end of period
  $ 15.41     $ 12.97     $ 9.28     $ 18.73     $ 20.76  
                                         
                                         
Total Return(b)
    21.51 %     43.60 %     (46.71 )%     2.28 %     20.33 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 599,876     $ 547,178     $ 414,024     $ 1,092,346     $ 1,105,264  
Net expenses to average daily net assets
    0.65 %(c)(d)     0.65 %(c)     0.67 %(c)     0.69 %(c)     0.69 %
Net investment income (loss) to average daily net assets
    2.20 %     2.08 %     3.09 %     2.33 %     1.83 %
Portfolio turnover rate
    40 %     49 %     67 %     41 %     34 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.11 %     0.09 %     0.11 %     0.09 %     0.08 %
 
(a) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain (loss) on investments due to the timing of purchases and redemptions of Fund shares in relation to fluctuating market values of the investments of the Fund.
(b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(c) The net expense ratio does not include the effect of expense reductions (Note 2).
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
† Calculated using average shares outstanding throughout the period.

         
    See accompanying notes to the financial statements.   21

 

GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO Tax-Managed International Equities Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund’s investment objective is high after-tax total return. The Manager seeks to achieve the Fund’s investment objective by investing in equities or groups of equities that the Manager believes will provide higher returns than the MSCI EAFE Index (after tax). The Manager uses active investment management methods, which means that equities are bought and sold according to the Manager’s evaluation of companies’ published financial information, securities’ prices, equity and bond markets, and the overall economy.
 
In selecting equities for the Fund, the Manager may use a combination of investment methods to identify equities that the Manager believes present positive return potential relative to other equities. Some of these methods evaluate individual equities or a group of equities based on the ratio of their price relative to historical financial information and forecasted financial information provided by industry analysts. Historical financial information may include book value, cash flow and earnings. The Manager may compare these ratios to industry or market averages in order to assess the relative attractiveness of an equity. Other methods focus on evaluating patterns of price movement or volatility of an equity or group of equities relative to the Fund’s investment universe. The Manager also may adjust the Fund’s portfolio for factors such as position size, market capitalization, and exposure to groups such as industry, sector, country or currency.
 
The Manager considers the tax effects of a proposed trade in conjunction with the return forecast of the identified equities, and their potential contribution to the overall portfolio. The Manager also may consider the Fund’s available realized and unrealized amounts of gains and losses, and current market conditions.
 
As a substitute for direct investments in equities, the Manager may use exchange-traded and over-the-counter (“OTC”) derivatives. The Manager also may use derivatives: (i) in an attempt to reduce investment exposures (which may result in a reduction below zero); (ii) to effect transactions intended as substitutes for securities lending; and (iii) in an attempt to adjust elements of the Fund’s investment exposure. Derivatives used may include futures, options, forward currency contracts and swap contracts. In addition, the Fund may lend its portfolio securities.
 
The Fund typically invests directly and indirectly (e.g., through underlying funds or derivatives) in equities of companies tied economically to countries other than the U.S. Under normal circumstances, the Fund

         
22
       

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
invests directly and indirectly at least 80% of its assets in equity investments. The terms “equities” and “equity investments” refer to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts. The Manager may make investments tied economically to emerging countries. These investments generally will represent 15% or less of the Fund’s total assets.
 
For cash management purposes, the Fund may invest in unaffiliated money market funds and/or GMO U.S. Treasury Fund.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the OTC market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. Additionally, because many foreign equity securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign equity securities as of the NYSE close using fair value prices, which are based on local closing prices adjusted by a factor supplied by a third party vendor using that vendor’s proprietary models. As of February 28, 2011, 96.3% of the net assets of the Fund were valued using fair value prices based on those adjustments and are

         
        23

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
classified as using Level 2 inputs in the table below. See Note 4 for a further discussion on valuation of derivative financial instruments.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include: fair value adjustments applied to local closing prices of foreign securities and derivatives due to market events that have occurred since the local market close but before the Fund’s daily NAV calculation.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant.

         
24
       

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Common Stocks
                               
Australia
  $ —     $ 17,368,305     $      —     $ 17,368,305  
Austria
    —       5,239,844       —       5,239,844  
Belgium
    —       5,125,577       —       5,125,577  
Canada
    11,662,407       —       —       11,662,407  
Denmark
    —       11,373,619       —       11,373,619  
Finland
    —       7,042,734       —       7,042,734  
France
    —       67,873,021       —       67,873,021  
Germany
    —       38,148,097       —       38,148,097  
Greece
    —       2,935,675       —       2,935,675  
Hong Kong
    —       7,795,672       —       7,795,672  
Ireland
    —       5,214,920       —       5,214,920  
Italy
    —       39,162,317       —       39,162,317  
Japan
    —       140,649,833       —       140,649,833  
Malta
    —       0 *     —       0  
Netherlands
    —       9,757,327       —       9,757,327  
New Zealand
    —       1,762,460       —       1,762,460  
Norway
    —       2,236,504       —       2,236,504  
Singapore
    —       17,497,207       —       17,497,207  
Spain
    —       10,726,573       —       10,726,573  
Sweden
    —       21,634,206       —       21,634,206  
Switzerland
    —       32,784,509       —       32,784,509  
United Kingdom
    —       125,904,500       —       125,904,500  
                                 
TOTAL COMMON STOCKS
    11,662,407       570,232,900       —       581,895,307  
                                 
Preferred Stocks
                               
Germany
    —       7,670,628       —       7,670,628  
                                 
TOTAL PREFERRED STOCKS
    —       7,670,628       —       7,670,628  
                                 
Rights and Warrants
                               
Austria
    —       0 *     —       0  
                                 
TOTAL RIGHTS AND WARRANTS
    —       0       —       0  
                                 

         
        25

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
  
  ASSET VALUATION INPUTS — continued
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Mutual Funds
                               
United States
  $ 263,025     $ —     $ —     $ 263,025  
                                 
TOTAL MUTUAL FUNDS
    263,025       —       —       263,025  
                                 
Short-Term Investments
                               
Time Deposits
    8,306,997       —       —       8,306,997  
                                 
Total Short-Term Investments
    8,306,997       —       —       8,306,997  
                                 
Total Investments
    20,232,429       577,903,528       —       598,135,957  
                                 
Total
  $ 20,232,429     $ 577,903,528     $ —     $ 598,135,957  
                                 
 
            * Represents the interest in securities that have no value at February 28, 2011.
 
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
The Fund held no investments or derivative financial instruments directly at either February 28, 2011 or February 28, 2010, whose fair value was categorized using Level 3 inputs.
 
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 pm. Income and expenses denominated in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.

         
26
       

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are generally withheld in accordance with the applicable country’s tax treaty with the United States. The foreign withholding rates applicable to a Fund’s investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Foreign taxes paid by the Fund may be treated, to the extent permissible under the Code and if the Fund so elects, as if paid by the shareholders of the Fund.
 
The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Taxes related to capital gains realized during the year ended February 28, 2011, if any, are reflected as part of Net realized gain (loss) in the Statement of Operations. Changes in tax liabilities related to capital gain taxes on unrealized investment gains, if any, are reflected as part of Change in net unrealized appreciation (depreciation) in the Statement of Operations. Transaction based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to passive foreign investment company transactions, capital loss carryforwards, and losses on wash sale transactions.

         
        27

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 12,622,343     $ 15,061,272  
                 
Total distributions
  $ 12,622,343     $ 15,061,272  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 3,132,673  
         
Other Tax Attributes:
       
Capital loss carryforwards
  $ (115,112,358 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 28, 2018
  $ (115,112,358 )
         
Total
  $ (115,112,358 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 475,758,657     $ 130,043,213     $ (7,665,913 )   $ 122,377,300      
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of

         
28
       

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (Note 5).
 
Brown Brothers Harriman & Co. (“BBH”) serves as the Fund’s custodian and fund accounting agent. State Street Bank and Trust Company (“State Street”) serves as the Fund’s transfer agent. BBH’s and State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with each agent. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. There can be no assurance that the Fund’s tax management strategies will be effective, and an investor may incur tax liabilities that exceed their economic return. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of

         
        29

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund’s investments.
 
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund needs to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund’s investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund’s investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
 
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of the Fund’s foreign currency holdings and investments denominated in foreign currencies.
 
Other principal risks of an investment in the Fund include Market Risk — Value Securities (risk that the price of the Fund’s investments will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Liquidity Risk (difficulty in selling Fund investments at desirable prices and/or increased likelihood of honoring redemption requests in kind); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund’s securities); Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such

         
30
       

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by “equitizing” its cash balances using futures contracts or other types of derivatives. The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically “sell” a portion of the Fund’s portfolio) in combination with a long futures contract on another index (to synthetically “buy” exposure to that index). The Funds also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically

         
        31

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral (e.g., foreign currency forwards; see “Currency Risk” above), that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In

         
32
       

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
 
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund’s forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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.
 
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. During the year ended February 28, 2011, the Fund used forward currency contracts to manage against anticipated currency exchange rates and to adjust exposure to foreign currencies. The Fund had no forward currency contracts outstanding at the end of the period.
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. Because regular trading on many foreign exchanges closes prior to the close of the NYSE, closing prices for these foreign

         
        33

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
futures contracts (including foreign index futures) do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund generally values foreign futures contracts using fair value prices, which are based on local closing prices adjusted by a factor, supplied by a third party vendor using that vendor’s proprietary models. During the year ended February 28, 2011, the Fund used futures contracts to maintain the diversity and liquidity of the portfolio and to adjust exposure to certain securities markets. The fund had no futures contracts outstanding at the end of the period.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. During the year ended February 28, 2011, the Fund used purchased call options contracts to as a substitute for direct equity investment (when paired with written put options). The Fund had no purchased option contracts outstanding at the end of the period.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. During the year ended February 28, 2011, the Fund used written put option contracts as a substitute for direct investment (when paired with purchased call options). The Fund had no written option contracts outstanding at the end of the period.
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in

         
34
       

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
For the year ended February 28, 2011, investment activity in options contracts written by the Fund was as follows:
 
                                                 
    Puts   Calls
    Principal
           Principal
        
    Amount
   Number
       Amount
   Number
    
    of Contracts   of Contracts   Premiums   of Contracts   of Contracts   Premiums
 
Outstanding, beginning of year
    (1,047,916 )          —     $ (491,823 )          —            —     $      —  
Options written
    —       —       —       —       —       —  
Options exercised
    —       —       —                          
Options expired
    1,047,916       —       491,823       —       —       —  
Options sold
    —       —       —       —       —       —  
                                                 
Outstanding, end of year
    —       —     $ —       —       —     $ —  
                                                 
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.

         
        35

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.

         
36
       

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. During the year ended February 28, 2011, the Fund held rights and warrants as a result of a corporate action. Rights and warrants held by the Fund at the end of the period are listed in the Fund’s Schedule of Investments.
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of
February 28, 2011Ù:
 
                                         
    Interest rate
   Foreign currency
   Equity
   Other
    
    contracts   contracts   contracts   contracts   Total
 
Assets:
                                       
Investments, at value (rights and warrants)
  $      —     $      —     $ 0     $      —     $ 0  
                                         
Total
  $ —     $ —     $ 0     $ —     $ 0  
                                         

         
        37

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended
February 28, 2011Ù:
 
                                         
    Interest rate
   Foreign currency
   Equity
   Other
    
    contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                       
Investments, at value, (rights and warrants)
  $      —     $ —     $ (88,962 )   $      —     $ (88,962 )
Forward Currency Contracts
            (12,016 )                     (12,016 )
Futures Contracts
                    248,283               248,283  
Written option contracts
                    491,823               491,823  
                                         
Total
  $ —     $ (12,016 )   $ 651,144     $ —     $ 639,128  
                                         
Change in Unrealized Appreciation (Depreciation) on:
                                       
Futures contracts
  $ —     $ —     $ 308,049     $ —     $ 308,049  
Investments, (rights and warrants)
    —       —       (247,719 )     —       (247,719 )
Forward currency contracts
    —       117,049       —       —       117,049  
Written option contracts
    —       —       (255,555 )     —       (255,555 )
                                         
Total
  $ —     $ 117,049     $ (195,225 )   $ —     $ (78,176 )
                                         
 
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
 
The volume of derivative activity, based on absolute values (forward currency contracts, futures contracts, and right and warrants), or principal amounts (options) outstanding at each month-end, was as follows for the period ended February 28, 2011:
 
                                 
    Forward
            
    currency
   Futures
       Rights/
    contracts   contracts   Options   Warrants
 
Average amount outstanding
  $ 2,929,814     $ 3,789,771     $ 1,587,698     $ 20,161  
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.50% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.50% of the Fund’s average daily net assets (the “Expense Reimbursement

         
38
       

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund’s Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund’s Expense Reimbursement Amount. These contractual expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $11,929 and $4,043, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
             
Indirect Net Expenses
 		           
(excluding shareholder
            
service fees and
     Indirect Shareholder
      
interest expense)     Service Fees     Total Indirect Expenses
< 0.001%
    0.000%     < 0.001%
             
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 aggregated $214,455,334 and $246,353,776, respectively.
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.

         
        39

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 22.38% of the outstanding shares of the Fund were held by two shareholders. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
 
As of February 28, 2011, 0.63% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and none of the Fund’s shares were held by accounts for which the Manager had investment discretion.
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    3,622,498     $ 45,310,663       4,695,558     $ 58,406,771  
Shares issued to shareholders in reinvestment of distributions
    471,904       6,752,942       550,972       7,346,499  
Shares repurchased
    (7,368,609 )     (98,409,451 )     (7,646,088 )     (93,390,053 )
                                 
Net increase (decrease)
    (3,274,207 )   $ (46,345,846 )     (2,399,558 )   $ (27,636,783 )
                                 
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                 
    Value,
               Distributions
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   period
 
GMO U.S. Treasury Fund
  $      —     $ 3,371,093     $ 3,108,068     $ 169     $      —     $ 263,025  
                                                 
Totals
  $ —     $ 3,371,093     $ 3,108,068     $ 169     $ —     $ 263,025  
                                                 

         
40
       

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Tax-Managed International Equities Fund:
 
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Tax-Managed International Equities Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
        41

 

GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
42
       

 

 
GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.66 %   $ 1,000.00     $ 1,253.80     $ 3.69  
2) Hypothetical
    0.66 %   $ 1,000.00     $ 1,021.52     $ 3.31  
                                 
 
            * Expenses are calculated using the Class’s annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
        43

 

GMO Tax-Managed International Equities Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
During the year ended February 28, 2011, the Fund paid foreign taxes of $1,439,884 and recognized foreign source income of $17,328,398.
 
For taxable, non-corporate shareholders, 100.00% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 represents qualified dividend income subject to the 15% rate category.

         
44
       

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
   Position(s)
   Length of
   During Past
   Complex
     Other Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
        45

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
   Position(s)
   Length of
   During Past
   Complex
     Other Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee; President and
Chief Executive
Officer of the Trust 		  Trustee since March 2010;
President and Chief Executive
Officer since March 2009. 		  General Counsel,
Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005). 		    63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
46        

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        47

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money
Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
48
       

 

 
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
 
Portfolio Managers
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Quantitative Equity Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
GMO Tax-Managed U.S. Equities Fund returned +15.2% for the fiscal year ended February 28, 2011, as compared with +24.3% for the Russell 3000 Index.
 
The Fund’s underperformance for the fiscal year is attributed to the combination of sector selection and stock selection. Within sector selection, underweight exposure to Energy stocks, the top performing sector for the period, detracted from relative returns. Overweight exposure to Health Care and Consumer Staples stocks, which lagged the market, also detracted from relative returns. The portfolio benefited from underweight exposure to Financial Services stocks, which also lagged the market.
 
Stock selection also detracted from relative performance. Selections within Consumer Staples, Health Care, and Information Technology were the three primary detractors. Within Consumer Staples, overweight exposure to Wal-Mart, which lagged the market, detracted from relative returns. This loss more than offset the gain from overweight exposure to Phillip Morris International, which outpaced the market. Within Health Care, the primary detractor was overweight exposure to Merck, which declined over the period, and Johnson & Johnson, which posted near-zero results. Within Information Technology, losses from overweight exposure to Cisco and Microsoft, which both declined over the period, more than offset gains from overweight exposure to Apple and Oracle, which outperformed the market.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice. References to specific securities are not recommendations of such securities and may not be representative of any GMO portfolio’s current or future investments.

 

 
Comparison of Change in Value of a $5,000,000 Investment in
GMO Tax-Managed U.S. Equities Fund Class III Shares and the Russell 3000 Index
As of February 28, 2011
 
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited.
 
 
* Russell 3000 + Index represents the S&P 500 Index prior to October 15, 2007 and the Russell 3000 Index thereafter.
 
The Russell 3000® Index is a trademark/service mark of the Frank Russell Company. Russelltm is a trademark of the Frank Russell Company.

 

GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary   % of Total Net Assets  
Common Stocks
    98.5 %
Mutual Funds
    1.4  
Short-Term Investments
    0.1  
Rights and Warrants
    0.1  
Other
    (0.1 )
         
      100.0 %
         
 
         
Industry Group Summary   % of Equity Investments*  
Software & Services
    21.1 %
Pharmaceuticals, Biotechnology & Life Sciences
    19.5  
Food, Beverage & Tobacco
    11.4  
Health Care Equipment & Services
    9.1  
Household & Personal Products
    6.4  
Technology Hardware & Equipment
    6.3  
Food & Staples Retailing
    6.0  
Capital Goods
    3.9  
Consumer Services
    2.6  
Retailing
    2.1  
Energy
    2.1  
Telecommunication Services
    1.9  
Insurance
    1.5  
Consumer Durables & Apparel
    1.5  
Media
    1.3  
Materials
    0.9  
Commercial & Professional Services
    0.6  
Transportation
    0.5  
Real Estate
    0.4  
Diversified Financials
    0.2  
Semiconductors & Semiconductor Equipment
    0.2  
Automobiles & Components
    0.2  
Banks
    0.2  
Utilities
    0.1  
         
      100.0 %
         
 
* Equity investments may consist of common stocks, and other stock-related securities, such as preferred stocks. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.

         
        1

 

GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            COMMON STOCKS — 98.5%        
                     
            Automobiles & Components — 0.2%        
      100     Autoliv, Inc.     7,489  
      100     BorgWarner, Inc. *     7,761  
      100     Dana Holding Corp. *     1,888  
      100     Harley-Davidson, Inc.     4,082  
      200     TRW Automotive Holdings Corp. *     11,360  
                     
            Total Automobiles & Components     32,580  
                     
                     
            Banks — 0.2%        
      1,400     CapitalSource, Inc.     10,612  
      100     CIT Group, Inc. *     4,332  
      200     New York Community Bancorp, Inc.     3,732  
      100     PNC Financial Services Group, Inc.     6,170  
      200     Regions Financial Corp.     1,528  
                     
            Total Banks     26,374  
                     
                     
            Capital Goods — 3.9%        
      2,600     3M Co.     239,798  
      200     Ametek, Inc.     8,390  
      200     Caterpillar, Inc.     20,586  
      100     Cummins, Inc.     10,112  
      1,800     Danaher Corp.     91,080  
      200     Deere & Co.     18,030  
      100     Eaton Corp.     11,078  
      100     Fastenal Co.     6,213  
      200     General Electric Co.     4,184  
      800     General Dynamics Corp.     60,896  
      200     Ingersoll-Rand Plc     9,060  
      100     ITT Industries, Inc.     5,793  
      100     Joy Global, Inc.     9,738  
      100     L-3 Communications Holdings, Inc.     7,929  
      60     Lockheed Martin Corp.     4,750  
      100     Navistar International Corp. *     6,198  
      200     Northrop Grumman Corp.     13,336  

         
2
  See accompanying notes to the financial statements.    

 

 
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Capital Goods — continued        
      100     Paccar, Inc.     5,013  
      100     Parker Hannifin Corp.     8,918  
      130     Precision Castparts Corp.     18,427  
      200     Primoris Services Corp.     1,710  
      300     Rockwell Collins, Inc.     19,332  
      600     United Technologies Corp.     50,124  
                     
            Total Capital Goods     630,695  
                     
                     
            Commercial & Professional Services — 0.6%        
      300     Copart, Inc. *     12,603  
      200     Dun & Bradstreet Corp.     16,160  
      200     IHS, Inc.-Class A *     16,740  
      500     Pitney Bowes, Inc.     12,590  
      500     Rollins, Inc.     9,810  
      300     Stericycle, Inc. *     25,926  
      100     Verisk Analytics, Inc.-Class A *     3,235  
                     
            Total Commercial & Professional Services     97,064  
                     
                     
            Consumer Durables & Apparel — 1.5%        
      700     Coach, Inc.     38,444  
      40     Deckers Outdoor Corp. *     3,529  
      100     Fortune Brands, Inc.     6,186  
      100     Fossil, Inc. *     7,674  
      1,900     Nike, Inc.-Class B     169,157  
      200     VF Corp.     19,134  
                     
            Total Consumer Durables & Apparel     244,124  
                     
                     
            Consumer Services — 2.6%        
      700     Apollo Group, Inc.-Class A *     31,682  
      30     Chipotle Mexican Grill, Inc. *     7,350  
      200     Choice Hotels International, Inc.     7,724  
      200     Darden Restaurants, Inc.     9,426  
      100     ITT Educational Services, Inc. *     7,585  
      400     Las Vegas Sands Corp. *     18,656  

         
    See accompanying notes to the financial statements.   3

 

 
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Consumer Services — continued        
      3,900     McDonald’s Corp.     295,152  
      100     MGM Mirage *     1,394  
      200     Weight Watchers International, Inc.     12,226  
      40     Wynn Resorts Ltd.     4,917  
      500     Yum! Brands, Inc.     25,165  
                     
            Total Consumer Services     421,277  
                     
                     
            Diversified Financials — 0.2%        
      200     American Capital Ltd. *     1,868  
      200     Capital One Financial Corp.     9,954  
      200     GAMCO Investors, Inc.-Class A     9,288  
      100     Safeguard Scientifics, Inc. *     2,098  
      1,000     SLM Corp. *     14,820  
                     
            Total Diversified Financials     38,028  
                     
                     
            Energy — 2.0%        
      100     Approach Resources, Inc. *     3,255  
      100     Baker Hughes, Inc.     7,105  
      600     Chevron Corp.     62,250  
      100     Concho Resources Inc. *     10,652  
      1,574     ConocoPhillips     122,568  
      10     Diamond Offshore Drilling, Inc.     782  
      100     Exxon Mobil Corp.     8,553  
      500     Marathon Oil Corp.     24,800  
      100     Murphy Oil Corp.     7,353  
      300     National Oilwell Varco, Inc.     23,871  
      100     Oil States International, Inc. *     7,279  
      100     Pioneer Natural Resources Co.     10,234  
      100     Rowan Cos, Inc. *     4,267  
      150     Schlumberger Ltd.     14,013  
      100     Ship Finance International Ltd.     2,079  
      200     Sunoco, Inc.     8,372  
      500     Valero Energy Corp.     14,090  
                     
            Total Energy     331,523  
                     

         
4
  See accompanying notes to the financial statements.    

 

 
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Food & Staples Retailing — 5.9%        
      700     Costco Wholesale Corp.     52,353  
      500     CVS Caremark Corp.     16,530  
      1,000     Kroger Co. (The)     22,900  
      300     Safeway, Inc.     6,546  
      2,300     Sysco Corp.     63,917  
      4,000     Walgreen Co.     173,360  
      12,000     Wal-Mart Stores, Inc.     623,760  
                     
            Total Food & Staples Retailing     959,366  
                     
                     
            Food, Beverage & Tobacco — 11.2%        
      5,800     Altria Group, Inc.     147,146  
      600     Brown-Forman Corp.-Class B     41,490  
      1,100     Campbell Soup Co.     37,026  
      500     Coca-Cola Enterprises, Inc.     13,150  
      8,600     Coca-Cola Co. (The)     549,712  
      300     Flowers Foods, Inc.     7,980  
      2,300     General Mills, Inc.     85,422  
      400     Hansen Natural Corp. *     23,020  
      1,000     Hershey Co. (The)     52,320  
      700     HJ Heinz Co.     35,154  
      1,200     Hormel Foods Corp.     32,880  
      200     J.M. Smucker Co. (The)     13,768  
      1,500     Kellogg Co.     80,340  
      500     Kraft Foods, Inc.-Class A     15,920  
      600     Lorillard, Inc.     46,062  
      600     McCormick & Co., Inc. (Non Voting)     28,590  
      6,030     PepsiCo, Inc.     382,423  
      3,200     Philip Morris International, Inc.     200,896  
      1,000     Reynolds American, Inc.     34,320  
      500     Sara Lee Corp.     8,560  
                     
            Total Food, Beverage & Tobacco     1,836,179  
                     

         
    See accompanying notes to the financial statements.   5

 

 
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Health Care Equipment & Services — 8.9%        
      600     Aetna, Inc.     22,416  
      200     AMERIGROUP Corp. *     11,470  
      600     AmerisourceBergen Corp.     22,746  
      2,200     Baxter International, Inc.     116,930  
      900     Becton, Dickinson and Co.     72,000  
      400     C.R. Bard, Inc.     39,104  
      600     Cardinal Health, Inc.     24,984  
      300     CareFusion Corp. *     8,196  
      300     Cerner Corp. *     30,135  
      300     Coventry Health Care, Inc. *     9,060  
      500     DENTSPLY International, Inc.     18,685  
      500     Edwards Lifesciences Corp. *     42,520  
      1,700     Express Scripts, Inc. *     95,574  
      200     Gen-Probe, Inc. *     12,576  
      300     Health Net, Inc. *     8,826  
      400     Henry Schein, Inc. *     27,592  
      300     Humana, Inc. *     19,503  
      300     Idexx Laboratories, Inc. *     23,310  
      60     Intuitive Surgical, Inc. *     19,677  
      200     Kinetic Concepts, Inc. *     9,794  
      500     Laboratory Corp. of America Holdings *     45,065  
      300     McKesson Corp.     23,784  
      200     Mednax, Inc. *     12,986  
      4,500     Medtronic, Inc.     179,640  
      400     Omnicare, Inc.     11,452  
      500     Patterson Cos., Inc.     16,690  
      600     Quest Diagnostics, Inc.     34,050  
      600     ResMed, Inc. *     18,960  
      1,400     Stryker Corp.     88,564  
      1,300     St Jude Medical, Inc. *     62,244  
      4,721     UnitedHealth Group, Inc.     201,020  
      400     Varian Medical Systems, Inc. *     27,712  
      100     VCA Antech, Inc. *     2,504  

         
6
  See accompanying notes to the financial statements.    

 

 
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Health Care Equipment & Services — continued        
      700     WellPoint, Inc. *     46,529  
      900     Zimmer Holdings, Inc. *     56,106  
                     
            Total Health Care Equipment & Services     1,462,404  
                     
                     
            Household & Personal Products — 6.3%        
      900     Avon Products, Inc.     25,029  
      300     Church & Dwight Co., Inc.     22,632  
      600     Clorox Co.     40,656  
      1,800     Colgate-Palmolive Co.     141,336  
      600     Estee Lauder Cos. (The), Inc.-Class A     56,646  
      100     Herbalife Ltd.     7,841  
      1,500     Kimberly-Clark Corp.     98,850  
      10,100     Procter & Gamble Co. (The)     636,805  
                     
            Total Household & Personal Products     1,029,795  
                     
                     
            Insurance — 1.5%        
      100     ACE, Ltd.     6,325  
      100     Allied World Assurance Company Holdings Ltd.     6,171  
      200     Allstate Corp. (The)     6,356  
      100     American Financial Group, Inc.     3,463  
      1,000     American International Group, Inc.     37,060  
      200     Aon Corp.     10,528  
      100     Arch Capital Group Ltd. *     9,050  
      200     Assurant, Inc.     8,126  
      200     Axis Capital Holdings Ltd.     7,264  
      100     Brown & Brown, Inc.     2,614  
      100     Chubb Corp.     6,068  
      300     CNO Financial Group, Inc. *     2,172  
      200     Endurance Specialty Holdings Ltd.     9,918  
      400     Hartford Financial Services Group (The), Inc.     11,840  
      100     PartnerRe Ltd.     7,930  
      400     Progressive Corp. (The)     8,332  
      200     Prudential Financial, Inc.     13,166  
      100     RenaissanceRe Holdings Ltd.     6,702  

         
    See accompanying notes to the financial statements.   7

 

 
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Insurance — continued        
      200     Symetra Financial Corp.     2,860  
      100     Torchmark Corp.     6,525  
      100     Transatlantic Holdings, Inc.     5,093  
      600     Travelers Cos. (The), Inc.     35,958  
      300     Unitrin, Inc.     8,787  
      300     Validus Holdings Ltd.     9,285  
      300     W.R. Berkley Corp.     8,985  
                     
            Total Insurance     240,578  
                     
                     
            Materials — 0.9%        
      10     CF Industries Holdings, Inc.     1,413  
      100     Domtar Corp.     8,740  
      500     E.I. du Pont de Nemours & Co.     27,435  
      800     Ecolab, Inc.     38,912  
      280     Freeport-McMoRan Copper & Gold, Inc.     14,826  
      200     Huntsman Corp.     3,530  
      100     LSB Industries, Inc. *     3,028  
      100     PPG Industries, Inc.     8,838  
      100     Sherwin-Williams Co. (The)     8,212  
      300     Sigma-Aldrich Corp.     19,167  
      200     Southern Copper Corp.     8,464  
      100     Valhi, Inc.     2,389  
                     
            Total Materials     144,954  
                     
                     
            Media — 1.2%        
      300     Arbitron, Inc.     11,943  
      100     Cablevision Systems Corp.-Class A     3,685  
      300     CBS Corp.-Class B (Non Voting)     7,158  
      200     Charter Communications, Inc. *     9,154  
      200     Clear Channel Outdoor Holdings, Inc.-Class A *     2,948  
      1,600     Comcast Corp.-Class A     41,216  
      300     DirectTV – Class A *     13,791  
      200     Gannett Co., Inc.     3,302  
      300     Liberty Global, Inc.-Class A *     12,630  

         
8
  See accompanying notes to the financial statements.    

 

 
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Media — continued        
      100     Liberty Media Corp. Capital-Class A *     7,256  
      100     Liberty Media Corp.-Starz-Class A *     7,020  
      200     McGraw-Hill Cos. (The), Inc.     7,736  
      300     Time Warner Cable, Inc.     21,654  
      900     Time Warner, Inc.     34,380  
      200     Viacom, Inc.-Class B     8,932  
      19     Washington Post Co. (The)-Class B     8,229  
                     
            Total Media     201,034  
                     
                     
            Pharmaceuticals, Biotechnology & Life Sciences — 19.2%        
      6,000     Abbott Laboratories     288,600  
      1,300     Allergan, Inc.     96,421  
      3,900     Amgen, Inc. *     200,187  
      300     Biogen Idec, Inc. *     20,520  
      6,700     Bristol-Myers Squibb Co.     172,927  
      100     Cephalon, Inc. *     5,631  
      200     Covance, Inc. *     11,286  
      5,900     Eli Lilly & Co.     203,904  
      700     Endo Pharmaceuticals Holdings, Inc. *     24,864  
      700     Enzon Pharmaceuticals, Inc. *     7,476  
      1,500     Forest Laboratories, Inc. *     48,600  
      100     Genzyme Corp. *     7,545  
      3,000     Gilead Sciences, Inc. *     116,940  
      100     Hospira, Inc. *     5,285  
      100     Illumina, Inc. *     6,940  
      10,100     Johnson & Johnson     620,544  
      13,761     Merck & Co., Inc.     448,196  
      170     Mettler-Toledo International, Inc. *     29,133  
      100     Mylan, Inc. *     2,287  
      38,464     Pfizer, Inc.     740,047  
      500     Pharmaceutical Product Development, Inc.     13,735  
      200     Techne Corp.     14,338  
      400     Theravance, Inc. *     9,112  

         
    See accompanying notes to the financial statements.   9

 

 
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Pharmaceuticals, Biotechnology & Life Sciences — continued        
      100     Thermo Fisher Scientific, Inc. *     5,582  
      400     Waters Corp. *     33,220  
                     
            Total Pharmaceuticals, Biotechnology & Life Sciences     3,133,320  
                     
                     
            Real Estate — 0.4%        
      500     Annaly Capital Management, Inc. REIT     8,965  
      70     AvalonBay Communities, Inc. REIT     8,472  
      300     CommonWealth REIT     8,613  
      100     Equity Residential REIT     5,511  
      100     Forest City Enterprises, Inc.-Class A REIT *     1,890  
      510     General Growth Properties, Inc. REIT     8,119  
      100     Public Storage REIT     11,225  
      50     Simon Property Group, Inc. REIT     5,502  
      100     UDR, Inc. REIT     2,432  
                     
            Total Real Estate     60,729  
                     
                     
            Retailing — 2.1%        
      300     Advance Auto Parts, Inc.     18,804  
      50     Amazon.com, Inc. *     8,664  
      400     AutoNation, Inc. *     13,456  
      110     AutoZone, Inc. *     28,374  
      500     Best Buy Co., Inc.     16,120  
      100     Dillard’s, Inc.-Class A     4,234  
      500     Dollar Tree, Inc. *     25,160  
      200     Family Dollar Stores, Inc.     10,016  
      600     Genuine Parts Co.     31,614  
      600     Home Depot, Inc.     22,482  
      300     J.C. Penney Co., Inc.     10,488  
      500     Liberty Media Corp.-Interactive-Class A *     8,030  
      200     Limited Brands, Inc.     6,404  
      200     Macy’s, Inc.     4,780  
      40     Netflix, Inc. *     8,267  
      200     O’Reilly Automotive, Inc. *     11,116  
      100     PetSmart, Inc.     4,087  

         
10
  See accompanying notes to the financial statements.    

 

 
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Retailing — continued        
      20     Priceline.com Inc. *     9,078  
      200     Ross Stores, Inc.     14,408  
      300     Sears Holdings Corp. *     24,993  
      200     Target Corp.     10,510  
      700     TJX Cos. (The), Inc.     34,909  
      200     Tractor Supply Co.     10,414  
                     
            Total Retailing     336,408  
                     
                     
            Semiconductors & Semiconductor Equipment — 0.2%        
      600     Atmel Corp. *     8,808  
      200     Broadcom Corp.-Class A     8,244  
      60     First Solar, Inc. *     8,843  
      200     Texas Instruments, Inc.     7,122  
                     
            Total Semiconductors & Semiconductor Equipment     33,017  
                     
                     
            Software & Services — 20.8%        
      1,600     Accenture Plc.-Class A     82,368  
      700     Adobe Systems, Inc. *     24,150  
      200     Akamai Technologies, Inc. *     7,506  
      700     AMDOCS Ltd. *     20,888  
      200     Ansys, Inc. *     11,264  
      1,300     Automatic Data Processing, Inc.     65,000  
      600     BMC Software, Inc. *     29,700  
      400     Broadridge Financial Solutions, Inc.     9,168  
      100     CACI International, Inc.-Class A *     5,932  
      400     Citrix Systems, Inc. *     28,064  
      800     Cognizant Technology Solutions Corp.-Class A *     61,496  
      100     Computer Sciences Corp.     4,813  
      100     Convergys Corp. *     1,407  
      4,661     eBay, Inc. *     156,167  
      200     Factset Research Systems, Inc.     20,976  
      100     Fiserv, Inc. *     6,327  
      200     Global Payments, Inc.     9,598  
      1,190     Google, Inc.-Class A *     729,946  

         
    See accompanying notes to the financial statements.   11

 

 
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Software & Services — continued        
      400     Informatica Corp. *     18,804  
      2,600     International Business Machines Corp.     420,888  
      1,400     Intuit, Inc. *     73,612  
      300     Jack Henry & Associates, Inc.     9,573  
      40     MasterCard, Inc.-Class A     9,622  
      300     Micros Systems, Inc. *     14,292  
      28,000     Microsoft Corp.     744,240  
      21,100     Oracle Corp.     694,190  
      1,500     Paychex, Inc.     50,445  
      300     Quest Software, Inc. *     8,037  
      110     Salesforce.com, Inc. *     14,550  
      1,800     Symantec Corp. *     32,454  
      300     TIBCO Software, Inc. *     7,386  
      700     Total System Services, Inc.     12,425  
      200     VMware, Inc. *     16,730  
                     
            Total Software & Services     3,402,018  
                     
                     
            Technology Hardware & Equipment — 6.2%        
      200     ADTRAN, Inc.     9,096  
      460     Apple, Inc. *     162,477  
      11,700     Cisco Systems, Inc. *     217,152  
      1,400     Dell, Inc. *     22,162  
      400     Dolby Laboratories, Inc.-Class A *     20,228  
      100     F5 Networks, Inc. *     11,801  
      100     Finisar Corp. *     4,102  
      100     FLIR Systems, Inc.     3,230  
      100     Harris Corp.     4,666  
      2,200     Hewlett-Packard Co.     95,986  
      500     Ingram Micro, Inc.-Class A *     9,965  
      100     NCR Corp. *     1,910  
      200     NetApp, Inc. *     10,332  
      6,500     Qualcomm, Inc.     387,270  
      100     SanDisk Corp. *     4,960  
      600     Seagate Technology Plc *     7,620  

         
12
  See accompanying notes to the financial statements.    

 

 
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Technology Hardware & Equipment — continued        
      200     Viasat, Inc. *     8,322  
      300     Western Digital Corp. *     9,174  
      1,500     Xerox Corp.     16,125  
                     
            Total Technology Hardware & Equipment     1,006,578  
                     
                     
            Telecommunication Services — 1.9%        
      4,463     AT&T, Inc.     126,660  
      200     CenturyTel, Inc.     8,236  
      200     Crown Castle International Corp. *     8,430  
      100     Frontier Communications Corp.     849  
      600     MetroPCS Communications, Inc. *     8,640  
      200     Telephone & Data Systems, Inc.     6,730  
      3,942     Verizon Communications, Inc.     145,539  
      100     Windstream Corp.     1,254  
                     
            Total Telecommunication Services     306,338  
                     
                     
            Transportation — 0.5%        
      700     CH Robinson Worldwide, Inc.     50,673  
      200     Expeditors International of Washington, Inc.     9,560  
      200     Union Pacific Corp.     19,082  
      300     United Continental Holdings, Inc. *     7,212  
                     
            Total Transportation     86,527  
                     
                     
            Utilities — 0.1%        
      100     Integrys Energy Group, Inc.     4,897  
      100     NextEra Energy, Inc.     5,547  
      100     NiSource, Inc.     1,916  
      200     Southern Co.     7,621  
                     
            Total Utilities     19,981  
                     
                     
            TOTAL COMMON STOCKS (COST $13,568,616)     16,080,891  
                     

         
    See accompanying notes to the financial statements.   13

 

 
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            MUTUAL FUNDS — 1.4%        
                     
            Affiliated Issuers — 1.4%        
      9,120     GMO U.S. Treasury Fund     228,000  
                     
                     
            TOTAL MUTUAL FUNDS (COST $228,000)     228,000  
                     
                     
            RIGHTS AND WARRANTS — 0.1%        
                     
            Insurance — 0.1%        
      533     American International Group, Inc., Warrants, Strike 45.00, Expires 01/19/21 *     6,183  
                     
                     
            TOTAL RIGHTS AND WARRANTS (COST $9,061)     6,183  
                     
                     
            SHORT-TERM INVESTMENTS — 0.1%        
                     
            Money Market Funds — 0.1%        
      22,389     State Street Institutional Treasury Money Market Fund-Institutional Class     22,389  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $22,389)     22,389  
                     
                     
            TOTAL INVESTMENTS — 100.1%
(Cost $13,828,066) 		    16,337,463  
            Other Assets and Liabilities (net) — (0.1%)     (8,446 )
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 16,329,017  
                     
 
Notes to Schedule of Investments:
 
REIT - Real Estate Investment Trust
* Non-income producing security.

         
14
  See accompanying notes to the financial statements.    

 

GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $13,600,066) (Note 2)
  $ 16,109,463  
Investments in affiliated issuers, at value (cost $228,000) (Notes 2 and 10)
    228,000  
Dividends receivable
    35,100  
Receivable for expenses reimbursed by Manager (Note 5)
    14,756  
         
Total assets
    16,387,319  
         
         
Liabilities:
       
Payable to affiliate for (Note 5):
       
Management fee
    4,137  
Shareholder service fee
    1,880  
Trustees and Trust Officers or agents unaffiliated with the Manager
    24  
Accrued expenses
    52,261  
         
Total liabilities
    58,302  
         
Net assets
  $ 16,329,017  
         
Net assets consist of:
       
Paid-in capital
  $ 32,812,322  
Accumulated undistributed net investment income
    47,184  
Accumulated net realized loss
    (19,039,886 )
Net unrealized appreciation
    2,509,397  
         
    $ 16,329,017  
         
Net assets attributable to:
       
Class III shares
  $ 16,329,017  
         
Shares outstanding:
       
Class III
    1,374,377  
         
Net asset value per share:
       
Class III
  $ 11.88  
         

         
    See accompanying notes to the financial statements.   15

 

GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends from unaffiliated issuers
  $ 351,652  
Dividends from affiliated issuers (Note 10)
    242  
Interest
    104  
         
Total investment income
    351,998  
         
Expenses:
       
Management fee (Note 5)
    52,936  
Shareholder service fee – Class III (Note 5)
    24,062  
Audit and tax fees
    64,531  
Custodian, fund accounting agent and transfer agent fees
    12,760  
Registration fees
    2,449  
Legal fees
    674  
Trustees fees and related expenses (Note 5)
    330  
Miscellaneous
    9,537  
         
Total expenses
    167,279  
Fees and expenses reimbursed by Manager (Note 5)
    (89,830 )
Expense reductions (Note 2)
    (28 )
         
Net expenses
    77,421  
         
Net investment income (loss)
    274,577  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in unaffiliated issuers
    888,419  
Investments in affiliated issuers
    (176 )
Realized gains distributions from affiliated issuers (Note 10)
    52  
Futures contracts
    28,852  
         
Net realized gain (loss)
    917,147  
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in unaffiliated issuers
    1,130,093  
         
Net realized and unrealized gain (loss)
    2,047,240  
         
Net increase (decrease) in net assets resulting from operations
  $ 2,321,817  
         

         
16
  See accompanying notes to the financial statements.    

 

GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 274,577     $ 211,747  
Net realized gain (loss)
    917,147       (854,787 )
Change in net unrealized appreciation (depreciation)
    1,130,093       3,796,115  
                 
                 
Net increase (decrease) in net assets from operations
    2,321,817       3,153,075  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (267,753 )     (215,661 )
                 
Net share transactions (Note 9):
               
Class III
    (1,611,081 )     2,749,894  
                 
                 
Total increase (decrease) in net assets
    442,983       5,687,308  
                 
Net assets:
               
Beginning of period
    15,886,034       10,198,726  
                 
End of period (including accumulated undistributed net investment income of $47,184 and $38,198, respectively)
  $ 16,329,017     $ 15,886,034  
                 

         
    See accompanying notes to the financial statements.   17

 

GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 10.49     $ 7.74     $ 12.21     $ 13.48     $ 12.83  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.18       0.18       0.18       0.21       0.19  
Net realized and unrealized gain (loss)
    1.39       2.75       (4.45 )     (1.08 )     0.64  
                                         
                                         
Total from investment operations
    1.57       2.93       (4.27 )     (0.87 )     0.83  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.18 )     (0.18 )     (0.20 )     (0.22 )     (0.18 )
From net realized gains
    —       —       —       (0.18 )     —  
                                         
                                         
Total distributions
    (0.18 )     (0.18 )     (0.20 )     (0.40 )     (0.18 )
                                         
                                         
Net asset value, end of period
  $ 11.88     $ 10.49     $ 7.74     $ 12.21     $ 13.48  
                                         
                                         
Total Return(a)
    15.18 %     38.22 %     (35.43 )%     (6.78 )%     6.53 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 16,329     $ 15,886     $ 10,199     $ 88,686     $ 116,725  
Net expenses to average daily net assets
    0.48 %(b)(c)     0.48 %(b)     0.48 %(b)     0.48 %(b)     0.48 %
Net investment income (loss) to average daily net assets
    1.71 %     1.86 %     1.55 %     1.55 %     1.46 %
Portfolio turnover rate
    70 %     61 %     66 %     62 %     67 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.56 %     0.84 %     0.17 %     0.12 %     0.11 %
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
† Calculated using average shares outstanding throughout the period.

         
18
  See accompanying notes to the financial statements.    

 

GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO Tax-Managed U.S. Equities Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund’s investment objective is high after-tax total return. The Manager seeks to achieve the Fund’s investment objective by investing in equities or groups of equities that the Manager believes will provide higher returns than the Russell 3000 Index. The Manager uses active investment management methods, which means that equities are bought and sold according to the Manager’s evaluation of companies’ published financial information, securities’ prices, equity and bond markets, and the overall economy.
 
In selecting equities for the Fund, the Manager may use a combination of investment methods to identify equities that the Manager believes present positive return potential relative to other equities. Some of these methods evaluate individual equities or a group of equities based on the ratio of their price relative to historical financial information and forecasted financial information provided by industry analysts. Historical financial information may include book value, cash flow and earnings. The Manager may compare these ratios to industry or market averages in order to assess the relative attractiveness of an equity. Other methods focus on evaluating patterns of price movement or volatility of an equity or group of equities relative to the Fund’s investment universe. The Manager also may adjust the Fund’s portfolio for factors such as position size, industry and sector exposure, and market capitalization.
 
The Manager considers the tax effects of a proposed trade in conjunction with the return forecast of the identified equities, and their potential contribution to the overall portfolio. The Manager also may consider the Fund’s available realized and unrealized amounts of gains and losses, and current market conditions.
 
As a substitute for direct investments in equities, the Manager may use exchange-traded and over-the-counter (“OTC”) derivatives. The Manager also may use derivatives: (i) in an attempt to reduce investment exposures (which may result in a reduction below zero); (ii) to effect transactions intended as substitutes for securities lending; and (iii) in an attempt to adjust elements of the Fund’s investment exposure. Derivatives used may include futures, options and swap contracts. In addition, the Fund may lend its portfolio securities.
 
Under normal circumstances, the Fund invests directly and indirectly (e.g., through underlying funds or derivatives) at least 80% of its assets in equity investments tied economically to the U.S. The terms “equities” and “equity investments” refer to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts.

         
        19

 

 
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
For cash management purposes, the Fund may invest in unaffiliated money market funds and/or GMO U.S. Treasury Fund.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the OTC market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. See Note 4 for a further discussion on valuation of derivative financial instruments.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for

         
20
       

 

 
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Common Stocks
  $ 16,080,891     $ —     $      —     $ 16,080,891  
Mutual Funds
    228,000       —       —       228,000  
Rights and Warrants
    —       6,183       —       6,183  
Short-Term Investments
    22,389       —       —       22,389  
                                 
Total Investments
    16,331,280       6,183       —       16,337,463  
                                 
Total
  $ 16,331,280     $ 6,183     $ —     $ 16,337,463  
                                 
 
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements.
 
All of the Fund’s common stocks held at period end are classified as Level 1. Please refer to the Schedule of Investments for a more detailed categorization of common stocks.
 
The Fund held no investments or derivative financial instruments at either February 28, 2011 or February 28, 2010, whose fair value was categorized using Level 3 inputs.

         
        21

 

 
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, quarterly, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards and losses on wash sale transactions.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 267,753     $ 215,661  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.

         
22
       

 

 
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 47,184  
         
Other Tax Attributes:
       
Capital loss carryforwards
  $ (18,887,868 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 28, 2017
  $ (7,517,802 )
February 28, 2018
    (11,370,066 )
         
Total
  $ (18,887,868 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 13,980,084     $ 2,448,713     $ (91,334 )   $ 2,357,379      
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.

         
        23

 

 
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (Note 5).
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. There can be no assurance that the Fund’s tax management strategies will be effective, and an investor may incur tax liabilities that exceed their economic return. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund’s investments.

         
24
       

 

 
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Other principal risks of an investment in the Fund include Market Risk — Value Securities (risk that the price of the Fund’s investments will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, and credit and counterparty risk); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund’s securities); Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by “equitizing” its cash balances using futures contracts or other types of derivatives.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero).
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, indices and markets without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically “sell” a portion of the Fund’s portfolio) in combination with a long futures contract on another index (to synthetically “buy” exposure to that index).

         
        25

 

 
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral, that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.

         
26
       

 

 
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. During the year ended February 28, 2011, the Fund used futures contracts to maintain the diversity and liquidity of the portfolio. The Fund had no futures contracts outstanding at the end of the period.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.

         
        27

 

 
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or

         
28
       

 

 
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.

         
        29

 

 
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. During the year ended February 28, 2011, the Fund held rights and warrants as a result of a corporate action. Rights and warrants held by the Fund at the end of the period are listed in the Fund’s Schedule of Investments.
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of
February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Assets:
                                               
Investments, at value (rights and warrants)
  $      —     $      —     $      —     $ 6,183     $      —     $ 6,183  
                                                 
Total
  $ —     $ —     $ —     $ 6,183     $ —     $ 6,183  
                                                 

         
30
       

 

 
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended
February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Investments (rights and warrants)
  $      —     $      —     $      —     $ 14     $      —     $ 14  
Future contracts
    —       —       —       28,852       —       28,852  
                                                 
Total
  $ —     $ —     $ —     $ 28,866     $ —     $ 28,866  
                                                 
                                                 
Change in Unrealized Appreciation (Depreciation) on:
                                               
Investments (rights and warrants)
  $ —     $ —     $ —     $ (2,878 )   $ —     $ (2,878 )
                                                 
Total
  $ —     $ —     $ —     $ (2,878 )   $ —     $ (2,878 )
                                                 
 
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
 
The volume of derivative activity, based on absolute values (futures contracts and rights and warrants) outstanding at each month-end, was as follows for the year ended February 28, 2011:
 
                 
    Futures
   Rights/
    contracts   Warrants
 
Average amount outstanding
  $ 129,267     $ 1,400  
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.33% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions,

         
        31

 

 
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition to the contractual expense reimbursement described above, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund’s Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund’s Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $330 and $59, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
             
Indirect Net Expenses
 		           
(excluding shareholder service
     Indirect Shareholder
      
fees and interest expense)     Service Fees     Total Indirect Expenses
< 0.001%
    0.000%     < 0.001%
             
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 aggregated $11,003,000 and $12,112,829, respectively.
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.

         
32
       

 

 
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 90.12% of the outstanding shares of the Fund were held by four shareholders, each holding more than 10% of the Fund’s outstanding shares.
 
As of February 28, 2011, 0.28% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and none of the Fund’s shares were held by accounts for which the Manager had investment discretion.
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    25,629     $ 259,479       486,817     $ 5,188,445  
Shares issued to shareholders in reinvestment of distributions
    15,190       162,189       11,344       103,124  
Shares repurchased
    (181,447 )     (2,032,749 )     (301,106 )     (2,541,675 )
                                 
Net increase (decrease)
    (140,628 )   $ (1,611,081 )     197,055     $ 2,749,894  
                                 
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                 
    Value,
               Distributions
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   period
 
GMO U.S. Treasury Fund
  $      —     $ 1,181,116     $ 952,940     $ 242     $ 52     $ 228,000  
                                                 
Totals
  $ —     $ 1,181,116     $ 952,940     $ 242     $ 52     $ 228,000  
                                                 

         
        33

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Tax-Managed U.S. Equities Fund:
 
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Tax-Managed U.S. Equities Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian and transfer agent provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
34
       

 

GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
        35

 

 
GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.48 %   $ 1,000.00     $ 1,220.50     $ 2.64  
2) Hypothetical
    0.48 %   $ 1,000.00     $ 1,022.41     $ 2.41  
                                 
 
            * Expenses are calculated using the Class’s annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
36
       

 

GMO Tax-Managed U.S. Equities Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
For taxable, non-corporate shareholders, 100.00% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 represents qualified dividend income subject to the 15% rate category.
 
For corporate shareholders, 98.46% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 qualified for the dividends-received deduction.

         
        37

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
   Position(s)
   Length of
   During Past
   Complex
     Other Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
38        

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
   Position(s)
   Length of
   During Past
   Complex
     Other Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of
Courier Corporation
(a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
   Position(s)
   Length of Time
   During Past
   Complex
     Other Directorships
Date of Birth   Held with Trust   Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee;
President and
Chief Executive
Officer of the Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
        39

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003 – 2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
40        

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money
Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        41

 

 
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Quantitative Equity Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
GMO Tobacco-Free Core Fund returned +16.2% for the fiscal year ended February 28, 2011, as compared with +22.6% for the S&P 500 Index.
 
Stock selection detracted from returns relative to the S&P 500 Index. Selections in Consumer Staples, Financials, and Industrials detracted from relative returns while selections in Health Care and Energy added. Individual names detracting from relative returns included overweight positions in Wal-Mart Stores and Microsoft and an underweight position in ExxonMobil. Individual names adding to relative returns included overweight positions in Apple and QUALCOMM and an underweight position in Bank of America.
 
Sector selection also detracted from returns relative to the S&P 500 Index. Sector weightings negatively impacting relative performance included overweight positions in Health Care and Consumer Staples and an underweight position in Energy. Sector weightings positively impacting relative performance included underweight positions in Utilities and Financials.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice. References to specific securities are not recommendations of such securities and may not be representative of any GMO portfolio’s current or future investments.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO Tobacco-Free Core Fund Class III Shares and the S&P 500 Index
As of February 28, 2011
 
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited.
 

 

GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary   % of Total Net Assets  
Common Stocks
    96.9 %
Mutual Funds
    1.7  
Investment Funds
    1.1  
Short-Term Investments
    0.3  
Swap Agreements
    (0.0 )Ù
Other
    0.0 Ù
         
      100.0 %
         
 
         
Industry Group Summary   % of Equity Investments*  
Software & Services
    21.3 %
Pharmaceuticals, Biotechnology & Life Sciences
    17.4  
Health Care Equipment & Services
    9.6  
Technology Hardware & Equipment
    7.7  
Food, Beverage & Tobacco
    7.0  
Food & Staples Retailing
    6.2  
Household & Personal Products
    5.0  
Energy
    4.3  
Capital Goods
    3.7  
Telecommunication Services
    3.3  
Retailing
    3.1  
Consumer Services
    2.7  
Insurance
    2.5  
Consumer Durables & Apparel
    1.7  
Media
    1.6  
Transportation
    0.7  
Materials
    0.6  
Commercial & Professional Services
    0.5  
Diversified Financials
    0.3  
Banks
    0.2  
Real Estate
    0.2  
Semiconductors & Semiconductor Equipment
    0.2  
Automobiles & Components
    0.2  
         
      100.0 %
         
 
* Equity investments may consist of common stocks and other stock-related securities, such as preferred stocks. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
Ù Rounds to 0.0%.

         
        1

 

GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            COMMON STOCKS — 96.9%        
                     
            Automobiles & Components — 0.2%        
      200     Autoliv, Inc.     14,978  
      400     TRW Automotive Holdings Corp. *     22,720  
                     
            Total Automobiles & Components     37,698  
                     
                     
            Banks — 0.2%        
      2,600     CapitalSource, Inc.     19,708  
      600     CIT Group, Inc. *     25,992  
      900     Valley National Bancorp     12,267  
                     
            Total Banks     57,967  
                     
                     
            Capital Goods — 3.6%        
      2,800     3M Co.     258,244  
      600     Caterpillar, Inc.     61,758  
      420     Cummins, Inc.     42,471  
      2,100     Danaher Corp.     106,260  
      500     Deere & Co.     45,075  
      500     Fastenal Co.     31,065  
      1,400     General Dynamics Corp.     106,568  
      300     Joy Global, Inc.     29,214  
      400     L-3 Communications Holdings, Inc.     31,716  
      600     Northrop Grumman Corp.     40,008  
      380     Precision Castparts Corp.     53,865  
      500     Rockwell Collins, Inc.     32,220  
      700     United Technologies Corp.     58,478  
                     
            Total Capital Goods     896,942  
                     
                     
            Commercial & Professional Services — 0.5%        
      300     Copart, Inc. *     12,603  
      200     Dun & Bradstreet Corp.     16,160  
      300     IHS, Inc.-Class A *     25,110  
      1,000     Pitney Bowes, Inc.     25,180  

         
2
  See accompanying notes to the financial statements.    

 

 
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Commercial & Professional Services — continued        
      750     Rollins, Inc.     14,715  
      400     Stericycle, Inc. *     34,568  
                     
            Total Commercial & Professional Services     128,336  
                     
                     
            Consumer Durables & Apparel — 1.7%        
      1,400     Coach, Inc.     76,888  
      500     Fortune Brands, Inc.     30,931  
      200     Fossil, Inc. *     15,348  
      500     Hasbro, Inc.     22,450  
      300     Mohawk Industries, Inc. *     17,433  
      2,400     Nike, Inc.-Class B     213,672  
      400     VF Corp.     38,268  
                     
            Total Consumer Durables & Apparel     414,990  
                     
                     
            Consumer Services — 2.6%        
      1,100     Apollo Group, Inc.-Class A *     49,786  
      60     Chipotle Mexican Grill, Inc. *     14,700  
      500     Darden Restaurants, Inc.     23,565  
      200     ITT Educational Services, Inc. *     15,170  
      1,500     Las Vegas Sands Corp. *     69,960  
      5,200     McDonald’s Corp.     393,536  
      50     Strayer Education, Inc.     6,872  
      400     Weight Watchers International, Inc.     24,452  
      1,200     Yum! Brands, Inc.     60,396  
                     
            Total Consumer Services     658,437  
                     
                     
            Diversified Financials — 0.3%        
      2,735     Bank of America Corp.     39,083  
      2,200     SLM Corp. *     32,604  
                     
            Total Diversified Financials     71,687  
                     
                     
            Energy — 4.1%        
      115     Anadarko Petroleum Corp.     9,411  
      50     Apache Corp.     6,231  

         
    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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Energy — continued        
      2,151     Chevron Corp.     223,166  
      5,617     ConocoPhillips     437,396  
      593     Exxon Mobil Corp.     50,719  
      100     Halliburton Co.     4,694  
      1,600     Marathon Oil Corp.     79,360  
      900     National Oilwell Varco, Inc.     71,613  
      326     Occidental Petroleum Corp.     33,242  
      300     Pioneer Natural Resources Co.     30,702  
      400     Rowan Cos, Inc. *     17,068  
      198     Schlumberger Ltd.     18,497  
      400     Sunoco, Inc.     16,744  
      1,300     Valero Energy Corp.     36,634  
                     
            Total Energy     1,035,477  
                     
                     
            Food & Staples Retailing — 6.0%        
      900     Costco Wholesale Corp.     67,311  
      1,400     CVS Caremark Corp.     46,284  
      2,200     Kroger Co. (The)     50,380  
      1,200     Safeway, Inc.     26,184  
      1,065     Supervalu, Inc.     9,191  
      2,800     Sysco Corp.     77,812  
      5,000     Walgreen Co.     216,700  
      19,630     Wal-Mart Stores, Inc.     1,020,367  
                     
            Total Food & Staples Retailing     1,514,229  
                     
                     
            Food, Beverage & Tobacco — 6.8%        
      700     Brown-Forman Corp.-Class B     48,405  
      1,400     Campbell Soup Co.     47,124  
      1,500     Coca-Cola Enterprises, Inc.     39,450  
      9,500     Coca-Cola Co. (The)     607,240  
      1,100     Dean Foods Co. *     11,616  
      400     Flowers Foods, Inc.     10,640  
      2,700     General Mills, Inc.     100,278  
      600     Hansen Natural Corp. *     34,530  

         
4
  See accompanying notes to the financial statements.    

 

 
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Food, Beverage & Tobacco — continued        
      1,400     Hershey Co. (The)     73,248  
      700     HJ Heinz Co.     35,154  
      1,600     Hormel Foods Corp.     43,840  
      1,600     Kellogg Co.     85,696  
      2,100     Kraft Foods, Inc.-Class A     66,864  
      700     McCormick & Co., Inc. (Non Voting)     33,355  
      7,117     PepsiCo, Inc.     451,360  
      900     Sara Lee Corp.     15,408  
                     
            Total Food, Beverage & Tobacco     1,704,208  
                     
                     
            Health Care Equipment & Services — 9.3%        
      1,700     Aetna, Inc.     63,512  
      1,000     Alere, Inc. *     38,640  
      300     AMERIGROUP Corp. *     17,205  
      1,800     AmerisourceBergen Corp.     68,238  
      3,197     Baxter International, Inc.     169,920  
      1,000     Becton, Dickinson and Co.     80,000  
      400     C.R. Bard, Inc.     39,104  
      1,700     Cardinal Health, Inc.     70,788  
      100     Catalyst Health Solutions, Inc. *     4,521  
      300     Cerner Corp. *     30,135  
      900     Coventry Health Care, Inc. *     27,180  
      500     DENTSPLY International, Inc.     18,685  
      600     Edwards Lifesciences Corp. *     51,024  
      2,100     Express Scripts, Inc. *     118,062  
      200     Gen-Probe, Inc. *     12,576  
      700     Health Net, Inc. *     20,594  
      300     Henry Schein, Inc. *     20,694  
      1,000     Humana, Inc. *     65,010  
      300     Idexx Laboratories, Inc. *     23,310  
      60     Intuitive Surgical, Inc. *     19,677  
      600     Kinetic Concepts, Inc. *     29,382  
      600     Laboratory Corp. of America Holdings *     54,078  
      1,406     Lincare Holdings, Inc.     41,252  

         
    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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Health Care Equipment & Services — continued        
      600     McKesson Corp.     47,568  
      200     Mednax, Inc. *     12,986  
      6,300     Medtronic, Inc.     251,496  
      400     Omnicare, Inc.     11,452  
      400     Owens & Minor, Inc.     12,480  
      500     Patterson Cos., Inc.     16,690  
      800     Quest Diagnostics, Inc.     45,400  
      900     ResMed, Inc. *     28,440  
      300     STERIS Corp.     10,155  
      1,600     Stryker Corp.     101,216  
      1,200     St Jude Medical, Inc. *     57,456  
      1,346     Triple-S Management Corp.-Class B *     26,597  
      7,976     UnitedHealth Group, Inc.     339,618  
      500     Varian Medical Systems, Inc. *     34,640  
      400     VCA Antech, Inc. *     10,016  
      2,276     WellPoint, Inc. *     151,286  
      1,500     Zimmer Holdings, Inc. *     93,510  
                     
            Total Health Care Equipment & Services     2,334,593  
                     
                     
            Household & Personal Products — 4.8%        
      700     Avon Products, Inc.     19,467  
      300     Church & Dwight Co., Inc.     22,632  
      900     Clorox Co.     60,984  
      2,200     Colgate-Palmolive Co.     172,744  
      800     Estee Lauder Cos. (The), Inc.-Class A     75,528  
      500     Herbalife Ltd.     39,205  
      1,900     Kimberly-Clark Corp.     125,210  
      11,048     Procter & Gamble Co. (The)     696,577  
                     
            Total Household & Personal Products     1,212,347  
                     
                     
            Insurance — 2.4%        
      300     Allied World Assurance Co Holdings Ltd.     18,513  
      600     American Financial Group, Inc.     20,778  
      3,000     American International Group, Inc. *     111,180  

         
6
  See accompanying notes to the financial statements.    

 

 
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Insurance — continued        
      300     Arch Capital Group Ltd. *     27,150  
      400     Aspen Insurance Holdings Ltd.     11,820  
      400     Assurant, Inc.     16,252  
      600     Axis Capital Holdings Ltd.     21,792  
      1,000     Brown & Brown, Inc.     26,140  
      400     Chubb Corp.     24,272  
      400     Endurance Specialty Holdings Ltd.     19,836  
      100     Everest Re Group Ltd.     8,865  
      900     Hartford Financial Services Group (The), Inc.     26,640  
      200     PartnerRe Ltd.     15,860  
      200     Platinum Underwriters Holdings Ltd.     8,340  
      600     Prudential Financial, Inc.     39,498  
      400     RenaissanceRe Holdings Ltd.     26,808  
      300     Torchmark Corp.     19,575  
      300     Transatlantic Holdings, Inc.     15,279  
      1,800     Travelers Cos. (The), Inc.     107,874  
      700     Validus Holdings Ltd.     21,665  
      800     W.R. Berkley Corp.     23,960  
                     
            Total Insurance     612,097  
                     
                     
            Materials — 0.6%        
      100     Commercial Metals Co.     1,667  
      1,400     E.I. du Pont de Nemours & Co.     76,818  
      700     Ecolab, Inc.     34,048  
      500     Sigma–Aldrich Corp.     31,945  
                     
            Total Materials     144,478  
                     
                     
            Media — 1.6%        
      300     Charter Communications, Inc. *     13,731  
      5,100     Comcast Corp.-Class A     131,376  
      1,000     Gannett Co., Inc.     16,510  
      400     Liberty Global, Inc.-Class A *     16,840  
      800     McGraw-Hill Cos. (The), Inc.     30,944  
      700     Time Warner Cable, Inc.     50,526  

         
    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, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Media — continued        
      2,500     Time Warner, Inc.     95,500  
      800     Viacom, Inc.-Class B     35,728  
      26     Washington Post Co. (The)-Class B     11,260  
                     
            Total Media     402,415  
                     
                     
            Pharmaceuticals, Biotechnology & Life Sciences — 16.8%        
      7,300     Abbott Laboratories     351,130  
      1,600     Allergan, Inc.     118,672  
      4,600     Amgen, Inc. *     236,118  
      900     Biogen Idec, Inc. *     61,560  
      7,600     Bristol-Myers Squibb Co.     196,156  
      200     Cephalon, Inc. *     11,262  
      300     Covance, Inc. *     16,929  
      9,400     Eli Lilly & Co.     324,864  
      1,200     Endo Pharmaceuticals Holdings, Inc. *     42,624  
      2,600     Forest Laboratories, Inc. *     84,240  
      3,000     Gilead Sciences, Inc. *     116,940  
      10,820     Johnson & Johnson     664,781  
      20,076     Merck & Co., Inc.     653,875  
      190     Mettler-Toledo International, Inc. *     32,560  
      62,657     Pfizer, Inc.     1,205,521  
      800     Pharmaceutical Product Development, Inc.     21,976  
      200     Techne Corp.     14,338  
      1,800     Warner Chilcott Plc     42,624  
      400     Waters Corp. *     33,220  
                     
            Total Pharmaceuticals, Biotechnology & Life Sciences     4,229,390  
                     
                     
            Real Estate — 0.2%        
      1,800     Annaly Capital Management, Inc. REIT     32,274  
      500     National Retail Properties, Inc. REIT     12,845  
      500     Omega Healthcare Investors, Inc. REIT     11,985  
                     
            Total Real Estate     57,104  
                     

         
8
  See accompanying notes to the financial statements.    

 

 
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Retailing — 3.0%        
      700     Advance Auto Parts, Inc.     43,876  
      1,976     Aeropostale, Inc. *     51,257  
      1,000     AutoNation, Inc. *     33,640  
      290     AutoZone, Inc. *     74,805  
      1,500     Best Buy Co., Inc.     48,360  
      900     Dollar Tree, Inc. *     45,288  
      600     Family Dollar Stores, Inc.     30,048  
      700     Foot Locker, Inc.     13,909  
      800     Genuine Parts Co.     42,152  
      1,900     Home Depot, Inc.     71,193  
      133     Jos. A. Bank Clothiers, Inc. *     6,133  
      2,300     Liberty Media Corp.-Interactive-Class A *     36,938  
      900     Limited Brands, Inc.     28,818  
      1,400     Macy’s, Inc.     33,460  
      110     Netflix, Inc. *     22,734  
      500     O’Reilly Automotive, Inc. *     27,790  
      400     PetSmart, Inc.     16,348  
      400     Ross Stores, Inc.     28,816  
      300     Target Corp.     15,765  
      1,200     TJX Cos. (The), Inc.     59,844  
      300     Tractor Supply Co.     15,621  
                     
            Total Retailing     746,795  
                     
                     
            Semiconductors & Semiconductor Equipment — 0.2%        
      1,200     Texas Instruments, Inc.     42,732  
                     
                     
            Software & Services — 20.6%        
      2,300     Accenture Plc.-Class A     118,404  
      800     Adobe Systems, Inc. *     27,600  
      1,100     AMDOCS Ltd. *     32,824  
      200     Ansys, Inc. *     11,264  
      1,500     Automatic Data Processing, Inc.     75,000  
      600     BMC Software, Inc. *     29,700  
      1,000     Broadridge Financial Solutions, Inc.     22,920  

         
    See accompanying notes to the financial statements.   9

 

 
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Software & Services — continued        
      700     Citrix Systems, Inc. *     49,112  
      1,400     Cognizant Technology Solutions Corp.-Class A *     107,618  
      300     Computer Sciences Corp.     14,439  
      6,600     eBay, Inc. *     221,133  
      300     Factset Research Systems, Inc.     31,464  
      500     Fiserv, Inc. *     31,635  
      500     Global Payments, Inc.     23,995  
      1,725     Google, Inc.-Class A *     1,058,115  
      600     Informatica Corp. *     28,206  
      3,952     International Business Machines Corp.     639,750  
      2,100     Intuit, Inc. *     110,418  
      400     Jack Henry & Associates, Inc.     12,764  
      361     MasterCard, Inc.-Class A     86,842  
      400     McAfee, Inc. *     19,180  
      500     Micros Systems, Inc. *     23,820  
      46,236     Microsoft Corp.     1,228,953  
      100     NeuStar, Inc. *     2,525  
      27,900     Oracle Corp.     917,910  
      1,700     Paychex, Inc.     57,171  
      800     Quest Software, Inc. *     21,432  
      210     Salesforce.com, Inc. *     27,777  
      3,400     Symantec Corp. *     61,302  
      500     TIBCO Software, Inc. *     12,310  
      900     Total System Services, Inc.     15,975  
      700     VMware, Inc. *     58,555  
                     
            Total Software & Services     5,180,113  
                     
                     
            Technology Hardware & Equipment — 7.5%        
      1,620     Apple, Inc. *     572,200  
      500     Aruba Networks, Inc. *     15,225  
      13,800     Cisco Systems, Inc. *     256,128  
      4,280     Dell, Inc. *     67,752  
      700     Dolby Laboratories, Inc.-Class A *     35,399  
      220     F5 Networks, Inc. *     25,962  

         
10
  See accompanying notes to the financial statements.    

 

 
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Technology Hardware & Equipment — continued        
      500     Harris Corp.     23,330  
      3,600     Hewlett-Packard Co.     157,068  
      1,200     Ingram Micro, Inc.-Class A *     23,916  
      300     Lexmark International, Inc. *     11,259  
      1,200     NCR Corp. *     22,920  
      700     NetApp, Inc. *     36,162  
      8,232     Qualcomm, Inc.     490,463  
      1,000     Seagate Technology Plc *     12,700  
      300     Tech Data Corp. *     14,874  
      2,200     Tellabs, Inc.     11,858  
      1,684     Western Digital Corp. *     51,497  
      3,900     Xerox Corp.     41,925  
                     
            Total Technology Hardware & Equipment     1,870,638  
                     
                     
            Telecommunication Services — 3.2%        
      10,700     AT&T, Inc.     303,666  
      700     CenturyTel, Inc.     28,826  
      900     MetroPCS Communications, Inc. *     12,960  
      700     Telephone & Data Systems, Inc.     23,555  
      11,984     Verizon Communications, Inc.     442,449  
                     
            Total Telecommunication Services     811,456  
                     
                     
            Transportation — 0.7%        
      1,000     CH Robinson Worldwide, Inc.     72,390  
      600     Expeditors International of Washington, Inc.     28,680  
      500     Union Pacific Corp.     47,705  
      800     United Continental Holdings, Inc. *     19,232  
                     
            Total Transportation     168,007  
                     
                     
            TOTAL COMMON STOCKS (COST $21,035,546)     24,332,136  
                     

         
    See accompanying notes to the financial statements.   11

 

 
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            INVESTMENT FUNDS — 1.1%        
      1,965     SPDR S&P 500 ETF Trust (a)     261,640  
                     
                     
            TOTAL INVESTMENT FUNDS (COST $239,515)     261,640  
                     
                     
            MUTUAL FUNDS — 1.7%        
                     
            Affiliated Issuers — 1.7%        
      17,479     GMO U.S. Treasury Fund     436,973  
                     
                     
            TOTAL MUTUAL FUNDS (COST $436,973)     436,973  
                     
                     
            SHORT-TERM INVESTMENTS — 0.3%        
                     
            Money Market Funds — 0.3%        
      79,609     State Street Institutional Treasury Money Market Fund-Institutional Class     79,609  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $79,609)     79,609  
                     
                     
            TOTAL INVESTMENTS — 100.0%
(Cost $21,791,643) 		    25,110,358  
            Other Assets and Liabilities (net) — (0.0%)     (7,081 )
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 25,103,277  
                     

         
12
  See accompanying notes to the financial statements.    

 

 
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
A summary of outstanding financial instruments at February 28, 2011 is as follows:
 
Swap Agreements
 
Total Return Swaps
 
                                 
Notional
 		  Expiration
 		              Market
Amount   Date   Counterparty   Fund Receives   Fund (Pays)/Receives   Value
 
  79,076     USD   7/19/2011   Deutsche Bank AG   12% of notional
amount 		  Return on Sears
Holding Corp. 		  $ (8,157 )
                                 
Premiums to (Pay) Receive
  $ —  
         
 
As of February 28, 2011, for futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
 
Notes to Schedule of Investments:
 
ETF - Exchange-Traded Fund
REIT - Real Estate Investment Trust
SPDR - Standard and Poor’s Depositary Receipt
* Non-income producing security.
(a) Represents an investment to equitize cash. The SPDR S&P 500 ETF Trust is a unit investment trust that issues securities called “Trust Units” or “Units” that represent an undivided ownership interest in a portfolio of all of the common stocks of the Standard & Poor’s 500 Composite Stock Price Index®. The SPDR S&P 500 ETF Trust intends to provide investment results that, before expenses, generally correspond to the price and yield performance of the S&P 500 Index.
 
Currency Abbreviations:
 
USD - United States Dollar

         
    See accompanying notes to the financial statements.   13

 

GMO Tobacco-Free Core Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $21,354,670) (Note 2)
  $ 24,673,385  
Investments in affiliated issuers, at value (cost $436,973) (Notes 2 and 10)
    436,973  
Receivable for Fund shares sold
    1,000  
Dividends and interest receivable
    53,181  
Receivable for expenses reimbursed by Manager (Note 5)
    16,268  
         
Total assets
    25,180,807  
         
         
Liabilities:
       
Payable for investments purchased
    1,817  
Payable to affiliate for (Note 5):
       
Management fee
    6,343  
Shareholder service fee
    2,882  
Trustees and Trust Officers or agents unaffiliated with the Manager
    78  
Payable for open swap contracts (Note 4)
    8,157  
Accrued expenses
    58,253  
         
Total liabilities
    77,530  
         
Net assets
  $ 25,103,277  
         
Net assets consist of:
       
Paid-in capital
  $ 32,295,531  
Accumulated undistributed net investment income
    111,791  
Accumulated net realized loss
    (10,614,603 )
Net unrealized appreciation
    3,310,558  
         
    $ 25,103,277  
         
Net assets attributable to:
       
Class III shares
  $ 25,103,277  
         
Shares outstanding:
       
Class III
    2,379,447  
         
Net asset value per share:
       
Class III
  $ 10.55  
         

         
14
  See accompanying notes to the financial statements.    

 

GMO Tobacco-Free Core Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends from unaffiliated issuers (net of withholding taxes of $15)
  $ 474,010  
Interest
    262  
Dividends from affiliated issuers (Note 10)
    219  
         
Total investment income
    474,491  
         
Expenses:
       
Management fee (Note 5)
    74,579  
Shareholder service fee – Class III (Note 5)
    33,900  
Audit and tax fees
    72,408  
Custodian, fund accounting agent and transfer agent fees
    34,921  
Registration fees
    2,657  
Legal fees
    947  
Trustees fees and related expenses (Note 5)
    436  
Miscellaneous
    9,882  
         
Total expenses
    229,730  
Fees and expenses reimbursed by Manager (Note 5)
    (120,511 )
         
Net expenses
    109,219  
         
Net investment income (loss)
    365,272  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in unaffiliated issuers
    664,785  
Investments in affiliated issuers
    (96 )
Realized gains distributions from affiliated issuers (Note 10)
    30  
Futures contracts
    9,019  
Swap contracts
    18,356  
         
Net realized gain (loss)
    692,094  
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in unaffiliated issuers
    2,457,105  
Futures contracts
    (2,954 )
Swap contracts
    (8,157 )
         
Net unrealized gain (loss)
    2,445,994  
         
Net realized and unrealized gain (loss)
    3,138,088  
         
Net increase (decrease) in net assets resulting from operations
  $ 3,503,360  
         

         
    See accompanying notes to the financial statements.   15

 

GMO Tobacco-Free Core Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 365,272     $ 324,660  
Net realized gain (loss)
    692,094       (1,908,963 )
Change in net unrealized appreciation (depreciation)
    2,445,994       8,515,515  
                 
                 
Net increase (decrease) in net assets from operations
    3,503,360       6,931,212  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (338,225 )     (360,133 )
                 
Net share transactions (Note 9):
               
Class III
    314,529       (1,796,320 )
                 
                 
Total increase (decrease) in net assets
    3,479,664       4,774,759  
                 
Net assets:
               
Beginning of period
    21,623,613       16,848,854  
                 
End of period (including accumulated undistributed net investment income of $111,791 and $54,783, respectively)
  $ 25,103,277     $ 21,623,613  
                 

         
16
  See accompanying notes to the financial statements.    

 

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,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 9.22     $ 6.54     $ 10.03     $ 12.88     $ 12.45  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.15       0.13       0.15       0.19       0.18  
Net realized and unrealized gain (loss)
    1.32       2.70       (3.50 )     (0.96 )(a)     0.54  
                                         
                                         
Total from investment operations
    1.47       2.83       (3.35 )     (0.77 )     0.72  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.14 )     (0.15 )     (0.14 )     (0.22 )     (0.23 )
From net realized gains
    —       —       —       (1.86 )     (0.06 )
                                         
                                         
Total distributions
    (0.14 )     (0.15 )     (0.14 )     (2.08 )     (0.29 )
                                         
                                         
Net asset value, end of period
  $ 10.55     $ 9.22     $ 6.54     $ 10.03     $ 12.88  
                                         
                                         
Total Return(b)
    16.17 %     43.63 %     (33.76 )%     (7.30 )%     5.87 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 25,103     $ 21,624     $ 16,849     $ 45,197     $ 188,133  
Net expenses to average daily net assets
    0.48 %(c)     0.48 %(d)     0.48 %(d)     0.48 %(d)     0.48 %
Net investment income (loss) to average daily net assets
    1.62 %     1.63 %     1.67 %     1.52 %     1.46 %
Portfolio turnover rate
    87 %     60 %     65 %     74 %     73 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.53 %     0.39 %     0.39 %     0.08 %     0.06 %
 
(a) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain (loss) on investments due to the timing of purchases and redemptions of Fund shares in relation to fluctuating market values of the investments of the Fund.
(b) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(d) The net expense ratio does not include the effect of expense reductions (Note 2).
† Calculated using average shares outstanding throughout the period.

         
    See accompanying notes to the financial statements.   17

 

GMO Tobacco-Free Core Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO Tobacco-Free Core Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund’s investment objective is high total return. The Manager seeks to achieve the Fund’s investment objective by investing in equities or groups of equities that the Manager believes will provide higher returns than the S&P 500 Index. The Manager uses active investment management methods, which means that equities are bought and sold according to the Manager’s evaluation of companies’ published financial information, securities’ prices, equity and bond markets, and the overall economy.
 
In selecting equities for the Fund, the Manager may use a combination of investment methods to identify equities that the Manager believes present positive return potential relative to other equities. Some of these methods evaluate individual equities or a group of equities based on the ratio of their price relative to historical financial information and forecasted financial information provided by industry analysts. Historical financial information may include book value, cash flow and earnings. The Manager may compare these ratios to industry or market averages in order to assess the relative attractiveness of an equity. Other methods focus on evaluating patterns of price movement or volatility of an equity or group of equities relative to the Fund’s investment universe. The Manager also may adjust the Fund’s portfolio for factors such as position size, industry and sector exposure, and market capitalization.
 
As a substitute for direct investments in equities, the Manager may use exchange-traded and over-the-counter (“OTC”) derivatives. The Manager also may use derivatives: (i) in an attempt to reduce investment exposures (which may result in a reduction below zero); (ii) to effect transactions intended as substitutes for securities lending; and (iii) in an attempt to adjust elements of the Fund’s investment exposure. Derivatives used may include futures, options and swap contracts. In addition, the Fund may lend its portfolio securities.
 
The Fund typically invests directly and indirectly (e.g., through underlying funds or derivatives) in equities. Under normal circumstances, the Fund invests directly and indirectly at least 80% of its assets, and expects to invest substantially all of its assets, in investments in tobacco-free companies. For these purposes, the term “equities” refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts, and the term “tobacco-free companies” refers to companies that are not listed in the Tobacco Producing Issuer industry classification maintained by Ford Investor Services.

         
18
       

 

 
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
For cash management purposes, the Fund may invest in unaffiliated money market funds and/or GMO U.S. Treasury Fund.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the OTC market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. See Note 4 for a further discussion on valuation of derivative financial instruments.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for

         
        19

 

 
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Common Stocks
  $ 24,332,136     $      —     $      —     $ 24,332,136  
Investment Funds
    261,640       —       —       261,640  
Mutual Funds
    436,973       —       —       436,973  
Short-Term Investments
    79,609       —       —       79,609  
                                 
Total Investments
    25,110,358       —       —       25,110,358  
                                 
Total
  $ 25,110,358     $ —     $ —     $ 25,110,358  
                                 

         
20
       

 

 
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
LIABILITY VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Liabilities
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Derivatives*
                               
Swap Agreements
                               
Equity Risk
  $      —     $ (8,157 )   $      —     $ (8,157 )
                                 
Total
  $ —     $ (8,157 )   $ —     $ (8,157 )
                                 
 
The risks referenced above are not intended to be inclusive of all risks. Please see the Investment Risks and Derivative Financial Instruments sections below for a further discussion of risks.
 
* Because the tables above are based on market values or unrealized appreciation (depreciation) rather than the notional amounts of derivatives, the uncertainties surrounding the valuation inputs for a derivative are likely to be more significant to the Fund’s net asset value than the uncertainties surrounding inputs for a non-derivative security with the same market value.
 
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements.
 
All of the Fund’s common stocks held at period end are classified as Level 1. Please refer to the Schedule of Investments for a more detailed categorization of common stocks.
 
The Fund held no investments or derivative financial instruments directly at either February 28, 2011 or February 28, 2010, whose fair value was categorized using Level 3 inputs.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, quarterly, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid

         
        21

 

 
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards, derivative contract transactions, differing treatment for litigation proceeds received, and losses on wash sale transactions.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 338,225     $ 360,133  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 108,946  
         
Other Tax Attributes:
       
Capital loss carryforwards
  $ (9,766,637 )

         
22
       

 

 
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 28, 2017
  $ (5,892,437 )
February 28, 2018
    (3,874,200 )
         
Total
  $ (9,766,637 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 22,639,608     $ 2,685,057     $ (214,307 )   $ 2,470,750      
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if

         
        23

 

 
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (Note 5).
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund’s investments.
 
• Market Risk — Value Securities — The Fund purchases some equity investments at prices below what the Manager believes to be their fundamental value. The Fund runs the risk that the prices of these investments will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value.
 
Other principal risks of an investment in the Fund include Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, and credit and counterparty risk); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund’s securities); Market Risk — Growth Securities (greater price fluctuations resulting from dependence on future earnings expectations); Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service

         
24
       

 

 
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will incur additional expenses as a result of such investments).
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by “equitizing” its cash balances using futures contracts or other types of derivatives.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero).
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, indices and markets without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically “sell” a portion of the Fund’s portfolio) in combination with a long futures contract on another index (to synthetically “buy” exposure to that index).
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the

         
        25

 

 
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral, that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.

         
26
       

 

 
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. During the year ended February 28, 2011, the Fund used futures contracts to maintain the diversity and liquidity of the portfolio. The Fund had no futures contracts outstanding at the end of the period.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to

         
        27

 

 
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.

         
28
       

 

 
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the

         
        29

 

 
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
year ended February 28, 2011, the Fund used total return swap agreements to achieve returns comparable to holding and lending a direct equity position. Swap agreements outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of
February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Liabilities:
                                               
Unrealized depreciation on swap agreements
  $      —     $      —     $      —     $ (8,157 )   $      —     $ (8,157 )
                                                 
Total
  $ —     $ —     $ —     $ (8,157 )   $ —     $ (8,157 )
                                                 
 
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Futures contracts
  $      —     $      —     $      —     $ 9,019     $      —     $ 9,019  
Swap agreements
    —       —       —       18,356       —       18,356  
                                                 
Total
  $ —     $ —     $ —     $ 27,375     $ —     $ 27,375  
                                                 

         
30
       

 

 
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended February 28, 2011Ù: — continued
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Change in Unrealized Appreciation (Depreciation) on:
                                               
Futures contracts
  $ —     $ —     $ —     $ (2,954 )   $ —     $ (2,954 )
Swap agreements
    —       —       —       (8,157 )     —       (8,157 )
                                                 
Total
  $ —     $ —     $ —     $ (11,111 )   $ —     $ (11,111 )
                                                 
 
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
 
The volume of derivative activity, based on absolute values (futures contracts) or notional amounts (swap agreements) outstanding at each month-end, was as follows for the year ended February 28, 2011:
 
                 
    Futures
   Swap
    contracts   agreements
 
Average amount outstanding
  $ 83,142     $ 11,702  
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.33% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act),

         
        31

 

 
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition to the contractual expense reimbursement described above, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund’s Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund’s Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $436 and $182, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
             
Indirect Net Expenses
 		           
(excluding shareholder
            
service fees and
     Indirect Shareholder
      
interest expense)     Service Fees     Total Indirect Expenses
< 0.001%
    0.000%     < 0.001%
             
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 aggregated $20,493,021 and $19,230,599, respectively.
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 85.19% of the outstanding shares of the Fund were held by one shareholder. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.

         
32
       

 

 
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and none of the Fund’s shares were held by accounts for which the Manager had investment discretion.
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    896     $ 9,135       1,012     $ 8,550  
Shares issued to shareholders in reinvestment of distributions
    32,483       306,743       40,875       327,224  
Shares repurchased
    (135 )     (1,349 )     (271,563 )     (2,132,094 )
                                 
Net increase (decrease)
    33,244     $ 314,529       (229,676 )   $ (1,796,320 )
                                 
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                 
    Value,
               Distributions
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   period
 
GMO U.S. Treasury Fund
  $      —     $ 783,069     $ 346,000     $ 219     $ 30     $ 436,973  
                                                 
Totals
  $ —     $ 783,069     $ 346,000     $ 219     $ 30     $ 436,973  
                                                 

         
        33

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO Tobacco-Free Core Fund:
 
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 (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian, brokers, and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
34
       

 

GMO Tobacco-Free Core Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
        35

 

 
GMO Tobacco-Free Core Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.48 %   $ 1,000.00     $ 1,232.20     $ 2.66  
2) Hypothetical
    0.48 %   $ 1,000.00     $ 1,022.41     $ 2.41  
                                 
 
            * Expenses are calculated using the Class’s annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
36
       

 

GMO Tobacco-Free Core Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
For taxable, non-corporate shareholders, 100.00% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 represents qualified dividend income subject to the 15% rate category.
 
For corporate shareholders, 98.54% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 qualified for the dividends-received deduction.

         
        37

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of Time
   During Past
   Complex
     Directorships
Date of Birth   Held with the Trust   Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
38        

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of Time
   During Past
   Complex
     Directorships
Date of Birth   Held with the Trust   Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
  Position(s)
   Length of Time
   During Past
   Complex
     Directorships
Date of Birth   Held with Trust   Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee;
President and
Chief Executive
Officer of the
Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
        39

 

Other Officers:
 
             
Name and
   Position(s)
       Principal Occupation(s)
Date of Birth   Held with Trust   Length of Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003 – 2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
40        

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
       Principal Occupation(s)
Date of Birth   Held with Trust   Length of Time Served   During Past Five Years3
 
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money
Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        41

 

 
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO U.S. Core Equity Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Quantitative Equity Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
The Class III shares of GMO U.S. Core Equity Fund returned +15.4% for the fiscal year ended February 28, 2011, as compared with +22.6% for the S&P 500 Index.
 
Stock selection detracted from returns relative to the S&P 500 Index. Selections in Consumer Staples, Financials, and Industrials detracted from relative returns while selections in Health Care and Energy added. Individual names detracting from relative returns included overweight positions in Wal-Mart Stores and Microsoft and an underweight position in ExxonMobil. Individual names adding to relative returns included overweight positions in Apple and QUALCOMM and an underweight position in Bank of America.
 
Sector selection also detracted from returns relative to the S&P 500 Index. Sector weightings negatively impacting relative performance included overweight positions in Health Care and Consumer Staples and an underweight position in Energy. Sector weightings positively impacting relative performance included underweight positions in Utilities and Financials.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice. References to specific securities are not recommendations of such securities and may not be representative of any GMO portfolio’s current or future investments.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO U.S. Core Equity Fund Class III Shares and the S&P 500 Index
As of February 28, 2011
 
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited. Performance for classes may vary due to different fees.
 
 
† The Fund is the successor to GMO U.S. Core Fund, therefore, performance for the periods prior to September 16, 2005 is that of GMO U.S. Core Fund.

 

GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary   % of Total Net Assets  
Common Stocks
    97.2 %
Mutual Funds
    1.4  
Investment Funds
    1.1  
Short-Term Investments
    0.1  
Swap Agreements
    (0.0 )*
Other
    0.2  
         
      100.0 %
         
 
         
Industry Group Summary   % of Equity Investments**  
Software & Services
    20.9 %
Pharmaceuticals, Biotechnology & Life Sciences
    17.2  
Food, Beverage & Tobacco
    9.8  
Health Care Equipment & Services
    9.0  
Technology Hardware & Equipment
    7.4  
Food & Staples Retailing
    6.1  
Household & Personal Products
    4.8  
Energy
    4.1  
Capital Goods
    3.6  
Telecommunication Services
    3.3  
Retailing
    2.8  
Consumer Services
    2.6  
Insurance
    2.2  
Media
    1.6  
Consumer Durables & Apparel
    1.6  
Materials
    0.8  
Transportation
    0.7  
Commercial & Professional Services
    0.5  
Diversified Financials
    0.3  
Banks
    0.2  
Semiconductors & Semiconductor Equipment
    0.2  
Real Estate
    0.2  
Automobiles & Components
    0.1  
         
      100.0 %
         
 
* Rounds to 0.0%.
** Equity investments may consist of common stocks and other stock-related securities, such as preferred stocks. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.

         
        1

 

GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            COMMON STOCKS — 97.2%        
                     
            Automobiles & Components — 0.1%        
      14,400     Autoliv, Inc.     1,078,416  
      22,900     TRW Automotive Holdings Corp. *     1,300,720  
                     
            Total Automobiles & Components     2,379,136  
                     
                     
            Banks — 0.2%        
      146,100     CapitalSource, Inc.     1,107,438  
      40,700     CIT Group, Inc. *     1,763,124  
      910     First Citizens BancShares, Inc.-Class A     183,820  
      12,200     TCF Financial Corp.     198,006  
      11,500     Valley National Bancorp     156,745  
                     
            Total Banks     3,409,133  
                     
                     
            Capital Goods — 3.5%        
      193,000     3M Co.     17,800,390  
      42,200     Caterpillar, Inc.     4,343,646  
      25,960     Cummins, Inc.     2,625,075  
      138,300     Danaher Corp.     6,997,980  
      34,400     Deere & Co.     3,101,160  
      28,400     Fastenal Co.     1,764,492  
      94,700     General Dynamics Corp.     7,208,564  
      16,200     Joy Global, Inc.     1,577,556  
      23,100     L-3 Communications Holdings, Inc.     1,831,599  
      34,200     Northrop Grumman Corp.     2,280,456  
      22,850     Precision Castparts Corp.     3,238,988  
      30,700     Rockwell Collins, Inc.     1,978,308  
      45,300     United Technologies Corp.     3,784,362  
                     
            Total Capital Goods     58,532,576  
                     
                     
            Commercial & Professional Services — 0.5%        
      25,000     Copart, Inc. *     1,050,250  
      10,600     Dun & Bradstreet Corp.     856,480  
      16,300     IHS, Inc.-Class A *     1,364,310  
      71,400     Pitney Bowes, Inc.     1,797,852  

         
2
  See accompanying notes to the financial statements.    

 

 
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Commercial & Professional Services — continued        
      53,400     Rollins, Inc.     1,047,708  
      27,200     Stericycle, Inc. *     2,350,624  
                     
            Total Commercial & Professional Services     8,467,224  
                     
                     
            Consumer Durables & Apparel — 1.5%        
      86,400     Coach, Inc.     4,745,088  
      25,300     Fortune Brands, Inc.     1,565,058  
      15,000     Fossil, Inc. *     1,151,100  
      24,000     Hasbro, Inc.     1,077,600  
      15,000     Mohawk Industries, Inc. *     871,650  
      162,200     Nike, Inc.-Class B     14,440,666  
      22,600     VF Corp.     2,162,142  
                     
            Total Consumer Durables & Apparel     26,013,304  
                     
                     
            Consumer Services — 2.5%        
      78,300     Apollo Group, Inc.-Class A *     3,543,858  
      4,090     Chipotle Mexican Grill, Inc. *     1,002,050  
      24,600     Darden Restaurants, Inc.     1,159,398  
      12,610     ITT Educational Services, Inc. *     956,469  
      90,500     Las Vegas Sands Corp. *     4,220,920  
      345,500     McDonald’s Corp.     26,147,440  
      1,660     Strayer Education, Inc.     228,150  
      25,000     Weight Watchers International, Inc.     1,528,250  
      85,200     Yum! Brands, Inc.     4,288,116  
                     
            Total Consumer Services     43,074,651  
                     
                     
            Diversified Financials — 0.3%        
      181,354     Bank of America Corp.     2,591,549  
      123,500     SLM Corp. *     1,830,270  
                     
            Total Diversified Financials     4,421,819  
                     
                     
            Energy — 4.0%        
      4,750     Anadarko Petroleum Corp.     388,693  
      3,050     Apache Corp.     380,091  

         
    See accompanying notes to the financial statements.   3

 

 
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Energy — continued        
      146,399     Chevron Corp.     15,188,896  
      373,484     ConocoPhillips     29,083,199  
      34,165     Exxon Mobil Corp.     2,922,132  
      9,000     Halliburton Co.     422,460  
      113,600     Marathon Oil Corp.     5,634,560  
      49,200     National Oilwell Varco, Inc.     3,914,844  
      16,898     Occidental Petroleum Corp.     1,723,089  
      15,100     Pioneer Natural Resources Co.     1,545,334  
      25,900     Rowan Cos, Inc. *     1,105,153  
      12,333     Schlumberger Ltd.     1,152,149  
      24,300     Sunoco, Inc.     1,017,198  
      83,100     Valero Energy Corp.     2,341,758  
                     
            Total Energy     66,819,556  
                     
                     
            Food & Staples Retailing — 5.9%        
      60,400     Costco Wholesale Corp.     4,517,316  
      92,800     CVS Caremark Corp.     3,067,968  
      153,500     Kroger Co. (The)     3,515,150  
      60,900     Safeway, Inc.     1,328,838  
      25,825     Supervalu, Inc.     222,870  
      192,600     Sysco Corp.     5,352,354  
      333,500     Walgreen Co.     14,453,890  
      1,310,045     Wal–Mart Stores, Inc.     68,096,139  
                     
            Total Food & Staples Retailing     100,554,525  
                     
                     
            Food, Beverage & Tobacco — 9.5%        
      704,600     Altria Group, Inc.     17,875,702  
      49,600     Brown-Forman Corp.-Class B     3,429,840  
      96,300     Campbell Soup Co.     3,241,458  
      97,600     Coca-Cola Enterprises, Inc.     2,566,880  
      635,200     Coca–Cola Co. (The)     40,601,984  
      22,800     Dean Foods Co. *     240,768  
      31,100     Flowers Foods, Inc.     827,260  
      173,500     General Mills, Inc.     6,443,790  

         
4
  See accompanying notes to the financial statements.    

 

 
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Food, Beverage & Tobacco — continued        
      41,200     Hansen Natural Corp. *     2,371,060  
      89,000     Hershey Co. (The)     4,656,480  
      49,000     HJ Heinz Co.     2,460,780  
      90,400     Hormel Foods Corp.     2,476,960  
      97,100     Kellogg Co.     5,200,676  
      129,300     Kraft Foods, Inc.-Class A     4,116,912  
      51,900     Lorillard, Inc.     3,984,363  
      41,400     McCormick & Co., Inc. (Non Voting)     1,972,710  
      468,474     PepsiCo, Inc.     29,710,621  
      381,937     Philip Morris International, Inc.     23,978,005  
      110,900     Reynolds American, Inc.     3,806,088  
      78,600     Sara Lee Corp.     1,345,632  
                     
            Total Food, Beverage & Tobacco     161,307,969  
                     
                     
            Health Care Equipment & Services — 8.8%        
      105,900     Aetna, Inc.     3,956,424  
      79,700     Alere, Inc. *     3,079,608  
      11,400     AMERIGROUP Corp. *     653,790  
      120,300     AmerisourceBergen Corp.     4,560,573  
      203,656     Baxter International, Inc.     10,824,316  
      62,900     Becton, Dickinson and Co.     5,032,000  
      21,900     C.R. Bard, Inc.     2,140,944  
      102,600     Cardinal Health, Inc.     4,272,264  
      4,600     Catalyst Health Solutions, Inc. *     207,966  
      17,800     Cerner Corp. *     1,788,010  
      44,400     Coventry Health Care, Inc. *     1,340,880  
      37,400     DENTSPLY International, Inc.     1,397,638  
      37,760     Edwards Lifesciences Corp. *     3,211,110  
      134,660     Express Scripts, Inc. *     7,570,585  
      11,400     Gen-Probe, Inc. *     716,832  
      33,600     Health Net, Inc. *     988,512  
      23,900     Henry Schein, Inc. *     1,648,622  
      58,000     Humana, Inc. *     3,770,580  
      21,100     Idexx Laboratories, Inc. *     1,639,470  

         
    See accompanying notes to the financial statements.   5

 

 
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Health Care Equipment & Services — continued        
      3,950     Intuitive Surgical, Inc. *     1,295,403  
      27,900     Kinetic Concepts, Inc. *     1,366,263  
      37,200     Laboratory Corp. of America Holdings *     3,352,836  
      84,313     Lincare Holdings, Inc.     2,473,744  
      36,400     McKesson Corp.     2,885,792  
      12,200     Mednax, Inc. *     792,146  
      414,400     Medtronic, Inc.     16,542,848  
      26,700     Omnicare, Inc.     764,421  
      5,600     Owens & Minor, Inc.     174,720  
      30,800     Patterson Cos., Inc.     1,028,104  
      45,000     Quest Diagnostics, Inc.     2,553,750  
      48,500     ResMed, Inc. *     1,532,600  
      4,500     STERIS Corp.     152,325  
      104,900     Stryker Corp.     6,635,974  
      82,800     St Jude Medical, Inc. *     3,964,464  
      6,400     Thoratec Corp. *     178,432  
      99,732     Triple-S Management Corp.-Class B *     1,970,704  
      539,674     UnitedHealth Group, Inc.     22,979,319  
      31,600     Varian Medical Systems, Inc. *     2,189,248  
      11,300     VCA Antech, Inc. *     282,952  
      155,793     WellPoint, Inc. *     10,355,561  
      92,300     Zimmer Holdings, Inc. *     5,753,982  
                     
            Total Health Care Equipment & Services     148,025,712  
                     
                     
            Household & Personal Products — 4.7%        
      56,700     Avon Products, Inc.     1,576,827  
      18,800     Church & Dwight Co., Inc.     1,418,272  
      50,800     Clorox Co.     3,442,208  
      139,900     Colgate–Palmolive Co.     10,984,948  
      47,700     Estee Lauder Cos. (The), Inc.-Class A     4,503,357  
      26,900     Herbalife Ltd.     2,109,229  
      123,900     Kimberly–Clark Corp.     8,165,010  
      744,800     Procter & Gamble Co. (The)     46,959,640  
                     
            Total Household & Personal Products     79,159,491  
                     

         
6
  See accompanying notes to the financial statements.    

 

 
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Insurance — 2.2%        
      22,100     Allied World Assurance Co Holdings Ltd.     1,363,791  
      31,600     American Financial Group, Inc.     1,094,308  
      197,500     American International Group, Inc. *     7,319,350  
      15,100     Arch Capital Group Ltd. *     1,366,550  
      26,700     Aspen Insurance Holdings Ltd.     788,985  
      30,500     Assurant, Inc.     1,239,215  
      28,300     Axis Capital Holdings Ltd.     1,027,856  
      40,500     Brown & Brown, Inc.     1,058,670  
      27,800     Chubb Corp.     1,686,904  
      17,500     Endurance Specialty Holdings Ltd.     867,825  
      9,100     Everest Re Group Ltd.     806,715  
      48,100     Hartford Financial Services Group (The), Inc.     1,423,760  
      14,600     PartnerRe Ltd.     1,157,780  
      4,600     Platinum Underwriters Holdings Ltd.     191,820  
      36,800     Prudential Financial, Inc.     2,422,544  
      17,800     RenaissanceRe Holdings Ltd.     1,192,956  
      3,500     StanCorp Financial Group, Inc.     161,000  
      15,100     Torchmark Corp.     985,275  
      16,200     Transatlantic Holdings, Inc.     825,066  
      123,300     Travelers Cos. (The), Inc.     7,389,369  
      41,300     Validus Holdings Ltd.     1,278,235  
      34,900     W.R. Berkley Corp.     1,045,255  
                     
            Total Insurance     36,693,229  
                     
                     
            Materials — 0.7%        
      11,000     Commercial Metals Co.     183,370  
      95,400     E.I. du Pont de Nemours & Co.     5,234,598  
      51,800     Ecolab, Inc.     2,519,552  
      54,316     Schweitzer-Mauduit International, Inc.     2,978,146  
      25,800     Sigma–Aldrich Corp.     1,648,362  
                     
            Total Materials     12,564,028  
                     

         
    See accompanying notes to the financial statements.   7

 

 
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Media — 1.6%        
      25,600     Charter Communications, Inc. *     1,171,712  
      339,300     Comcast Corp.-Class A     8,740,368  
      61,100     Gannett Co., Inc.     1,008,761  
      30,000     Liberty Global, Inc.-Class A *     1,263,000  
      57,700     McGraw-Hill Cos. (The), Inc.     2,231,836  
      46,700     Time Warner Cable, Inc.     3,370,806  
      149,000     Time Warner, Inc.     5,691,800  
      54,000     Viacom, Inc.-Class B     2,411,640  
      1,792     Washington Post Co. (The)-Class B     776,097  
                     
            Total Media     26,666,020  
                     
                     
            Pharmaceuticals, Biotechnology & Life Sciences — 16.7%        
      494,700     Abbott Laboratories     23,795,070  
      97,600     Allergan, Inc.     7,238,992  
      312,700     Amgen, Inc. *     16,050,891  
      58,700     Biogen Idec, Inc. *     4,015,080  
      510,300     Bristol–Myers Squibb Co.     13,170,843  
      14,900     Cephalon, Inc. *     839,019  
      13,000     Covance, Inc. *     733,590  
      632,700     Eli Lilly & Co.     21,866,112  
      76,200     Endo Pharmaceuticals Holdings, Inc. *     2,706,624  
      172,600     Forest Laboratories, Inc. *     5,592,240  
      201,400     Gilead Sciences, Inc. *     7,850,572  
      727,000     Johnson & Johnson     44,666,880  
      1,335,362     Merck & Co., Inc.     43,492,740  
      12,100     Mettler-Toledo International, Inc. *     2,073,577  
      4,199,921     Pfizer, Inc.     80,806,480  
      41,900     Pharmaceutical Product Development, Inc.     1,150,993  
      8,800     Techne Corp.     630,872  
      131,900     Warner Chilcott Plc     3,123,392  
      23,500     Waters Corp. *     1,951,675  
                     
            Total Pharmaceuticals, Biotechnology & Life Sciences     281,755,642  
                     

         
8
  See accompanying notes to the financial statements.    

 

 
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Real Estate — 0.1%        
      128,000     Annaly Capital Management, Inc. REIT     2,295,040  
      6,300     National Retail Properties, Inc. REIT     161,847  
      7,000     Omega Healthcare Investors, Inc. REIT     167,790  
                     
            Total Real Estate     2,624,677  
                     
                     
            Retailing — 2.8%        
      41,500     Advance Auto Parts, Inc.     2,601,220  
      113,906     Aeropostale, Inc. *     2,954,722  
      55,900     AutoNation, Inc. *     1,880,476  
      19,174     AutoZone, Inc. *     4,945,933  
      105,300     Best Buy Co., Inc.     3,394,872  
      54,700     Dollar Tree, Inc. *     2,752,504  
      38,200     Family Dollar Stores, Inc.     1,913,056  
      35,800     Foot Locker, Inc.     711,346  
      45,900     Genuine Parts Co.     2,418,471  
      129,800     Home Depot, Inc.     4,863,606  
      9,439     Jos. A. Bank Clothiers, Inc. *     435,232  
      126,500     Liberty Media Corp.-Interactive-Class A *     2,031,590  
      47,100     Limited Brands, Inc.     1,508,142  
      90,100     Macy’s, Inc.     2,153,390  
      8,140     Netflix, Inc. *     1,682,294  
      31,700     O’Reilly Automotive, Inc. *     1,761,886  
      23,200     PetSmart, Inc.     948,184  
      27,200     Ross Stores, Inc.     1,959,488  
      16,800     Target Corp.     882,840  
      82,800     TJX Cos. (The), Inc.     4,129,236  
      15,200     Tractor Supply Co.     791,464  
                     
            Total Retailing     46,719,952  
                     
                     
            Semiconductors & Semiconductor Equipment — 0.2%        
      79,600     Texas Instruments, Inc.     2,834,556  
                     

         
    See accompanying notes to the financial statements.   9

 

 
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Software & Services — 20.4%        
      153,300     Accenture Plc.-Class A     7,891,884  
      51,700     Adobe Systems, Inc. *     1,783,650  
      56,100     AMDOCS Ltd. *     1,674,024  
      14,200     Ansys, Inc. *     799,744  
      94,100     Automatic Data Processing, Inc.     4,705,000  
      45,600     BMC Software, Inc. *     2,257,200  
      45,300     Broadridge Financial Solutions, Inc.     1,038,276  
      39,300     Citrix Systems, Inc. *     2,757,288  
      94,200     Cognizant Technology Solutions Corp.-Class A *     7,241,154  
      23,300     Computer Sciences Corp.     1,121,429  
      447,700     eBay, Inc. *     15,000,189  
      19,400     Factset Research Systems, Inc.     2,034,672  
      24,600     Fiserv, Inc. *     1,556,442  
      27,400     Global Payments, Inc.     1,314,926  
      115,575     Google, Inc.-Class A *     70,893,705  
      29,500     Informatica Corp. *     1,386,795  
      263,754     International Business Machines Corp.     42,696,498  
      143,400     Intuit, Inc. *     7,539,972  
      31,500     Jack Henry & Associates, Inc.     1,005,165  
      22,756     MasterCard, Inc.-Class A     5,474,183  
      29,900     McAfee, Inc. *     1,433,705  
      35,200     Micros Systems, Inc. *     1,676,928  
      3,103,957     Microsoft Corp.     82,503,177  
      5,800     NeuStar, Inc. *     146,450  
      1,878,030     Oracle Corp.     61,787,187  
      95,400     Paychex, Inc.     3,208,302  
      36,500     Quest Software, Inc. *     977,835  
      15,200     Salesforce.com, Inc. *     2,010,504  
      222,500     Symantec Corp. *     4,011,675  
      30,600     TIBCO Software, Inc. *     753,372  
      57,500     Total System Services, Inc.     1,020,625  
      47,800     VMware, Inc. *     3,998,470  
                     
            Total Software & Services     343,700,426  
                     

         
10
  See accompanying notes to the financial statements.    

 

 
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Technology Hardware & Equipment — 7.2%        
      108,770     Apple, Inc. *     38,418,652  
      14,300     Aruba Networks, Inc. *     435,435  
      935,900     Cisco Systems, Inc. *     17,370,304  
      273,006     Dell, Inc. *     4,321,685  
      38,600     Dolby Laboratories, Inc.-Class A *     1,952,002  
      14,720     F5 Networks, Inc. *     1,737,107  
      23,700     Harris Corp.     1,105,842  
      239,200     Hewlett-Packard Co.     10,436,296  
      64,000     Ingram Micro, Inc.-Class A *     1,275,520  
      23,400     Lexmark International, Inc. *     878,202  
      50,500     NCR Corp. *     964,550  
      41,900     NetApp, Inc. *     2,164,554  
      553,600     Qualcomm, Inc.     32,983,488  
      78,900     Seagate Technology Plc *     1,002,030  
      8,700     Tech Data Corp. *     431,346  
      29,300     Tellabs, Inc.     157,927  
      104,435     Western Digital Corp. *     3,193,622  
      222,000     Xerox Corp.     2,386,500  
                     
            Total Technology Hardware & Equipment     121,215,062  
                     
                     
            Telecommunication Services — 3.2%        
      706,700     AT&T, Inc.     20,056,146  
      47,400     CenturyTel, Inc.     1,951,932  
      56,700     MetroPCS Communications, Inc. *     816,480  
      30,700     Telephone & Data Systems, Inc.     1,033,055  
      801,222     Verizon Communications, Inc.     29,581,116  
                     
            Total Telecommunication Services     53,438,729  
                     
                     
            Transportation — 0.6%        
      61,400     CH Robinson Worldwide, Inc.     4,444,746  
      37,700     Expeditors International of Washington, Inc.     1,802,060  

         
    See accompanying notes to the financial statements.   11

 

 
GMO U.S. Core Equity Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Transportation — continued        
      31,000     Union Pacific Corp.     2,957,710  
      61,500     United Continental Holdings, Inc. *     1,478,460  
                     
            Total Transportation     10,682,976  
                     
                     
            TOTAL COMMON STOCKS (COST $1,415,366,971)     1,641,060,393  
                     
                     
            INVESTMENT FUNDS — 1.1%        
      145,040     SPDR S&P 500 ETF Trust (a)     19,312,076  
                     
                     
            TOTAL INVESTMENT FUNDS (COST $17,748,966)     19,312,076  
                     
                     
            MUTUAL FUNDS — 1.4%        
                     
            Affiliated Issuers — 1.4%        
      928,840     GMO U.S. Treasury Fund     23,221,000  
                     
                     
            TOTAL MUTUAL FUNDS (COST $23,221,000)     23,221,000  
                     
                     
            SHORT-TERM INVESTMENTS — 0.1%        
                     
            Money Market Funds — 0.1%        
      2,185,928     State Street Institutional Treasury Money Market Fund-Institutional Class     2,185,928  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $2,185,928)     2,185,928  
                     
                     
            TOTAL INVESTMENTS — 99.8%
(COST $1,458,522,865) 		    1,685,779,397  
            Other Assets and Liabilities (net) — 0.2%     2,543,745  
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 1,688,323,142  
                     

         
12
  See accompanying notes to the financial statements.    

 

 
GMO U.S. Core Equity Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
A summary of outstanding financial instruments at February 28, 2011 is as follows:
 
Swap Agreements
 
Total Return Swaps
 
                                 
Notional
 		  Expiration
 		              Market
Amount   Date   Counterparty   Fund Receives   Fund Pays/Receives   Value
 
  5,856,239         7/19/2011   Deutsche Bank AG   12% of notional amount   Return on Sears
Holding Corp. 		  $ (604,066 )
                                 
Premiums to (Pay) Receive
  $ —  
         
 
As of February 28, 2011, for futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
 
Notes to Schedule of Investments:
 
ETF - Exchange-Traded Fund
REIT - Real Estate Investment Trust
SPDR - Standard and Poor’s Depositary Receipt
* Non-income producing security.
(a) Represents an investment to equitize cash. The SPDR S&P 500 ETF Trust is a unit investment trust that issues securities called “Trust Units” or “Units” that represent an undivided ownership interest in a portfolio of all of the common stocks of the Standard & Poor’s 500 Composite Stock Price Index®. The SPDR S&P 500 ETF Trust intends to provide investment results that, before expenses, generally correspond to the price and yield performance of the S&P 500 Index.

         
    See accompanying notes to the financial statements.   13

 

GMO U.S. Core Equity Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $1,435,301,865) (Note 2)
  $ 1,662,558,397  
Investments in affiliated issuers, at value (cost $23,221,000) (Notes 2 and 10)
    23,221,000  
Receivable for investments sold
    2,000,000  
Receivable for Fund shares sold
    81,721  
Dividends and interest receivable
    3,618,039  
Receivable for expenses reimbursed by Manager (Note 5)
    31,332  
         
Total assets
    1,691,510,489  
         
         
Liabilities:
       
Payable for investments purchased
    125,413  
Payable for Fund shares repurchased
    1,793,182  
Payable to affiliate for (Note 5):
       
Management fee
    402,390  
Shareholder service fee
    105,853  
Administration fee – Class M
    183  
Trustees and Trust Officers or agents unaffiliated with the Manager
    4,139  
Payable for 12b-1 fee – Class M
    474  
Payable for open swap contracts (Note 4)
    604,066  
Accrued expenses
    151,647  
         
Total liabilities
    3,187,347  
         
Net assets
  $ 1,688,323,142  
         

         
14
  See accompanying notes to the financial statements.    

 

 
GMO U.S. Core Equity Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011 — (Continued)
 
         
Net assets consist of:
       
Paid-in capital
  $ 2,278,675,864  
Accumulated undistributed net investment income
    7,652,230  
Accumulated net realized loss
    (824,657,418 )
Net unrealized appreciation
    226,652,466  
         
    $ 1,688,323,142  
         
Net assets attributable to:
       
Class III shares
  $ 393,523,466  
         
Class IV shares
  $ 163,627,367  
         
Class VI shares
  $ 1,129,977,625  
         
Class M shares
  $ 1,194,684  
         
Shares outstanding:
       
Class III
    32,785,192  
         
Class IV
    13,656,154  
         
Class VI
    94,384,741  
         
Class M
    99,577  
         
Net asset value per share:
       
Class III
  $ 12.00  
         
Class IV
  $ 11.98  
         
Class VI
  $ 11.97  
         
Class M
  $ 12.00  
         

         
    See accompanying notes to the financial statements.   15

 

GMO U.S. Core Equity Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends from unaffiliated issuers (net of withholding taxes of $729)
  $ 38,766,190  
Interest
    36,857  
Dividends from affiliated issuers (Note 10)
    11,177  
         
Total investment income
    38,814,224  
         
Expenses:
       
Management fee (Note 5)
    5,590,136  
Shareholder service fee – Class III (Note 5)
    696,477  
Shareholder service fee – Class IV (Note 5)
    243,538  
Shareholder service fee – Class VI (Note 5)
    601,823  
12b-1 fee – Class M (Note 5)
    2,977  
Administration fee – Class M (Note 5)
    2,382  
Custodian, fund accounting agent and transfer agent fees
    274,751  
Legal fees
    72,462  
Audit and tax fees
    53,096  
Trustees fees and related expenses (Note 5)
    39,920  
Registration fees
    30,877  
Miscellaneous
    47,721  
         
Total expenses
    7,656,160  
Fees and expenses reimbursed by Manager (Note 5)
    (462,010 )
Expense reductions (Note 2)
    (811 )
         
Net expenses
    7,193,339  
         
Net investment income (loss)
    31,620,885  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in unaffiliated issuers
    37,372,002  
Investments in affiliated issuers
    (3,683 )
Realized gains distributions from affiliated issuers (Note 10)
    958  
Futures contracts
    (485,448 )
Swap contracts
    1,359,459  
         
Net realized gain (loss)
    38,243,288  
         
Change in net unrealized appreciation (depreciation) on:
       
Investments
    160,538,471  
Swap contracts
    (604,066 )
         
Net unrealized gain (loss)
    159,934,405  
         
Net realized and unrealized gain (loss)
    198,177,693  
         
Net increase (decrease) in net assets resulting from operations
  $ 229,798,578  
         

         
16
  See accompanying notes to the financial statements.    

 

GMO U.S. Core Equity Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 31,620,885     $ 33,835,401  
Net realized gain (loss)
    38,243,288       (249,904,990 )
Change in net unrealized appreciation (depreciation)
    159,934,405       829,307,675  
                 
                 
Net increase (decrease) in net assets from operations
    229,798,578       613,238,086  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (7,688,037 )     (10,923,666 )
Class IV
    (3,460,876 )     (6,982,974 )
Class VI
    (18,917,318 )     (18,598,750 )
Class M
    (15,852 )     (23,641 )
                 
Total distributions from net investment income
    (30,082,083 )     (36,529,031 )
                 
Net share transactions (Note 9):
               
Class III
    (177,852,017 )     (175,328,045 )
Class IV
    (250,904,445 )     19,146,175  
Class VI
    (87,292,204 )     (70,070,440 )
Class M
    (235,395 )     (974,725 )
                 
Increase (decrease) in net assets resulting from net share transactions
    (516,284,061 )     (227,227,035 )
                 
                 
Total increase (decrease) in net assets
    (316,567,566 )     349,482,020  
                 
Net assets:
               
Beginning of period
    2,004,890,708       1,655,408,688  
                 
End of period (including accumulated undistributed net investment income of $7,652,230 and $4,665,485, respectively)
  $ 1,688,323,142     $ 2,004,890,708  
                 

         
    See accompanying notes to the financial statements.   17

 

GMO U.S. Core Equity Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 10.57     $ 7.65     $ 12.05     $ 14.77     $ 14.50  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.18       0.17       0.18       0.22       0.22  
Net realized and unrealized gain (loss)
    1.43       2.93       (4.40 )     (1.10 )     0.64  
                                         
                                         
Total from investment operations
    1.61       3.10       (4.22 )     (0.88 )     0.86  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.18 )     (0.18 )     (0.18 )     (0.25 )     (0.22 )
From net realized gains
    —       —       —       (1.59 )     (0.37 )
                                         
                                         
Total distributions
    (0.18 )     (0.18 )     (0.18 )     (1.84 )     (0.59 )
                                         
                                         
Net asset value, end of period
  $ 12.00     $ 10.57     $ 7.65     $ 12.05     $ 14.77  
                                         
                                         
Total Return(a)
    15.42 %     40.85 %     (35.39 )%     (7.33 )%     5.97 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 393,523     $ 519,309     $ 509,120     $ 1,131,800     $ 1,789,872  
Net expenses to average daily net assets
    0.46 %(b)(c)     0.46 %(b)     0.46 %(b)     0.46 %(b)     0.46 %
Net investment income (loss) to average daily net assets
    1.68 %     1.73 %     1.70 %     1.55 %     1.51 %
Portfolio turnover rate
    96 %     52 %     62 %     71 %     78 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.03 %     0.03 %     0.02 %     0.02 %     0.02 %
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
† Calculated using average shares outstanding throughout the period.

         
18
  See accompanying notes to the financial statements.    

 

GMO U.S. Core Equity Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class IV share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 10.55     $ 7.63     $ 12.02     $ 14.75     $ 14.48  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.18       0.17       0.19       0.22       0.22  
Net realized and unrealized gain (loss)
    1.43       2.93       (4.39 )     (1.10 )     0.65  
                                         
                                         
Total from investment operations
    1.61       3.10       (4.20 )     (0.88 )     0.87  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.18 )     (0.18 )     (0.19 )     (0.26 )     (0.23 )
From net realized gains
    —       —       —       (1.59 )     (0.37 )
                                         
                                         
Total distributions
    (0.18 )     (0.18 )     (0.19 )     (1.85 )     (0.60 )
                                         
                                         
Net asset value, end of period
  $ 11.98     $ 10.55     $ 7.63     $ 12.02     $ 14.75  
                                         
                                         
Total Return(a)
    15.47 %     41.04 %     (35.36 )%     (7.36 )%     6.05 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 163,627     $ 415,267     $ 286,333     $ 478,084     $ 602,048  
Net expenses to average daily net assets
    0.41 %(b)(c)     0.41 %(b)     0.41 %(b)     0.41 %(b)     0.41 %
Net investment income (loss) to average daily net assets
    1.68 %     1.76 %     1.78 %     1.57 %     1.55 %
Portfolio turnover rate
    96 %     52 %     62 %     71 %     78 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.03 %     0.03 %     0.02 %     0.02 %     0.02 %
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
† Calculated using average shares outstanding throughout the period.

         
    See accompanying notes to the financial statements.   19

 

GMO U.S. Core Equity Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class VI share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 10.54     $ 7.63     $ 12.02     $ 14.75     $ 14.47  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.20       0.17       0.19       0.23       0.23  
Net realized and unrealized gain (loss)
    1.42       2.93       (4.38 )     (1.11 )     0.65  
                                         
                                         
Total from investment operations
    1.62       3.10       (4.19 )     (0.88 )     0.88  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.19 )     (0.19 )     (0.20 )     (0.26 )     (0.23 )
From net realized gains
    —       —       —       (1.59 )     (0.37 )
                                         
                                         
Total distributions
    (0.19 )     (0.19 )     (0.20 )     (1.85 )     (0.60 )
                                         
                                         
Net asset value, end of period
  $ 11.97     $ 10.54     $ 7.63     $ 12.02     $ 14.75  
                                         
                                         
Total Return(a)
    15.59 %     40.96 %     (35.33 )%     (7.32 )%     6.17 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 1,129,978     $ 1,069,030     $ 858,170     $ 2,031,659     $ 3,671,926  
Net expenses to average daily net assets
    0.37 %(b)(c)     0.37 %(b)     0.37 %(b)     0.37 %(b)     0.37 %
Net investment income (loss) to average daily net assets
    1.80 %     1.80 %     1.78 %     1.63 %     1.61 %
Portfolio turnover rate
    96 %     52 %     62 %     71 %     78 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.03 %     0.03 %     0.02 %     0.02 %     0.02 %
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
† Calculated using average shares outstanding throughout the period.

         
20
  See accompanying notes to the financial statements.    

 

GMO U.S. Core Equity Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class M share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 10.57     $ 7.65     $ 12.03     $ 14.75     $ 14.47  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.15       0.14       0.15       0.18       0.18  
Net realized and unrealized gain (loss)
    1.43       2.94       (4.40 )     (1.11 )     0.64  
                                         
                                         
Total from investment operations
    1.58       3.08       (4.25 )     (0.93 )     0.82  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.15 )     (0.16 )     (0.13 )     (0.20 )     (0.17 )
From net realized gains
    —       —       —       (1.59 )     (0.37 )
                                         
                                         
Total distributions
    (0.15 )     (0.16 )     (0.13 )     (1.79 )     (0.54 )
                                         
                                         
Net asset value, end of period
  $ 12.00     $ 10.57     $ 7.65     $ 12.03     $ 14.75  
                                         
                                         
Total Return(a)
    15.08 %     40.51 %     (35.61 )%     (7.64 )%     5.73 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 1,195     $ 1,285     $ 1,786     $ 56,422     $ 131,640  
Net expenses to average daily net assets
    0.76 %(b)(c)     0.76 %(b)     0.76 %(b)     0.76 %(b)     0.76 %
Net investment income (loss) to average daily net assets
    1.40 %     1.51 %     1.29 %     1.23 %     1.22 %
Portfolio turnover rate
    96 %     52 %     62 %     71 %     78 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.03 %     0.03 %     0.02 %     0.02 %     0.02 %
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) The net expense ratio does not include the effect of expense reductions (Note 2).
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
† Calculated using average shares outstanding throughout the period.

         
    See accompanying notes to the financial statements.   21

 

GMO U.S. Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO U.S. Core Equity Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund’s investment objective is high total return. The Manager seeks to achieve the Fund’s investment objective by investing in equities or groups of equities that the Manager believes will provide higher returns than the S&P 500 Index. The Manager uses active investment management methods, which means that equities are bought and sold according to the Manager’s evaluation of companies’ published financial information, securities’ prices, equity and bond markets, and the overall economy.
 
In selecting equities for the Fund, the Manager may use a combination of investment methods to identify equities that the Manager believes present positive return potential relative to other equities. Some of these methods evaluate individual equities or a group of equities based on the ratio of their price relative to historical financial information and forecasted financial information provided by industry analysts. Historical financial information may include book value, cash flow and earnings. The Manager may compare these ratios to industry or market averages in order to assess the relative attractiveness of an equity. Other methods focus on evaluating patterns of price movement or volatility of an equity or group of equities relative to the Fund’s investment universe. The Manager also may adjust the Fund’s portfolio for factors such as position size, industry and sector exposure, and market capitalization.
 
As a substitute for direct investments in equities, the Manager may use exchange-traded and over-the-counter (“OTC”) derivatives. The Manager also may use derivatives: (i) in an attempt to reduce investment exposures (which may result in a reduction below zero); (ii) to effect transactions intended as substitutes for securities lending; and (iii) in an attempt to adjust elements of the Fund’s investment exposure. Derivatives used may include futures, options and swap contracts. In addition, the Fund may lend its portfolio securities.
 
Under normal circumstances, the Fund invests directly and indirectly (e.g., through underlying funds or derivatives) at least 80% of its assets in equity investments tied economically to the U.S. The terms “equities” and “equity investments” refer to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts.
 
For cash management purposes, the Fund may invest in unaffiliated money market funds and/or GMO U.S. Treasury Fund.

         
22
       

 

 
GMO U.S. Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Throughout the period ended February 28, 2011, the Fund had four classes of shares outstanding: Class III, Class IV, Class VI, and Class M. Class M shares bear an administration fee and a 12b-1 fee while Classes III, IV and VI bear a shareholder service fee (See Note 5). The principal economic difference among the classes of shares is the type and level of fees they bear.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the OTC market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. See Note 4 for a further discussion on valuation of derivative financial instruments.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions,

         
        23

 

 
GMO U.S. Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
(b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Common Stocks
  $ 1,641,060,393     $      —     $      —     $ 1,641,060,393  
Investment Funds
    19,312,076       —       —       19,312,076  
Mutual Funds
    23,221,000       —       —       23,221,000  
Short-Term Investments
    2,185,928       —       —       2,185,928  
                                 
Total Investments
    1,685,779,397       —       —       1,685,779,397  
                                 
Total
  $ 1,685,779,397     $ —     $ —     $ 1,685,779,397  
                                 

         
24
       

 

 
GMO U.S. Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
LIABILITY VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Liabilities
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Derivatives
                               
Swap Agreements
                               
Equity Risk
  $      —     $ (604,066 )   $      —     $ (604,066 )
                                 
Total
  $ —     $ (604,066 )   $ —     $ (604,066 )
                                 
 
The risks referenced above are not intended to be inclusive of all risks. Please see the Investment Risks and Derivative Financial Instruments sections below for a further discussion of risks.
 
            * Because the tables above are based on market values or unrealized appreciation (depreciation) rather than the notional amounts of derivatives, the uncertainties surrounding the valuation inputs for a derivative are likely to be more significant to the Fund’s net asset value than the uncertainties surrounding inputs for a non-derivative security with the same market value.
 
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements.
 
All of the Fund’s common stocks held at period end are classified as Level 1. Please refer to the Schedule of Investments for a more detailed categorization of common stocks.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
The Fund held no investments or derivative financial instruments directly at either February 28, 2011 or February 28, 2010, whose fair value was categorized using Level 3 inputs.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, quarterly, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid

         
        25

 

 
GMO U.S. Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards, derivative contract transactions and losses on wash sale transactions.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 30,082,083     $ 36,529,031  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 7,441,512  
         
Other Tax Attributes:
       
Capital loss carryforwards
  $ (752,131,366 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 28, 2017
  $ (240,726,835 )
February 28, 2018
    (511,404,531 )
         
Total
  $ (752,131,366 )
         

         
26
       

 

 
GMO U.S. Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                         
            Net Unrealized
    Gross Unrealized
   Gross Unrealized
   Appreciation
Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)
 
$1,531,048,916
  $ 166,878,449     $ (12,147,968 )   $ 154,730,481  
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, 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 among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service, 12b-1, and administration fees, which are directly attributable to a class of shares, are

         
        27

 

 
GMO U.S. Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
charged to that class’s operations. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (Note 5).
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund’s investments.
 
• Market Risk — Value Securities — The Fund purchases some equity investments at prices below what the Manager believes to be their fundamental value. The Fund runs the risk that the prices of these investments will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value.
 
Other principal risks of an investment in the Fund include Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, and credit and counterparty risk); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund’s securities); Market Risk — Growth Securities (greater price fluctuations resulting from dependence on future earnings expectations); Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or

         
28
       

 

 
GMO U.S. Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by “equitizing” its cash balances using futures contracts or other types of derivatives.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero).
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, indices and markets without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically “sell” a portion of the Fund’s portfolio) in combination with a long futures contract on another index (to synthetically “buy” exposure to that index).
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.

         
        29

 

 
GMO U.S. Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral, that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash,

         
30
       

 

 
GMO U.S. Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. During the year ended February 28, 2011, the Fund used futures contracts to maintain the diversity and liquidity of the portfolio. The Fund had no futures contracts outstanding at the end of the period.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
 
When an option contract is closed, 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 at the time it was closed. Realized gains

         
        31

 

 
GMO U.S. Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon

         
32
       

 

 
GMO U.S. Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the year ended February 28, 2011, the Fund used total return swap agreements to achieve returns comparable to holding and lending a direct equity position. Swap agreements outstanding at the end of the period are listed in the Fund’s Schedule of Investments.

         
        33

 

 
GMO U.S. Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. During the year ended February 28, 2011, the Fund held rights and warrants received as a result of a corporate action. The Fund held no rights or warrants at the end of the period.
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of
February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Liabilities:
                                               
Unrealized depreciation on swap agreements
  $      —     $      —     $      —     $ (604,066 )   $      —     $ (604,066 )
                                                 
Total
  $ —     $ —     $ —     $ (604,066 )   $ —     $ (604,066 )
                                                 
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Investments (rights and warrants)
  $ —     $ —     $ —     $ (191,700 )   $ —     $ (191,700 )
Futures contracts
         —            —            —       (485,448 )          —       (485,448 )
Swap agreements
    —       —       —       1,359,459       —       1,359,459  
                                                 
Total
  $ —     $ —     $ —     $ 682,311     $ —     $ 682,311  
                                                 
Change in Unrealized Appreciation (Depreciation) on:
                                               
Swap agreements
  $ —     $ —     $ —     $ (604,066 )   $ —     $ (604,066 )
                                                 
Total
  $ —     $ —     $ —     $ (604,066 )   $ —     $ (604,066 )
                                                 
 
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.

         
34
       

 

 
GMO U.S. Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The volume of derivative activity, based on absolute values (futures contracts and rights and warrants) or notional amounts (swap agreements) outstanding at each month-end, was as follows for the year ended February 28, 2011:
 
                         
    Futures contracts   Swap agreements   Right/Warrants
 
Average amount outstanding
  $ 6,585,256     $ 866,664     $ 129,921  
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.31% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets of each class at the annual rate of 0.15% for Class III shares, 0.10% for Class IV shares and 0.055% for Class VI shares.
 
Holders of Class M shares of the Fund pay GMO an administration fee for support services provided to Class M shareholders. That fee is paid monthly at the annual rate of 0.20% of the average daily net assets of Class M shares. Pursuant to a Rule 12b-1 distribution and service plan adopted by the Fund, holders of Class M shares of the Fund may pay a fee, at the annual rate of up to 1.00% of average daily net assets of Class M shares, for any activities or expenses primarily intended to result in the sale of Class M shares of the Fund and/or the provision of services to Class M shareholders. The Trustees currently limit payments on Class M shares to 0.25% of the Fund’s average daily net assets of Class M shares.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.31% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means the administration fee and distribution (12b-1) fee (Class M Shares only), shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition to the contractual expense reimbursement described above, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund’s Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund’s

         
        35

 

 
GMO U.S. Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $39,920 and $13,791, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
             
Indirect Net Expenses
 		           
(excluding shareholder
            
service fees and
     Indirect Shareholder
      
interest expense)     Service Fees     Total Indirect Expenses
< 0.001%
    0.000%     < 0.001%
             
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 aggregated $1,696,293,225 and $2,188,623,168, respectively.
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 45.14% of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund’s outstanding shares. On that date, no other shareholder owned more than 10% of the Fund’s outstanding shares of the Fund. One of the shareholders is another fund of the Trust.
 
As of February 28, 2011, 0.02% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and 57.71% of the Fund’s shares were held by accounts for which the Manager had investment discretion.

         
36
       

 

 
GMO U.S. Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    1,742,656     $ 18,918,171       3,511,410     $ 32,897,874  
Shares issued to shareholders in reinvestment of distributions
    607,138       6,494,451       966,073       8,947,756  
Shares repurchased
    (18,693,019 )     (203,264,639 )     (21,930,843 )     (217,173,675 )
                                 
Net increase (decrease)
    (16,343,225 )   $ (177,852,017 )     (17,453,360 )   $ (175,328,045 )
                                 
                                 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class IV:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    —     $ —       7,571,207     $ 76,018,597  
Shares issued to shareholders in reinvestment of distributions
    294,993       3,208,274       726,034       6,697,682  
Shares repurchased
    (26,016,665 )     (254,112,719 )     (6,449,352 )     (63,570,104 )
                                 
Net increase (decrease)
    (25,721,672 )   $ (250,904,445 )     1,847,889     $ 19,146,175  
                                 
                                 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class VI:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    19,230,775     $ 200,810,712       25,991,710     $ 252,219,486  
Shares issued to shareholders in reinvestment of distributions
    1,768,755       18,917,318       2,002,865       18,598,750  
Shares repurchased
    (28,000,574 )     (307,020,234 )     (39,110,545 )     (340,888,676 )
                                 
Net increase (decrease)
    (7,001,044 )   $ (87,292,204 )     (11,115,970 )   $ (70,070,440 )
                                 
                                 
                                 

         
        37

 

 
GMO U.S. Core Equity Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class M:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    —     $ —       —     $ —  
Shares issued to shareholders in reinvestment of distributions
    1,484       15,851       2,609       23,641  
Shares repurchased
    (23,519 )     (251,246 )     (114,519 )     (998,366 )
                                 
Net increase (decrease)
    (22,035 )   $ (235,395 )     (111,910 )   $ (974,725 )
                                 
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                 
    Value,
               Distributions
    
    beginning of
       Sales
   Dividend
   of Realized
   Value, end
Affiliate   period   Purchases   Proceeds   Income   Gains   of period
 
GMO U.S. Treasury Fund
  $      —     $ 163,998,601     $ 140,773,918     $ 11,177     $ 958     $ 23,221,000  
                                                 
Totals
  $ —     $ 163,998,601     $ 140,773,918     $ 11,177     $ 958     $ 23,221,000  
                                                 

         
38
       

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO U.S. Core Equity Fund:
 
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO U.S. Core Equity Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian, broker, and transfer agent provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
        39

 

GMO U.S. Core Equity Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, distribution (12b-1) and/or administration fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
This example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
40
       

 

 
GMO U.S. Core Equity Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.46 %   $ 1,000.00     $ 1,223.40     $ 2.54  
2) Hypothetical
    0.46 %   $ 1,000.00     $ 1,022.51     $ 2.31  
                                 
Class IV
                               
                                 
1) Actual
    0.41 %   $ 1,000.00     $ 1,224.20     $ 2.26  
2) Hypothetical
    0.41 %   $ 1,000.00     $ 1,022.76     $ 2.06  
                                 
Class VI
                               
                                 
1) Actual
    0.37 %   $ 1,000.00     $ 1,224.70     $ 2.04  
2) Hypothetical
    0.37 %   $ 1,000.00     $ 1,022.96     $ 1.85  
                                 
Class M
                               
                                 
1) Actual
    0.76 %   $ 1,000.00     $ 1,222.80     $ 4.19  
2) Hypothetical
    0.76 %   $ 1,000.00     $ 1,021.03     $ 3.81  
                                 
 
            * Expenses are calculated using each Class’s annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
        41

 

GMO U.S. Core Equity Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
For taxable, non-corporate shareholders, 100.00% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 represents qualified dividend income subject to the 15% rate category.
 
For corporate shareholders, 99.64% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 qualified for the dividends-received deduction.

         
42        

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with the
   Length of Time
   During Past
   Complex
     Directorships
Date of Birth   Trust   Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
        43

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with the
   Length of Time
   During Past
   Complex
     Directorships
Date of Birth   Trust   Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of Time
   During Past
   Complex
     Directorships
Date of Birth   Held with Trust   Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee; President
and Chief Executive
Officer of the Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
44        

 

 
Other Officers:
 
             
Name and
   Position(s)
   Length of Time
   Principal Occupation(s)
Date of Birth   Held with Trust   Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        45

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of Time
   Principal Occupation(s)
Date of Birth   Held with Trust   Served   During Past Five Years3
 
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money
Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
46        

 

 
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Asset Allocation Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
GMO U.S. Equity Allocation Fund returned +14.1% for the fiscal year ended February 28, 2011, as compared with +24.3% for the Russell 3000 Index.
 
Underlying fund implementation was negative, detracting 8.8% from relative performance, as GMO U.S. Core Equity Fund and GMO Quality Fund each underperformed their respective benchmarks during the period.
 
Asset allocation detracted 1.4% from relative performance because the Fund was overweight funds emphasizing large capitalization equities and underweight funds emphasizing small capitalization equities.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice. References to specific securities are not recommendations of such securities and may not be representative of any GMO portfolio’s current or future investments.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO U.S. Equity Allocation Fund Class III Shares and the Russell 3000 Index
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited.
 
 
* Russell 3000 ++ Index represents the S&P 500 Index prior to February 28, 2003 and the Russell 3000 Index thereafter.
The Russell 3000® Index is a trademark/service mark of the Frank Russell Company. Russelltm is a trademark of the Frank Russell Company.

 

GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary*   % of Total Net Assets  
Common Stocks
    96.9 %
Short-Term Investments
    2.4  
Investment Funds
    0.6  
Rights and Warrants
    0.0 Ù
Swap Agreements
    (0.0 )Ù
Other
    0.1  
         
      100.0 %
         
 
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust (“underlying funds”).
Ù Rounds to 0.0%.

         
        1

 

GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                 
Shares /
 		           
Par Value ($)     Description   Value ($)  
        MUTUAL FUNDS — 100.0%        
                 
        Affiliated Issuers — 100.0%        
  2,243,191     GMO Quality Fund, Class VI     46,703,245  
  3,923,885     GMO U.S. Core Equity Fund, Class VI     46,968,900  
  75,275     GMO U.S. Small/Mid Cap Growth Fund, Class III     1,194,609  
  128,144     GMO U.S. Small/Mid Cap Value Fund, Class III     1,055,906  
                 
                 
        TOTAL MUTUAL FUNDS (COST $81,381,291)     95,922,660  
                 
                 
        SHORT-TERM INVESTMENTS — 0.0%        
                 
        Time Deposits — 0.0%        
  26,562     State Street Eurodollar Time Deposit, 0.01%, due 03/01/11     26,562  
                 
                 
        TOTAL SHORT-TERM INVESTMENTS (COST $26,562)     26,562  
                 
                 
        TOTAL INVESTMENTS — 100.0%
(Cost $81,407,853) 		    95,949,222  
        Other Assets and Liabilities (net) — (0.0%)     (26,076 )
                 
                 
        TOTAL NET ASSETS — 100.0%   $ 95,923,146  
                 

         
2
  See accompanying notes to the financial statements.    

 

GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $26,562) (Note 2)
  $ 26,562  
Investments in affiliated issuers, at value (cost $81,381,291) (Notes 2 and 10)
    95,922,660  
Receivable for Fund shares sold
    1,890  
Receivable for expenses reimbursed by Manager (Note 5)
    7,627  
         
Total assets
    95,958,739  
         
         
Liabilities:
       
Payable to affiliate for (Note 5):
       
Trustees and Trust Officers or agents unaffiliated with the Manager
    245  
Accrued expenses
    35,348  
         
Total liabilities
    35,593  
         
Net assets
  $ 95,923,146  
         
Net assets consist of:
       
Paid-in capital
  $ 98,216,599  
Accumulated undistributed net investment income
    759,077  
Accumulated net realized loss
    (17,593,899 )
Net unrealized appreciation
    14,541,369  
         
    $ 95,923,146  
         
Net assets attributable to:
       
Class III shares
  $ 95,923,146  
         
Shares outstanding:
       
Class III
    3,760,506  
         
Net asset value per share:
       
Class III
  $ 25.51  
         

         
    See accompanying notes to the financial statements.   3

 

GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends from affiliated issuers (Note 10)
  $ 2,164,926  
Interest
    4  
         
Total investment income
    2,164,930  
         
Expenses:
       
Audit and tax fees
    34,729  
Custodian, fund accounting agent and transfer agent fees
    18,659  
Legal fees
    4,990  
Registration fees
    2,667  
Trustees fees and related expenses (Note 5)
    2,532  
Miscellaneous
    9,958  
         
Total expenses
    73,535  
Fees and expenses reimbursed by Manager (Note 5)
    (70,089 )
Expense reductions (Note 2)
    (35 )
         
Net expenses
    3,411  
         
Net investment income (loss)
    2,161,519  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in affiliated issuers
    (8,686,789 )
         
Net realized gain (loss)
    (8,686,789 )
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in affiliated issuers
    22,834,512  
         
Net realized and unrealized gain (loss)
    14,147,723  
         
Net increase (decrease) in net assets resulting from operations
  $ 16,309,242  
         

         
4
  See accompanying notes to the financial statements.    

 

GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 2,161,519     $ 2,237,184  
Net realized gain (loss)
    (8,686,789 )     (496,961 )
Change in net unrealized appreciation (depreciation)
    22,834,512       31,860,661  
                 
                 
Net increase (decrease) in net assets from operations
    16,309,242       33,600,884  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (2,513,176 )     (1,126,450 )
                 
Net share transactions (Note 9):
               
Class III
    (46,437,467 )     26,669,880  
Purchase premiums and redemption fees (Notes 2 and 9):
               
Class III
    —       4,778  
                 
Total increase (decrease) in net assets resulting from net share transactions and redemption fees
    (46,437,467 )     26,674,658  
                 
                 
Total increase (decrease) in net assets
    (32,641,401 )     59,149,092  
                 
Net assets:
               
Beginning of period
    128,564,547       69,415,455  
                 
End of period (including accumulated undistributed net investment income of $759,077 and $1,110,734, respectively)
  $ 95,923,146     $ 128,564,547  
                 

         
    See accompanying notes to the financial statements.   5

 

GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011(a)   2010(a)   2009(a)   2008(a)   2007(a)
 
Net asset value, beginning of period
  $ 22.80     $ 16.55     $ 25.55     $ 31.90     $ 32.80  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)(b)†
    0.43       0.40       0.45       0.55       0.50  
Net realized and unrealized gain (loss)
    2.73       6.05       (8.50 )     (2.10 )     1.40  
                                         
                                         
Total from investment operations
    3.16       6.45       (8.05 )     (1.55 )     1.90  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.45 )     (0.20 )     (0.40 )     (1.60 )     (0.75 )
From net realized gains
    —       —       (0.55 )     (3.20 )     (2.05 )
                                         
                                         
Total distributions
    (0.45 )     (0.20 )     (0.95 )     (4.80 )     (2.80 )
                                         
                                         
Net asset value, end of period
  $ 25.51     $ 22.80     $ 16.55     $ 25.55     $ 31.90  
                                         
                                         
Total Return(c)
    14.13 %     38.94 %     (32.42 )%     (6.43 )%     6.48 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 95,923     $ 128,565     $ 69,415     $ 95,067     $ 149,312  
Net expenses to average daily net assets(d)
    0.00 %(e)(f)     0.00 %(e)(f)     0.00 %(e)(f)     0.00 %(e)(f)     0.04 %
Net investment income (loss) to average daily net assets(b)
    1.86 %     1.99 %     1.94 %     1.78 %     1.63 %
Portfolio turnover rate
    7 %     2 %     39 %     26 %     35 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.06 %     0.05 %     0.06 %     0.04 %     0.18 %
Purchase premiums and redemption fees consisted of the following per share amounts: (Note 2)†
    —     $ 0.00 (g)   $ 0.00 (g)   $ 0.00 (g)   $ 0.00 (g)
 
(a) Per share amounts were adjusted to reflect a 1:5 reverse stock split effective November 15, 2010.
(b) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(c) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(e) The net expense ratio does not include the effect of expense reductions (Note 2).
(f) Net expenses to average daily net assets were less than 0.01%.
(g) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.

         
6
  See accompanying notes to the financial statements.    

 

GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO U.S. Equity Allocation Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund seeks total return greater than that of its benchmark, the Russell 3000 Index. The Fund is a fund of funds and invests primarily in shares of the GMO U.S. Equity Funds. The Fund also may invest in shares of GMO Flexible Equities Fund (GMO Funds in which the Fund invests are collectively referred to as “underlying funds”). In addition, the Fund may hold securities directly. The Fund primarily seeks exposure to U.S. equity investments (including both growth and value style equities and equities of any market capitalization). The Fund also may have exposure to foreign equity investments. Under normal circumstances, the Fund invests (including through investment in the underlying funds) at least 80% of its assets in equity investments tied economically to the U.S. The term “equity investments” refers to direct and indirect (e.g., through the underlying funds) investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts.
 
The Manager uses multi-year forecasts of relative value and risk among major sectors in the U.S. equity market (large-cap value, large-cap growth, large-cap core, small- and mid-cap value, small- and mid-cap growth, and real estate/REIT) to select the underlying funds in which the Fund invests and to decide how much to invest in each. The Manager changes the Fund’s holdings of underlying funds in response to changes in its investment outlook and market valuations and may use redemption/purchase activity to rebalance the Fund’s investments.
 
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
 
On October 5, 2010, the Fund’s Board of Trustees approved a one for five reverse stock split for the Fund. The reverse stock split was effective as of November 15, 2010. The reverse stock split did not result in a change to the value of the shareholder account balances.
 
The financial statements of the underlying funds should be read in conjunction with the Fund’s financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect) or by visiting GMO’s website at www.gmo.com.

         
        7

 

 
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Shares of the underlying funds and other investment funds are generally valued at their net asset value. Investments held by the underlying funds are valued as follows. Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the over-the-counter (“OTC”) market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. Additionally, because many foreign securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund and the underlying funds generally value those foreign securities (including futures, derivatives and other securities whose values are based on indices comprised of such securities) as of the NYSE close using fair value prices, which are based on local closing prices adjusted by a factor supplied by a third party vendor using that vendor’s proprietary models. As of February 28, 2011, those foreign equity securities representing 6.4%, of the net assets of the Fund, through investments in the underlying funds, were valued using fair value prices based on those adjustments. Those underlying funds classify such securities (as defined below) as Level 2.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

         
8
       

 

 
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Mutual Funds
  $ 95,922,660     $      —     $      —     $ 95,922,660  
Short-Term Investments
    26,562       —       —       26,562  
                                 
Total Investments
    95,949,222       —       —       95,949,222  
                                 
Total
  $ 95,949,222     $ —     $ —     $ 95,949,222  
                                 
 
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements.

         
        9

 

 
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund held no investments or derivative financial instruments directly at either February 28, 2011 or February 28, 2010, whose fair value was categorized using Level 3 inputs.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards, losses on wash sale transactions and post-October capital losses.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 2,513,176     $ 1,126,450  
                 
Total distributions
  $ 2,513,176     $ 1,126,450  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.

         
10
       

 

 
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 759,077  
         
Other Tax Attributes:
       
Capital loss carryforwards
  $ (5,932,209 )
Post-October capital loss deferral
  $ (6,771,334 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 29, 2012
  $ (136,192 )
February 28, 2017
    (4,328,424 )
February 28, 2018
    (176,824 )
February 28, 2019
    (1,290,769 )
         
Total
  $ (5,932,209 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 86,298,207     $ 9,651,015     $ —     $ 9,651,015      
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.

         
        11

 

 
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Income dividends and capital gain distributions from the underlying funds are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (Note 5).
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
Purchases and redemptions of Fund shares
Purchase premiums and redemption fees are paid to and retained by the Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. Such fees are recorded as a component of the Fund’s net share transactions. The Fund charges purchase premiums and redemption fees based on the weighted average of (i) the estimated transaction costs for directly held assets and (ii) the purchase premiums and/or redemption fees, if any, imposed by the underlying Funds in which it invests, provided that, if that weighted average is less than 0.05%, the Fund generally will not charge a purchase premium or redemption fee. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of the Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. All or a portion of the Fund’s purchase premiums and /or redemption fees may be waived at the Manager’s discretion when they are de minimis and/or the Manager deems it equitable to do so, including without limitation when the weighted average of (i) the

         
12
       

 

 
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
estimated transaction costs for directly held assets and (ii) the purchase premiums and /or redemption fees, if any, imposed by the underlying funds are less than the purchase premiums and /or redemption fees imposed by the Fund. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund’s shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund’s shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder’s securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of the Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with GMO Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. References to investments include those held directly by the Fund and indirectly through the Fund’s investments in the underlying funds. The Fund and some of the underlying funds are non-diversified investment companies under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund or an underlying fund may affect the Fund’s or the underlying fund’s performance more than if the Fund or the underlying fund were diversified. The principal risks of investing in the Fund are summarized below, including those risks to which the Fund is exposed as a result of its investments in the underlying funds. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund and the underlying funds normally do not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund’s investments.
 
• Smaller Company Risk — The securities of small- and mid-cap companies often are less widely held and trade less frequently and in lesser quantities, and their market prices often fluctuate more, than the securities of companies with larger market capitalizations.
 
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in the underlying funds, including the risk that the underlying funds in which it invests do not perform as expected. Because the Fund bears the fees and expenses of the underlying funds in which it invests, new investments in underlying funds with higher fees or expenses than those of the underlying funds in which the Fund is currently invested will increase the Fund’s total expenses. The fees and expenses associated

         
        13

 

 
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
with an investment in the Fund are less predictable and may be higher than fees and expenses associated with an investment in funds that charge a fixed management fee.
 
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund or the underlying funds may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund or the underlying funds need to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund or the underlying funds to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund’s investments.
 
• Currency Risk — Risk that fluctuations in exchange rates will adversely affect the value of foreign currency holdings and investments denominated in foreign currencies.
 
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund or an underlying fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
 
Other principal risks of an investment in the Fund include Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund’s securities); Market Risk — Value Securities (risk that the price of investments held by the Fund will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Market Risk — Growth Securities (greater price fluctuations resulting from dependence on future earnings expectations); Real Estate Risk (risk to an underlying fund that concentrates its assets in real estate-related investments that factors affecting the real estate industry may cause the value of the Fund’s investments to fluctuate more than if it invested in securities of companies in a broader range of industries); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of

         
14
       

 

 
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
 
4. Derivative financial instruments
 
At February 28, 2011, the Fund held no derivative financial instruments directly. For a listing of derivative financial instruments held by the underlying funds, if any, please refer to the underlying funds’ Schedule of Investments.
 
5. Fees and other transactions with affiliates
 
The Manager decides how to allocate the assets of the Fund among underlying funds. The Manager does not charge the Fund a management fee or shareholder service fee, but it receives management and shareholder service fees from the underlying funds in which the Fund invests. Because those fees vary from fund to fund, the levels of indirect net expenses set forth below are affected by the Manager’s asset allocation decisions.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.00% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). This contractual expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $2,532 and $913, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.

         
        15

 

 
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
             
Indirect Net Expenses
 		           
(excluding Shareholder
     Indirect Shareholder
      
service fees)     Service Fees     Total Indirect Expenses
0.323%
    0.057%     0.380%
             
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments and class exchanges, for the year ended February 28, 2011 aggregated $8,030,467 and $54,809,258, respectively.
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 67.05% of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund’s outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
 
As of February 28, 2011, less than 0.01% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and none of the Fund’s shares were held by accounts for which the Manager had investment discretion.

         
16
       

 

 
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares *   Amount   Shares *   Amount
                 
 
Shares sold
    254,234     $ 5,528,576       1,497,949     $ 27,882,504  
Shares issued to shareholders in
reinvestment of distributions
    83,316       1,906,115       36,241       853,486  
Shares repurchased
    (2,211,666 )     (53,872,158 )     (91,392 )     (2,066,110 )
Purchase premiums
    —       —       —       4,651  
Redemption fees
    —       —       —       127  
                                 
Net increase (decrease)
    (1,874,116 )   $ (46,437,467 )     1,442,798     $ 26,674,658  
                                 
 
            * Shares were adjusted to reflect a 1:5 reverse stock split effective November 15, 2010.
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                 
    Value,
               Distributions
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   period
 
GMO Quality Fund, Class VI
  $ 63,773,409     $ 4,760,713     $ 27,566,179     $ 1,148,318     $      —     $ 46,703,245  
GMO U.S. Core Equity Fund, Class VI
    62,497,103       3,254,914       26,518,541       1,001,768       —       46,968,900  
GMO U.S. Small/Mid Cap Growth Fund, Class III
    1,080,728       3,856       292,426       3,856       —       1,194,609  
GMO U.S. Small/Mid Cap Value Fund, Class III
    1,202,569       10,984       432,112       10,984       —       1,055,906  
                                                 
Totals
  $ 128,553,809     $ 8,030,467     $ 54,809,258     $ 2,164,926     $ —     $ 95,922,660  
                                                 

         
        17

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO U.S. Equity Allocation Fund:
 
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. Equity Allocation Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian and tranfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
18
       

 

GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
        19

 

 
GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as purchase premiums and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.38 %   $ 1,000.00     $ 1,213.00     $ 2.09  
2) Hypothetical
    0.38 %   $ 1,000.00     $ 1,022.91     $ 1.91  
                                 
 
            * Expenses are calculated using the Class’s annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
20
       

 

GMO U.S. Equity Allocation Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
For taxable, non-corporate shareholders, 100.00% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 represents qualified dividend income subject to the 15% rate category.
 
For corporate shareholders, 100.00% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 qualified for the dividends-received deduction.

         
        21

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with the
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Trust   Time Served   Five Years   Overseen     Held
 
                         
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
22        

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with the
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee;
President and
Chief Executive
Officer
of the Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
        23

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003 – 2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
24        

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money
Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        25

 

 
GMO U.S. Growth Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO U.S. Growth Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Quantitative Equity Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
The Class III shares of GMO U.S. Growth Fund returned +21.8% for the fiscal year ended February 28, 2011, as compared with +24.9% for the Russell 1000 Growth Index.
 
Stock selection detracted from returns relative to the Russell 1000 Growth Index. Selections in Consumer Discretionary, Health Care, and Information Technology were among the detractors. In terms of individual stocks, overweight positions in Apollo Group, Visa, and Cisco Systems were among those detracting from relative returns. Overweight positions in Apple, QUALCOMM, and Estée Lauder added to relative returns.
 
Sector selection also detracted from returns relative to the Russell 1000 Growth Index. Sector weightings negatively impacting relative performance included an overweight in Consumer Staples and underweight positions in Energy and Industrials. Sector weightings positively impacting relative performance included an underweight position in Financials.
 
Litigation proceeds received during the fiscal year had a positive impact on Fund returns, adding 384 basis points.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice. References to specific securities are not recommendations of such securities and may not be representative of any GMO portfolio’s current or future investments.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO U.S. Growth Fund Class III Shares and the Russell 1000 Growth Index
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited. Performance for classes may vary due to different fees.
 
 
† The Fund is the successor to GMO Growth Fund, therefore, performance for the periods prior to September 16, 2005 is that of GMO Growth Fund.
 
The Russell 1000 Growth® Index is a trademark/service mark of the Frank Russell Company. Russelltm is a trademark of the Frank Russell Company.

 

GMO U.S. Growth Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary   % of Total Net Assets  
Common Stocks
    96.4 %
Mutual Funds
    4.0  
Short-Term Investments
    1.1  
Other
    (1.5 )
         
      100.0 %
         
 
         
Industry Group Summary   % of Equity Investments*  
Software & Services
    19.1 %
Technology Hardware & Equipment
    17.7  
Food, Beverage & Tobacco
    13.0  
Household & Personal Products
    7.0  
Energy
    6.0  
Pharmaceuticals, Biotechnology & Life Sciences
    6.0  
Food & Staples Retailing
    5.6  
Retailing
    5.2  
Capital Goods
    5.1  
Consumer Services
    4.5  
Health Care Equipment & Services
    3.0  
Semiconductors & Semiconductor Equipment
    2.0  
Media
    1.7  
Telecommunication Services
    1.5  
Consumer Durables & Apparel
    0.9  
Transportation
    0.8  
Materials
    0.4  
Diversified Financials
    0.4  
Real Estate
    0.1  
         
      100.0 %
         
 
* Equity investments may consist of common stocks and other stock-related securities, such as preferred stocks. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.

         
        1

 

GMO U.S. Growth Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            COMMON STOCKS — 96.4%        
                     
            Capital Goods — 4.9%        
      486     3M Co.     44,824  
      162     Danaher Corp.     8,197  
      100     Emerson Electric Co.     5,966  
      37     Flowserve Corp.     4,624  
      62     Goodrich Corp.     5,346  
      57     Lockheed Martin Corp.     4,512  
      136     TransDigm Group, Inc. *     10,932  
      450     United Technologies Corp.     37,593  
                     
            Total Capital Goods     121,994  
                     
                     
            Consumer Durables & Apparel — 0.8%        
      236     Nike, Inc.-Class B     21,011  
                     
                     
            Consumer Services — 4.4%        
      460     Apollo Group, Inc.-Class A *     20,820  
      100     Career Education Corp. *     2,411  
      100     DeVry, Inc.     5,425  
      272     Las Vegas Sands Corp. *     12,686  
      566     McDonald’s Corp.     42,835  
      100     Starwood Hotels & Resorts Worldwide, Inc.     6,110  
      21     Strayer Education, Inc.     2,886  
      319     Yum! Brands, Inc.     16,055  
                     
            Total Consumer Services     109,228  
                     
                     
            Diversified Financials — 0.4%        
      5     BlackRock, Inc.     1,020  
      200     Charles Schwab Corp. (The)     3,794  
      199     TD Ameritrade Holding Corp.     4,338  
                     
            Total Diversified Financials     9,152  
                     

         
2
  See accompanying notes to the financial statements.    

 

 
GMO U.S. Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Energy — 5.8%        
      100     Chevron Corp.     10,375  
      1,444     Exxon Mobil Corp.     123,505  
      205     Range Resources Corp.     11,132  
                     
            Total Energy     145,012  
                     
                     
            Food & Staples Retailing — 5.4%        
      319     Costco Wholesale Corp.     23,858  
      265     CVS Caremark Corp.     8,761  
      262     Kroger Co. (The)     6,000  
      648     Sysco Corp.     18,008  
      578     Walgreen Co.     25,050  
      1,037     Wal–Mart Stores, Inc.     53,903  
                     
            Total Food & Staples Retailing     135,580  
                     
                     
            Food, Beverage & Tobacco — 12.5%        
      579     Altria Group, Inc.     14,689  
      157     Brown-Forman Corp.-Class B     10,857  
      330     Campbell Soup Co.     11,108  
      257     Coca-Cola Enterprises, Inc.     6,759  
      965     Coca–Cola Co. (The)     61,683  
      200     ConAgra Foods, Inc.     4,632  
      366     Flowers Foods, Inc.     9,736  
      476     General Mills, Inc.     17,679  
      130     Green Mountain Coffee Roasters, Inc. *     5,301  
      219     Hansen Natural Corp. *     12,603  
      304     Hershey Co. (The)     15,905  
      272     HJ Heinz Co.     13,660  
      345     Kellogg Co.     18,478  
      261     McCormick & Co., Inc. (Non Voting)     12,437  
      19     Mead Johnson Nutrition Co.     1,137  
      698     PepsiCo, Inc.     44,267  
      813     Philip Morris International, Inc.     51,040  
                     
            Total Food, Beverage & Tobacco     311,971  
                     

         
    See accompanying notes to the financial statements.   3

 

 
GMO U.S. Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Health Care Equipment & Services — 2.9%        
      38     Baxter International, Inc.     2,020  
      189     DaVita, Inc. *     15,001  
      254     Express Scripts, Inc. *     14,280  
      236     Health Management Associates, Inc.-Class A *     2,360  
      155     Lincare Holdings, Inc.     4,547  
      100     Mednax, Inc. *     6,493  
      663     Medtronic, Inc.     26,467  
                     
            Total Health Care Equipment & Services     71,168  
                     
                     
            Household & Personal Products — 6.8%        
      440     Avon Products, Inc.     12,236  
      162     Church & Dwight Co., Inc.     12,221  
      314     Clorox Co.     21,277  
      344     Colgate–Palmolive Co.     27,011  
      383     Estee Lauder Cos. (The), Inc.-Class A     36,159  
      116     Herbalife Ltd.     9,096  
      319     Kimberly–Clark Corp.     21,022  
      475     Procter & Gamble Co. (The)     29,949  
                     
            Total Household & Personal Products     168,971  
                     
                     
            Materials — 0.4%        
      100     Air Products & Chemicals, Inc.     9,200  
      16     Sherwin-Williams Co. (The)     1,314  
                     
            Total Materials     10,514  
                     
                     
            Media — 1.7%        
      539     DirectTV – Class A *     24,778  
      300     Discovery Communications, Inc. *     12,933  
      100     Viacom, Inc.-Class B     4,466  
                     
            Total Media     42,177  
                     
                     
            Pharmaceuticals, Biotechnology & Life Sciences — 5.8%        
      1,008     Abbott Laboratories     48,485  
      543     Eli Lilly & Co.     18,766  

         
4
  See accompanying notes to the financial statements.    

 

 
GMO U.S. Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Pharmaceuticals, Biotechnology & Life Sciences — continued        
      495     Gilead Sciences, Inc. *     19,295  
      100     Human Genome Sciences, Inc. *     2,503  
      99     Illumina, Inc. *     6,871  
      751     Johnson & Johnson     46,141  
      100     Warner Chilcott Plc     2,368  
                     
            Total Pharmaceuticals, Biotechnology & Life Sciences     144,429  
                     
                     
            Real Estate — 0.1%        
      204     General Growth Properties, Inc. REIT *     3,248  
                     
                     
            Retailing — 5.0%        
      100     Abercrombie & Fitch Co.-Class A     5,737  
      189     Amazon.com, Inc. *     32,752  
      100     Bed Bath & Beyond, Inc. *     4,815  
      42     Dick’s Sporting Goods, Inc. *     1,560  
      320     Dollar General Corp. *     9,040  
      117     Dollar Tree, Inc. *     5,887  
      89     Expedia, Inc.     1,767  
      189     Family Dollar Stores, Inc.     9,465  
      100     Guess?, Inc.     4,529  
      331     Home Depot, Inc.     12,403  
      16     Netflix, Inc. *     3,307  
      100     O’Reilly Automotive, Inc. *     5,558  
      26     Priceline.com Inc. *     11,801  
      294     Target Corp.     15,450  
                     
            Total Retailing     124,071  
                     
                     
            Semiconductors & Semiconductor Equipment — 1.9%        
      1,428     Intel Corp.     30,659  
      472     Marvell Technology Group Ltd *     8,628  
      100     Skyworks Solutions, Inc. *     3,594  
      147     Texas Instruments, Inc.     5,235  
                     
            Total Semiconductors & Semiconductor Equipment     48,116  
                     

         
    See accompanying notes to the financial statements.   5

 

 
GMO U.S. Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Software & Services — 18.4%        
      200     Accenture Plc.-Class A     10,296  
      119     Autodesk, Inc. *     5,004  
      220     Citrix Systems, Inc. *     15,435  
      200     Cognizant Technology Solutions Corp.-Class A *     15,374  
      126     eBay, Inc. *     4,222  
      400     Electronic Arts, Inc. *     7,520  
      120     Equinix, Inc. *     10,373  
      400     Genpact Ltd. *     5,580  
      136     Google, Inc.-Class A *     83,422  
      94     IAC/InterActiveCorp *     2,921  
      519     International Business Machines Corp.     84,016  
      137     Lender Processing Services, Inc.     4,668  
      41     MasterCard, Inc.-Class A     9,863  
      3,111     Microsoft Corp.     82,690  
      2,585     Oracle Corp.     85,046  
      31     Salesforce.com, Inc. *     4,100  
      305     Visa, Inc.-Class A     22,280  
      279     Western Union Co.     6,135  
                     
            Total Software & Services     458,945  
                     
                     
            Technology Hardware & Equipment — 17.0%        
      100     Amphenol Corp.-Class A     5,748  
      585     Apple, Inc. *     206,628  
      2,661     Cisco Systems, Inc. *     49,388  
      77     Corning, Inc.     1,776  
      200     Dell, Inc. *     3,166  
      1,116     EMC Corp. *     30,366  
      1,360     Hewlett-Packard Co.     59,337  
      31     Itron, Inc. *     1,758  
      100     NetApp, Inc. *     5,166  
      950     Qualcomm, Inc.     56,601  
      100     SanDisk Corp. *     4,960  
                     
            Total Technology Hardware & Equipment     424,894  
                     

         
6
  See accompanying notes to the financial statements.    

 

 
GMO U.S. Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Telecommunication Services — 1.5%        
      226     American Tower Corp.-Class A *     12,195  
      483     Crown Castle International Corp. *     20,358  
      100     NII Holdings, Inc. *     4,096  
                     
            Total Telecommunication Services     36,649  
                     
                     
            Transportation — 0.7%        
      10     Union Pacific Corp.     954  
      241     United Parcel Service, Inc.-Class B     17,785  
                     
            Total Transportation     18,739  
                     
                     
            TOTAL COMMON STOCKS (COST $2,095,183)     2,405,869  
                     
                     
            MUTUAL FUNDS — 4.0%        
                     
            Affiliated Issuers — 4.0%        
      4,040     GMO U.S. Treasury Fund     100,999  
                     
                     
            TOTAL MUTUAL FUNDS (COST $100,999)     100,999  
                     
                     
            SHORT-TERM INVESTMENTS — 1.1%        
                     
            Money Market Funds — 1.1%        
      26,917     State Street Institutional Treasury Money Market Fund-Institutional Class     26,917  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $26,917)     26,917  
                     
                     
            TOTAL INVESTMENTS — 101.5%
(COST $2,223,099) 		    2,533,785  
            Other Assets and Liabilities (net) — (1.5%)     (38,380 )
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 2,495,405  
                     
 
Notes to Schedule of Investments:
 
REIT - Real Estate Investment Trust
* Non-income producing security.

         
    See accompanying notes to the financial statements.   7

 

GMO U.S. Growth Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $2,122,100) (Note 2)
  $ 2,432,786  
Investments in affiliated issuers, at value (cost $100,999) (Notes 2 and 10)
    100,999  
Receivable for Fund shares sold
    7,989  
Dividends and interest receivable
    4,429  
Receivable for expenses reimbursed by Manager (Note 5)
    10,836  
         
Total assets
    2,557,039  
         
         
Liabilities:
       
Payable to affiliate for (Note 5):
       
Management fee
    591  
Shareholder service fee
    218  
Administration fee – Class M
    89  
Trustees and Trust Officers or agents unaffiliated with the Manager
    6  
Payable for 12b-1 fee – Class M
    232  
Accrued expenses
    60,498  
         
Total liabilities
    61,634  
         
Net assets
  $ 2,495,405  
         
Net assets consist of:
       
Paid-in capital
  $ 2,863,278  
Accumulated undistributed net investment income
    3,938  
Accumulated net realized loss
    (682,497 )
Net unrealized appreciation
    310,686  
         
    $ 2,495,405  
         
Net assets attributable to:
       
Class III shares
  $ 1,908,380  
         
Class M shares
  $ 587,025  
         
Shares outstanding:
       
Class III
    108,487  
         
Class M
    33,445  
         
Net asset value per share:
       
Class III
  $ 17.59  
         
Class M
  $ 17.55  
         

         
8
  See accompanying notes to the financial statements.    

 

GMO U.S. Growth Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends from unaffiliated issuers (net of withholding taxes of $1)
  $ 125,801  
Interest
    138  
Dividends from affiliated issuers (Note 10)
    77  
         
Total investment income
    126,016  
         
Expenses:
       
Management fee (Note 5)
    24,909  
Shareholder service fee – Class III (Note 5)
    11,211  
12b-1 fee – Class M (Note 5)
    1,401  
Administration fee – Class M (Note 5)
    1,121  
Audit and tax fees
    69,069  
Custodian, fund accounting agent and transfer agent fees
    28,956  
Registration fees
    24,584  
Trustees fees and related expenses (Note 5)
    185  
Legal fees
    109  
Miscellaneous
    10,666  
         
Total expenses
    172,211  
Fees and expenses reimbursed by Manager (Note 5)
    (133,321 )
Expense reductions (Note 2)
    (7 )
         
Net expenses
    38,883  
         
Net investment income (loss)
    87,133  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in unaffiliated issuers
    6,178,898  
Investments in affiliated issuers
    (27 )
Realized gains distributions from affiliated issuers (Note 10)
    8  
Futures contracts
    70,177  
         
Net realized gain (loss)
    6,249,056  
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in unaffiliated issuers
    (3,037,344 )
Futures contracts
    (4,319 )
         
Net unrealized gain (loss)
    (3,041,663 )
         
Net realized and unrealized gain (loss)
    3,207,393  
         
Net increase (decrease) in net assets resulting from operations
  $ 3,294,526  
         

         
    See accompanying notes to the financial statements.   9

 

GMO U.S. Growth Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 87,133     $ 670,063  
Net realized gain (loss)
    6,249,056       (4,520,387 )
Change in net unrealized appreciation (depreciation)
    (3,041,663 )     18,290,138  
                 
                 
Net increase (decrease) in net assets from operations
    3,294,526       14,439,814  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (163,264 )     (700,931 )
Class M
    (4,666 )     (8,245 )
                 
Total distributions from net investment income
    (167,930 )     (709,176 )
                 
Net share transactions (Note 9):
               
Class III
    (41,634,045 )     (7,776,148 )
Class M
    (119,482 )     (115,249 )
                 
Increase (decrease) in net assets resulting from net share transactions
    (41,753,527 )     (7,891,397 )
                 
                 
Total increase (decrease) in net assets
    (38,626,931 )     5,839,241  
                 
Net assets:
               
Beginning of period
    41,122,336       35,283,095  
                 
End of period (including accumulated undistributed net investment income of $3,938 and $82,726, respectively)
  $ 2,495,405     $ 41,122,336  
                 

         
10
  See accompanying notes to the financial statements.    

 

GMO U.S. Growth Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 14.61     $ 10.47     $ 15.82     $ 17.24     $ 18.17  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.16       0.21       0.18       0.17       0.15  
Net realized and unrealized gain (loss)
    3.00       4.15       (5.32 )     (1.06 )     0.07  
                                         
                                         
Total from investment operations
    3.16       4.36       (5.14 )     (0.89 )     0.22  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.18 )     (0.22 )     (0.21 )     (0.17 )     (0.15 )
From net realized gains
    —       —       —       (0.36 )     (1.00 )
                                         
                                         
Total distributions
    (0.18 )     (0.22 )     (0.21 )     (0.53 )     (1.15 )
                                         
                                         
Net asset value, end of period
  $ 17.59     $ 14.61     $ 10.47     $ 15.82     $ 17.24  
                                         
                                         
Total Return(a)
    21.76 %(b)     41.94 %     (32.84 )%     (5.49 )%     1.24 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 1,908     $ 40,521     $ 34,758     $ 129,666     $ 224,554  
Net expenses to average daily net assets
    0.46 %(c)(d)     0.46 %     0.46 %(d)     0.46 %(d)     0.46 %
Net investment income (loss) to average daily net assets
    1.09 %     1.60 %     1.19 %     0.94 %     0.85 %
Portfolio turnover rate
    61 %     118 %     70 %     97 %     111 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    1.40 %     0.33 %     0.19 %     0.07 %     0.05 %
 
(a) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions.
(b) Litigation proceeds received during the fiscal year had a positive impact on total return adding 3.84%.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(d) The net expense ratio does not include the effect of expense reductions (Note 2).
† Calculated using average shares outstanding throughout the period.

         
    See accompanying notes to the financial statements.   11

 

GMO U.S. Growth Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class M share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 14.58     $ 10.45     $ 15.76     $ 17.16     $ 18.10  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.15       0.17       0.13       0.11       0.10  
Net realized and unrealized gain (loss)
    2.95       4.14       (5.30 )     (1.05 )     0.06  
                                         
                                         
Total from investment operations
    3.10       4.31       (5.17 )     (0.94 )     0.16  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.13 )     (0.18 )     (0.14 )     (0.10 )     (0.10 )
From net realized gains
    —       —       —       (0.36 )     (1.00 )
                                         
                                         
Total distributions
    (0.13 )     (0.18 )     (0.14 )     (0.46 )     (1.10 )
                                         
                                         
Net asset value, end of period
  $ 17.55     $ 14.58     $ 10.45     $ 15.76     $ 17.16  
                                         
                                         
Total Return(a)
    21.36 %(b)     41.50 %     (33.01 )%     (5.79 )%     0.91 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 587     $ 601     $ 525     $ 68,732     $ 85,714  
Net expenses to average daily net assets
    0.76 %(c)(d)     0.76 %     0.76 %(d)     0.76 %(d)     0.76 %
Net investment income (loss) to average daily net assets
    1.00 %     1.31 %     0.80 %     0.64 %     0.56 %
Portfolio turnover rate
    61 %     118 %     70 %     97 %     111 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    5.15 %     0.34 %     0.10 %     0.07 %     0.05 %
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) Litigation proceeds received during the fiscal year had a positive impact on total return adding 3.84%.
(c) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(d) The net expense ratio does not include the effect of expense reductions (Note 2).
† Calculated using average shares outstanding throughout the period.

         
12
  See accompanying notes to the financial statements.    

 

GMO U.S. Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO U.S. Growth Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund’s investment objective is long-term capital growth. The Manager seeks to achieve the Fund’s investment objective by investing in equities or groups of equities that the Manager believes will provide higher returns than the Russell 1000 Growth Index. The Manager uses active investment management methods, which means that equities are bought and sold according to the Manager’s evaluation of companies’ published financial information, securities’ prices, equity and bond markets, and the overall economy.
 
In selecting equities for the Fund, the Manager may use a combination of investment methods to identify equities that the Manager believes present positive return potential relative to other equities. Some of these methods evaluate individual equities or a group of equities based on the ratio of their price relative to historical financial information and forecasted financial information provided by industry analysts. Historical financial information may include book value, cash flow and earnings. The Manager may compare these ratios to industry or market averages in order to assess the relative attractiveness of an equity. Other methods focus on evaluating patterns of price movement or volatility of an equity or group of equities relative to the Fund’s investment universe. The Manager also may adjust the Fund’s portfolio for factors such as position size, industry and sector exposure, and market capitalization.
 
As a substitute for direct investments in equities, the Manager may use exchange-traded and over-the-counter (“OTC”) derivatives. The Manager also may use derivatives: (i) in an attempt to reduce investment exposures (which may result in a reduction below zero); (ii) to effect transactions intended as substitutes for securities lending; and (iii) in an attempt to adjust elements of the Fund’s investment exposure. Derivatives used may include futures, options and swap contracts. In addition, the Fund may lend its portfolio securities.
 
The Fund typically invests directly and indirectly (e.g., through underlying funds or derivatives) in equities. Under normal circumstances, the Fund invests directly and indirectly at least 80% of its assets in investments tied economically to the U.S. The term “equities” refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts.

         
        13

 

 
GMO U.S. Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
For cash management purposes, the Fund may invest in unaffiliated money market funds and/or GMO U.S. Treasury Fund.
 
Throughout the year ended February 28, 2011, the Fund had two classes of shares outstanding: Class III and Class M. Class M shares bear an administration fee and a 12b-1 fee, while Class III shares bear a shareholder service fee (See Note 5). The principal economic difference between the classes of shares is the type and level of fees they bear.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the OTC market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. See Note 4 for a further discussion on valuation of derivative financial instruments.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

         
14
       

 

 
GMO U.S. Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Common Stocks
  $ 2,405,869     $      —     $      —     $ 2,405,869  
Mutual Funds
    100,999       —       —       100,999  
Short-Term Investments
    26,917       —       —       26,917  
                                 
Total Investments
    2,533,785       —       —       2,533,785  
                                 
Total
  $ 2,533,785     $ —     $ —     $ 2,533,785  
                                 
 
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements. All of the Fund’s common stocks held at period end

         
        15

 

 
GMO U.S. Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
are classified as Level 1. Please refer to the Schedule of Investments for a more detailed categorization of common stocks.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
The Fund held no investments or derivative financial instruments directly at either February 28, 2011 or February 28, 2010, whose fair value was categorized using Level 3 inputs.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, quarterly, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards, derivative contract transactions, losses on wash sale transactions, post-October capital losses and differing treatment of litigation proceeds received.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 167,930     $ 709,176  
                 
Total distributions
  $ 167,930     $ 709,176  
                 

         
16
       

 

 
GMO U.S. Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 3,936  
         
Other Tax Attributes:
       
Capital loss carryforwards
  $ (648,854 )
Post-October capital loss deferral
  $ (1,416 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains, if any, to the extent permitted by the Code. As of February 28, 2011, the capital loss carryforwards disclosed below were permanently reduced by $18,702,667 due to share ownership activity. Utilization of the capital loss carryforwards, post-October capital losses and losses realized in the future, if any, subsequent to February 28, 2011 could be subject to further limitations imposed by the Code related to share ownership activity. The Fund’s capital loss carryforwards expire as follows:
 
         
February 28, 2017
  $ (557,487 )
February 28, 2018
    (91,367 )
         
Total
  $ (648,854 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 2,255,326     $ 335,484     $ (57,025 )   $ 278,459      
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would

         
        17

 

 
GMO U.S. Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, 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 among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service, 12b-1, and administration fees, which are directly attributable to a class of shares, are charged to that class’s operations. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (Note 5).
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.

         
18
       

 

 
GMO U.S. Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund’s investments.
 
• Market Risk — Growth Securities — Because growth securities typically trade at higher multiples of current earnings than other securities, their market values are often more sensitive than other securities to changes in future earnings expectations.
 
Other principal risks of an investment in the Fund include Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, and credit and counterparty risk); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund’s securities); Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by “equitizing” its cash balances using futures contracts or other types of derivatives.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero).

         
        19

 

 
GMO U.S. Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, indices and markets without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically “sell” a portion of the Fund’s portfolio) in combination with a long futures contract on another index (to synthetically “buy” exposure to that index).
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral, that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will

         
20
       

 

 
GMO U.S. Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. During the year ended February 28, 2011, the Fund used futures contracts to maintain the diversity and liquidity of the portfolio. The Fund had no futures contracts outstanding at the end of the period.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price

         
        21

 

 
GMO U.S. Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.

         
22
       

 

 
GMO U.S. Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated

         
        23

 

 
GMO U.S. Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.

         
24
       

 

 
GMO U.S. Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Future contracts
  $      —     $      —     $      —     $ 70,177     $      —     $ 70,177  
                                                 
Total
  $ —     $ —     $ —     $ 70,177     $ —     $ 70,177  
                                                 
Change in Unrealized Appreciation (Depreciation) on:
                                               
Future contracts
  $ —     $ —     $ —     $ (4,319 )   $ —     $ (4,319 )
                                                 
Total
  $ —     $ —     $ —     $ (4,319 )   $ —     $ (4,319 )
                                                 
 
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
 
The volume of derivative activity, based on absolute values (futures contracts) outstanding at each month-end, was as follows for the year ended February 28, 2011:
 
         
    Futures
    contracts
 
Average amount outstanding
  $ 58,260  
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.31% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares.
 
Holders of Class M shares of the Fund pay GMO an administration fee for support services provided to Class M shareholders. That fee is paid monthly at the annual rate of 0.20% of the average net assets daily of Class M shares. Pursuant to a Rule 12b-1 distribution and service plan adopted by the Fund, holders of Class M shares of the Fund may pay a fee, at the annual rate of up to 1.00% of average daily net assets of Class M shares, for any activities or expenses primarily intended to result in the sale of Class M shares of the Fund and/or the provision of services to Class M shareholders. The Trustees currently limit payments on Class M shares to 0.25% of the Fund’s average daily net assets of Class M shares.

         
        25

 

 
GMO U.S. Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.31% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means the administration fee and distribution (12b-1) fee (Class M Shares only) shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition to the contractual expense reimbursement described above, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund’s Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund’s Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $185 and $51, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
             
Indirect Net Expenses
 		           
(excluding shareholder
            
service fees and interest
     Indirect Shareholder
      
expense)     Service Fees     Total Indirect Expenses
< 0.001%
    0.000%     < 0.001%
             
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 aggregated $4,958,151 and $45,171,575, respectively.

         
26
       

 

 
GMO U.S. Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 90.72% of the outstanding shares of the Fund were held by three shareholders, each holding more than 10% of the Fund’s outstanding shares.
 
As of February 28, 2011, 0.38% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and none of the Fund’s shares were held by accounts for which the Manager had investment discretion.
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    3,949     $ 66,528       5,132     $ 67,630  
Shares issued to shareholders in reinvestment of distributions
    10,490       162,806       54,613       700,053  
Shares repurchased
    (2,679,550 )     (41,863,379 )     (605,706 )     (8,543,831 )
                                 
Net increase (decrease)
    (2,665,111 )   $ (41,634,045 )     (545,961 )   $ (7,776,148 )
                                 
                                 
                                 
    Year Ended
   Year Ended
    February 28, 2011   February 28, 2010
Class M:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    —     $ —       —     $ —  
Shares issued to shareholders in reinvestment of distributions
    294       4,665       644       8,245  
Shares repurchased
    (8,092 )     (124,147 )     (9,658 )     (123,494 )
                                 
Net increase (decrease)
    (7,798 )   $ (119,482 )     (9,014 )   $ (115,249 )
                                 

         
        27

 

 
GMO U.S. Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                 
    Value,
               Distributions
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   period
 
GMO U.S. Treasury Fund
  $      —     $ 187,025     $ 86,000     $ 77     $ 8     $ 100,999  
                                                 
Totals
  $ —     $ 187,025     $ 86,000     $ 77     $ 8     $ 100,999  
                                                 

         
28
       

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO U.S. Growth Fund:
 
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. Growth Fund (the “Fund”) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian and transfer agent provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
        29

 

GMO U.S. Growth Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, distribution (12b-1) and/or administration fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table for each class below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table for each class below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
30
       

 

 
GMO U.S. Growth Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.46 %   $ 1,000.00     $ 1,272.60     $ 2.59  
2) Hypothetical
    0.46 %   $ 1,000.00     $ 1,022.51     $ 2.31  
                                 
Class M
                               
                                 
1) Actual
    0.76 %   $ 1,000.00     $ 1,270.60     $ 4.28  
2) Hypothetical
    0.76 %   $ 1,000.00     $ 1,021.03     $ 3.81  
                                 
 
            * Expenses are calculated using each Class’s annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
        31

 

GMO U.S. Growth Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
For taxable, non-corporate shareholders, 100.00% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 represents qualified dividend income subject to the 15% rate category.
 
For corporate shareholders, 95.41% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 qualified for the dividends-received deduction.

         
32        

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with
   Length of
   During Past
   Complex
     Directorships
Date of Birth   the Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
        33

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with
   Length of
   During Past
   Complex
     Directorships
Date of Birth   the Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee;
President and
Chief Executive
Officer of the Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
34        

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003 – 2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        35

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money
Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
36        

 

 
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Quantitative Equity Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
GMO U.S. Intrinsic Value Fund returned +21.8% for the fiscal year ended February 28, 2011, as compared with +22.2% for the Russell 1000 Value Index.
 
Stock selection added to returns relative to the Russell 1000 Value Index. Selections in Health Care and Energy added to relative returns while selections in Industrials, Information Technology, and Financials detracted. Overweight positions in Apple, ConocoPhillips, and ExxonMobil were among the individual names adding to relative returns. Overweight positions in Microsoft, Wal-Mart Stores, and Cisco Systems were among the detractors.
 
Sector selection detracted from returns relative to the Russell 1000 Value Index. Sector weightings negatively impacting relative performance included an overweight in Health Care and underweight positions in Telecommunication Services and Materials. Sector weightings positively impacting relative performance included underweight positions in Utilities and Financials.
 
Litigation proceeds received during the fiscal year had a positive impact on Fund returns, adding 135 basis points.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice. References to specific securities are not recommendations of such securities and may not be representative of any GMO portfolio’s current or future investments.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO U.S. Intrinsic Value Fund Class III Shares and the Russell 1000 Value Index
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited.
 
 
† The Fund is the successor to GMO Intrinsic Value Fund, therefore, performance for the periods prior to September 16, 2005 is that of GMO Intrinsic Value Fund.
 
The Russell 1000 Value® Index is a trademark/service mark of the Frank Russell Company. Russelltm is a trademark of the Frank Russell Company.

 

GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary   % of Total Net Assets  
Common Stocks
    97.4 %
Mutual Funds
    2.4  
Short-Term Investments
    0.5  
Rights and Warrants
    0.0
Swaps
    (0.0 )
Other
    (0.3 )
         
      100.0 %
         
 
         
Industry Group Summary   % of Equity Investments*  
Pharmaceuticals, Biotechnology & Life Sciences
    12.4 %
Energy
    12.3  
Health Care Equipment & Services
    12.1  
Software & Services
    11.8  
Technology Hardware & Equipment
    6.9  
Insurance
    6.4  
Capital Goods
    6.3  
Food, Beverage & Tobacco
    5.1  
Telecommunication Services
    4.4  
Food & Staples Retailing
    4.2  
Real Estate
    3.4  
Media
    2.1  
Retailing
    2.1  
Diversified Financials
    1.9  
Transportation
    1.4  
Household & Personal Products
    1.4  
Banks
    1.3  
Consumer Services
    1.2  
Consumer Durables & Apparel
    0.9  
Utilities
    0.9  
Materials
    0.7  
Semiconductors & Semiconductor Equipment
    0.4  
Commercial & Professional Services
    0.2  
Automobiles & Components
    0.2  
         
      100.0 %
         
 
* Equity investments may consist of common stocks and other stock-related securities, such as preferred stocks. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.
Ù Rounds to 0.0%.

         
        1

 

GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            COMMON STOCKS — 97.4%        
                     
            Automobiles & Components — 0.2%        
      100     Autoliv, Inc.     7,489  
      100     BorgWarner, Inc. *     7,761  
      100     Harley-Davidson, Inc.     4,082  
                     
            Total Automobiles & Components     19,332  
                     
                     
            Banks — 1.2%        
      400     Associated Banc Corp.     5,788  
      100     City National Corp.     5,891  
      100     Cullen/Frost Bankers, Inc.     5,856  
      600     Fulton Financial Corp.     6,534  
      100     M&T Bank Corp.     8,805  
      700     New York Community Bancorp, Inc.     13,062  
      500     PNC Financial Services Group, Inc.     30,850  
      100     Signature Bank/New York NY *     5,189  
      1,100     TCF Financial Corp.     17,853  
      500     TFS Financial Corp.     5,190  
                     
            Total Banks     105,018  
                     
                     
            Capital Goods — 6.1%        
      300     3M Co.     27,669  
      100     AGCO Corp. *     5,478  
      300     Boeing Co.     21,603  
      100     Caterpillar, Inc.     10,293  
      200     Cummins, Inc.     20,224  
      300     Deere & Co.     27,045  
      100     Dover Corp.     6,425  
      140     Eaton Corp.     15,509  
      100     Fluor Corp.     7,076  
      6,200     General Electric Co.     129,704  
      1,200     General Dynamics Corp.     91,344  
      100     ITT Industries, Inc.     5,793  
      200     KBR, Inc.     6,560  
      300     L-3 Communications Holdings, Inc.     23,787  

         
2
  See accompanying notes to the financial statements.    

 

 
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Capital Goods — continued        
      80     Lockheed Martin Corp.     6,333  
      500     Northrop Grumman Corp.     33,340  
      200     Owens Corning, Inc. *     7,146  
      100     Parker Hannifin Corp.     8,918  
      100     Precision Castparts Corp.     14,175  
      100     Raytheon Co.     5,121  
      100     Rockwell Automation, Inc.     8,773  
      100     Rockwell Collins, Inc.     6,444  
      300     United Technologies Corp.     25,062  
      200     WESCO International, Inc. *     11,644  
                     
            Total Capital Goods     525,466  
                     
                     
            Commercial & Professional Services — 0.2%        
      200     Pitney Bowes, Inc.     5,036  
      800     RR Donnelley & Sons Co.     14,896  
                     
            Total Commercial & Professional Services     19,932  
                     
                     
            Consumer Durables & Apparel — 0.9%        
      400     Coach, Inc.     21,968  
      200     Fossil, Inc. *     15,348  
      200     Garmin Ltd     6,790  
      400     Newell Rubbermaid, Inc.     7,736  
      100     Nike, Inc.-Class B     8,903  
      100     Stanley Black & Decker, Inc.     7,583  
      100     Whirlpool Corp.     8,250  
                     
            Total Consumer Durables & Apparel     76,578  
                     
                     
            Consumer Services — 1.2%        
      200     Apollo Group, Inc.-Class A *     9,052  
      400     Brinker International, Inc.     9,456  
      150     ITT Educational Services, Inc. *     11,378  
      800     McDonald’s Corp.     60,544  
      200     Starwood Hotels & Resorts Worldwide, Inc.     12,220  
                     
            Total Consumer Services     102,650  
                     

         
    See accompanying notes to the financial statements.   3

 

 
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Diversified Financials — 1.8%        
      70     Affiliated Managers Group, Inc. *     7,472  
      4,700     Bank of America Corp.     67,163  
      400     Capital One Financial Corp.     19,908  
      300     Discover Financial Services     6,525  
      60     Goldman Sachs Group (The), Inc.     9,827  
      200     Moody’s Corp.     6,380  
      500     Morgan Stanley     14,840  
      400     NASDAQ OMX Group (The), Inc. *     11,444  
      200     NYSE Euronext     7,400  
      400     SLM Corp. *     5,928  
                     
            Total Diversified Financials     156,887  
                     
                     
            Energy — 12.0%        
      100     Atwood Oceanics, Inc. *     4,552  
      200     Baker Hughes, Inc.     14,210  
      1,500     Chevron Corp.     155,625  
      100     Cimarex Energy Co.     11,613  
      3,829     ConocoPhillips     298,164  
      3,400     Exxon Mobil Corp.     290,802  
      400     Frontier Oil Corp. *     11,160  
      1,000     Marathon Oil Corp.     49,600  
      100     Murphy Oil Corp.     7,353  
      200     Nabors Industries Ltd. *     5,694  
      500     National Oilwell Varco, Inc.     39,785  
      100     Oceaneering International, Inc. *     8,363  
      100     Oil States International, Inc. *     7,279  
      100     Pioneer Natural Resources Co.     10,234  
      200     Rowan Cos, Inc. *     8,534  
      500     Sunoco, Inc.     20,930  
      500     Tesoro Corp. *     11,890  
      100     Tidewater, Inc.     6,221  
      1,500     Valero Energy Corp.     42,270  

         
4
  See accompanying notes to the financial statements.    

 

 
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Energy — continued        
      200     Whiting Petroleum Corp. *     13,068  
      200     World Fuel Services Corp.     8,288  
                     
            Total Energy     1,025,635  
                     
                     
            Food & Staples Retailing — 4.1%        
      100     BJ’s Wholesale Club, Inc. *     4,842  
      600     CVS Caremark Corp.     19,836  
      900     Kroger Co. (The)     20,610  
      500     Safeway, Inc.     10,910  
      1,475     Supervalu, Inc.     12,729  
      2,200     Walgreen Co.     95,348  
      3,600     Wal–Mart Stores, Inc.     187,128  
                     
            Total Food & Staples Retailing     351,403  
                     
                     
            Food, Beverage & Tobacco — 5.0%        
      1,900     Altria Group, Inc.     48,203  
      400     Archer-Daniels-Midland Co.     14,872  
      2,200     Coca-Cola Co. (The)     140,624  
      200     General Mills, Inc.     7,428  
      200     Hansen Natural Corp. *     11,510  
      100     Kellogg Co.     5,356  
      607     Kraft Foods, Inc.-Class A     19,327  
      1,197     PepsiCo, Inc.     75,914  
      1,500     Philip Morris International, Inc.     94,170  
      400     Sara Lee Corp.     6,848  
      224     Tyson Foods, Inc.-Class A     4,173  
                     
            Total Food, Beverage & Tobacco     428,425  
                     
                     
            Health Care Equipment & Services — 11.8%        
      1,500     Aetna, Inc.     56,040  
      1,200     AmerisourceBergen Corp.     45,492  
      2,000     Cardinal Health, Inc.     83,280  
      600     Cigna Corp.     25,242  
      600     Coventry Health Care, Inc. *     18,120  

         
    See accompanying notes to the financial statements.   5

 

 
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Health Care Equipment & Services — continued        
      380     Express Scripts, Inc. *     21,363  
      400     Health Net, Inc. *     11,768  
      700     Humana, Inc. *     45,507  
      300     Kinetic Concepts, Inc. *     14,691  
      100     LifePoint Hospitals, Inc. *     3,898  
      1,100     McKesson Corp.     87,208  
      2,200     Medtronic, Inc.     87,824  
      100     Omnicare, Inc.     2,863  
      200     Patterson Cos., Inc.     6,676  
      100     Quest Diagnostics, Inc.     5,675  
      400     Stryker Corp.     25,304  
      6,767     UnitedHealth Group, Inc.     288,139  
      100     Universal Health Services, Inc.-Class B     4,571  
      1,800     WellPoint, Inc. *     119,646  
      900     Zimmer Holdings, Inc. *     56,106  
                     
            Total Health Care Equipment & Services     1,009,413  
                     
                     
            Household & Personal Products — 1.4%        
      500     Colgate–Palmolive Co.     39,260  
      100     Kimberly–Clark Corp.     6,590  
      1,100     Procter & Gamble Co. (The)     69,355  
                     
            Total Household & Personal Products     115,205  
                     
                     
            Insurance — 6.3%        
      600     ACE, Ltd.     37,950  
      700     AFLAC, Inc.     41,202  
      1,400     Allstate Corp. (The)     44,492  
      400     American Financial Group, Inc.     13,852  
      300     American International Group, Inc. *     11,118  
      200     Arch Capital Group Ltd. *     18,100  
      400     Assurant, Inc.     16,252  
      200     Axis Capital Holdings Ltd.     7,264  
      700     Chubb Corp.     42,476  
      200     Endurance Specialty Holdings Ltd.     9,918  

         
6
  See accompanying notes to the financial statements.    

 

 
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Insurance — continued        
      100     Everest Re Group Ltd.     8,865  
      400     Fidelity National Financial, Inc.-Class A     5,540  
      300     Hartford Financial Services Group (The), Inc.     8,880  
      400     HCC Insurance Holdings, Inc.     12,456  
      300     Lincoln National Corp.     9,516  
      300     MetLife, Inc.     14,208  
      575     Old Republic International Corp.     7,188  
      100     PartnerRe Ltd.     7,930  
      1,400     Progressive Corp. (The)     29,162  
      200     Reinsurance Group of America, Inc.     12,078  
      100     RenaissanceRe Holdings Ltd.     6,702  
      100     StanCorp Financial Group, Inc.     4,600  
      300     Torchmark Corp.     19,575  
      100     Transatlantic Holdings, Inc.     5,093  
      1,700     Travelers Cos. (The), Inc.     101,881  
      600     Unum Group     15,918  
      300     W.R. Berkley Corp.     8,985  
      600     XL Group Plc     14,010  
                     
            Total Insurance     535,211  
                     
                     
            Materials — 0.6%        
      100     Albemarle Corp.     5,756  
      600     Alcoa, Inc.     10,110  
      100     Cytec Industries, Inc.     5,683  
      600     E.I. du Pont de Nemours & Co.     32,922  
                     
            Total Materials     54,471  
                     
                     
            Media — 2.0%        
      600     CBS Corp.-Class B (Non Voting)     14,316  
      3,000     Comcast Corp.-Class A     77,280  
      300     DirectTV-Class A *     13,791  
      100     DreamWorks Animation SKG, Inc.-Class A *     2,762  
      600     Interpublic Group of Cos. (The), Inc. *     7,920  
      100     Liberty Media Corp. Capital-Class A *     7,256  

         
    See accompanying notes to the financial statements.   7

 

 
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Media — continued        
      500     News Corp.-Class A     8,685  
      200     Time Warner Cable, Inc.     14,436  
      600     Walt Disney Co. (The)     26,244  
                     
            Total Media     172,690  
                     
                     
            Pharmaceuticals, Biotechnology & Life Sciences — 12.1%        
      1,800     Abbott Laboratories     86,580  
      100     Allergan, Inc.     7,417  
      1,900     Amgen, Inc. *     97,527  
      1,000     Biogen Idec, Inc. *     68,400  
      400     Bristol–Myers Squibb Co.     10,324  
      100     Cephalon, Inc. *     5,631  
      3,700     Eli Lilly & Co.     127,872  
      300     Endo Pharmaceuticals Holdings, Inc. *     10,656  
      1,500     Forest Laboratories, Inc. *     48,600  
      200     Genzyme Corp. *     15,090  
      700     Gilead Sciences, Inc. *     27,286  
      2,400     Johnson & Johnson     147,456  
      2,000     Merck & Co., Inc.     65,140  
      400     Mylan, Inc. *     9,148  
      16,176     Pfizer, Inc.     311,226  
                     
            Total Pharmaceuticals, Biotechnology & Life Sciences     1,038,353  
                     
                     
            Real Estate — 3.3%        
      170     Alexandria Real Estate Equities, Inc. REIT     13,634  
      400     Annaly Capital Management, Inc. REIT     7,172  
      230     AvalonBay Communities, Inc. REIT     27,837  
      200     Boston Properties, Inc. REIT     19,184  
      200     BRE Properties, Inc. REIT     9,502  
      800     Douglas Emmett, Inc. REIT     15,000  
      700     Equity Residential REIT     38,577  
      110     Essex Property Trust, Inc. REIT     13,616  
      200     Federal Realty Investment Trust REIT     16,836  
      100     Jones Lang LaSalle, Inc.     9,842  

         
8
  See accompanying notes to the financial statements.    

 

 
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Real Estate — continued        
      1,000     Kimco Realty Corp. REIT     19,380  
      300     Plum Creek Timber Co., Inc. REIT     12,588  
      200     Rayonier, Inc. REIT     12,266  
      200     Realty Income Corp. REIT     7,194  
      200     Regency Centers Corp. REIT     9,050  
      600     UDR, Inc. REIT     14,592  
      400     Vornado Realty Trust REIT     37,332  
                     
            Total Real Estate     283,602  
                     
                     
            Retailing — 2.0%        
      200     Abercrombie & Fitch Co.-Class A     11,474  
      100     Advance Auto Parts, Inc.     6,268  
      450     Aeropostale, Inc. *     11,673  
      300     Ascena Retail Group, Inc. *     9,372  
      30     AutoZone, Inc. *     7,739  
      200     Best Buy Co., Inc.     6,448  
      200     Big Lots, Inc. *     8,206  
      100     Dollar Tree, Inc. *     5,032  
      200     Family Dollar Stores, Inc.     10,016  
      400     Foot Locker, Inc.     7,948  
      100     Genuine Parts Co.     5,269  
      100     Guess?, Inc.     4,529  
      1,200     Home Depot, Inc.     44,964  
      300     Limited Brands, Inc.     9,606  
      500     Lowe’s Cos., Inc.     13,085  
      100     O’Reilly Automotive, Inc. *     5,558  
      100     Williams-Sonoma, Inc.     3,609  
                     
            Total Retailing     170,796  
                     
                     
            Semiconductors & Semiconductor Equipment — 0.4%        
      700     Atmel Corp. *     10,276  
      200     Novellus Systems, Inc. *     7,992  

         
    See accompanying notes to the financial statements.   9

 

 
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Semiconductors & Semiconductor Equipment — continued        
      300     Skyworks Solutions, Inc. *     10,782  
      200     Texas Instruments, Inc.     7,122  
                     
            Total Semiconductors & Semiconductor Equipment     36,172  
                     
                     
            Software & Services — 11.5%        
      100     Akamai Technologies, Inc. *     3,753  
      400     Cognizant Technology Solutions Corp.-Class A *     30,748  
      3,400     eBay, Inc. *     113,917  
      100     Fiserv, Inc. *     6,327  
      400     Google, Inc.-Class A *     245,360  
      330     International Business Machines Corp.     53,420  
      10,300     Microsoft Corp.     273,774  
      7,400     Oracle Corp.     243,460  
      900     Symantec Corp. *     16,227  
                     
            Total Software & Services     986,986  
                     
                     
            Technology Hardware & Equipment — 6.7%        
      700     Apple, Inc. *     247,247  
      2,400     Cisco Systems, Inc. *     44,544  
      700     Dell, Inc. *     11,081  
      40     F5 Networks, Inc. *     4,720  
      2,200     Hewlett-Packard Co.     95,986  
      700     Ingram Micro, Inc.-Class A *     13,951  
      400     Lexmark International, Inc. *     15,012  
      200     Polycom, Inc. *     9,560  
      1,300     Qualcomm, Inc.     77,454  
      200     Tech Data Corp. *     9,916  
      700     Tellabs, Inc.     3,773  
      1,000     Western Digital Corp. *     30,580  
      1,300     Xerox Corp.     13,975  
                     
            Total Technology Hardware & Equipment     577,799  
                     

         
10
  See accompanying notes to the financial statements.    

 

 
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Telecommunication Services — 4.3%        
      7,358     AT&T, Inc.     208,820  
      600     MetroPCS Communications, Inc. *     8,640  
      4,052     Verizon Communications, Inc.     149,600  
                     
            Total Telecommunication Services     367,060  
                     
                     
            Transportation — 1.4%        
      200     Kansas City Southern *     10,768  
      400     Norfolk Southern Corp.     26,232  
      1,300     Southwest Airlines Co.     15,379  
      600     Union Pacific Corp.     57,246  
      300     Werner Enterprises, Inc.     7,065  
                     
            Total Transportation     116,690  
                     
                     
            Utilities — 0.9%        
      300     Aqua America, Inc.     6,756  
      300     Dominion Resources, Inc./Virginia     13,689  
      200     DTE Energy Co.     9,416  
      100     Exelon Corp.     4,176  
      100     Integrys Energy Group, Inc.     4,897  
      200     NextEra Energy, Inc.     11,094  
      600     Southern Co.     22,866  
                     
            Total Utilities     72,894  
                     
                     
            TOTAL COMMON STOCKS (COST $6,932,001)     8,348,668  
                     
                     
            MUTUAL FUNDS — 2.4%        
                     
            Affiliated Issuers — 2.4%        
      8,239     GMO U.S. Treasury Fund     205,992  
                     
                     
            TOTAL MUTUAL FUNDS (COST $206,031)     205,992  
                     

         
    See accompanying notes to the financial statements.   11

 

 
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            RIGHTS AND WARRANTS — 0.0%        
                     
            Diversified Financials — 0.0%        
      60     SLM Corp. (Escrow Shares), Rights, Expires TBD *     150  
                     
                     
            Insurance — 0.0%        
      160     American International Group, Inc., Warrants, Expires 01/19/21 *     1,856  
                     
                     
            TOTAL RIGHTS AND WARRANTS (COST $2,717)     2,006  
                     
                     
            SHORT-TERM INVESTMENTS — 0.5%        
                     
            Money Market Funds — 0.5%        
      42,837     State Street Institutional Treasury Money Market Fund-Institutional Class     42,837  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $42,837)     42,837  
                     
                     
            TOTAL INVESTMENTS — 100.3%
(COST $7,183,586) 		    8,599,503  
            Other Assets and Liabilities (net) — (0.3%)     (25,780 )
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 8,573,723  
                     

         
12
  See accompanying notes to the financial statements.    

 

 
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
A summary of outstanding financial instruments at February 28, 2011 is as follows:
 
Swap Agreements
 
Total Return Swaps
 
                                 
Notional
 		  Expiration
 		              Market
Amount   Date   Counterparty   Fund Receives   Fund (Pays)/Receives   Value
 
  9,303     USD   7/19/2011   Deutsche Bank AG   12% of notional
amount 		  Return on Sears
Holding Corp. 		  $ (960 )
                                 
Premiums to (Pay) Receive
  $ —  
         
 
As of February 28, 2011, for futures contracts, swap agreements and written options, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
 
Notes to Schedule of Investments:
 
REIT - Real Estate Investment Trust
TBD - To Be Determined
* Non-income producing security.
 
Currency Abbreviations:
 
USD - United States Dollar

         
    See accompanying notes to the financial statements.   13

 

GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $6,977,555) (Note 2)
  $ 8,393,511  
Investments in affiliated issuers, at value (cost $206,031) (Notes 2 and 10)
    205,992  
Dividends and interest receivable
    20,279  
Receivable for expenses reimbursed by Manager (Note 5)
    9,017  
         
Total assets
    8,628,799  
         
         
Liabilities:
       
Payable to affiliate for (Note 5):
       
Management fee
    2,022  
Shareholder service fee
    979  
Trustees and Trust Officers or agents unaffiliated with the Manager
    54  
Payable for open swap contracts (Note 4)
    960  
Accrued expenses
    51,061  
         
Total liabilities
    55,076  
         
Net assets
  $ 8,573,723  
         
Net assets consist of:
       
Paid-in capital
  $ 10,327,319  
Accumulated undistributed net investment income
    23,888  
Accumulated net realized loss
    (3,192,441 )
Net unrealized appreciation
    1,414,957  
         
    $ 8,573,723  
         
Net assets attributable to:
       
Class III shares
  $ 8,573,723  
         
Shares outstanding:
       
Class III
    1,094,306  
         
Net asset value per share:
       
Class III
  $ 7.83  
         

         
14
  See accompanying notes to the financial statements.    

 

GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends from unaffiliated issuers
  $ 151,151  
Dividends from affiliated issuers (Note 10)
    144  
Interest
    95  
         
Total investment income
    151,390  
         
Expenses:
       
Management fee (Note 5)
    22,894  
Shareholder service fee – Class III (Note 5)
    11,078  
Audit and tax fees
    66,762  
Custodian, fund accounting agent and transfer agent fees
    18,889  
Registration fees
    369  
Legal fees
    309  
Trustees fees and related expenses (Note 5)
    195  
Miscellaneous
    9,527  
         
Total expenses
    130,023  
Fees and expenses reimbursed by Manager (Note 5)
    (95,796 )
         
Net expenses
    34,227  
         
Net investment income (loss)
    117,163  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in unaffiliated issuers
    278,503  
Investments in affiliated issuers
    (12 )
Realized gains distributions from affiliated issuers (Note 10)
    17  
Swap contracts
    1,819  
         
Net realized gain (loss)
    280,327  
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in unaffiliated issuers
    1,143,181  
Investments in affiliated issuers
    (39 )
Swap contracts
    (960 )
         
Net unrealized gain (loss)
    1,142,182  
         
Net realized and unrealized gain (loss)
    1,422,509  
         
Net increase (decrease) in net assets resulting from operations
  $ 1,539,672  
         

         
    See accompanying notes to the financial statements.   15

 

GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 117,163     $ 106,886  
Net realized gain (loss)
    280,327       (509,954 )
Change in net unrealized appreciation (depreciation)
    1,142,182       2,618,818  
                 
                 
Net increase (decrease) in net assets from operations
    1,539,672       2,215,750  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (114,113 )     (102,749 )
                 
Net share transactions (Note 9):
               
Class III
    127,830       69,350  
                 
                 
Total increase (decrease) in net assets
    1,553,389       2,182,351  
                 
Net assets:
               
Beginning of period
    7,020,334       4,837,983  
                 
End of period (including accumulated undistributed net investment income of $23,888 and $15,210, respectively)
  $ 8,573,723     $ 7,020,334  
                 

         
16
  See accompanying notes to the financial statements.    

 

GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 6.53     $ 4.55     $ 7.86     $ 9.68     $ 10.78  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.11       0.10       0.14       0.18       0.21  
Net realized and unrealized gain (loss)
    1.30       1.98       (3.31 )     (1.23 )     0.80  
                                         
                                         
Total from investment operations
    1.41       2.08       (3.17 )     (1.05 )     1.01  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.11 )     (0.10 )     (0.14 )     (0.18 )     (0.23 )
From net realized gains
    —       —       —       (0.59 )     (1.88 )
                                         
                                         
Total distributions
    (0.11 )     (0.10 )     (0.14 )     (0.77 )     (2.11 )
                                         
                                         
Net asset value, end of period
  $ 7.83     $ 6.53     $ 4.55     $ 7.86     $ 9.68  
                                         
                                         
Total Return(a)
    21.81 %(b)     45.95 %     (40.83 )%     (11.88 )%     9.80 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 8,574     $ 7,020     $ 4,838     $ 29,358     $ 35,726  
Net expenses to average daily net assets
    0.46 %(d)     0.46 %     0.46 %(c)     0.46 %     0.46 %
Net investment income (loss) to average daily net assets
    1.59 %     1.70 %     1.94 %     1.93 %     1.91 %
Portfolio turnover rate
    53 %     54 %     57 %     75 %     72 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    1.30 %     1.22 %     0.43 %     0.23 %     0.13 %
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions.
(b) Litigation proceeds received during the fiscal year had a positive impact on total return adding 1.35%.
(c) The net expense ratio does not include the effect of expense reductions (Note 2).
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
† Calculated using average shares outstanding throughout the period.

         
    See accompanying notes to the financial statements.   17

 

GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO U.S. Intrinsic Value Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund’s investment objective is long-term capital growth. The Manager seeks to achieve the Fund’s investment objective by investing in equities or groups of equities that the Manager believes will provide higher returns than the Russell 1000 Value Index. The Manager uses active investment management methods, which means that equities are bought and sold according to the Manager’s evaluation of companies’ published financial information, securities’ prices, equity and bond markets, and the overall economy.
 
In selecting equities for the Fund, the Manager may use a combination of investment methods to identify equities that the Manager believes present positive return potential relative to other equities. Some of these methods evaluate individual equities or a group of equities based on the ratio of their price relative to historical financial information and forecasted financial information provided by industry analysts. Historical financial information may include book value, cash flow and earnings. The Manager may compare these ratios to industry or market averages in order to assess the relative attractiveness of an equity. Other methods focus on evaluating patterns of price movement or volatility of an equity or group of equities relative to the Fund’s investment universe. The Manager also may adjust the Fund’s portfolio for factors such as position size, industry and sector exposure, and market capitalization.
 
As a substitute for direct investments in equities, the Manager may use exchange-traded and over-the-counter (“OTC”) derivatives. The Manager also may use derivatives: (i) in an attempt to reduce investment exposures (which may result in a reduction below zero); (ii) to effect transactions intended as substitutes for securities lending; and (iii) in an attempt to adjust elements of the Fund’s investment exposure. Derivatives used may include futures, options and swap contracts. In addition, the Fund may lend its portfolio securities.
 
The Fund typically invests directly and indirectly (e.g., through underlying funds or derivatives) in equities. Under normal circumstances, the Fund invests directly and indirectly at least 80% of its assets in investments tied economically to the U.S. The term “equities” refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts.

         
18
       

 

 
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
For cash management purposes, the Fund may invest in unaffiliated money market funds and/or GMO U.S. Treasury Fund.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the OTC market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. See Note 4 for a further discussion on valuation of derivative financial instruments.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e.,

         
        19

 

 
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Common Stocks
  $ 8,348,668     $ —     $      —     $ 8,348,668  
Mutual Funds
    205,992       —       —       205,992  
Rights and Warrants
    —       2,006       —       2,006  
Short-Term Investments
    42,837       —       —       42,837  
                                 
Total Investments
    8,597,497       2,006       —       8,599,503  
                                 
Total
  $ 8,597,497     $ 2,006     $ —     $ 8,599,503  
                                 

         
20
       

 

 
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
LIABILITY VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Liabilities
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Derivatives*
                               
Swap Agreements
                               
Equity risk
  $      —     $ (960 )   $      —     $ (960 )
                                 
Total
  $ —     $ (960 )   $ —     $ (960 )
                                 
 
The risks referenced above are not intended to be inclusive of all risks. Please see the Investment Risks and Derivative Financial Instruments sections below for a further discussion of risks.
 
*Because the tables above are based on market values or unrealized appreciation (depreciation) rather than the notional amounts of derivatives, the uncertainties surrounding the valuation inputs for a derivative are likely to be more significant to the Fund’s net asset value than the uncertainties surrounding inputs for a non-derivative security with the same market value.
 
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements. All of the Fund’s common stocks held at period end are classified as Level 1. Please refer to the Schedule of Investments for a more detailed categorization of common stocks.
 
The Fund held no investments or derivative financial instruments directly at either February 28, 2011 or February 28, 2010, whose fair value was categorized using Level 3 inputs.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, quarterly, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid

         
        21

 

 
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards and losses on wash sale transactions.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 114,113     $ 102,749  
                 
Total distributions
  $ 114,113     $ 102,749  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 23,553  
         
Other Tax Attributes:
       
Capital loss carryforwards
  $ (2,869,149 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains, if any, to the extent permitted by the Code. As of February 28, 2011, the capital loss carryforwards disclosed below were permanently reduced by $290,942 due to share ownership activity. Utilization of the capital loss carryforwards, post-October capital losses and losses realized in the future, if any, subsequent

         
22
       

 

 
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
to February 28, 2011 could be subject to further limitations imposed by the Code related to share ownership activity. The Fund’s capital loss carryforwards expire as follows:
 
         
February 28, 2017
  $ (2,533,619 )
February 28, 2018
    (290,942 )
February 28, 2019
    (44,588 )
         
Total
  $ (2,869,149 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 7,506,876     $ 1,208,610     $ (115,983 )   $ 1,092,627      
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if

         
        23

 

 
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (Note 5).
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund’s investments.
 
• Market Risk — Value Securities — The Fund purchases some equity investments at prices below what the Manager believes to be their fundamental value. The Fund runs the risk that the prices of these investments will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value.
 
Other principal risks of an investment in the Fund include Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, and credit and counterparty risk); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund’s securities); Smaller Company Risk (greater price fluctuations and liquidity risk resulting from investments in companies with smaller market capitalizations); Leveraging Risk (increased risk of loss from use of derivatives and securities

         
24
       

 

 
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
lending); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by “equitizing” its cash balances using futures contracts or other types of derivatives.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero).
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, indices and markets without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically “sell” a portion of the Fund’s portfolio) in combination with a long futures contract on another index (to synthetically “buy” exposure to that index).
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have

         
        25

 

 
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral, that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.

         
26
       

 

 
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. The Fund had no futures contracts outstanding at the end of the period.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting

         
        27

 

 
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset

         
28
       

 

 
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral

         
        29

 

 
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the year ended February 28, 2011, the Fund used total return swap agreements to achieve returns comparable to holding and lending a direct equity position. Swap agreements outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. During the year ended February 28, 2011, the Fund held rights and warrants as a result of a corporate action. Rights and warrants held by the Fund at the end of the period are listed in the Fund’s Schedule of Investments.
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of
February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign exchange
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Assets:
                                               
Investments, at value (rights and warrants)
  $      —     $      —     $      —     $ 2,006     $      —     $ 2,006  
                                                 
Total
  $ —     $ —     $ —     $ 2,006     $ —     $ 2,006  
                                                 
                                                 
Liabilities:
                                               
Unrealized depreciation on swap agreements
  $ —     $ —     $ —     $ (960 )   $ —     $ (960 )
                                                 
Total
  $ —     $ —     $ —     $ (960 )   $ —     $ (960 )
                                                 

         
30
       

 

 
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign exchange
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Swap agreements
  $      —     $      —     $      —     $ 1,819     $      —     $ 1,819  
                                                 
Total
  $ —     $ —     $ —     $ 1,819     $ —     $ 1,819  
                                                 
                                                 
Change in Unrealized Appreciation (Depreciation) on:
                                               
Investments (rights and warrants)
  $ —     $ —     $ —     $ (711 )   $ —     $ (711 )
Swap agreements
    —       —       —       (960 )     —       (960 )
                                                 
Total
  $ —     $ —     $ —     $ (1,671 )   $ —     $ (1,671 )
                                                 
 
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
 
The volume of derivative activity, based on absolute values (rights and warrants) or notional amounts (swap agreements) outstanding at each month-end, was as follows for the year ended February 28, 2011:
 
                 
    Swap
  Rights/
    agreements   Warrants
 
Average amount outstanding
  $ 1,403     $ 361  
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.31% of average daily net assets. The Fund has adopted a Shareholder Service Plan underwhich the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.31% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions,

         
        31

 

 
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition to the contractual expense reimbursement described above, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund’s Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund’s Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $195 and $26, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
             
Indirect Net Expenses
 		           
(excluding shareholder
            
service fees and
     Indirect Shareholder
      
interest expense)     Service Fees     Total Indirect Expenses
<0.001%
    0.000%     <0.001%
             
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 aggregated $4,251,495 and $3,856,117, respectively.
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.

         
32
       

 

 
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 97.69% of the outstanding shares of the Fund were held by one shareholder. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
 
As of February 28, 2011, 0.36% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and 0.20% of the Fund’s shares were held by accounts for which the Manager had investment discretion.
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    5,305     $ 39,149       3,224     $ 19,432  
Shares issued to shareholders in reinvestment of distributions
    16,949       113,504       17,838       101,883  
Shares repurchased
    (3,472 )     (24,823 )     (8,970 )     (51,965 )
                                 
Net increase (decrease)
    18,782     $ 127,830       12,092     $ 69,350  
                                 
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                 
    Value,
               Distributions
    
    beginning of
       Sales
   Dividend
   of Realized
   Value, end
Affiliate   period   Purchases   Proceeds   Income   Gains   of period
 
GMO U.S. Treasury Fund
  $      —     $ 236,043     $ 30,000     $ 144     $ 17     $ 205,992  
                                                 
Totals
  $ —     $ 236,043     $ 30,000     $ 144     $ 17     $ 205,992  
                                                 

         
        33

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO U.S. Intrinsic Value Fund:
 
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. Intrinsic Value Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian, broker, and transfer agent provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
34
       

 

GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
        35

 

 
GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.46 %   $ 1,000.00     $ 1,296.80     $ 2.62  
2) Hypothetical
    0.46 %   $ 1,000.00     $ 1,022.51     $ 2.31  
                                 
 
            * Expenses are calculated using the Class’s annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
36
       

 

GMO U.S. Intrinsic Value Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
For taxable, non-corporate shareholders, 94.33% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 represents qualified dividend income subject to the 15% rate category.
 
For corporate shareholders, 97.29% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 qualified for the dividends-received deduction.

         
        37

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
    Other
Name and
  Held with the
   Length of Time
   During Past
   Complex
     Directorships
Date of Birth   Trust   Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
38        

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
    Other
Name and
  Held with the
   Length of Time
   During Past
   Complex
     Directorships
Date of Birth   Trust   Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
    Other
Name and
  Position(s)
   Length of Time
   During Past
   Complex
     Directorships
Date of Birth   Held with Trust   Served   Five Years   Overseen     Held
 
                         
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee; President
and Chief Executive
Officer of the
Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
        39

 

Other Officers:
 
             
    Position(s)
   Length of
   Principal Occupation(s)
Name and Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
40        

 

Other Officers: — (Continued)
 
             
    Position(s)
   Length of
   Principal Occupation(s)
Name and Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money
Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        41

 

 
GMO U.S. Treasury Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO U.S. Treasury Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
GMO U.S. Treasury Fund returned +0.1% for the fiscal year ended February 28, 2011, matching the +0.1% return of the Citigroup 3 Month Treasury Bill Index.
 
The Fund performed in line with the benchmark during the fiscal year, as the securities selected for the portfolio performed in line with those of the benchmark. Note that due to the voluntary waiving of the 0.08% management fee, the Fund’s gross and net returns were equivalent.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO U.S. Treasury Fund and the Citigroup 3 Month Treasury Bill Index
As of February 28, 2011
 
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited.
 
 

 

GMO U.S. Treasury Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary   % of Total Net Assets  
Short-Term Investments
    100.0 %
Other
    (0.0 )*
         
      100.0 %
         
 
* Rounds to (0.0)%

         
        1

 

GMO U.S. Treasury Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                 
 
 		           
Shares /
 		           
Par Value ($)     Description   Value ($)  
        SHORT-TERM INVESTMENTS — 100.0%        
                 
        Money Market Funds — 0.0%        
  11,475     State Street Institutional Treasury Plus Money Market Fund-Institutional Class     11,475  
                 
                 
        U.S. Government — 100.0%        
  649,930,000     U.S. Treasury Bill, 0.13%, due 04/07/11 (a)     649,845,903  
  550,170,000     U.S. Treasury Bill, 0.13%, due 04/14/11 (a)     550,084,439  
  148,825,000     U.S. Treasury Bill, 0.15%, due 04/21/11 (a)     148,793,375  
  234,535,000     U.S. Treasury Bill, 0.12%, due 04/28/11 (a)     234,489,612  
  40,215,000     U.S. Treasury Bill, 0.15%, due 05/12/11 (a)     40,205,590  
  104,355,000     U.S. Treasury Bill, 0.11%, due 05/19/11 (a)     104,325,255  
  86,940,000     U.S. Treasury Bill, 0.14%, due 07/07/11 (a)     86,896,704  
                 
        Total U.S. Government     1,814,640,878  
                 
                 
        TOTAL SHORT-TERM INVESTMENTS (COST $1,814,655,499)     1,814,652,353  
                 
                 
        TOTAL INVESTMENTS — 100.0%
(Cost $1,814,655,499) 		    1,814,652,353  
        Other Assets and Liabilities (net) — (0.0%)     (99,276 )
                 
                 
        TOTAL NET ASSETS — 100.0%   $ 1,814,553,077  
                 
 
Notes to Schedule of Investments:
 
(a) Rate shown represents yield-to-maturity.

         
2
  See accompanying notes to the financial statements.    

 

GMO U.S. Treasury Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments, at value (cost $1,814,655,499) (Note 2)
  $ 1,814,652,353  
Receivable for Fund shares sold
    11,173,000  
Receivable for expenses reimbursed by Manager (Note 5)
    151,606  
         
Total assets
    1,825,976,959  
         
         
Liabilities:
       
Payable for investments purchased
    8,590,874  
Payable for Fund shares repurchased
    2,500,000  
Payable to affiliate for (Note 5):
       
Management fee
    103,726  
Trustees and Trust Officers or agents unaffiliated with the Manager
    4,070  
Dividend payable
    84,803  
Accrued expenses
    140,409  
         
Total liabilities
    11,423,882  
         
Net assets
  $ 1,814,553,077  
         
Net assets consist of:
       
Paid-in capital
  $ 1,814,468,794  
Accumulated net realized gain
    87,429  
Net unrealized depreciation
    (3,146 )
         
Net assets
  $ 1,814,553,077  
         
Shares outstanding
    72,575,689  
         
Net asset value per share
  $ 25.00  
         

         
    See accompanying notes to the financial statements.   3

 

GMO U.S. Treasury Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Interest
  $ 1,432,854  
Dividends
    24  
         
Total investment income
    1,432,878  
         
Expenses:
       
Management fee (Note 5)
    835,483  
Custodian, fund accounting agent and transfer agent fees
    117,245  
Audit and tax fees
    58,117  
Legal fees
    42,516  
Registration fees
    40,636  
Trustees fees and related expenses (Note 5)
    25,718  
Miscellaneous
    20,791  
         
Total expenses
    1,140,506  
Fees and expenses reimbursed by Manager (Note 5)
    (1,107,886 )
Net expenses
    32,620  
         
Net investment income (loss)
    1,400,258  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on :
       
Investments
    127,935  
Change in net unrealized appreciation (depreciation) on investments
    31,094  
         
Net realized and unrealized gain (loss)
    159,029  
         
Net increase (decrease) in net assets resulting from operations
  $ 1,559,287  
         

         
4
  See accompanying notes to the financial statements.    

 

GMO U.S. Treasury Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
        Period from
        March 17, 2009
        (commencement of
        operations)
    Year Ended
 		  through
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 1,400,258     $ 699,567  
Net realized gain (loss)
    127,935       250,764  
Change in net unrealized appreciation (depreciation)
    31,094       (34,240 )
                 
                 
Net increase (decrease) in net assets from operations
    1,559,287       916,091  
                 
Distributions to shareholders from:
               
Net investment income
    (1,400,258 )     (699,567 )
Net realized gains
    (95,016 )     (196,254 )
                 
      (1,495,274 )     (895,821 )
                 
Net share transactions (Note 9):
    1,268,413,134       546,055,660  
                 
                 
Total increase (decrease) in net assets
    1,268,477,147       546,075,930  
                 
Net assets:
               
Beginning of period
    546,075,930       —  
                 
End of period
  $ 1,814,553,077     $ 546,075,930  
                 

         
    See accompanying notes to the financial statements.   5

 

GMO U.S. Treasury Fund
(A Series of GMO Trust)

Financial Highlights
(For a share outstanding throughout the period)
 
                 
        Period from
        March 17, 2009
        (commencement
        of operations)
    Year Ended
 		  through
    February 28, 2011   February 28, 2010
 
Net asset value, beginning of period
  $ 25.00     $ 25.00  
                 
                 
Income (loss) from investment operations:
               
Net investment income (loss)†
    0.03       0.04  
Net realized and unrealized gain (loss)
    0.00 (a)     0.02  
                 
                 
Total from investment operations
    0.03       0.06  
                 
                 
Less distributions to shareholders:
               
From net investment income
    (0.03 )     (0.05 )
From net realized gains
    (0.00 )(b)     (0.01 )
                 
                 
Total distributions
    (0.03 )     (0.06 )
                 
                 
Net asset value, end of period
  $ 25.00     $ 25.00  
                 
                 
Total Return(c)
    0.15 %     0.25 %**
                 
Ratios/Supplemental Data:
               
Net assets, end of period (000’s)
  $ 1,814,553     $ 546,076  
Net expenses to average daily net assets
    0.00 %(d)     0.00 %(d) *
Net investment income (loss) to average daily net assets
    0.13 %     0.18 %*
Portfolio Turnover(e)
    0.00 %     0.00 %**
Fees and expenses reimbursed and/or waived by the Manager to average daily net assets
    0.11 %     0.12 %*
 
(a) Net realized and unrealized gain (loss) was less than $0.01 per share
(b) Distributions from net realized gains were less than $0.01 per share.
(c) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assume the effect of reinvested distributions. Without the waivers, total returns would have been 0.07% and 0.17%, respectively for the fiscal year and/or period ended February 28, 2011 and February 28, 2010.
(d) Total net expenses were less than 0.01% to average daily net assets.
(e) Portfolio turnover rate calculation excludes short-term investments.
† Calculated using average shares outstanding throughout the period.
* Annualized.
** Not annualized.

         
6
  See accompanying notes to financial statements.    

 

GMO U.S. Treasury Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO U.S. Treasury Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund seeks liquidity and safety of principal with current income as a secondary objective. The Fund primarily invests in U.S. Treasury securities. Under normal circumstances, the Fund invests at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in Direct U.S. Treasury Obligations and repurchase agreements collateralized by these Obligations. “Direct U.S. Treasury Obligations” include U.S. Treasury bills, bonds, and notes and other securities issued by the U.S. Treasury, such as Separately Traded Registered Interest and Principal Securities (“STRIPS”) and other zero-coupon securities, that are backed by the full faith and credit of the U.S. government as well as repurchase agreements relating to the foregoing.
 
The Fund may enter into repurchase agreements, under which the Fund purchases a security backed by the full faith and credit of the U.S. government from a seller who simultaneously commits to repurchase, on an agreed upon date in the future, the security from the Fund at the original purchase price plus an agreed upon amount representing the original purchase price plus interest. The counterparties in repurchase agreements are typically broker-dealers and banks, and the safety of the arrangement is dependent on, among other things, the Fund’s having an interest in the security that can be realized in the event of the insolvency of the counterparty. In addition to Direct U.S. Treasury Obligations, the Fund also may invest in other fixed-income securities that are backed by the full faith and credit of the U.S. government, such as guaranteed securities issued by the Government National Mortgage Association (GNMA) and the Federal Deposit Insurance Corporation (FDIC). The Fund also may invest in unaffiliated money market funds.
 
The Fund normally invests in Direct U.S. Treasury Obligations and other fixed-income securities backed by the full faith and credit of the U.S. government with a stated or remaining maturity of one year or less. This may not be true of Direct U.S. Treasury Obligations purchased pursuant to repurchase agreements, and, therefore, if the counterparty to the repurchase agreement defaults, the Fund may own a security with a stated or remaining maturity of greater than one year.
 
Although the Fund primarily invests in short-term obligations, it is not a money market fund and is not subject to the duration, quality, diversification, and other requirements applicable to money market funds. In addition, the Manager normally seeks to maintain an interest rate duration of one year or less for the Fund’s portfolio.

         
        7

 

 
GMO U.S. Treasury Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
In selecting U.S. Treasury securities for the Fund’s portfolio, the Manager focuses primarily on the relative attractiveness of different obligations (such as bonds, notes, or bills), which can vary depending on the general level of interest rates as well as supply/demand imbalances and other market conditions. The Fund’s benchmark is the Citigroup 3 Month Treasury Bill Index.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the over-the-counter (“OTC”) market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent quoted bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e.,

         
8
       

 

 
GMO U.S. Treasury Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was be effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. U.S. Treasury Bills having sixty days or less to final maturity were valued using amortized cost.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Short-Term Investments
  $ 231,439,024     $ 1,583,213,329     $      —     $ 1,814,652,353  
                                 
Total Investments
    231,439,024       1,583,213,329       —       1,814,652,353  
                                 
Total
  $ 231,439,024     $ 1,583,213,329     $ —     $ 1,814,652,353  
                                 
 
At February 28, 2011, the Fund’s investments in U.S. Treasury Bills having sixty days or less to final maturity were valued using amortized cost, in accordance with rules under the Investment Company Act of 1940. Amortized cost approximates the current fair value of a security, as the value is not obtained from a quoted price in an active market. Securities valued at amortized cost are considered to be valued using Level 2.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
The Fund held no investments or derivative financial instruments at either February 28, 2011 or February 28, 2010, whose fair value was categorized using Level 3 inputs.

         
        9

 

 
GMO U.S. Treasury Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Repurchase agreements
The Fund may enter into repurchase agreements. Under a repurchase agreement 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 it acquired under the repurchase agreement. The value of the securities acquired is required by contract to be marked to market daily and additional collateral is required to be transferred so that the market value is at least equal to the amount owed to the Fund by the seller. If the seller of a repurchase agreement defaults or enters into insolvency proceedings and/or the value of the securities subject to the repurchase agreement is insufficient, the Fund’s recovery of cash from the seller may be delayed and the Fund may incur a loss equal to the difference between the cash it paid and the value of the securities. The Fund had no repurchase agreements outstanding at the end of the period.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
 
The Fund’s policy is to declare distributions from net investment income daily, and will pay distributions on the first business day following the end of each month in which distributions were declared. The Fund’s policy is to declare and pay distributions from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
During the year ended February 28, 2011, there were no significant adjustments due to differences between U.S. GAAP and tax accounting.

         
10
       

 

 
GMO U.S. Treasury Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 1,495,274     $ 895,821  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 87,429  
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 1,814,655,499     $ —     $ (3,146 )   $ (3,146 )    
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the period ended February 28, 2010 through the year ended February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the

         
        11

 

 
GMO U.S. Treasury Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds.
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Fixed Income Securities — Typically, the value of the Fund’s U.S. Treasury and other fixed income securities will decline during periods of rising interest rates, and yields on the Fund’s securities may equal or approach zero under some market conditions.
 
• Credit and Counterparty Risk — The Fund runs the risk that the issuer or guarantor of a fixed income security, the counterparty to a repurchase agreement, or a borrower of the Fund’s securities will be unable or unwilling to make timely principal, interest, or settlement payments, or otherwise honor its obligations.
 
• Focused Investment Risk — Focusing investments in a particular type of security (e.g., Direct U.S. Treasury Obligations) creates additional risk.
 
• Large Shareholder Risk — To the extent that shares of the Fund are held by large shareholders (e.g., institutional investors, asset allocation funds, or other GMO Funds), the Fund is subject to the risk that

         
12
       

 

 
GMO U.S. Treasury Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
these shareholders will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis.
 
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
 
Other principal risks of an investment in the Fund include Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
 
4. Derivative financial instruments
 
At February 28, 2011, the Fund held no derivative contracts.
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.08% of average daily net assets. The Manager has voluntarily agreed to waive the Fund’s management fee and to reimburse the Fund to the extent the Fund’s total annual operating expenses exceed 0.00% of the Fund’s average daily net assets (excluding the Fund’s Excluded Fund Fees and Expenses described below). The Manager may change or terminate these voluntary waivers and reimbursements at any time, and these voluntary waivers and reimbursements are in addition to the Manager’s contractual expense reimbursement agreement described below. During any period for which these voluntary waivers and reimbursements are in effect, the Fund will incur management fees at an annual rate lower than 0.08% of the Fund’s average daily net assets, and, as a result, total annual operating expenses after expense reimbursement for the Fund will be lower.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.08% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including

         
        13

 

 
GMO U.S. Treasury Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). This expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $25,718 and $6,687, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
6. Purchases and sales of securities
 
There were no purchases or sales of securities, excluding short-term investments, for the period ended February 28, 2011.
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 71.60% of the shares outstanding of the Fund were held by two shareholders, each holding more than 10% of the Fund’s outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. Each of the shareholders greater than 10% are other funds of the Trust.
 
As of February 28, 2011, 0.42% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and 99.58% of the Fund’s shares were held by accounts for which the Manager had investment discretion.

         
14
       

 

 
GMO U.S. Treasury Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
9. Share transactions
 
The Declaration of Trust permits each Fund to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
 
                                 
        Period from
        March 17, 2009
        (commencement of
    Year Ended
   operations) through
    February 28, 2011   February 28, 2010
    Shares   Amount   Shares   Amount
                 
 
Shares sold
    167,092,973     $ 4,177,381,162       97,033,628     $ 2,426,592,199  
Shares issued to shareholders in reinvestment of distributions
    43,739       1,093,488       35,275       882,302  
Shares repurchased
    (116,400,442 )     (2,910,061,516 )     (75,229,484 )     (1,881,418,841 )
                                 
Net increase (decrease)
    50,736,270     $ 1,268,413,134       21,839,419     $ 546,055,660  
                                 

         
        15

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO U.S. Treasury Fund:
 
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. Treasury Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations, the changes in its net assets and the financial highlights for the periods indicated in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
16
       

 

GMO U.S. Treasury Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
        17

 

 
GMO U.S. Treasury Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
 		  Beginning
 		  Ending
 		  Net
    Net Expense
   Account
   Account
   Expense
    Ratio*   Value   Value   Incurred**
1) Actual
    0.00 %   $ 1,000.00     $ 1,000.60     $ 0.02  
2) Hypothetical
    0.00 %   $ 1,000.00     $ 1,024.78     $ 0.02  
                                 
 
            * Annualized net expense ratios are less than 0.01%.
            ** Expenses are calculated using the annualized net expense ratio for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
18
       

 

GMO U.S. Treasury Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
The Fund hereby designates as qualified interest income and qualified short-term capital gains with respect to its taxable year ended February 28, 2011, $1,400,258 and $95,016, respectively, or if determined to be different, the qualified interest income and qualified short-term capital gains of such year.
 
Of the ordinary income distributions made by the Fund during the fiscal year ended February 28, 2011, 92.36% is derived from investments in U.S. Government and Agency Obligations. All or a portion of the distributions from this income may be exempt from taxation at the state level. Consult your tax advisor for state specific information.

         
        19

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
  Position(s)
   Length of Time
   During Past
   Complex
     Other Directorships
Date of Birth   Held with the Trust   Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
20        

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
  Position(s)
   Length of Time
   During Past
   Complex
     Other Directorships
Date of Birth   Held with the Trust   Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
  Position(s)
   Length of Time
   During Past
   Complex
     Other Directorships
Date of Birth   Held with Trust   Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee;
President and
Chief Executive
Officer of the Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
        21

 

Other Officers:
 
             
Name and
  Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
22        

 

Other Officers: — (Continued)
 
             
Name and
  Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        23

 

 
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Quantitative Equity Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
GMO U.S. Small/Mid Cap Growth Fund returned +42.6% for the fiscal year ended February 28, 2011, as compared with +36.4% for the Russell 2500 Growth Index.
 
Stock selection added to returns relative to the Russell 2500 Growth Index. Selections in Industrials, Information Technology, and Consumer Discretionary were among those adding to relative returns. Individual names adding to relative returns included overweight positions in F5 Networks, Acme Packet, and Polypore International while detractors included overweight positions in Lincare Holdings, Genworth Financial, and Cree.
 
Sector selection detracted from returns relative to the Russell 2500 Growth Index. Sector weightings negatively impacting relative performance included an overweight in Consumer Staples and underweight positions in Energy and Information Technology. Sector weightings positively impacting relative performance included underweight positions in Health Care, Utilities, and Financials.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice. References to specific securities are not recommendations of such securities and may not be representative of any GMO portfolio’s current or future investments.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO U.S. Small/Mid Cap Growth Fund Class III Shares and the Russell 2500 Growth Index
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Each performance figure assumes a purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of .50% on the purchase and .50% on the redemption. Transaction fees are retained by the Fund to cover trading costs. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. All information is unaudited.
 
 
† The Fund is the successor to GMO Small/Mid Cap Growth Fund, therefore, performance for the periods prior to September 16, 2005 is that of GMO Small/Mid Cap Growth Fund.
The Russell 2500 Growth® Index is a trademark/service mark of the Frank Russell Company. Russelltm is a trademark of the Frank Russell Company.

 

GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary   % of Total Net Assets  
Common Stocks
    99.5 %
Mutual Funds
    0.8  
Short-Term Investments
    0.1  
Other
    (0.4 )
         
      100.0 %
         
 
         
Industry Group Summary   % of Equity Investments*  
Capital Goods
    13.0 %
Software & Services
    11.3  
Technology Hardware & Equipment
    10.3  
Semiconductors & Semiconductor Equipment
    6.9  
Materials
    6.6  
Consumer Durables & Apparel
    6.1  
Consumer Services
    6.0  
Health Care Equipment & Services
    5.9  
Energy
    5.3  
Retailing
    5.1  
Pharmaceuticals, Biotechnology & Life Sciences
    4.5  
Automobiles & Components
    3.1  
Commercial & Professional Services
    2.6  
Household & Personal Products
    2.6  
Insurance
    2.2  
Diversified Financials
    2.0  
Transportation
    1.8  
Food, Beverage & Tobacco
    1.6  
Telecommunication Services
    1.3  
Food & Staples Retailing
    1.0  
Real Estate
    0.5  
Media
    0.1  
Banks
    0.1  
Utilities
    0.1  
         
      100.0 %
         
 
* Equity investments may consist of common stocks and other stock-related securities, such as preferred stocks. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.

         
        1

 

GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            COMMON STOCKS — 99.5%        
                     
            Automobiles & Components — 3.0%        
      300     Autoliv, Inc.      22,467  
      1,700     BorgWarner, Inc. *     131,937  
      100     Cooper Tire & Rubber Co.      2,346  
      700     Dorman Products, Inc. *     24,269  
      100     Lear Corp. *     10,580  
      600     Standard Motor Products, Inc.      6,978  
      1,700     Tenneco, Inc. *     67,796  
      2,400     TRW Automotive Holdings Corp. *     136,320  
                     
            Total Automobiles & Components     402,693  
                     
                     
            Banks — 0.1%        
      200     Bank of the Ozarks, Inc.      8,610  
      100     S.Y. Bancorp, Inc.      2,480  
                     
            Total Banks     11,090  
                     
                     
            Capital Goods — 12.9%        
      600     A.O. Smith Corp.      24,240  
      400     AAON, Inc.      12,280  
      400     Acuity Brands, Inc.      22,608  
      300     Altra Holdings, Inc. *     6,489  
      100     American Science & Engineering, Inc.      9,400  
      5,000     Ametek, Inc.      209,750  
      1,400     Applied Industrial Technologies, Inc.      44,856  
      3,500     ArvinMeritor, Inc. *     62,720  
      400     Astronics Corp. *     8,624  
      200     AZZ, Inc.      8,532  
      600     Blount International, Inc. *     9,120  
      300     CAI International, Inc. *     6,354  
      1,300     Chicago Bridge & Iron Co NV (NY Shares) *     46,176  
      300     Clarcor, Inc.      12,342  
      100     Colfax Corp. *     2,218  
      100     Cubic Corp.      5,031  
      500     DXP Enterprises, Inc. *     10,630  
      100     EnPro Industries, Inc. *     3,968  
      400     Franklin Electric Co., Inc.      17,000  
      1,700     Gardner Denver, Inc.      124,338  
      700     GeoEye, Inc. *     31,185  
      3,100     Hexcel Corp. *     57,505  

         
2
  See accompanying notes to the financial statements.    

 

 
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Capital Goods — continued        
      200     II-VI, Inc. *     10,238  
      400     KBR, Inc.      13,120  
      700     Middleby Corp. *     62,769  
      100     National Presto Industries, Inc.      12,654  
      400     Pall Corp.      21,744  
      3,000     Polypore International, Inc. *     175,320  
      300     RBC Bearings, Inc. *     10,857  
      1,400     Sauer-Danfoss, Inc. *     42,742  
      700     TAL International Group, Inc.      24,416  
      900     Textainer Group Holdings Ltd.      31,815  
      400     Thomas & Betts Corp. *     22,156  
      2,000     Timken Co. (The)     97,440  
      100     Titan International, Inc.      2,402  
      100     Titan Machinery, Inc. *     2,573  
      1,500     Toro Co. (The)     93,600  
      4,400     Trimas Corp. *     90,508  
      1,000     Vicor Corp.      15,230  
      3,500     WABCO Holdings, Inc. *     204,505  
      700     WESCO International, Inc. *     40,754  
                     
            Total Capital Goods     1,710,209  
                     
                     
            Commercial & Professional Services — 2.6%        
      600     Acacia Research — Acacia Technologies *     17,592  
      1,100     Administaff, Inc.      32,923  
      500     Advisory Board Co. (The) *     25,580  
      100     American Reprographics Co. *     890  
      200     CompX International, Inc.      3,020  
      100     Consolidated Graphics, Inc. *     5,454  
      300     Corporate Executive Board Co. (The)     12,021  
      1,700     Deluxe Corp.      43,435  
      200     Exponent, Inc. *     7,870  
      200     Herman Miller, Inc.      5,388  
      1,100     IHS, Inc.-Class A *     92,070  
      1,600     Interface, Inc.-Class A     26,672  
      1,400     Knoll, Inc.      28,938  
      100     Multi-Color Corp.      1,855  
      1,600     Rollins, Inc.      31,392  
      500     Schawk, Inc.      9,035  
                     
            Total Commercial & Professional Services     344,135  
                     

         
    See accompanying notes to the financial statements.   3

 

 
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Consumer Durables & Apparel — 6.1%        
      3,700     CROCS, Inc. *     65,305  
      1,600     Deckers Outdoor Corp. *     141,152  
      2,900     Fossil, Inc. *     222,546  
      200     G-III Apparel Group Ltd. *     7,864  
      300     K-Swiss, Inc.-Class A *     3,003  
      300     Kenneth Cole Productions, Inc.-Class A *     3,900  
      1,900     Liz Claiborne, Inc. *     9,766  
      700     Maidenform Brands, Inc. *     18,998  
      500     Oxford Industries, Inc.      12,060  
      1,400     Polaris Industries, Inc.      105,630  
      800     Steven Madden Ltd. *     34,512  
      300     Sturm, Ruger & Co., Inc.      5,418  
      100     Timberland Co.-Class A *     3,694  
      2,600     Under Armour, Inc.-Class A *     172,198  
                     
            Total Consumer Durables & Apparel     806,046  
                     
                     
            Consumer Services — 6.0%        
      100     AFC Enterprises, Inc. *     1,479  
      100     BJ’s Restaurants, Inc. *     3,595  
      900     California Pizza Kitchen, Inc. *     15,156  
      400     CEC Entertainment, Inc. *     15,476  
      400     Cheesecake Factory (The), Inc. *     11,616  
      1,500     Chipotle Mexican Grill, Inc. *     367,500  
      700     Cracker Barrel Old Country Store, Inc.      34,888  
      300     DineEquity, Inc. *     17,163  
      600     Domino’s Pizza, Inc. *     10,122  
      400     Krispy Kreme Doughnuts, Inc. *     2,508  
      700     LIFE TIME FITNESS, Inc. *     26,845  
      200     Panera Bread Co.-Class A *     23,350  
      200     Papa John’s International, Inc. *     5,836  
      400     Pre-Paid Legal Services, Inc. *     26,376  
      1,500     Sotheby’s     73,830  
      400     Texas Roadhouse, Inc. *     6,792  
      2,500     Weight Watchers International, Inc.      152,825  
                     
            Total Consumer Services     795,357  
                     
                     
            Diversified Financials — 1.9%        
      1,400     Credit Acceptance Corp. *     98,840  
      100     Epoch Holding Corp.      1,573  
      2,000     EZCORP, Inc.-Class A *     57,360  

         
4
  See accompanying notes to the financial statements.    

 

 
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Diversified Financials — continued        
      1,100     First Cash Financial Services, Inc. *     36,014  
      400     GFI Group, Inc.      2,000  
      100     Kohlberg Capital Corp.      835  
      700     Life Partners Holdings, Inc.      5,782  
      400     MarketAxess Holdings, Inc.      8,556  
      300     Nelnet, Inc.-Class A     6,699  
      200     NewStar Financial, Inc. *     2,118  
      100     Portfolio Recovery Associates, Inc. *     8,335  
      200     Virtus Investment Partners, Inc. *     11,656  
      300     World Acceptance Corp. *     17,943  
                     
            Total Diversified Financials     257,711  
                     
                     
            Energy — 5.3%        
      400     Apco Oil and Gas International, Inc.      32,376  
      1,100     Callon Petroleum Co. *     9,218  
      500     CARBO Ceramics, Inc.      61,985  
      500     Clayton Williams Energy, Inc. *     53,040  
      700     Cloud Peak Energy, Inc. *     14,350  
      100     Concho Resources Inc. *     10,652  
      500     Core Laboratories NV     51,675  
      900     Dresser-Rand Group, Inc. *     44,352  
      1,300     Dril-Quip, Inc. *     99,710  
      300     Gulfport Energy Corp. *     8,877  
      400     Holly Corp.      22,856  
      1,000     Lufkin Industries, Inc.      78,150  
      700     Newpark Resources, Inc. *     4,886  
      100     Oil States International, Inc. *     7,279  
      400     Rowan Cos, Inc. *     17,068  
      8,450     RPC, Inc.      165,451  
      200     Superior Energy Services, Inc. *     7,662  
      100     VAALCO Energy, Inc. *     802  
      100     W&T Offshore, Inc.      2,553  
      200     World Fuel Services Corp.      8,288  
                     
            Total Energy     701,230  
                     
                     
            Food & Staples Retailing — 1.0%        
      300     BJ’s Wholesale Club, Inc. *     14,526  
      300     Casey’s General Stores, Inc.      12,321  
      200     Pantry, Inc. *     3,152  
      1,600     PriceSmart, Inc.      56,944  

         
    See accompanying notes to the financial statements.   5

 

 
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Food & Staples Retailing — continued        
      500     Ruddick Corp.      18,350  
      200     Susser Holdings Corp. *     2,770  
      600     United Natural Foods, Inc. *     25,470  
                     
            Total Food & Staples Retailing     133,533  
                     
                     
            Food, Beverage & Tobacco — 1.6%        
      900     B&G Foods, Inc.      13,500  
      800     Boston Beer Co., Inc.-Class A *     74,256  
      600     Darling International, Inc. *     8,334  
      1,600     Hansen Natural Corp. *     92,080  
      1,400     Vector Group Ltd.      23,646  
                     
            Total Food, Beverage & Tobacco     211,816  
                     
                     
            Health Care Equipment & Services — 5.9%        
      200     Almost Family, Inc. *     7,800  
      700     AMERIGROUP Corp. *     40,145  
      200     Analogic Corp.      10,840  
      700     BioScrip, Inc. *     2,954  
      500     Chemed Corp.      32,720  
      200     Computer Programs & Systems, Inc.      10,802  
      700     Cooper Cos (The), Inc.      43,274  
      800     CorVel Corp. *     39,600  
      1,600     Delcath Systems, Inc. *     10,480  
      100     Ensign Group, Inc. (The)     3,041  
      200     Exactech, Inc. *     3,790  
      200     Five Star Quality Care, Inc. *     1,404  
      6,500     Health Management Associates, Inc.-Class A *     65,000  
      4,000     Hill-Rom Holdings, Inc.      152,280  
      500     HMS Holdings Corp. *     37,780  
      200     Kensey Nash Corp. *     5,252  
      600     Merit Medical Systems, Inc. *     10,248  
      1,200     Molina Healthcare, Inc. *     42,036  
      100     MWI Veterinary Supply, Inc. *     6,922  
      100     National Research Corp.      3,271  
      400     Natus Medical, Inc. *     6,344  
      900     Neogen Corp. *     33,651  
      4,800     NxStage Medical, Inc. *     99,024  
      400     Orthofix International NV *     12,640  
      700     Providence Service Corp. (The) *     11,487  
      700     Rural/Metro Corp. *     10,493  

         
6
  See accompanying notes to the financial statements.    

 

 
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Health Care Equipment & Services — continued        
      1,100     SXC Health Solutions Corp *     54,285  
      100     Universal Health Services, Inc.-Class B     4,571  
      100     Young Innovations, Inc.      3,167  
      200     Zoll Medical Corp. *     9,256  
                     
            Total Health Care Equipment & Services     774,557  
                     
                     
            Household & Personal Products — 2.6%        
      3,700     Herbalife Ltd.      290,117  
      1,000     Inter Parfums, Inc.      18,070  
      700     USANA Health Sciences, Inc. *     24,374  
      200     WD-40 Co.      8,132  
                     
            Total Household & Personal Products     340,693  
                     
                     
            Insurance — 2.2%        
      100     Arthur J. Gallagher & Co.      3,140  
      1,000     Axis Capital Holdings Ltd.      36,320  
      800     Brown & Brown, Inc.      20,912  
      100     Endurance Specialty Holdings Ltd.      4,959  
      3,300     Erie Indemnity Co.-Class A     230,472  
                     
            Total Insurance     295,803  
                     
                     
            Materials — 6.6%        
      3,600     Albemarle Corp.      207,216  
      300     Allied Nevada Gold Corp. *     9,102  
      700     Balchem Corp.-Class B     25,200  
      400     Ball Corp.      14,440  
      100     Brush Engineered Materials, Inc. *     4,377  
      1,500     Carpenter Technology Corp.      62,370  
      100     Clearwater Paper Corp. *     7,930  
      400     Crown Holdings, Inc. *     15,392  
      100     Eastman Chemical Co.      9,341  
      400     Ferro Corp. *     6,368  
      1,200     Globe Specialty Metals, Inc.      27,948  
      400     Hawkins, Inc.      15,308  
      200     Innophos Holdings, Inc.      8,566  
      1,900     International Flavors & Fragrances, Inc.      108,205  
      1,100     Kraton Performance Polymers, Inc. *     37,730  
      300     LSB Industries, Inc. *     9,084  
      200     Neenah Paper, Inc.      3,894  

         
    See accompanying notes to the financial statements.   7

 

 
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Materials — continued        
      300     NewMarket Corp.      38,433  
      1,800     Omnova Solutions, Inc. *     12,672  
      2,600     PolyOne Corp. *     36,088  
      200     Quaker Chemical Corp.      7,746  
      200     Rock-Tenn Co.-Class A     13,730  
      800     Rockwood Holdings, Inc. *     37,240  
      200     Scotts Miracle-Gro Co. (The)-Class A     11,234  
      600     Silgan Holdings, Inc.      21,888  
      1,600     Stillwater Mining Co. *     38,192  
      100     Temple-Inland, Inc.      2,339  
      2,000     Titanium Metals Corp. *     37,980  
      5,100     US Gold Corp. *     37,026  
                     
            Total Materials     867,039  
                     
                     
            Media — 0.1%        
      300     Arbitron, Inc.      11,943  
      500     Playboy Enterprises, Inc.-Class B *     3,070  
                     
            Total Media     15,013  
                     
                     
            Pharmaceuticals, Biotechnology & Life Sciences — 4.5%        
      3,300     Akorn, Inc. *     18,447  
      100     Bruker Corp. *     1,919  
      300     Dionex Corp. *     35,346  
      400     Emergent Biosolutions, Inc. *     8,416  
      1,500     eResearchTechnology, Inc. *     9,525  
      200     Hi-Tech Pharmacal Co., Inc. *     4,618  
      2,000     Impax Laboratories, Inc. *     41,180  
      800     Incyte Corp. *     10,944  
      600     InterMune, Inc. *     21,966  
      700     Medicines Co. *     12,173  
      1,500     Mettler-Toledo International, Inc. *     257,055  
      900     Neurocrine Biosciences, Inc. *     6,075  
      500     NPS Pharmaceuticals, Inc. *     3,865  
      1,600     PAREXEL International Corp. *     37,552  
      800     PerkinElmer, Inc.      21,200  
      2,900     Pharmaceutical Product Development, Inc.      79,663  
      2,000     Questcor Pharmaceuticals, Inc. *     25,920  
                     
            Total Pharmaceuticals, Biotechnology & Life Sciences     595,864  
                     

         
8
  See accompanying notes to the financial statements.    

 

 
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Real Estate — 0.5%        
      700     Associated Estates Realty Corp. REIT     11,375  
      200     Getty Realty Corp. REIT     5,884  
      100     National Health Investors, Inc. REIT     4,752  
      300     Omega Healthcare Investors, Inc. REIT     7,191  
      100     Rayonier, Inc. REIT     6,133  
      600     Saul Centers, Inc. REIT     27,600  
      100     Urstadt Biddle Properties, Inc. REIT     1,939  
                     
            Total Real Estate     64,874  
                     
                     
            Retailing — 5.1%        
      300     Abercrombie & Fitch Co.-Class A     17,211  
      100     America’s Car-Mart, Inc. *     2,478  
      200     AnnTaylor Stores Corp. *     4,642  
      400     AutoNation, Inc. *     13,456  
      100     Big 5 Sporting Goods Corp.      1,394  
      1,500     Cato Corp. (The)-Class A     36,375  
      500     Childrens Place Retail Stores (The), Inc. *     22,850  
      1,200     Hibbett Sports, Inc. *     37,692  
      200     HSN, Inc. *     6,496  
      1,250     Jos. A. Bank Clothiers, Inc. *     57,638  
      100     Lithia Motors, Inc.-Class A     1,514  
      600     Monro Muffler, Inc.      19,608  
      300     NutriSystem, Inc.      3,969  
      2,300     PetSmart, Inc.      94,001  
      3,900     Sally Beauty Holdings, Inc. *     50,583  
      3,900     Tractor Supply Co.      203,073  
      400     Ulta Salon Cosmetics & Fragrance, Inc. *     16,692  
      2,200     Williams-Sonoma, Inc.      79,398  
                     
            Total Retailing     669,070  
                     
                     
            Semiconductors & Semiconductor Equipment — 6.8%        
      19,200     Atmel Corp. *     281,856  
      500     AXT, Inc. *     3,710  
      4,300     Cirrus Logic, Inc. *     100,405  
      4,700     Entropic Communications, Inc. *     43,522  
      500     GSI Technology, Inc. *     4,705  
      3,000     GT Solar International, Inc. *     32,070  
      1,000     IXYS Corp. *     12,420  
      4,400     Lattice Semiconductor Corp. *     29,216  
      1,600     Micrel, Inc.      21,504  

         
    See accompanying notes to the financial statements.   9

 

 
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Semiconductors & Semiconductor Equipment — continued        
      3,100     MIPS Technologies, Inc. *     37,727  
      1,100     Novellus Systems, Inc. *     43,956  
      200     NVE Corp. *     11,850  
      1,600     Omnivision Technologies, Inc. *     48,992  
      100     Semtech Corp. *     2,368  
      3,100     Silicon Image, Inc. *     24,924  
      5,000     Skyworks Solutions, Inc. *     179,700  
      1,800     TriQuint Semiconductor, Inc. *     25,650  
                     
            Total Semiconductors & Semiconductor Equipment     904,575  
                     
                     
            Software & Services — 11.3%        
      700     ACI Worldwide, Inc. *     21,917  
      1,300     Actuate Corp. *     6,201  
      1,100     Ancestry.com, Inc. *     36,146  
      1,200     Ariba, Inc. *     37,140  
      1,000     Cardtronics, Inc. *     18,950  
      2,600     Compuware Corp. *     29,276  
      100     DST Systems, Inc.      5,100  
      300     Factset Research Systems, Inc.      31,464  
      300     Forrester Research, Inc.      10,854  
      300     Fortinet, Inc. *     12,252  
      200     Gartner, Inc. *     7,544  
      2,900     Global Cash Access Holdings, Inc. *     9,976  
      600     IAC/InterActiveCorp *     18,642  
      1,500     iGate Corp.      27,150  
      1,800     Informatica Corp. *     84,618  
      200     j2 Global Communications, Inc. *     5,818  
      600     Liquidity Services, Inc. *     9,642  
      1,000     LivePerson, Inc. *     10,030  
      400     LogMeIn, Inc. *     14,356  
      100     Magma Design Automation, Inc. *     665  
      600     Manhattan Associates, Inc. *     19,320  
      2,700     Micros Systems, Inc. *     128,628  
      1,100     OpenTable, Inc. *     97,757  
      700     Opnet Technologies, Inc.      23,856  
      1,700     Parametric Technology Corp. *     40,290  
      550     Progress Software Corp. *     16,148  
      2,900     Quest Software, Inc. *     77,691  
      2,200     Radiant Systems, Inc. *     37,730  
      700     Renaissance Learning, Inc.      7,518  

         
10
  See accompanying notes to the financial statements.    

 

 
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Software & Services — continued        
      100     Rovi Corp. *     5,542  
      3,900     Sapient Corp. *     46,215  
      1,500     Smith Micro Software, Inc. *     14,055  
      100     Stamps.com, Inc.      1,344  
      800     Support.com, Inc. *     4,464  
      700     Synchronoss Technologies, Inc. *     23,982  
      1,200     Syntel, Inc.      63,180  
      13,800     TIBCO Software, Inc. *     339,756  
      500     Travelzoo, Inc. *     19,725  
      2,600     VeriFone Holdings, Inc. *     118,144  
      1,000     Virnetx Holding Corp.      12,000  
                     
            Total Software & Services     1,495,086  
                     
                     
            Technology Hardware & Equipment — 10.2%        
      5,100     Acme Packet, Inc. *     383,724  
      3,600     ADTRAN, Inc.      163,728  
      200     Anixter International, Inc.      14,324  
      600     Aruba Networks, Inc. *     18,270  
      200     Coherent, Inc. *     12,350  
      800     DDi Corp.      8,296  
      300     Faro Technologies, Inc. *     10,695  
      400     Finisar Corp. *     16,408  
      500     Insight Enterprises, Inc. *     9,145  
      3,200     Ixia *     56,160  
      900     Loral Space & Communications, Inc. *     68,094  
      100     MTS Systems Corp.      4,631  
      5,800     NCR Corp. *     110,780  
      200     Oplink Communications, Inc. *     5,442  
      8,000     Riverbed Technology, Inc. *     330,320  
      300     Spectrum Control, Inc. *     4,203  
      100     Stratasys, Inc. *     4,538  
      900     Super Micro Computer, Inc. *     13,455  
      1,800     Trimble Navigation Ltd. *     88,470  
      100     Universal Display Corp. *     4,209  
      64     Vishay Precision Group, Inc. *     1,059  
      700     Zebra Technologies Corp. *     26,124  
                     
            Total Technology Hardware & Equipment     1,354,425  
                     

         
    See accompanying notes to the financial statements.   11

 

 
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Telecommunication Services — 1.3%        
      400     Alaska Communications Systems Group, Inc.      4,076  
      500     Consolidated Communications Holdings, Inc.      9,145  
      9,700     MetroPCS Communications, Inc. *     139,680  
      1,300     USA Mobility, Inc.      19,396  
                     
            Total Telecommunication Services     172,297  
                     
                     
            Transportation — 1.8%        
      100     Alaska Air Group, Inc. *     5,945  
      600     Celadon Group, Inc. *     8,766  
      800     Genesee & Wyoming, Inc.-Class A *     41,672  
      200     HUB Group, Inc.-Class A *     6,992  
      200     Marten Transport Ltd.      4,270  
      2,000     Old Dominion Freight Line, Inc. *     61,560  
      700     Pacer International, Inc. *     3,801  
      100     Park-Ohio Holdings Corp. *     2,208  
      300     Ryder System, Inc.      14,349  
      2,635     United Continental Holdings, Inc. *     63,345  
      1,100     UTi Worldwide, Inc.      21,890  
                     
            Total Transportation     234,798  
                     
                     
            Utilities — 0.1%        
      200     South Jersey Industries, Inc.      10,972  
                     
                     
            TOTAL COMMON STOCKS (COST $10,338,441)     13,168,886  
                     
                     
            MUTUAL FUNDS — 0.8%        
                     
            Affiliated Issuers — 0.8%        
      4,040     GMO U.S. Treasury Fund     101,000  
                     
                     
            TOTAL MUTUAL FUNDS (COST $101,000)     101,000  
                     

         
12
  See accompanying notes to the financial statements.    

 

 
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            SHORT-TERM INVESTMENTS — 0.1%        
                     
            Money Market Funds — 0.1%        
      16,038     State Street Institutional Treasury Money Market Fund-Institutional Class     16,038  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $16,038)     16,038  
                     
                     
            TOTAL INVESTMENTS — 100.4%
(COST $10,455,479) 		    13,285,924  
            Other Assets and Liabilities (net) — (0.4%)     (52,172 )
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 13,233,752  
                     
 
Notes to Schedule of Investments:
 
REIT - Real Estate Investment Trust
* Non-income producing security.

         
    See accompanying notes to the financial statements.   13

 

GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $10,354,479) (Note 2)
  $ 13,184,924  
Investments in affiliated issuers, at value (cost $101,000) (Notes 2 and 10)
    101,000  
Receivable for investments sold
    189,556  
Dividends and interest receivable
    3,041  
Receivable for expenses reimbursed by Manager (Note 5)
    15,680  
         
Total assets
    13,494,201  
         
         
Liabilities:
       
Payable for investments purchased
    190,063  
Payable to affiliate for (Note 5):
       
Management fee
    3,113  
Shareholder service fee
    1,506  
Trustees and Trust Officers or agents unaffiliated with the Manager
    28  
Accrued expenses
    65,739  
         
Total liabilities
    260,449  
         
Net assets
  $ 13,233,752  
         
Net assets consist of:
       
Paid-in capital
  $ 10,706,328  
Accumulated undistributed net investment income
    3,256  
Accumulated net realized loss
    (306,277 )
Net unrealized appreciation
    2,830,445  
         
    $ 13,233,752  
         
Net assets attributable to:
       
Class III shares
  $ 13,233,752  
         
Shares outstanding:
       
Class III
    833,805  
         
Net asset value per share:
       
Class III
  $ 15.87  
         

         
14
  See accompanying notes to the financial statements.    

 

GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends from unaffiliated issuers (net of withholding taxes of $32)
  $ 78,159  
Interest
    149  
Dividends from affiliated issuers (Note 10)
    77  
         
Total investment income
    78,385  
         
Expenses:
       
Management fee (Note 5)
    33,468  
Shareholder service fee – Class III (Note 5)
    16,193  
Custodian, fund accounting agent and transfer agent fees
    76,721  
Audit and tax fees
    59,836  
Registration fees
    3,429  
Legal fees
    434  
Trustees fees and related expenses (Note 5)
    224  
Miscellaneous
    9,913  
         
Total expenses
    200,218  
Fees and expenses reimbursed by Manager (Note 5)
    (150,292 )
         
Net expenses
    49,926  
         
Net investment income (loss)
    28,459  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in unaffiliated issuers
    1,447,934  
Investments in affiliated issuers
    (30 )
Realized gains distributions from affiliated issuers (Note 10)
    9  
Futures contracts
    7,248  
         
Net realized gain (loss)
    1,455,161  
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in unaffiliated issuers
    2,512,712  
Futures contracts
    (996 )
         
Net unrealized gain (loss)
    2,511,716  
         
Net realized and unrealized gain (loss)
    3,966,877  
         
Net increase (decrease) in net assets resulting from operations
  $ 3,995,336  
         

         
    See accompanying notes to the financial statements.   15

 

GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 28,459     $ 15,080  
Net realized gain (loss)
    1,455,161       (832,021 )
Change in net unrealized appreciation (depreciation)
    2,511,716       2,534,293  
                 
                 
Net increase (decrease) in net assets from operations
    3,995,336       1,717,352  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (37,472 )     (12,384 )
                 
Net share transactions (Note 9):
               
Class III
    (583,571 )     4,236,292  
Purchase premiums and redemption fees (Notes 2 and 9):
               
Class III
    4,754       31,080  
                 
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees
    (578,817 )     4,267,372  
                 
                 
Total increase (decrease) in net assets
    3,379,047       5,972,340  
                 
Net assets:
               
Beginning of period
    9,854,705       3,882,365  
                 
End of period (including accumulated undistributed net investment income of $3,256 and $2,548, respectively)
  $ 13,233,752     $ 9,854,705  
                 

         
16
  See accompanying notes to the financial statements.    

 

GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 11.17     $ 7.54     $ 13.59     $ 18.93     $ 19.67  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.03       0.03       0.04       0.06       0.07  
Net realized and unrealized gain (loss)
    4.71       3.63       (6.05 )     (1.79 )     0.79  
                                         
                                         
Total from investment operations
    4.74       3.66       (6.01 )     (1.73 )     0.86  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.04 )     (0.03 )     (0.04 )     (0.06 )     (0.09 )
From net realized gains
    —       —       —       (3.49 )     (1.51 )
Return of capital
    —       —       —       (0.06 )     —  
                                         
                                         
Total distributions
    (0.04 )     (0.03 )     (0.04 )     (3.61 )     (1.60 )
                                         
                                         
Net asset value, end of period
  $ 15.87     $ 11.17     $ 7.54     $ 13.59     $ 18.93  
                                         
                                         
Total Return(a)
    42.57 %     48.53 %     (44.27 )%     (11.74 )%     4.86 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 13,234     $ 9,855     $ 3,882     $ 8,198     $ 25,314  
Net expenses to average daily net assets
    0.46 %(b)     0.46 %     0.46 %     0.46 %     0.46 %
Net investment income (loss) to average daily net assets
    0.26 %     0.28 %     0.35 %     0.30 %     0.38 %
Portfolio turnover rate
    136 %     140 %     127 %     118 %     109 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    1.39 %     1.94 %     1.74 %     0.48 %     0.60 %
Purchase premiums and redemption fees consisted of the following per share amounts (Note 2):†
  $ 0.01     $ 0.06     $ 0.01     $ 0.07     $ 0.03  
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effects of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(b) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
† Calculated using average shares outstanding throughout the period.

         
    See accompanying notes to the financial statements.   17

 

GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO U.S. Small/Mid Cap Growth Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund’s investment objective is long-term capital growth. The Manager seeks to achieve the Fund’s investment objective by investing in equities or groups of equities that the Manager believes will provide higher returns than the Russell 2500 Growth Index. The Manager uses active investment management methods, which means that equities are bought and sold according to the Manager’s evaluation of companies’ published financial information, securities’ prices, equity and bond markets, and the overall economy.
 
In selecting equities for the Fund, the Manager may use a combination of investment methods to identify equities that the Manager believes present positive return potential relative to other equities. Some of these methods evaluate individual equities or a group of equities based on the ratio of their price relative to historical financial information and forecasted financial information provided by industry analysts. Historical financial information may include book value, cash flow and earnings. The Manager may compare these ratios to industry or market averages in order to assess the relative attractiveness of an equity. Other methods focus on evaluating patterns of price movement or volatility of an equity or group of equities relative to the Fund’s investment universe. The Manager also may adjust the Fund’s portfolio for factors such as position size, industry and sector exposure, and market capitalization.
 
As a substitute for direct investments in equities, the Manager may use exchange-traded and over-the-counter (“OTC”) derivatives. The Manager also may use derivatives: (i) in an attempt to reduce investment exposures (which may result in a reduction below zero); (ii) to effect transactions intended as substitutes for securities lending; and (iii) in an attempt to adjust elements of the Fund’s investment exposure. Derivatives used may include futures, options and swap contracts. In addition, the Fund may lend its portfolio securities.
 
The Fund typically invests directly and indirectly (e.g., through underlying funds or derivatives) in equities of U.S. companies that issue stocks included in the Russell 2500 Index, a U.S. stock index, and in companies with similar market capitalizations (“small-and mid-cap companies”). Under normal circumstances, the Fund invests directly and indirectly at least 80% of its assets in investments in small-and mid-cap companies tied economically to the U.S. For these purposes, such investments include direct and indirect (e.g., through underlying funds or derivatives) investments in U.S. companies that issue stocks included in the Russell 2500 Index, a U.S. stock index, and in companies with similar market

         
18
       

 

 
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
capitalizations. The term “equities” refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts.
 
For cash management purposes, the Fund may invest in unaffiliated money market funds and/or GMO U.S. Treasury Fund.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the OTC market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. See Note 4 for a further discussion on valuation of derivative financial instruments.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure

         
        19

 

 
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Common Stocks
  $ 13,168,886     $      —     $      —     $ 13,168,886  
Mutual Funds
    101,000       —       —       101,000  
Short-Term Investments
    16,038       —       —       16,038  
                                 
Total Investments
    13,285,924       —       —       13,285,924  
                                 
Total
  $ 13,285,924     $ —     $ —     $ 13,285,924  
                                 
 
All of the Fund’s common stocks held at period end are classified as Level 1. Please refer to the Schedule of Investments for a more detailed categorization of common stocks.
 
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements.

         
20
       

 

 
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
The Fund held no investments or derivative financial instruments directly at either February 28, 2011 or February 28, 2010, whose fair value was categorized using Level 3 inputs.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, quarterly, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards, losses on wash sale transactions, and differing treatment of litigation proceeds received.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 37,472     $ 12,384  
                 
Total distributions
  $ 37,472     $ 12,384  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.

         
        21

 

 
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 750,486  
Undistributed net long-term capital gain
  $ 442,408  
         
Other Tax Attributes:
       
Capital loss carryforwards
  $ (1,491,707 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains, if any, to the extent permitted by the Code. As of February 28, 2011, the capital loss carryforwards disclosed below were permanently reduced by $244,044 due to share ownership activity. Utilization of the capital loss carryforwards, post-October capital losses and losses realized in the future, if any, subsequent to February 28, 2011 could be subject to further limitations imposed by the Code related to share ownership activity. The Fund’s capital loss carryforwards expire as follows:
 
         
February 28, 2017
  $ (1,278,606 )
February 28, 2018
    (213,101 )
         
Total
  $ (1,491,707 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 10,459,674     $ 2,937,467     $ (111,217 )   $ 2,826,250      
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are

         
22
       

 

 
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (Note 5).
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
Purchases and redemptions of Fund shares
For the year ended February 28, 2011, the premium on cash purchases and fee on cash redemptions of Fund shares were each 0.50% of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by the Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. Such fees are recorded as a component of the Fund’s net share transactions. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of the Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund’s shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the

         
        23

 

 
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Fund’s shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder’s securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of the Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs. Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with the Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund’s investments.
 
• Smaller Company Risk — The securities of small- and mid-cap companies often are less widely held and trade less frequently and in lesser quantities, and their market prices often fluctuate more, than the securities of companies with larger market capitalizations.
 
• Market Risk — Growth Securities — Because growth securities typically trade at higher multiples of current earnings than other securities, their market values are often more sensitive than other securities to changes in future earnings expectations.
 
Other principal risks of an investment in the Fund include Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, and credit and counterparty risk); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund’s securities); Liquidity Risk (difficulty in selling Fund investments at desirable prices and/or increased likelihood of honoring redemption requests in-kind); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on

         
24
       

 

 
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by “equitizing” its cash balances using futures contracts or other types of derivatives.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero).
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, indices and markets without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically “sell” a portion of the Fund’s portfolio) in combination with a long futures contract on another index (to synthetically “buy” exposure to that index).
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may

         
        25

 

 
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral, that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.

         
26
       

 

 
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. During the year ended February 28, 2011, the Fund used futures contracts to maintain the diversity and liquidity of the portfolio. The Fund had no futures contracts outstanding at the end of the period.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to

         
        27

 

 
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.

         
28
       

 

 
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type

         
        29

 

 
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended
February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Futures contracts
  $      —     $      —     $      —     $ 7,248     $      —     $ 7,248  
                                                 
Total
  $ —     $ —     $ —     $ 7,248     $ —     $ 7,248  
                                                 
Change in Unrealized Appreciation (Depreciation) on:
                                               
Futures contracts
  $ —     $ —     $ —     $ (996 )   $ —     $ (996 )
                                                 
Total
  $ —     $ —     $ —     $ (996 )   $ —     $ (996 )
                                                 
 
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
 
The volume of derivative activity, based on absolute values (futures contracts) outstanding at each month-end, was as follows for the year ended February 28, 2011:
 
         
    Futures contracts
 
Average amount outstanding
  $ 36,880  

         
30
       

 

 
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.31% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.31% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition to the contractual expense reimbursement described above, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund’s Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund’s Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $224 and $36, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.

         
        31

 

 
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
             
Indirect Net Expenses
 		           
(excluding shareholder
            
service fees and
     Indirect Shareholder
      
interest expense)     Service Fees     Total Indirect Expenses
< 0.001%
    0.000%     < 0.001%
             
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 aggregated $14,664,605 and $14,488,112, respectively.
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 57.60% of the outstanding shares of the Fund were held by one shareholder. On that date, no other shareholders owned more than 10% of the outstanding shares of the Fund.
 
As of February 28, 2011, 0.19% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and 96.89% of the Fund’s shares were held by accounts for which the Manager had investment discretion.

         
32
       

 

 
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    11,204     $ 166,147       530,981     $ 5,902,580  
Shares issued to shareholders in
reinvestment of distributions
    2,617       34,039       982       9,393  
Shares repurchased
    (62,535 )     (783,757 )     (164,620 )     (1,675,681 )
Purchase premiums
    —       835       —       26,226  
Redemption fees
    —       3,919       —       4,854  
                                 
Net increase (decrease)
    (48,714 )   $ (578,817 )     367,343     $ 4,267,372  
                                 
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                 
    Value,
               Distributions
    
    beginning of
       Sales
   Dividend
   of Realized
   Value, end
Affiliate   period   Purchases   Proceeds   Income   Gains   of period
 
GMO U.S. Treasury Fund
  $ —     $ 488,027     $ 386,997     $ 77     $ 9     $ 101,000  
                                                 
Totals
  $ —     $ 488,027     $ 386,997     $ 77     $ 9     $ 101,000  
                                                 
 
11. Subsequent events
 
Subsequent to February 28, 2011, the Fund received redemption requests in the amount of $8,185,675.

         
        33

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO U.S. Small/Mid Cap Growth Fund:
 
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. Small/Mid Cap Growth Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
34
       

 

GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including management fees, shareholder service fees and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
        35

 

 
GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
  Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.46 %   $ 1,000.00     $ 1,441.00     $ 2.78  
2) Hypothetical
    0.46 %   $ 1,000.00     $ 1,022.51     $ 2.31  
                                 
 
            * Expenses are calculated using the Class’s annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
36
       

 

GMO U.S. Small/Mid Cap Growth Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
For taxable, non-corporate shareholders, 100.00% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 represents qualified dividend income subject to the 15% rate category.
 
For corporate shareholders, 100.00% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 qualified for the dividends-received deduction.

         
        37

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with the
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
38        

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with the
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee;
President and
Chief Executive
Officer of
the Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP
(prior to
October 2005). 		    63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
        39

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and
Chief Financial
Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since
November 2006; Clerk since March 2006. 		  Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
40        

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money
Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        41

 

 
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Quantitative Equity Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
GMO U.S. Small/Mid Cap Value Fund returned +27.4% for the fiscal year ended February 28, 2011, as compared with +29.5% for the Russell 2500 Value Index.
 
Stock selection added to returns relative to the Russell 2500 Value Index. Selections in Consumer Discretionary, Consumer Staples, and Financials added to relative returns while selections in Health Care, Information Technology, and Materials detracted. Overweight positions in Fossil, TRW Automotive Holdings, and Herbalife added to relative returns. Overweight positions in Genworth Financial, Amedisys, and Seagate Technology detracted from relative returns.
 
Sector selection detracted from returns relative to the Russell 2500 Value Index. Sector weightings negatively impacting relative performance included an underweight in Energy and overweight positions in Consumer Staples and Consumer Discretionary. Sector weightings positively impacting relative performance included underweight positions in Financials and Utilities.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice. References to specific securities are not recommendations of such securities and may not be representative of any GMO portfolio’s current or future investments.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO U.S. Small/Mid Cap Value Fund Class III Shares and the Russell 2500 Value Index
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Each performance figure assumes a purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of .50% on the purchase and .50% on the redemption. Transaction fees are retained by the Fund to cover trading costs. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. All information is unaudited.
 
 
† The Fund is the successor to GMO Small/Mid Cap Value Fund, therefore, performance for the periods prior to September 16, 2005 is that of GMO Small/Mid Cap Value Fund.
The Russell 2500 Value® Index is a trademark/service mark of the Frank Russell Company. Russelltm is a trademark of the Frank Russell Company.

 

GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary   % of Total Net Assets  
Common Stocks
    98.5 %
Mutual Funds
    1.4  
Short-Term Investments
    0.4  
Rights and Warrants
    0.1  
Other
    (0.4 )
         
      100.0 %
         
 
         
Industry Group Summary   % of Equity Investments*  
Insurance
    12.3 %
Retailing
    10.6  
Health Care Equipment & Services
    9.9  
Capital Goods
    9.0  
Consumer Durables & Apparel
    6.8  
Software & Services
    6.7  
Materials
    6.1  
Technology Hardware & Equipment
    4.2  
Household & Personal Products
    3.8  
Pharmaceuticals, Biotechnology & Life Sciences
    3.8  
Commercial & Professional Services
    3.8  
Energy
    3.5  
Food, Beverage & Tobacco
    3.5  
Automobiles & Components
    3.1  
Consumer Services
    2.5  
Food & Staples Retailing
    2.4  
Diversified Financials
    2.2  
Telecommunication Services
    1.4  
Media
    1.3  
Real Estate
    1.1  
Utilities
    0.9  
Transportation
    0.4  
Semiconductors & Semiconductor Equipment
    0.4  
Banks
    0.3  
         
      100.0 %
         
 
* Equity investments may consist of common stocks and other stock-related securities, such as preferred stocks. This table excludes exposure to derivative contracts, if any. For a summary of derivative contract exposure, if any, see the summary of outstanding financial instruments section of the Schedule of Investments.

         
        1

 

GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            COMMON STOCKS — 98.5%        
                     
            Automobiles & Components — 3.1%        
      2,200     Autoliv, Inc.      164,758  
      500     Dorman Products, Inc. *     17,335  
      730     Lear Corp. *     77,234  
      2,500     TRW Automotive Holdings Corp. *     142,000  
                     
            Total Automobiles & Components     401,327  
                     
                     
            Banks — 0.2%        
      400     1st Source Corp.      7,828  
      200     Federal Agricultural Mortgage Corp.-Class C     3,986  
      600     MainSource Financial Group, Inc.      5,964  
      100     Northrim BanCorp, Inc.      1,857  
      300     Republic Bancorp, Inc.-Class A     5,142  
      300     Washington Trust Bancorp, Inc.      6,894  
                     
            Total Banks     31,671  
                     
                     
            Capital Goods — 8.9%        
      600     A.O. Smith Corp.      24,240  
      600     Aceto Corp.      4,758  
      200     Alamo Group, Inc.      5,828  
      400     Alliant Techsystems, Inc.      28,868  
      2,000     Ametek, Inc.      83,900  
      1,300     Applied Industrial Technologies, Inc.      41,652  
      600     Ceradyne, Inc. *     22,938  
      1,500     Crane Co.      70,860  
      400     DXP Enterprises, Inc. *     8,504  
      500     EnPro Industries, Inc. *     19,840  
      800     Esterline Technologies Corp. *     57,256  
      1,500     Hubbell, Inc.-Class B     101,265  
      1,400     Idex Corp.      57,736  
      2,200     KBR, Inc.      72,160  
      400     Middleby Corp. *     35,868  
      250     NACCO Industries, Inc.-Class A     31,138  
      300     NN, Inc. *     3,675  

         
2
  See accompanying notes to the financial statements.    

 

 
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Capital Goods — continued        
      100     Preformed Line Products Co.      7,098  
      1,000     Roper Industries, Inc.      84,130  
      500     Sauer-Danfoss, Inc. *     15,265  
      41     Seaboard Corp.      95,128  
      300     Standex International Corp.      10,281  
      800     Teledyne Technologies, Inc. *     41,896  
      300     Titan Machinery, Inc. *     7,719  
      600     Toro Co. (The)     37,440  
      700     Trimas Corp. *     14,399  
      500     Triumph Group, Inc.      43,295  
      600     Tutor Perini Corp.      14,292  
      200     Twin Disc, Inc.      6,472  
      900     United Rentals, Inc. *     27,882  
      1,400     WESCO International, Inc. *     81,508  
                     
            Total Capital Goods     1,157,291  
                     
                     
            Commercial & Professional Services — 3.7%        
      700     ABM Industries, Inc.      18,641  
      700     Administaff, Inc.      20,951  
      1,900     Avery Dennison Corp.      75,848  
      2,200     Cintas Corp.      61,864  
      800     Corporate Executive Board Co. (The)     32,056  
      1,700     Deluxe Corp.      43,435  
      500     Ennis, Inc.      8,125  
      300     G&K Services Inc.-Class A     9,726  
      1,000     Kelly Services, Inc.-Class A *     21,020  
      1,100     Manpower, Inc.      69,850  
      300     Multi-Color Corp.      5,565  
      400     Schawk, Inc.      7,228  
      900     SFN Group, Inc. *     12,447  
      1,300     Towers Watson & Co.-Class A     76,440  
      400     United Stationers, Inc. *     26,968  
                     
            Total Commercial & Professional Services     490,164  
                     

         
    See accompanying notes to the financial statements.   3

 

 
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Consumer Durables & Apparel — 6.7%        
      200     Blyth, Inc.      6,874  
      900     Columbia Sportswear Co.      56,511  
      1,170     Deckers Outdoor Corp. *     103,217  
      1,700     Fossil, Inc. *     130,458  
      500     G-III Apparel Group Ltd. *     19,660  
      2,500     Hasbro, Inc.      112,250  
      500     Helen of Troy Ltd. *     13,965  
      2,000     Iconix Brand Group, Inc. *     44,200  
      1,000     Jakks Pacific, Inc. *     18,640  
      600     Maidenform Brands, Inc. *     16,284  
      4,400     Newell Rubbermaid, Inc.      85,096  
      600     Oxford Industries, Inc.      14,472  
      500     Perry Ellis International, Inc. *     14,520  
      1,100     Phillips-Van Heusen Corp.      66,011  
      700     Polaris Industries, Inc.      52,815  
      4,600     Quiksilver, Inc. *     19,826  
      700     RC2 Corp. *     15,197  
      400     Steven Madden Ltd. *     17,256  
      800     Timberland Co.-Class A *     29,552  
      1,100     Wolverine World Wide, Inc.      40,436  
                     
            Total Consumer Durables & Apparel     877,240  
                     
                     
            Consumer Services — 2.4%        
      400     AFC Enterprises, Inc. *     5,916  
      1,300     Brinker International, Inc.      30,732  
      800     Cracker Barrel Old Country Store, Inc.      39,872  
      600     DineEquity, Inc. *     34,326  
      1,700     Domino’s Pizza, Inc. *     28,679  
      400     Mac-Gray Corp.      6,384  
      600     Papa John’s International, Inc. *     17,508  
      300     Pre-Paid Legal Services, Inc. *     19,782  
      1,100     Regis Corp.      19,283  

         
4
  See accompanying notes to the financial statements.    

 

 
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Consumer Services — continued        
      1,600     Ruby Tuesday, Inc. *     21,376  
      1,500     Weight Watchers International, Inc.      91,695  
                     
            Total Consumer Services     315,553  
                     
                     
            Diversified Financials — 2.2%        
      10,900     American Capital Ltd. *     101,806  
      900     BlackRock Kelso Capital Corp.      11,187  
      500     Encore Capital Group, Inc. *     13,615  
      1,600     EZCORP, Inc.-Class A *     45,888  
      700     First Cash Financial Services, Inc. *     22,918  
      700     International Assets Holding Corp. *     16,947  
      1,500     Nelnet, Inc.-Class A     33,495  
      1,500     Primus Guaranty Ltd. *     7,575  
      500     World Acceptance Corp. *     29,905  
                     
            Total Diversified Financials     283,336  
                     
                     
            Energy — 3.5%        
      1,700     Cloud Peak Energy, Inc. *     34,850  
      1,300     Complete Production Services, Inc. *     37,453  
      1,400     Oil States International, Inc. *     101,906  
      370     SEACOR Holdings, Inc.      35,065  
      3,100     Sunoco, Inc.      129,766  
      2,500     Western Refining, Inc. *     40,675  
      1,800     World Fuel Services Corp.      74,592  
                     
            Total Energy     454,307  
                     
                     
            Food & Staples Retailing — 2.4%        
      1,500     BJ’s Wholesale Club, Inc. *     72,630  
      900     Casey’s General Stores, Inc.      36,963  
      500     Ingles Markets, Inc.-Class A     9,615  
      400     Nash Finch Co.      16,148  
      700     Pantry, Inc. *     11,032  
      1,600     Ruddick Corp.      58,720  
      400     Spartan Stores, Inc.      6,028  

         
    See accompanying notes to the financial statements.   5

 

 
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Food & Staples Retailing — continued        
      400     Susser Holdings Corp. *     5,540  
      1,200     United Natural Foods, Inc. *     50,940  
      400     Village Super Market, Inc.      12,016  
      800     Weis Markets, Inc.      31,736  
                     
            Total Food & Staples Retailing     311,368  
                     
                     
            Food, Beverage & Tobacco — 3.4%        
      100     Coca-Cola Bottling Co.      5,770  
      5,000     Constellation Brands, Inc.-Class A *     101,600  
      1,700     Corn Products International, Inc.      82,994  
      6,300     Del Monte Foods Co.      119,259  
      1,400     Flowers Foods, Inc.      37,240  
      1,000     Fresh Del Monte Produce, Inc.      28,580  
      1,100     Hain Celestial Group (The), Inc. *     32,802  
      500     Hansen Natural Corp. *     28,775  
      900     National Beverage Corp.      11,421  
                     
            Total Food, Beverage & Tobacco     448,441  
                     
                     
            Health Care Equipment & Services — 9.7%        
      100     Almost Family, Inc. *     3,900  
      1,900     AMERIGROUP Corp. *     108,965  
      1,800     Centene Corp. *     54,846  
      600     Chemed Corp.      39,264  
      400     Conmed Corp. *     10,592  
      1,100     Continucare Corp. *     6,226  
      1,700     Cooper Cos (The), Inc.      105,094  
      5,200     Coventry Health Care, Inc. *     157,040  
      300     Ensign Group, Inc. (The)     9,123  
      300     Greatbatch, Inc. *     7,464  
      3,300     Health Net, Inc. *     97,086  
      2,200     Healthspring, Inc. *     82,808  
      2,100     Hill-Rom Holdings, Inc.      79,947  
      200     ICU Medical, Inc. *     8,398  
      600     Integra LifeSciences Holdings Corp. *     30,090  

         
6
  See accompanying notes to the financial statements.    

 

 
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Health Care Equipment & Services — continued        
      600     Invacare Corp.      17,742  
      1,000     Kinetic Concepts, Inc. *     48,970  
      900     LifePoint Hospitals, Inc. *     35,082  
      1,300     Lincare Holdings, Inc.      38,142  
      1,000     Magellan Health Services, Inc. *     47,980  
      800     Mednax, Inc. *     51,944  
      700     MedQuist, Inc.      6,265  
      1,300     Metropolitan Health Networks, Inc. *     6,461  
      900     Molina Healthcare, Inc. *     31,527  
      200     MWI Veterinary Supply, Inc. *     13,844  
      1,100     Owens & Minor, Inc.      34,320  
      500     Providence Service Corp. (The) *     8,205  
      1,200     STERIS Corp.      40,620  
      2,500     Universal American Financial Corp.      51,450  
      300     US Physical Therapy, Inc. *     5,931  
      600     WellCare Health Plans, Inc. *     22,530  
      200     Young Innovations, Inc.      6,334  
                     
            Total Health Care Equipment & Services     1,268,190  
                     
                     
            Household & Personal Products — 3.8%        
      800     Central Garden & Pet Co.-Class A *     7,368  
      900     Elizabeth Arden, Inc. *     26,181  
      2,400     Energizer Holdings, Inc. *     160,392  
      2,300     Herbalife Ltd.      180,343  
      1,000     Inter Parfums, Inc.      18,070  
      400     Nu Skin Enterprises, Inc.-Class A     12,768  
      200     Nutraceutical International Corp. *     2,960  
      1,600     Prestige Brands Holdings, Inc. *     17,632  
      700     Schiff Nutrition International, Inc.      5,999  
      900     Spectrum Brands Holdings, Inc. *     25,830  
      600     USANA Health Sciences, Inc. *     20,892  
      400     WD-40 Co.      16,264  
                     
            Total Household & Personal Products     494,699  
                     

         
    See accompanying notes to the financial statements.   7

 

 
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Insurance — 12.0%        
      1,400     Allied World Assurance Co Holdings Ltd.      86,394  
      1,700     American Equity Investment Life Holding Co.      22,440  
      2,700     American Financial Group, Inc.      93,501  
      2,800     American International Group, Inc. *     103,768  
      300     American Safety Insurance Holdings Ltd. *     6,405  
      1,600     AmTrust Financial Services, Inc.      30,768  
      800     Arch Capital Group Ltd. *     72,400  
      400     Argo Group International Holdings Ltd.      15,236  
      1,500     Aspen Insurance Holdings Ltd.      44,325  
      3,100     Assurant, Inc.      125,953  
      2,300     Axis Capital Holdings Ltd.      83,536  
      2,600     Brown & Brown, Inc.      67,964  
      1,100     CNA Surety Corp. *     27,808  
      1,400     Endurance Specialty Holdings Ltd.      69,426  
      300     Enstar Group Ltd. *     25,158  
      900     Erie Indemnity Co.-Class A     62,856  
      800     FBL Financial Group, Inc.-Class A     24,992  
      200     FPIC Insurance Group, Inc. *     7,532  
      1,100     Horace Mann Educators Corp.      18,645  
      300     Infinity Property & Casualty Corp.      18,213  
      1,500     Meadowbrook Insurance Group, Inc.      15,240  
      1,400     Montpelier Re Holdings Ltd.      28,238  
      1,100     National Financial Partners Corp. *     15,554  
      1,000     Platinum Underwriters Holdings Ltd.      41,700  
      2,300     Protective Life Corp.      65,389  
      1,500     RenaissanceRe Holdings Ltd.      100,530  
      400     Safety Insurance Group, Inc.      19,248  
      2,600     Torchmark Corp.      169,650  
      600     Tower Group, Inc.      16,308  
      3,000     Validus Holdings Ltd.      92,850  
                     
            Total Insurance     1,572,027  
                     

         
8
  See accompanying notes to the financial statements.    

 

 
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Materials — 6.0%        
      900     AptarGroup, Inc.      43,353  
      3,800     Ball Corp.      137,180  
      1,100     Eastman Chemical Co.      102,751  
      300     Hawkins, Inc.      11,481  
      500     Innophos Holdings, Inc.      21,415  
      600     Innospec, Inc. *     16,086  
      1,800     International Flavors & Fragrances, Inc.      102,510  
      1,000     KapStone Paper and Packaging Corp. *     17,150  
      500     Kraton Performance Polymers, Inc. *     17,150  
      540     Lubrizol Corp.      58,790  
      200     Quaker Chemical Corp.      7,746  
      1,000     Scotts Miracle-Gro Co. (The)-Class A     56,170  
      1,000     Sensient Technologies Corp.      33,380  
      2,000     Silgan Holdings, Inc.      72,960  
      200     TPC Group, Inc. *     5,810  
      2,000     Valspar Corp.      76,040  
                     
            Total Materials     779,972  
                     
                     
            Media — 1.3%        
      200     Arbitron, Inc.      7,962  
      900     Charter Communications, Inc. *     41,193  
      1,600     Journal Communications, Inc.-Class A *     9,824  
      600     Liberty Media Corp.-Starz-Class A *     42,120  
      1,200     Meredith Corp.      42,312  
      2,200     Sinclair Broadcast Group, Inc.      28,468  
                     
            Total Media     171,879  
                     
                     
            Pharmaceuticals, Biotechnology & Life Sciences — 3.8%        
      700     Cephalon, Inc. *     39,417  
      4,400     Endo Pharmaceuticals Holdings, Inc. *     156,288  
      1,400     Medicis Pharmaceutical Corp.-Class A     44,926  
      900     Par Pharmaceutical Cos., Inc. *     27,792  
      2,300     Pharmaceutical Product Development, Inc.      63,181  

         
    See accompanying notes to the financial statements.   9

 

 
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Pharmaceuticals, Biotechnology & Life Sciences — continued        
      2,600     Viropharma, Inc. *     46,618  
      2,000     Watson Pharmaceuticals, Inc. *     111,980  
                     
            Total Pharmaceuticals, Biotechnology & Life Sciences     490,202  
                     
                     
            Real Estate — 1.1%        
      200     Agree Realty Corp. REIT     5,106  
      2,200     American Capital Agency Corp. REIT     64,790  
      1,200     Ashford Hospitality Trust, Inc. REIT *     12,372  
      1,400     Hatteras Financial Corp. REIT     41,412  
      800     Newcastle Investment Corp. REIT *     6,752  
      300     Pennymac Mortgage Investment Trust REIT     5,655  
      400     Walter Investment Management Corp. REIT     7,836  
                     
            Total Real Estate     143,923  
                     
                     
            Retailing — 10.5%        
      1,800     Abercrombie & Fitch Co.-Class A     103,266  
      1,600     Advance Auto Parts, Inc.      100,288  
      400     America’s Car-Mart, Inc. *     9,912  
      1,100     Asbury Automotive Group, Inc. *     20,295  
      3,100     AutoNation, Inc. *     104,284  
      1,900     Cabela’s, Inc. *     51,547  
      1,000     Cato Corp. (The)-Class A     24,250  
      400     Childrens Place Retail Stores (The), Inc. *     18,280  
      100     Core-Mark Holding Co., Inc. *     3,395  
      100     Destination Maternity Corp.      4,510  
      2,000     Dillard’s, Inc.-Class A     84,680  
      800     Family Dollar Stores, Inc.      40,064  
      3,300     Foot Locker, Inc.      65,571  
      800     Fred’s, Inc.-Class A     11,024  
      1,700     GameStop Corp.-Class A *     33,915  
      500     Genesco, Inc. *     19,760  
      600     Group 1 Automotive, Inc.      25,350  
      600     Hibbett Sports, Inc. *     18,846  
      300     Jo-Ann Stores, Inc. *     18,210  

         
10
  See accompanying notes to the financial statements.    

 

 
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Retailing — continued        
      1,000     Jos. A. Bank Clothiers, Inc. *     46,110  
      500     Lithia Motors, Inc.-Class A     7,570  
      1,300     Men’s Wearhouse (The), Inc.      34,710  
      3,900     PetSmart, Inc.      159,393  
      2,400     Rent-A-Center, Inc.      79,344  
      800     Retail Ventures, Inc. *     14,000  
      3,500     Sally Beauty Holdings, Inc. *     45,395  
      300     Shoe Carnival, Inc. *     7,782  
      800     Sonic Automotive, Inc.      11,504  
      1,800     Tractor Supply Co.      93,726  
      1,500     Tuesday Morning Corp. *     7,005  
      600     West Marine, Inc. *     6,258  
      2,700     Williams-Sonoma, Inc.      97,443  
                     
            Total Retailing     1,367,687  
                     
                     
            Semiconductors & Semiconductor Equipment — 0.4%        
      3,400     GT Solar International, Inc. *     36,346  
      2,200     Silicon Image, Inc. *     17,688  
                     
            Total Semiconductors & Semiconductor Equipment     54,034  
                     
                     
            Software & Services — 6.6%        
      1,500     AOL, Inc. *     31,305  
      800     CACI International, Inc.-Class A *     47,456  
      1,200     CIBER, Inc. *     5,604  
      5,700     Compuware Corp. *     64,182  
      600     CSG Systems International, Inc. *     11,730  
      700     DST Systems, Inc.      35,700  
      3,400     EarthLink, Inc.      27,982  
      300     ePlus, Inc. *     8,526  
      1,100     Fair Isaac Corp.      30,745  
      1,100     j2 Global Communications, Inc. *     31,999  
      1,300     Jack Henry & Associates, Inc.      41,483  
      200     Manhattan Associates, Inc. *     6,440  
      1,400     Mentor Graphics Corp. *     22,260  

         
    See accompanying notes to the financial statements.   11

 

 
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
            Software & Services — continued        
      1,300     Parametric Technology Corp. *     30,810  
      2,300     Progress Software Corp. *     67,528  
      3,100     Quest Software, Inc. *     83,049  
      900     Radiant Systems, Inc. *     15,435  
      500     Smith Micro Software, Inc. *     4,685  
      1,100     SRA International, Inc.-Class A *     29,953  
      400     Stamps.com, Inc.      5,376  
      4,200     Synopsys, Inc. *     116,424  
      600     Syntel, Inc.      31,590  
      3,500     TIBCO Software, Inc. *     86,170  
      1,300     United Online, Inc.      7,813  
      1,000     Valueclick, Inc. *     14,930  
                     
            Total Software & Services     859,175  
                     
                     
            Technology Hardware & Equipment — 4.2%        
      800     ADTRAN, Inc.      36,384  
      700     Anixter International, Inc.      50,134  
      1,500     Arrow Electronics, Inc. *     58,800  
      600     Black Box Corp.      22,914  
      600     Cogo Group, Inc. *     4,848  
      300     EMS Technologies, Inc. *     5,832  
      3,700     Ingram Micro, Inc.-Class A *     73,741  
      1,300     Insight Enterprises, Inc. *     23,777  
      2,700     Lexmark International, Inc. *     101,331  
      400     Measurement Specialties, Inc. *     12,376  
      400     PC Connection, Inc. *     3,400  
      400     Scansource, Inc. *     14,612  
      500     SYNNEX Corp. *     17,640  
      1,100     Tech Data Corp. *     54,538  
      1,700     Zebra Technologies Corp. *     63,444  
                     
            Total Technology Hardware & Equipment     543,771  
                     

         
12
  See accompanying notes to the financial statements.    

 

 
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            Telecommunication Services — 1.3%        
      3,500     CenturyTel, Inc.      144,130  
      500     IDT Corp.-Class B     13,015  
      600     USA Mobility, Inc.      8,952  
      2,300     Vonage Holdings Corp. *     10,166  
                     
            Total Telecommunication Services     176,263  
                     
                     
            Transportation — 0.4%        
      1,900     Air Transport Services Group, Inc. *     14,915  
      1,000     Pacer International, Inc. *     5,430  
      600     Republic Airways Holdings, Inc. *     3,804  
      1,600     UTi Worldwide, Inc.      31,840  
                     
            Total Transportation     55,989  
                     
                     
            Utilities — 0.9%        
      3,700     UGI Corp.      117,993  
                     
                     
            TOTAL COMMON STOCKS (COST $9,973,590)     12,866,502  
                     
                     
            MUTUAL FUNDS — 1.4%        
                     
            Affiliated Issuers — 1.4%        
      7,400     GMO U.S. Treasury Fund     185,000  
                     
                     
            TOTAL MUTUAL FUNDS (COST $185,000)     185,000  
                     
                     
            RIGHTS AND WARRANTS — 0.1%        
                     
            Insurance — 0.1%        
      1,495     American International Group, Inc., Warrants, Strike 45.00, Expires 01/19/21 *     17,342  
                     
                     
            TOTAL RIGHTS AND WARRANTS (COST $25,415)     17,342  
                     

         
    See accompanying notes to the financial statements.   13

 

 
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Shares     Description   Value ($)  
                     
            SHORT-TERM INVESTMENTS — 0.4%        
                     
            Money Market Funds — 0.4%        
      48,372     State Street Institutional Treasury Money Market Fund-Institutional Class     48,372  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $48,372)     48,372  
                     
                     
            TOTAL INVESTMENTS — 100.4%
(Cost $10,232,377) 		    13,117,216  
            Other Assets and Liabilities (net) — (0.4%)     (57,548 )
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 13,059,668  
                     
 
Notes to Schedule of Investments:
 
REIT - Real Estate Investment Trust
* Non-income producing security.

         
14
  See accompanying notes to the financial statements.    

 

GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $10,047,377) (Note 2)
  $ 12,932,216  
Investments in affiliated issuers, at value (cost $185,000) (Notes 2 and 10)
    185,000  
Receivable for Fund shares sold
    1,881  
Dividends receivable
    6,888  
Receivable for expenses reimbursed by Manager (Note 5)
    9,492  
         
Total assets
    13,135,477  
         
         
Liabilities:
       
Payable to affiliate for (Note 5):
       
Management fee
    3,086  
Shareholder service fee
    1,493  
Trustees and Trust Officers or agents unaffiliated with the Manager
    28  
Accrued expenses
    71,202  
         
Total liabilities
    75,809  
         
Net assets
  $ 13,059,668  
         
Net assets consist of:
       
Paid-in capital
  $ 21,206,995  
Accumulated undistributed net investment income
    37,370  
Accumulated net realized loss
    (11,069,536 )
Net unrealized appreciation
    2,884,839  
         
    $ 13,059,668  
         
Net assets attributable to:
       
Class III shares
  $ 13,059,668  
         
Shares outstanding:
       
Class III
    1,585,446  
         
Net asset value per share:
       
Class III
  $ 8.24  
         

         
    See accompanying notes to the financial statements.   15

 

GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends
  $ 174,044  
Dividends from affiliated issuers (Note 10)
    141  
Interest
    128  
         
Total investment income
    174,313  
         
Expenses:
       
Management fee (Note 5)
    36,411  
Shareholder service fee – Class III (Note 5)
    17,618  
Audit and tax fees
    57,455  
Custodian, fund accounting agent and transfer agent fees
    27,245  
Legal fees
    373  
Registration fees
    368  
Trustees fees and related expenses (Note 5)
    232  
Miscellaneous
    9,735  
         
Total expenses
    149,437  
Fees and expenses reimbursed by Manager (Note 5)
    (95,131 )
         
Net expenses
    54,306  
         
Net investment income (loss)
    120,007  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in unaffiliated issuers
    1,887,260  
Investments in affiliated issuers
    (33 )
Realized gains distributions from affiliated issuers (Note 10)
    11  
Futures contracts
    7,330  
         
Net realized gain (loss)
    1,894,568  
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in unaffiliated issuers
    907,536  
         
Net realized and unrealized gain (loss)
    2,802,104  
         
Net increase (decrease) in net assets resulting from operations
  $ 2,922,111  
         

         
16
  See accompanying notes to the financial statements.    

 

GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 120,007     $ 190,253  
Net realized gain (loss)
    1,894,568       (3,946,989 )
Change in net unrealized appreciation (depreciation)
    907,536       9,830,454  
                 
                 
Net increase (decrease) in net assets from operations
    2,922,111       6,073,718  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (114,599 )     (214,080 )
                 
Net share transactions (Note 9):
               
Class III
    (998,002 )     (7,776,760 )
Purchase premiums and redemption fees (Notes 2 and 9):
               
Class III
    6,265       41,995  
                 
Total increase (decrease) in net assets resulting from net share transactions, purchase premiums and redemption fees
    (991,737 )     (7,734,765 )
                 
                 
Total increase (decrease) in net assets
    1,815,775       (1,875,127 )
                 
Net assets:
               
Beginning of period
    11,243,893       13,119,020  
                 
End of period (including accumulated undistributed net investment income of $37,370 and $1,983, respectively)
  $ 13,059,668     $ 11,243,893  
                 

         
    See accompanying notes to the financial statements.   17

 

GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 6.53     $ 4.44     $ 7.36     $ 10.01     $ 10.52  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.07       0.07       0.10       0.13       0.15  
Net realized and unrealized gain (loss)
    1.71       2.10       (2.92 )     (1.87 )     0.68  
                                         
                                         
Total from investment operations
    1.78       2.17       (2.82 )     (1.74 )     0.83  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.07 )     (0.08 )     (0.10 )     (0.13 )     (0.20 )
From net realized gains
    —       —       —       (0.78 )     (1.14 )
                                         
                                         
Total distributions
    (0.07 )     (0.08 )     (0.10 )     (0.91 )     (1.34 )
                                         
                                         
Net asset value, end of period
  $ 8.24     $ 6.53     $ 4.44     $ 7.36     $ 10.01  
                                         
                                         
Total Return(a)
    27.43 %     49.15 %     (38.76 )%     (18.73 )%     8.71 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 13,060     $ 11,244     $ 13,119     $ 35,230     $ 58,452  
Net expenses to average daily net assets
    0.46 %(b)     0.46 %     0.46 %     0.46 %     0.46 %
Net investment income (loss) to average daily net assets
    1.02 %     1.27 %     1.46 %     1.44 %     1.46 %
Portfolio turnover rate
    106 %     175 %     73 %     63 %     79 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.81 %     0.65 %     0.43 %     0.19 %     0.22 %
Purchase premiums and redemption fees consisted of the following per share amounts (Note 2):†
  $ 0.00 (c)   $ 0.02     $ 0.02     $ 0.01     $ 0.02  
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(b) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(c) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.

         
18
  See accompanying notes to the financial statements.    

 

GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO U.S. Small/Mid Cap Value Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund’s investment objective is long-term capital growth. The Manager seeks to achieve the Fund’s investment objective by investing in equities or groups of equities that the Manager believes will provide higher returns than the Russell 2500 Value Index. The Manager uses active investment management methods, which means that equities are bought and sold according to the Manager’s evaluation of companies’ published financial information, securities’ prices, equity and bond markets, and the overall economy.
 
In selecting equities for the Fund, the Manager may use a combination of investment methods to identify equities that the Manager believes present positive return potential relative to other equities. Some of these methods evaluate individual equities or a group of equities based on the ratio of their price relative to historical financial information and forecasted financial information provided by industry analysts. Historical financial information may include book value, cash flow and earnings. The Manager may compare these ratios to industry or market averages in order to assess the relative attractiveness of an equity. Other methods focus on evaluating patterns of price movement or volatility of an equity or group of equities relative to the Fund’s investment universe. The Manager also may adjust the Fund’s portfolio for factors such as position size, industry and sector exposure, and market capitalization.
 
As a substitute for direct investments in equities, the Manager may use exchange-traded and over-the-counter (“OTC”) derivatives. The Manager also may use derivatives: (i) in an attempt to reduce investment exposures (which may result in a reduction below zero); (ii) to effect transactions intended as substitutes for securities lending; and (iii) in an attempt to adjust elements of the Fund’s investment exposure. Derivatives used may include futures, options and swap contracts. In addition, the Fund may lend its portfolio securities.
 
The Fund typically invests directly and indirectly (e.g., through underlying funds or derivatives) in equities of U.S. companies that issue stocks included in the Russell 2500 Index, a U.S. stock index, and in companies with similar market capitalizations (“small-and mid-cap companies”). Under normal circumstances, the Fund invests directly and indirectly at least 80% of its assets in investments in small-and mid-cap companies tied economically to the U.S. For these purposes, such investments include direct and indirect (e.g., through underlying funds or derivatives) investments in U.S. companies that issue stocks included in the Russell 2500 Index, a U.S. stock index, and in companies with similar market

         
        19

 

 
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
capitalizations. The term “equities” refers to direct and indirect investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts.
 
For cash management purposes, the Fund may invest in unaffiliated money market funds and/or GMO U.S. Treasury Fund.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the OTC market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Shares of open-end investment companies are generally valued at their net asset value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. See Note 4 for a further discussion on valuation of derivative financial instruments.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure

         
20
       

 

 
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Common Stocks
  $ 12,866,502     $ —     $      —     $ 12,866,502  
Mutual Funds
    185,000       —       —       185,000  
Rights and Warrants
    —       17,342       —       17,342  
Short-Term Investments
    48,372       —       —       48,372  
                                 
Total Investments
    13,099,874       17,342       —       13,117,216  
                                 
Total
  $ 13,099,874     $ 17,342     $ —     $ 13,117,216  
                                 
 
All of the Fund’s common stocks held at period end are classified as Level 1. Please refer to the Schedule of Investments for a more detailed categorization of common stocks.
 
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements.

         
        21

 

 
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
The Fund held no investments or derivative financial instruments directly at either February 28, 2011 or February 28, 2010, whose fair value was categorized using Level 3 inputs.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, quarterly, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards, losses on wash sale transactions and differing treatment for litigation proceeds received.
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 114,599     $ 214,080  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.

         
22
       

 

 
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
As of February 28, 2011, the components of distributable earnings on a tax basis and other tax attributes consisted of the following:
 
         
Undistributed ordinary income (including any net short-term capital gain)
  $ 39,912  
         
Other Tax Attributes:
       
Capital loss carryforwards
  $ (11,012,313 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 28, 2017
  $ (4,305,159 )
February 28, 2018
    (6,707,154 )
         
Total
  $ (11,012,313 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 10,292,140     $ 2,903,474     $ (78,398 )   $ 2,825,076      
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the U.S. and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the

         
        23

 

 
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds (Note 5).
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
Purchases and redemptions of Fund shares
For the year ended February 28, 2011, the premium on cash purchases and fee on cash redemptions of Fund shares were each 0.50% of the amount invested or redeemed. Purchase premiums and redemption fees are paid to and retained by the Fund to help offset non-de minimis estimated portfolio transaction costs and other related costs (e.g., stamp duties and transfer fees) incurred by the Fund as a result of the purchase or redemption. Such fees are recorded as a component of the Fund’s net share transactions. The Fund may impose a new purchase premium and/or redemption fee, or modify or eliminate an existing fee, at any time. Purchase premiums are not charged on reinvestments of distributions. Redemption fees apply to all shares of the Fund regardless of how the shares were acquired (e.g., by direct purchase or by reinvestment of dividends or other distributions). If the Manager determines that any portion of a cash purchase or redemption, as applicable, is offset by a corresponding cash redemption or purchase occurring on the same day, it ordinarily will waive or reduce the purchase premium or redemption fee with respect to that portion. The Manager also may waive or reduce the purchase premium or redemption fee relating to a cash purchase or redemption of the Fund’s shares if the Fund will not incur transaction costs or will incur reduced transaction costs. The Manager will waive or reduce the purchase premium relating to the in-kind portion of a purchase of the Fund’s shares except to the extent of estimated or known transaction costs (e.g., stamp duties or transfer fees) incurred by the Fund in connection with the transfer of the purchasing shareholder’s securities to the Fund. In-kind redemptions are generally not subject to redemption fees except when they include a cash component. However, when a substantial portion of the Fund is being redeemed in-kind, the Fund may charge a redemption fee equal to known or estimated costs.

         
24
       

 

 
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Purchase premiums or redemption fees will not be waived for purchases and redemptions of Fund shares executed through brokers or agents, including, without limitation, intermediary platforms that are allowed pursuant to agreements with the Trust to transmit orders for purchases and redemptions to the Manager the day after those orders are received by the broker or agent.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund normally does not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund’s investments.
 
• Smaller Company Risk — The securities of small- and mid-cap companies often are less widely held and trade less frequently and in lesser quantities, and their market prices often fluctuate more, than the securities of companies with larger market capitalizations.
 
• Market Risk — Value Securities — The Fund purchases some equity investments at prices below what the Manager believes to be their fundamental value. The Fund runs the risk that the prices of these investments will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value.
 
Other principal risks of an investment in the Fund include Derivatives Risk (the value of derivatives may not correlate with the value of the relevant underlying assets, rates or indices; derivatives also present other Fund risks, including market risk, liquidity risk, and credit and counterparty risk); Credit and Counterparty Risk (risk of default of a derivatives counterparty or a borrower of the Fund’s securities); Liquidity Risk (difficulty in selling Fund investments at desirable prices and/or increased likelihood of honoring redemption requests in-kind); Leveraging Risk (increased risk of loss from use of derivatives and securities lending); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Fund of Funds Risk (risk that the underlying funds in which the Fund invests will not perform as expected or that the Fund will incur additional expenses as a result of such investments).

         
        25

 

 
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. For example, the Fund may use derivatives instead of investing directly in equity securities, including using equity derivatives to maintain equity exposure when it holds cash by “equitizing” its cash balances using futures contracts or other types of derivatives.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero).
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, indices and markets without actually having to sell existing investments or make new direct investments. For example, if the Fund holds a large proportion of stocks of companies in a particular sector and the Manager believes that stocks of companies in another sector will outperform those stocks, the Fund might use a short futures contract on an appropriate index (to synthetically “sell” a portion of the Fund’s portfolio) in combination with a long futures contract on another index (to synthetically “buy” exposure to that index).
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral, that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not

         
26
       

 

 
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash, U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is marked to market

         
        27

 

 
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
daily and an appropriate payable or receivable for the change in value (“variation margin”) is recorded by the Fund. The payable or receivable is settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. During the year ended February 28, 2011, the Fund used futures contracts to maintain the diversity and liquidity of the portfolio. The Fund had no futures contracts outstanding at the end of the period.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. The Fund had no purchased option contracts outstanding at the end of the period.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. The Fund had no written option contracts outstanding at the end of the period.
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in

         
28
       

 

 
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.

         
        29

 

 
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. The Fund had no swap agreements outstanding at the end of the period.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated

         
30
       

 

 
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. During the year ended February 28, 2011, the Fund held rights and warrants received as a result of a corporate action. Rights and warrants held by the Fund at the end of the period are listed in the Fund’s Schedule of Investments.
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of
February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Assets:
                                               
Investments, at value (rights and warrants)
  $      —     $      —     $      —     $ 17,342     $      —     $ 17,342  
                                                 
Total
  $ —     $ —     $ —     $ 17,342     $ —     $ 17,342  
                                                 
 
The Effect of Derivative Instruments on the Statement of Operations for the Year Ended February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Futures contracts
  $      —     $      —     $      —     $ 7,330     $      —     $ 7,330  
                                                 
Total
  $ —     $ —     $ —     $ 7,330     $ —     $ 7,330  
                                                 
Change in Unrealized Appreciation (Depreciation) on:
                                               
Investments (rights and warrants)
  $ —     $ —     $ —     $ (8,073 )   $ —     $ (8,073 )
                                                 
Total
  $ —     $ —     $ —     $ (8,073 )   $ —     $ (8,073 )
                                                 
 
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.

         
        31

 

 
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The volume of derivative activity, based on absolute values (futures contracts and rights and warrants) outstanding at each month-end, was as follows for the year ended February 28, 2011:
 
                 
    Futures
   Rights/
    contracts   Warrants
 
Average amount outstanding
  $ 18,819     $ 3,254  
 
5. Fees and other transactions with affiliates
 
GMO receives a management fee for the services it provides to the Fund. That fee is paid monthly at the annual rate of 0.31% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares.
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.31% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). In addition to the contractual expense reimbursement described above, the Manager has contractually agreed to reimburse the Fund for the amount of fees and expenses incurred indirectly by the Fund through its direct or indirect investment in U.S. Treasury Fund (excluding U.S. Treasury Fund’s Excluded Fund Fees and Expenses), subject to a maximum total reimbursement to the Fund of such fees and expenses equal to the Fund’s Expense Reimbursement Amount. These expense limitations will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ended February 28, 2011 was $232 and $40, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.

         
32
       

 

 
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
             
Indirect Net Expenses
 		           
(excluding shareholder
            
service fees and
     Indirect Shareholder
      
interest expense)     Service Fees     Total Indirect Expenses
< 0.001%
    0.000%     < 0.001%
             
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 aggregated $12,250,787 and $12,682,865, respectively.
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 56.06% of the outstanding shares of the Fund were held by one shareholder. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
 
As of February 28, 2011, 1.05% of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and 91.76% of the Fund’s shares were held by accounts for which the Manager had investment discretion.

         
        33

 

 
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    9,533     $ 74,379       44,718     $ 210,967  
Shares issued to shareholders in
reinvestment of distributions
    14,611       105,923       37,225       199,297  
Shares repurchased
    (161,695 )     (1,178,304 )     (1,310,616 )     (8,187,024 )
Purchase premiums
    —       374       —       1,060  
Redemption fees
    —       5,891       —       40,935  
                                 
Net increase (decrease)
    (137,551 )   $ (991,737 )     (1,228,673 )   $ (7,734,765 )
                                 
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                 
    Value,
               Distributions
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   period
 
GMO U.S. Treasury Fund
  $      —     $ 602,037     $ 417,004     $ 141     $ 11     $ 185,000  
                                                 
Totals
  $ —     $ 602,037     $ 417,004     $ 141     $ 11     $ 185,000  
                                                 
 
11. Subsequent events
 
Subsequent to February 28, 2011, the Fund received redemption requests in the amount of $7,715,573.

         
34
       

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO U.S. Small/Mid Cap Value Fund:
 
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. Small/Mid Cap Value Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
        35

 

GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including purchase premiums and redemption fees; and (2) ongoing costs, including management fees, shareholder service fees and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
36
       

 

 
GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.46 %   $ 1,000.00     $ 1,333.30     $ 2.66  
2) Hypothetical
    0.46 %   $ 1,000.00     $ 1,022.51     $ 2.31  
                                 
 
            * Expenses are calculated using the Class’s annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
        37

 

GMO U.S. Small/Mid Cap Value Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
For taxable, non-corporate shareholders, 100.00% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 represents qualified dividend income subject to the 15% rate category.
 
For corporate shareholders, 100.00% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 qualified for the dividends-received deduction.

         
38        

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
        39

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with the Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
     Other
Name and
   Position(s)
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Held with Trust   Time Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee;
President and
Chief Executive
Officer of the Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
40        

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        41

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money Laundering
Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
42        

 

 
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund has a policy with respect to disclosure of portfolio holdings under which it may also make available on GMO’s website at www.gmo.com a complete schedule of portfolio holdings.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus for the GMO Trust, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The GMO Trust prospectus can be obtained at www.gmo.com.
 

 

GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Asset Allocation Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
GMO World Opportunities Equity Allocation Fund returned +17.2% for the fiscal year ended February 28, 2011, as compared with +21.7% for the Fund’s benchmark, the MSCI World Index.
 
Underlying fund implementation was negative, detracting 4.6%, as GMO Quality Fund and GMO U.S. Core Equity Fund underperformed their respective benchmarks during the period.
 
Asset allocation added 0.1% to relative performance.
 
Because some of the securities and instruments held directly or indirectly by the Fund had positive fair value adjustments during the fiscal year (and the performance of indices are not fair valued), the Fund’s absolute and relative performance is better than it otherwise would have been.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice. References to specific securities are not recommendations of such securities and may not be representative of any GMO portfolio’s current or future investments.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO World Opportunities Equity Allocation Fund Class III Shares and the MSCI World Index
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, visit www.gmo.com. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as February 28, 2011. All information is unaudited.
 
 
MSCI data may not be reproduced or used for any other purpose. MSCI provides no warranties, has not prepared or approved this report, and has no liability hereunder.

 

GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary*   % of Total Net Assets  
Common Stocks
    96.4 %
Short-Term Investments
    2.2  
Preferred Stocks
    0.7  
Investment Funds
    0.1  
Futures Contracts
    0.0 Ù
Debt Obligations
    0.0 Ù
Rights and Warrants
    0.0 Ù
Forward Currency Contracts
    (0.0 )Ù
Swap Agreements
    (0.0 )Ù
Other
    0.6  
         
      100.0 %
         
 
         
Country / Region Summary**   % of Investments  
United States
    39.4 %
Japan
    12.7  
United Kingdom
    12.6  
France
    5.9  
Switzerland
    5.7  
Germany
    4.6  
Emerging***
    3.0  
Italy
    2.6  
Sweden
    2.5  
Singapore
    1.8  
Denmark
    1.3  
Netherlands
    1.3  
Canada
    1.1  
Hong Kong
    1.1  
Belgium
    0.8  
Spain
    0.8  
Australia
    0.7  
Finland
    0.6  
Austria
    0.3  
Greece
    0.3  
Ireland
    0.3  
Norway
    0.3  
Israel
    0.2  
New Zealand
    0.1  
Portugal
    0.0 Ù
         
      100.0 %
         

         
        1

 

 
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Investments Concentration Summary — (Continued)
February 28, 2011 (Unaudited)
 
* The table above incorporates aggregate indirect asset class exposure associated with investments in other funds of GMO Trust (“underlying funds”).
** The table above shows indirect country exposure associated with investments in the underlying funds. The table excludes short-term investments. The table includes exposure through the use of derivative financial instruments. The table excludes exposure through forward currency contracts.
*** The “Emerging” exposure is comprised of Argentina, Brazil, Chile, China, Colombia, Congo, Czech Republic, Dominican Republic, Egypt, Hungary, India, Indonesia, Malaysia, Mexico, Philippines, Poland, Russia, South Africa, South Korea, Taiwan, Thailand, Turkey, Ukraine and Venezuela.
Ù Rounds to 0.0%.

         
2
       

 

GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
Shares /
 		           
Par Value ($)     Description   Value ($)  
            MUTUAL FUNDS — 100.0%        
                     
            Affiliated Issuers — 100.0%        
      2,505,122     GMO Emerging Markets Fund, Class VI     36,098,808  
      669,503     GMO Flexible Equities Fund, Class VI     13,135,642  
      12,929,157     GMO International Growth Equity Fund, Class IV     308,748,264  
      13,256,273     GMO International Intrinsic Value Fund, Class IV     308,871,163  
      21,075,028     GMO Quality Fund, Class VI     438,782,086  
      9,142,222     GMO U.S. Core Equity Fund, Class VI     109,432,403  
                     
                     
            TOTAL MUTUAL FUNDS (COST $1,150,694,358)     1,215,068,366  
                     
                     
            SHORT-TERM INVESTMENTS — 0.0%        
                     
            Time Deposits — 0.0%        
      26,404     State Street Eurodollar Time Deposit, 0.01%, due 03/01/11     26,404  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $26,404)     26,404  
                     
                     
            TOTAL INVESTMENTS — 100.0%
(Cost $1,150,720,762) 		    1,215,094,770  
            Other Assets and Liabilities (net) — (0.0%)     (52,037 )
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 1,215,042,733  
                     

         
    See accompanying notes to the financial statements.   3

 

GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments in unaffiliated issuers, at value (cost $26,404) (Note 2)
  $ 26,404  
Investments in affiliated issuers, at value (cost $1,150,694,358) (Notes 2 and 10)
    1,215,068,366  
Receivable for Fund shares sold
    3,935  
Receivable for expenses reimbursed by Manager (Note 5)
    10,528  
         
Total assets
    1,215,109,233  
         
         
Liabilities:
       
Payable to affiliate for (Note 5):
       
Trustees and Trust Officers or agents unaffiliated with the Manager
    2,927  
Accrued expenses
    63,573  
         
Total liabilities
    66,500  
         
Net assets
  $ 1,215,042,733  
         
Net assets consist of:
       
Paid-in capital
  $ 1,344,025,692  
Accumulated net realized loss
    (193,356,967 )
Net unrealized appreciation
    64,374,008  
         
    $ 1,215,042,733  
         
Net assets attributable to:
       
Class III shares
  $ 1,215,042,733  
         
Shares outstanding:
       
Class III
    62,887,904  
         
Net asset value per share:
       
Class III
  $ 19.32  
         

         
4
  See accompanying notes to the financial statements.    

 

GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Dividends from affiliated issuers (Note 10)
  $ 18,002,964  
Interest
    12  
         
Total investment income
    18,002,976  
         
Expenses:
       
Legal fees
    56,855  
Custodian, fund accounting agent and transfer agent fees
    53,272  
Audit and tax fees
    34,211  
Trustees fees and related expenses (Note 5)
    23,756  
Registration fees
    4,716  
Miscellaneous
    23,806  
         
Total expenses
    196,616  
Fees and expenses reimbursed by Manager (Note 5)
    (164,680 )
Expense reductions (Note 2)
    (343 )
         
Net expenses
    31,593  
         
Net investment income (loss)
    17,971,383  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments in affiliated issuers
    (57,573,804 )
         
Net realized gain (loss)
    (57,573,804 )
         
Change in net unrealized appreciation (depreciation) on:
       
Investments in affiliated issuers
    224,406,335  
         
Net realized and unrealized gain (loss)
    166,832,531  
         
Net increase (decrease) in net assets resulting from operations
  $ 184,803,914  
         

         
    See accompanying notes to the financial statements.   5

 

GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 17,971,383     $ 23,921,339  
Net realized gain (loss)
    (57,573,804 )     (68,000,417 )
Change in net unrealized appreciation (depreciation)
    224,406,335       326,717,906  
                 
                 
Net increase (decrease) in net assets from operations
    184,803,914       282,638,828  
                 
Distributions to shareholders from:
               
Net investment income
               
Class III
    (17,986,274 )     (23,938,105 )
                 
Net share transactions (Note 9):
               
Class III
    (11,614,518 )     102,614,012  
                 
                 
Total increase (decrease) in net assets
    155,203,122       361,314,735  
                 
Net assets:
               
Beginning of period
    1,059,839,611       698,524,876  
                 
End of period
  $ 1,215,042,733     $ 1,059,839,611  
                 

         
6
  See accompanying notes to the financial statements.    

 

GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)

Financial Highlights
(For a Class III share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 16.74     $ 12.29     $ 21.71     $ 24.25     $ 22.49  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)(a)†
    0.28       0.42       0.53       0.43       0.40  
Net realized and unrealized gain (loss)
    2.59       4.47       (8.50 )     0.01 (b)     2.93  
                                         
                                         
Total from investment operations
    2.87       4.89       (7.97 )     0.44       3.33  
                                         
                                         
Less distributions to shareholders:
                                       
From net investment income
    (0.29 )     (0.44 )     (0.54 )     (1.10 )     (0.73 )
From net realized gains
    —       —       (0.91 )     (1.88 )     (0.84 )
                                         
                                         
Total distributions
    (0.29 )     (0.44 )     (1.45 )     (2.98 )     (1.57 )
                                         
                                         
Net asset value, end of period
  $ 19.32     $ 16.74     $ 12.29     $ 21.71     $ 24.25  
                                         
                                         
Total Return(c)
    17.19 %     39.64 %     (38.63 )%     0.72 %     14.94 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 1,215,043     $ 1,059,840     $ 698,525     $ 944,374     $ 902,324  
Net expenses to average daily net assets(d)(e)
    0.00 %(f)     0.00 %(f)     0.00 %(f)     0.00 %(f)     0.00 %
Net investment income (loss) to average daily net assets(a)
    1.61 %     2.64 %     2.89 %     1.72 %     1.68 %
Portfolio turnover rate
    20 %     16 %     35 %     20 %     12 %
Fees and expenses reimbursed by the Manager to average daily net assets:
    0.01 %     0.02 %     0.01 %     0.01 %     0.02 %
Purchase premiums and redemption fees consisted of the following per share amounts (Note 2):†
  $ —       —     $ 0.00 (g)   $ 0.00 (g)   $ 0.01  
 
(a) Net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests.
(b) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain (loss) on investments due to the timing of purchases and redemptions of Fund shares in relation to fluctuating market values of the investments of the Fund.
(c) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown and assumes the effect of reinvested distributions. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder.
(d) Net expenses exclude expenses incurred indirectly through investment in the underlying funds (Note 5).
(e) Net expenses to average daily net assets were less than 0.01%.
(f) The net expense ratio does not include the effect of expense reductions (Note 2).
(g) Purchase premiums and redemption fees were less than $0.01 per share.
† Calculated using average shares outstanding throughout the period.

         
    See accompanying notes to the financial statements.   7

 

GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO World Opportunities Equity Allocation Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund seeks total return greater than that of its benchmark, the MSCI World Index. The Fund is a fund of funds and invests primarily in shares of the GMO International Equity Funds and the GMO U.S. Equity Funds. The Fund also may invest in shares of other GMO Funds, including the GMO Fixed Income Funds, GMO Alpha Only Fund, and GMO Alternative Asset Opportunity Fund (GMO Funds in which the Fund invests are collectively referred to as “underlying funds”). In addition, the Fund may hold securities directly. Although the Fund’s primary exposure is to foreign and U.S. equity investments (including emerging country equities, both growth and value style equities, and equities of any market capitalization), the Fund also may have exposure to foreign and U.S. fixed income securities (including fixed income securities of any credit quality and having any maturity or duration), the investment returns of commodities and, from time to time, other alternative asset classes. Under normal circumstances, the Fund invests (including through investment in the underlying funds) at least 80% of its assets in equity investments. The term “equity investments” refers to direct and indirect (e.g., through the underlying funds) investments in common stocks and other stock-related securities, such as preferred stocks, convertible securities, and depositary receipts.
 
The Manager uses multi-year forecasts of relative value and risk among asset classes (e.g., U.S. equity, foreign equity, emerging country equity, emerging country debt, foreign fixed income, U.S. fixed income, and commodities) to select the underlying funds in which the Fund invests and to decide how much to invest in each. The Manager changes the Fund’s holdings of underlying funds in response to changes in its investment outlook and market valuations and may use redemption/purchase activity to rebalance the Fund’s investments.
 
The Fund may invest in unaffiliated money market funds. Additionally, the Fund may (but is not required to) invest in GMO U.S. Treasury Fund. The Fund normally does not take temporary defensive positions. To the extent the Fund takes temporary defensive positions, it may not achieve its investment objective.
 
The financial statements of the underlying funds should be read in conjunction with the Fund’s financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 (collect) or by visiting GMO’s website at www.gmo.com.

         
8
       

 

 
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Shares of the underlying funds and other investment funds are generally valued at their net asset value. Investments held by the underlying funds are valued as follows. Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the over-the-counter (“OTC”) market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. As of February 28, 2011, the total value of securities held indirectly that were fair valued using methods determined in good faith by or at the direction of the Trustees of the Trust represented 0.2% of net assets. The underlying funds classify such securities (as defined below) as Level 3. Additionally, because many foreign securities markets and exchanges close prior to the close of the NYSE, closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, the Fund and the underlying funds generally value those foreign securities (including futures, derivatives and other securities whose values are based on indices comprised of such securities) as of the NYSE close using fair value prices, which are based on local closing prices adjusted by a factor supplied by a third party vendor using that vendor’s proprietary models. As of February 28, 2011, those foreign equity securities, foreign index futures contracts and swap agreements representing 55.9%, 0.1% and 0.0%, respectively, of the net assets of the Fund, through investments in the underlying funds, were valued using fair value prices based on those adjustments. Those underlying funds classify such securities (as defined below) as Level 2.

         
        9

 

 
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant.
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Mutual Funds
  $ 1,215,068,366     $ —     $ —     $ 1,215,068,366  
Short-Term Investments
    26,404       —       —       26,404  
                                 
Total Investments
    1,215,094,770       —       —       1,215,094,770  
                                 
Total
  $ 1,215,094,770     $ —     $ —     $ 1,215,094,770  
                                 

         
10
       

 

 
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.
 
The underlying funds held at period end are classified above as Level 1. For the summary of valuation inputs (including Level 3 inputs, if any) of the underlying funds, please refer to the underlying funds’ portfolio valuation notes in their financial statements. The aggregate net values of the Fund’s investments in securities and derivative financial instruments indirectly using Level 3 inputs were 0.2% and 0.0% of total net assets, respectively.
 
The Fund held no investments or other financial instruments directly at either February 28, 2011 or February 28, 2010, whose fair value was categorized using Level 3 inputs.
 
Taxes and distributions
The Fund intends to qualify each tax year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Fund intends to distribute substantially all of its net investment income and all of its net realized short-term and long-term capital gain, if any, after giving effect to any available capital loss carryforwards for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary.
 
The Fund’s policy is to declare and pay distributions from net investment income, if any, semiannually, and from net realized short-term and long-term capital gain, if any, at least annually. All distributions are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date.
 
Income and capital gain distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences that arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary over-distributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.
 
U.S. GAAP and tax accounting differences primarily relate to capital loss carryforwards, losses on wash sale transactions and post-October capital losses.

         
        11

 

 
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The tax character of distributions declared to shareholders is as follows:
 
                 
    February 28, 2011   February 28, 2010
 
Ordinary income (including any net short-term capital gain)
  $ 17,986,274     $ 23,938,105  
                 
Total distributions
  $ 17,986,274     $ 23,938,105  
                 
 
Distributions in excess of tax basis earnings and profits, if significant, are reported in the financial statements as a return of capital for tax purposes.
 
As of February 28, 2011, certain tax attributes consisted of the following:
 
         
Tax Attributes:
       
Capital loss carryforwards
  $ (60,829,507 )
Post-October capital loss deferral
  $ (23,989,325 )
 
As of February 28, 2011, the Fund had capital loss carryforwards available to offset future realized gains if any, to the extent permitted by the Code. Utilization of the capital loss carryforwards could be subject to limitations imposed by the Code related to share ownership activity. Such losses expire as follows:
 
         
February 28, 2018
  $ (27,174,228 )
February 28, 2019
  $ (33,655,279 )
         
Total
  $ (60,829,507 )
         
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 1,259,258,896     $ —     $ (44,164,126 )   $ (44,164,126 )    
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S.

         
12
       

 

 
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Income dividends and capital gain distributions from the underlying funds are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have different expense and fee levels and the Fund may own different proportions of the underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary (See Note 5).
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. References to investments include those held directly by the Fund and indirectly through the Fund’s investments in the underlying funds. Some of the underlying funds are non-diversified investment companies under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by those funds may affect their performance more than if they were diversified. The principal risks of investing in the Fund are summarized below, including those risks to which the Fund is exposed as a result of its investments in the underlying funds. This summary is not intended to include every potential risk of investing in the

         
        13

 

 
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Equity Securities — The market value of equity investments may decline due to factors affecting the issuing companies, their industries, or the economy and equity markets generally. Because the Fund and the underlying funds normally do not take temporary defensive positions, declines in stock market prices generally are likely to reduce the market value of the Fund’s investments.
 
• Foreign Investment Risk — The market prices of many foreign securities may fluctuate more than those of U.S. securities. Foreign markets often are less stable, smaller, less liquid and less regulated than U.S. markets, and the cost of trading in those markets often is higher than in U.S. markets. In addition, the Fund or the underlying funds may be subject to foreign taxes on capital gains or other income payable on foreign securities, on transactions in those securities or otherwise on the repatriation of proceeds generated from those securities. Also, there are risks associated with any license that the Fund or the underlying funds need to maintain to invest in some foreign markets. In some foreign markets, prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) may expose the Fund or the underlying funds to credit and other risks with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. Further, adverse changes in investment regulations, capital requirements, or exchange controls could adversely affect the value of the Fund’s investments. These and other risks (e.g., nationalization, expropriation, or other confiscation of assets of foreign issuers to which the Fund is exposed) are greater for the Fund’s investments in companies tied economically to emerging countries, the economies of which tend to be more volatile than the economies of developed countries.
 
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund or an underlying fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
 
• Derivatives Risk — The use of derivatives involves the risk that their value may not correlate with the value of the relevant underlying assets, rates or indices. Derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk.
 
• Fund of Funds Risk — The Fund is indirectly exposed to all of the risks of an investment in the underlying funds, including the risk that the underlying funds in which it invests do not perform as expected. Because the Fund bears the fees and expenses of the underlying funds in which it invests, new investments in underlying funds with higher fees or expenses than those of the underlying funds in which the Fund is currently invested will increase the Fund’s total expenses. The fees and expenses associated with an investment in the Fund are less predictable and may be higher than fees and expenses associated with an investment in funds that charge a fixed management fee.

         
14
       

 

 
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
• Market Risk — Fixed Income Securities — Typically, the value of fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
 
Other principal risks of an investment in the Fund include Smaller Company Risk (greater market risk and liquidity risk resulting from investments in companies with smaller market capitalizations); Market Risk — Value Securities (risk that the price of investments held by the Fund will not increase to what the Manager believes to be their fundamental value or that the Manager has overestimated their fundamental value); Market Risk — Growth Securities (greater price fluctuations resulting from dependence on future earnings expectations); Commodities Risk (value of an underlying fund’s shares may be affected by factors particular to the commodities markets and may fluctuate more than the share value of a fund with a broader range of investments); Currency Risk (risk that fluctuations in exchange rates may adversely affect the value of investments denominated in foreign currencies or that the U.S. dollar will decline in value relative to a foreign currency being hedged); Leveraging Risk (increased risk of loss from use of reverse repurchase agreements and other derivatives and securities lending); Credit and Counterparty Risk (risk of default of an issuer of a portfolio security, a derivatives counterparty, or a borrower of the Fund’s securities); Real Estate Risk (risk to an underlying fund that concentrates its assets in real estate-related investments that factors affecting the real estate industry may cause the value of the underlying fund’s investments to fluctuate more than if it invested in securities of companies in a broader range of industries); Short Sales Risk (risk that an underlying fund’s loss on the short sale of securities that it does not own is unlimited); Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world economies and markets generally); and Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis).
 
4. Derivative financial instruments
 
At February 28, 2011, the Fund held no derivative financial instruments directly. For a listing of derivative financial instruments held by the underlying funds, if any, please refer to the underlying funds’ Schedule of Investments.
 
5. Fees and other transactions with affiliates
 
The Manager decides how to allocate the assets of the Fund among underlying funds. The Manager does not charge the Fund a management fee or shareholder service fee, but it receives management and shareholder service fees from the underlying funds in which the Fund invests. Because those fees vary from fund to fund, the levels of indirect net expenses set forth below are affected by the Manager’s asset allocation decisions.

         
        15

 

 
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s operating expenses that exceed 0.00% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means shareholder service fees, expenses incurred indirectly by investment in other GMO Funds, fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). This contractual expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ending February 28, 2011 was $23,756 and $7,964, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2011, these indirect fees and expenses expressed as an annualized percentage of the Fund’s average daily net assets were as follows:
 
             
Indirect Net Expenses
 		           
(excluding shareholder
     Indirect Shareholder
      
service fees)     Service Fees     Total Indirect Expenses
0.430%
    0.072%     0.502%
             
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments and class exchanges, for the year ended February 28, 2011 aggregated $227,123,869 and $238,740,643, respectively.
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss

         
16
       

 

 
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 20.45% of the outstanding shares of the Fund were held by two shareholders, each holding more than 10% of the Fund’s outstanding shares. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund.
 
As of February 28, 2011, none of the Fund’s shares were held by senior management of the Manager and GMO Trust officers and 12.00% of the Fund’s shares were held by accounts for which the Manager had investment discretion.
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
Class III:   Shares   Amount   Shares   Amount
                 
 
Shares sold
    4,301,923     $ 76,033,694       12,907,784     $ 207,883,739  
Shares issued to shareholders in reinvestment of distributions
    920,278       17,052,753       1,301,276       22,668,232  
Shares repurchased
    (5,636,673 )     (104,700,965 )     (7,736,512 )     (127,937,959 )
                                 
Net increase (decrease)
    (414,472 )   $ (11,614,518 )     6,472,548     $ 102,614,012  
                                 

         
        17

 

 
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
10. Investments in affiliated issuers
 
A summary of the Fund’s transactions in the shares of other funds of the Trust during the year ended February 28, 2011 is set forth below:
 
                                                 
    Value,
               Distributions
   Value,
    beginning of
       Sales
   Dividend
   of Realized
   end of
Affiliate   period   Purchases   Proceeds   Income   Gains   period
 
GMO Emerging Markets Fund, Class VI
  $ —     $ 37,937,021     $ 8,195,062     $ 466,710     $      —     $ 36,098,808  
GMO Flexible Equities Fund, Class VI
    21,035,579       479,434       8,480,251       176,149       —       13,135,642  
GMO International Growth Equity Fund, Class IV
    223,870,059       51,220,967       21,206,042       3,021,803       —       308,748,264  
GMO International Intrinsic Value Fund, Class IV
    223,056,848       56,960,074       22,523,376       4,172,337       —       308,871,163  
GMO International Small Companies Fund, Class III
    19,834,925       292,399       20,601,377       205,724       —       —  
GMO Quality Fund, Class VI
    408,859,750       73,296,480       81,593,286       7,628,945       —       438,782,086  
GMO U.S. Core Equity Fund, Class VI
    163,195,449       6,937,494       76,141,249       2,331,296       —       109,432,403  
                                                 
Totals
  $ 1,059,852,610     $ 227,123,869     $ 238,740,643     $ 18,002,964     $ —     $ 1,215,068,366  
                                                 

         
18
       

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO World Opportunities Equity Allocation Fund:
 
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 Opportunities Equity Allocation Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian and transfer agent, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
        19

 

GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs; and (2) ongoing costs, including management fees, shareholder service fees, and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

         
20
       

 

 
GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
Class III
                               
                                 
1) Actual
    0.51 %   $ 1,000.00     $ 1,220.80     $ 2.81  
2) Hypothetical
    0.51 %   $ 1,000.00     $ 1,022.27     $ 2.56  
                                 
 
            * Expenses are calculated using the Class’s annualized net expense ratio (including indirect expenses incurred) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
        21

 

GMO World Opportunities Equity Allocation Fund
(A Series of GMO Trust)


Tax Information for the Tax Year Ended February 28, 2011 (Unaudited)
 
The Fund will notify shareholders of amounts for use in preparing 2011 income tax forms in early 2012.
 
For taxable, non-corporate shareholders, 100.00% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 represents qualified dividend income subject to the 15% rate category.
 
For corporate shareholders, 53.71% of the income and short-term capital gains, if any, distributed in the Fund’s fiscal year ended February 28, 2011 qualified for the dividends-received deduction.

         
22
       

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
   Position(s)
   Length of Time
   During Past
   Complex
     Other Directorships
Date of Birth   Held with the Trust   Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
        23

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
            Occupation(s)
   Fund
      
Name and
   Position(s)
   Length of Time
   During Past
   Complex
     Other Directorships
Date of Birth   Held with the Trust   Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
      
            Principal
   Portfolios
      
            Occupation(s)
   in Fund
     Other
Name and
   Position(s)
   Length of Time
   During Past
   Complex
     Directorships
Date of Birth   Held with Trust   Served   Five Years   Overseen     Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee;
President and
Chief Executive
Officer of the Trust 		  Trustee since March 2010; President and Chief Executive Officer since March 2009.   General Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005).     63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
24        

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003-2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President and
Clerk 		  Vice President since November 2006; Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since March 2005; Assistant Clerk since March 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        25

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money
Laundering Officer 		  Since December 2004.   Manager, Client Service Administration, Grantham, Mayo, Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
26        

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Annual Report
February 28, 2011

 

 
For a free copy of the Fund’s proxy voting guidelines, shareholders may call 1-617-346-7646 (collect) or visit the Securities and Exchange Commission’s website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on GMO’s website at www.gmo.com, or on the Securities and Exchange Commission’s website at www.sec.gov.
 
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which is available on the Commission’s website at www.sec.gov. The Fund’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
 
This report is prepared for the general information of shareholders. It is authorized for distribution to prospective investors only when preceded or accompanied by a private placement memorandum, which contains a complete discussion of the risks associated with an investment in this Fund and other important information. The private placement memorandum can be obtained by calling 1-617-346-7646 (collect).
 

 

GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
 
Portfolio Management
 
Day-to-day management of the Fund’s portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC.
 
Management Discussion and Analysis of Fund Performance
 
GMO World Opportunity Overlay Fund returned +6.5% for the fiscal year ended February 28, 2011, as compared with +0.5% for the J.P. Morgan U.S. 3 Month Cash Index.
 
The Fund outperformed the benchmark during the fiscal year by 6.0%. Approximately 5% of that outperformance was due to the Fund’s asset-backed securities holdings. Asset-backed security spreads tightened and pricing and liquidity conditions in securitized credit markets improved during the fiscal year. The Fund’s asset-backed holdings experienced credit downgrades during the fiscal year: The Fund had 35 downgraded securities, representing 10% of its market value from the beginning of the fiscal year. At fiscal year-end, about 72% of the Fund’s portfolio was rated AAA.
 
Approximately 1% of the Fund’s outperformance was due to the Fund’s derivative overlay strategies (largely interest-rate swaps, exchange-traded futures and, to a lesser extent, currency options and forwards). In particular, the Fund’s bond and swap positions in U.S. Treasury STRIPS versus LIBOR added value, as the spread between U.S. Treasuries and LIBOR tightened slightly during the fiscal year.
 
The Fund’s duration at fiscal year-end was 0.6 years.
 
The views expressed herein are exclusively those of Grantham, Mayo, Van Otterloo & Co. LLC Management as of the date of this report and are subject to change. GMO disclaims any responsibility to update such views. They are not meant as investment advice.

 

 
Comparison of Change in Value of a $10,000,000 Investment in
GMO World Opportunity Overlay Fund and the J.P. Morgan U.S. 3 Month Cash Index
As of February 28, 2011
 
(LINE GRAPH)
 
 
Performance data quoted represents past performance and is not indicative of future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance data may be lower or higher than the performance data provided herein. To obtain performance information up to the most recent month-end, please call (617) 330-7500. Performance shown is net of all fees after reimbursement from the Manager. Returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The performance information shown above only includes purchase premiums and/or redemption fees in effect as of February 28, 2011. All information is unaudited.
 

 

GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Investments Concentration Summary
February 28, 2011 (Unaudited)
 
         
Asset Class Summary   % of Total Net Assets  
Debt Obligations
    93.0 %
Short-Term Investments
    15.2  
Options Purchased
    1.6  
Written Options
    (0.0 )Ù
Futures Contracts
    (3.4 )
Swaps
    (4.2 )
Reverse Repurchase Agreements
    (4.5 )
Other
    2.3  
         
      100.0 %
         
 
         
Industry Summary   % of Debt Obligations  
U.S. Government & Agencies
    48.8 %
Residential Asset-Backed Securities (United States)
    11.8  
Auto Financing
    6.1  
Credit Cards
    6.0  
Foreign Government Obligations
    5.1  
CMBS
    4.7  
Insured Auto Financing
    3.9  
Residential Mortgage-Backed Securities (European)
    3.7  
Business Loans
    1.9  
Corporate Collateralized Debt Obligations
    1.7  
Residential Mortgage-Backed Securities (Australian)
    1.5  
CMBS Collateralized Debt Obligations
    1.2  
Insured Other
    0.9  
Insured Residential Asset-Backed Securities (United States)
    0.9  
Student Loans
    0.8  
Insured Transportation
    0.5  
Insured Time Share
    0.4  
Insured Residential Mortgage-Backed Securities (United States)
    0.1  
         
      100.0 %
         
 
Ù Rounds to 0.0%.

         
        1

 

GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            DEBT OBLIGATIONS — 93.0%        
                     
            Asset-Backed Securities — 42.9%        
            Auto Financing — 5.7%        
      3,189,708     Capital Auto Receivable Asset Trust, Series 07-2, Class A4B, 1 mo. LIBOR + .40%, 0.67%, due 02/18/14     3,193,249  
      9,000,000     Carmax Auto Owner Trust, Series 08-2, Class A4B, 1 mo. LIBOR + 1.65%, 1.92%, due 08/15/13     9,121,500  
      4,685,000     Daimler Chrysler Auto Trust, Series 08-B, Class A4A, 5.32%, due 11/10/14     4,813,369  
      772,627     Ford Credit Auto Owner Trust, Series 06-C, Class A4B, 1 mo. LIBOR + .04%, 0.31%, due 02/15/12     772,535  
      1,522,121     Ford Credit Auto Owner Trust, Series 07-B, Class A4B, 1 mo. LIBOR + .38%, 0.65%, due 07/15/12     1,523,400  
      11,790,000     Ford Credit Floorplan Master Owner Trust, Series 06-4, Class A, 1 mo. LIBOR + .25%, 0.52%, due 06/15/13     11,738,608  
      9,000,000     Merrill Auto Trust Securitization, Series 08-1, Class A4B, 1 mo. LIBOR + 2.20%, 2.47%, due 04/15/15     9,117,900  
      1,735,021     Merrill Auto Trust Securitization, Series 07-1, Class A4, 1 mo. LIBOR + .06%, 0.33%, due 12/15/13     1,732,939  
      3,098,426     Nissan Auto Receivables Owner Trust, Series 07-A, Class A4, 1 mo. LIBOR, 0.27%, due 06/17/13     3,095,637  
      3,139,606     World Omni Auto Receivables Trust, Series 07-A, Class A4, 1 mo. LIBOR, 0.27%, due 11/15/12     3,132,190  
                     
            Total Auto Financing     48,241,327  
                     
                     
            Business Loans — 1.8%        
      1,380,496     Bayview Commercial Asset Trust, Series 04-3, Class A1, 144A, 1 mo. LIBOR + .37%, 0.63%, due 01/25/35     1,187,227  
      2,009,541     Bayview Commercial Asset Trust, Series 05-4A, Class A2, 144A, 1 mo. LIBOR + .39%, 0.65%, due 01/25/36     1,567,442  
      9,000,000     Bayview Commercial Asset Trust, Series 07-6A, Class A2, 144A, 1 mo. LIBOR + 1.30%, 1.56%, due 12/25/37     7,470,000  
      1,338,023     GE Business Loan Trust, Series 05-2A, Class A, 144A, 1 mo. LIBOR + .24%, 0.51%, due 11/15/33     1,157,390  
      1,683,877     Lehman Brothers Small Balance Commercial, Series 05-1A, Class A, 144A, 1 mo. LIBOR + .25%, 0.51%, due 02/25/30     1,380,779  
      1,126,299     Lehman Brothers Small Balance Commercial, Series 05-2A, Class 1A, 144A, 1 mo. LIBOR + .25%, 0.51%, due 09/25/30     923,565  

         
2
  See accompanying notes to the financial statements.    

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            Business Loans — continued        
      1,956,023     Lehman Brothers Small Balance Commercial, Series 07-3A, Class 1A2, 144A, 1 mo. LIBOR + .85%, 1.11%, due 10/25/37     1,662,620  
                     
            Total Business Loans     15,349,023  
                     
                     
            CMBS — 4.3%        
      4,876,011     Citigroup/Deutsche Bank Commercial Mortgage, Series 05-CD1, Class A2FL, 1 mo. LIBOR + .12%, 0.38%, due 07/15/44     4,823,203  
      11,500,000     Commercial Mortgage Pass-Through Certificates, Series 06-FL12, Class AJ, 144A, 1 mo. LIBOR + .13%, 0.40%, due 12/15/20     10,120,000  
      2,087,538     GE Capital Commercial Mortgage Corp., Series 05-C4, Class A2, 5.31%, due 11/10/45     2,087,538  
      3,600,000     GE Capital Commercial Mortgage Corp., Series 06-C1, Class A2, 5.17%, due 03/10/44     3,604,680  
      3,770,355     GS Mortgage Securities Corp., Series 06-GG6, Class A2, 5.51%, due 04/10/38     3,843,405  
      4,527,734     Merrill Lynch Mortgage Trust, Series 06-C1, Class A2, 5.62%, due 05/12/39     4,674,885  
      2,560,695     Morgan Stanley Capital I, Series 06-IQ11, Class A3, 5.69%, due 10/15/42     2,659,128  
      5,302,205     Wachovia Bank Commercial Mortgage Trust, Series 06-WL7A, Class A1, 144A, 1 mo. LIBOR + .09%, 0.36%, due 09/15/21     5,179,512  
                     
            Total CMBS     36,992,351  
                     
                     
            CMBS Collateralized Debt Obligations — 1.1%        
      6,777,455     American Capital Strategies Ltd. Commercial Real Estate CDO Trust, Series 07-1A, Class A, 144A, 3 mo. LIBOR + .80%, 1.11%, due 11/23/52     67,775  
      3,825,705     Guggenheim Structured Real Estate Funding, Series 05-2A, Class A, 144A, 1 mo. LIBOR + .32%, 0.58%, due 08/26/30     3,596,162  
      6,450,000     Marathon Real Estate CDO, Series 06-1A, Class A1, 144A, 1 mo. LIBOR + .33%, 0.59%, due 05/25/46     5,547,000  
                     
            Total CMBS Collateralized Debt Obligations     9,210,937  
                     
                     
            Corporate Collateralized Debt Obligations — 1.6%        
      4,800,000     Morgan Stanley ACES SPC, Series 06-13A, Class A, 144A, 3 mo. LIBOR + .29%, 0.59%, due 06/20/13     4,575,360  
      9,000,000     Prism Orso Trust, Series 04-MAPL, Class CERT, 144A, 3 mo. LIBOR + .70%, 1.00%, due 08/01/11     8,996,400  
                     
            Total Corporate Collateralized Debt Obligations     13,571,760  
                     

         
    See accompanying notes to the financial statements.   3

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
                     
            Credit Cards — 5.6%        
      4,100,000     American Express Credit Account Master Trust, Series 06-1, Class A, 1 mo. LIBOR + .03%, 0.30%, due 12/15/13     4,098,770  
      7,100,000     Cabela’s Master Credit Card Trust, Series 08-4A, Class A2, 144A, 1 mo. LIBOR + 3.00%, 3.27%, due 09/15/14     7,201,317  
      4,500,000     Capital One Multi-Asset Execution Trust, Series 04-A7, Class A7, 3 mo. LIBOR + .15%, 0.46%, due 06/16/14     4,499,010  
      8,100,000     Capital One Multi-Asset Execution Trust, Series 08-A6, Class A6, 1 mo. LIBOR + 1.10%, 1.37%, due 03/17/14     8,115,228  
      7,700,000     Charming Shoppes Master Trust, Series 07-1A, Class A1, 144A, 1 mo. LIBOR + 1.25%, 1.52%, due 09/15/17     7,700,000  
      4,000,000     Discover Card Master Trust I, Series 96-4, Class A, 1 mo. LIBOR + .38%, 0.64%, due 10/16/13     4,000,000  
      3,900,000     Discover Card Master Trust I, Series 05-4, Class A2, 1 mo. LIBOR + .09%, 0.36%, due 06/16/15     3,885,375  
      2,700,000     Discover Card Master Trust I, Series 06-2, Class A2, 1 mo. LIBOR + .03%, 0.30%, due 01/16/14     2,697,570  
      4,200,000     National City Credit Card Master Trust, Series 08-3, Class A, 1 mo. LIBOR + 1.80%, 2.07%, due 05/15/13     4,215,750  
      900,000     World Financial Network Credit Card Master Trust, Series 06-A, Class A, 144A, 1 mo. LIBOR + .13%, 0.40%, due 02/15/17     884,349  
                     
            Total Credit Cards     47,297,369  
                     
                     
            Insured Auto Financing — 3.7%        
      1,000,000     Aesop Funding II LLC, Series 06-1A, Class A, 144A, MBIA, 1 mo. LIBOR + .22%, 0.48%, due 03/20/12     999,258  
      1,380,991     AmeriCredit Automobile Receivables Trust, Series 07-AX, Class A4, XL, 1 mo. LIBOR + .04%, 0.30%, due 10/06/13     1,373,395  
      2,003,479     AmeriCredit Automobile Receivables Trust, Series 07-DF, Class A4B, FSA, 1 mo. LIBOR + .80%, 1.06%, due 06/06/14     1,999,491  
      5,104,024     AmeriCredit Prime Automobile Receivable Trust, Series 07-2M, Class A4B, MBIA, 1 mo. LIBOR + .50%, 0.76%, due 03/08/16     5,094,326  
      4,677,031     Capital One Auto Finance Trust, Series 07-A, Class A4, AMBAC, 1 mo. LIBOR + .02%, 0.29%, due 11/15/13     4,649,904  
      5,874,095     Santander Drive Auto Receivables Trust, Series 07-3, Class A4B, FGIC, 1 mo. LIBOR + .65%, 0.92%, due 10/15/14     5,853,007  

         
4
  See accompanying notes to the financial statements.    

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            Insured Auto Financing — continued        
      11,000,000     Triad Auto Receivables Owner Trust, Series 07-B, Class A4B, FSA, 1 mo. LIBOR + 1.20%, 1.46%, due 07/14/14     11,101,970  
                     
            Total Insured Auto Financing     31,071,351  
                     
                     
            Insured Other — 0.9%        
      2,319,839     Henderson Receivables LLC, Series 06-4A, Class A1, 144A, MBIA, 1 mo. LIBOR + .20%, 0.47%, due 12/15/41     2,150,110  
      2,943,352     Henderson Receivables LLC, Series 06-3A, Class A1, 144A, MBIA, 1 mo. LIBOR + .20%, 0.47%, due 09/15/41     2,661,204  
      2,355,554     TIB Card Receivables Fund, 144A, FGIC, 3 mo. LIBOR + .25%, 0.55%, due 01/05/14     1,978,666  
      9,200,000     Toll Road Investment Part II, Series C, 144A, MBIA, Zero Coupon, due 02/15/37     777,860  
                     
            Total Insured Other     7,567,840  
                     
             
            Insured Residential Asset-Backed Securities (United States) — 0.8%
      7,896,036     Ameriquest Mortgage Securities, Inc., Series 04-R6, Class A1, XL, 1 mo. LIBOR + .21%, 0.47%, due 07/25/34     6,869,552  
                     
             
            Insured Residential Mortgage-Backed Securities (United States) — 0.1%
      1,050,684     SBI Heloc Trust, Series 05-HE1, Class 1A, 144A, FSA, 1 mo. LIBOR + .19%, 0.45%, due 11/25/35     771,202  
                     
                     
            Insured Time Share — 0.3%        
      344,591     Sierra Receivables Funding Co., Series 06-1A, Class A2, 144A, MBIA, 1 mo. LIBOR + .15%, 0.41%, due 05/20/18     326,138  
      2,794,868     Sierra Receivables Funding Co., Series 07-2A, Class A2, 144A, MBIA, 1 mo. LIBOR + 1.00%, 1.26%, due 09/20/19     2,643,607  
                     
            Total Insured Time Share     2,969,745  
                     
                     
            Insured Transportation — 0.4%        
      4,143,176     CLI Funding LLC, Series 06-1A, Class A, 144A, AMBAC, 1 mo. LIBOR + .18%, 0.44%, due 08/18/21     3,749,574  
                     

         
    See accompanying notes to the financial statements.   5

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
                     
            Residential Asset-Backed Securities (United States) ◊ — 11.0%        
      103,071     ACE Securities Corp., Series 05-SD1, Class A1, 1 mo. LIBOR + .40%, 0.66%, due 11/25/50     97,917  
      9,400,000     ACE Securities Corp., Series 06-ASP5, Class A2C, 1 mo. LIBOR + .18%, 0.44%, due 10/25/36     3,207,750  
      2,093,805     ACE Securities Corp., Series 06-CW1, Class A2B, 1 mo. LIBOR + .10%, 0.36%, due 07/25/36     1,793,344  
      11,900,000     ACE Securities Corp., Series 06-HE2, Class A2C, 1 mo. LIBOR + .16%, 0.42%, due 05/25/36     7,824,250  
      817,061     ACE Securities Corp., Series 06-HE3, Class A2B, 1 mo. LIBOR + .09%, 0.35%, due 06/25/36     774,166  
      788,549     ACE Securities Corp., Series 06-SL1, Class A, 1 mo. LIBOR + .16%, 0.58%, due 09/25/35     166,581  
      1,889,724     ACE Securities Corp., Series 06-SL3, Class A1, 1 mo. LIBOR + .10%, 0.36%, due 06/25/36     321,253  
      2,054,607     ACE Securities Corp., Series 06-SL3, Class A2, 1 mo. LIBOR + .17%, 0.43%, due 06/25/36     267,099  
      1,134,229     ACE Securities Corp., Series 06-SL4, Class A1, 1 mo. LIBOR + .12%, 0.38%, due 09/25/36     295,251  
      4,356,605     ACE Securities Corp., Series 07-ASL1, Class A2, 1 mo. LIBOR + .17%, 0.43%, due 12/25/36     364,430  
      1,517,145     ACE Securities Corp., Series 07-WM1, Class A2A, 1 mo. LIBOR + .07%, 0.33%, due 11/25/36     1,005,109  
      10,060,967     Argent Securities, Inc., Series 06-M1, Class A2C, 1 mo. LIBOR + .15%, 0.41%, due 07/25/36     4,414,249  
      5,706,192     Argent Securities, Inc., Series 06-M2, Class A2B, 1 mo. LIBOR + .11%, 0.37%, due 09/25/36     2,196,884  
      1,900,882     Argent Securities, Inc., Series 06-W2, Class A2B, 1 mo. LIBOR + .19%, 0.45%, due 03/25/36     779,362  
      2,039,271     Argent Securities, Inc., Series 06-W5, Class A2C, 1 mo. LIBOR + .15%, 0.41%, due 06/25/36     783,207  
      384,525     Asset Backed Funding Certificates, Series 06-OPT2, Class A3B, 1 mo. LIBOR + .11%, 0.37%, due 10/25/36     383,295  
      2,700,000     Asset Backed Funding Certificates, Series 06-OPT2, Class A3C, 1 mo. LIBOR + .15%, 0.41%, due 10/25/36     1,876,500  
      4,832,308     Asset Backed Funding Certificates, Series 07-NC1, Class A1, 144A, 1 mo. LIBOR + .22%, 0.48%, due 05/25/37     4,080,884  

         
6
  See accompanying notes to the financial statements.    

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            Residential Asset-Backed Securities (United States) — continued        
      3,718,829     Bayview Financial Acquisition Trust, Series 05-A, Class A1, 144A, 1 mo. LIBOR + .50%, 1.26%, due 02/28/40     2,305,674  
      2,681,411     Bear Stearns Asset Backed Securities, Inc., Series 07-AQ1, Class A1, 1 mo. LIBOR + .11%, 0.37%, due 11/25/36     2,314,326  
      5,400,000     Bear Stearns Asset Backed Securities, Inc., Series 07-AQ1, Class A2, 1 mo. LIBOR + .20%, 0.46%, due 11/25/36     983,340  
      1,076,016     Bear Stearns Mortgage Funding Trust, Series 07-SL2, Class 1A, 1 mo. LIBOR + .16%, 0.42%, due 02/25/37     139,129  
      2,084,742     Centex Home Equity, Series 06-A, Class AV3, 1 mo. LIBOR + .16%, 0.42%, due 06/25/36     1,919,359  
      2,600,000     Citigroup Mortgage Loan Trust, Inc., Series 06-HE3, Class A2C, 1 mo. LIBOR + .16%, 0.42%, due 12/25/36     1,040,000  
      6,600,000     Citigroup Mortgage Loan Trust, Inc., Series 06-WFH4, Class A3, 1 mo. LIBOR + .15%, 0.41%, due 11/25/36     5,088,600  
      8,112,000     Countrywide Asset-Backed Certificates, Series 06-BC3, Class 2A2, 1 mo. LIBOR + .14%, 0.40%, due 02/25/37     6,795,422  
      570,579     Countrywide Asset-Backed Certificates, Series 06-BC5, Class 2A1, 1 mo. LIBOR + .08%, 0.34%, due 03/25/37     568,753  
      4,400,000     Fremont Home Loan Trust, Series 06-B, Class 2A3, 1 mo. LIBOR + .16%, 0.42%, due 08/25/36     1,837,000  
      1,099,416     Household Home Equity Loan Trust, Series 05-2, Class A2, 1 mo. LIBOR + .31%, 0.57%, due 01/20/35     993,254  
      419,848     Household Home Equity Loan Trust, Series 05-3, Class A2, 1 mo. LIBOR + .29%, 0.55%, due 01/20/35     392,033  
      6,524,267     J.P. Morgan Mortgage Acquisition Corp., Series 06-WMC4, Class A3, 1 mo. LIBOR + .12%, 0.38%, due 12/25/36     2,800,868  
      280,005     Master Asset-Backed Securities Trust, Series 05-FRE1, Class A4, 1 mo. LIBOR + .25%, 0.51%, due 10/25/35     268,805  
      3,752,116     Master Asset-Backed Securities Trust, Series 06-FRE2, Class A4, 1 mo. LIBOR + .15%, 0.41%, due 03/25/36     2,194,988  
      2,700,000     Master Asset-Backed Securities Trust, Series 06-HE2, Class A3, 1 mo. LIBOR + .15%, 0.41%, due 06/25/36     1,026,000  
      5,751,225     Master Asset-Backed Securities Trust, Series 06-HE3, Class A3, 1 mo. LIBOR + .15%, 0.41%, due 08/25/36     2,156,709  
      3,100,000     Master Asset-Backed Securities Trust, Series 06-NC3, Class A4, 1 mo. LIBOR + .16%, 0.42%, due 10/25/36     1,178,000  

         
    See accompanying notes to the financial statements.   7

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            Residential Asset-Backed Securities (United States) — continued        
      1,254,461     Master Second Lien Trust, Series 06-1, Class A, 1 mo. LIBOR + .16%, 0.42%, due 03/25/36     156,808  
      2,493,579     Merrill Lynch Mortgage Trust, Series 06-SD1, Class A, 1 mo. LIBOR + .28%, 0.54%, due 01/25/47     1,792,385  
      2,300,000     Morgan Stanley IXIS Real Estate Capital Trust, Series 06-2, Class A3, 1 mo. LIBOR + .15%, 0.41%, due 11/25/36     879,750  
      8,800,000     Nationstar Home Equity Loan Trust, Series 06-B, Class AV3, 1 mo. LIBOR + .17%, 0.43%, due 09/25/36     7,104,625  
      9,100,000     Nomura Home Equity Loan, Inc., Series 06-HE3, Class 2A3, 1 mo. LIBOR + .15%, 0.41%, due 07/25/36     4,525,828  
      1,668,286     People’s Choice Home Loan Securities Trust, Series 05-4, Class 1A2, 1 mo. LIBOR + .26%, 0.52%, due 12/25/35     1,046,849  
      4,232,390     Saxon Asset Securities Trust, Series 06-3, Class A2, 1 mo. LIBOR + .11%, 0.37%, due 10/25/46     3,957,285  
      9,100,000     Securitized Asset-Backed Receivables LLC Trust, Series 06-HE1, Class A2C, 1 mo. LIBOR + .16%, 0.42%, due 07/25/36     3,367,000  
      647,909     Security National Mortgage Loan Trust, Series 06-2A, Class A1, 144A, 1 mo. LIBOR + .29%, 0.55%, due 10/25/36     634,951  
      382,071     SG Mortgage Securities Trust, Series 05-OPT1, Class A2, 1 mo. LIBOR + .26%, 0.52%, due 10/25/35     367,973  
      1,759,740     Soundview Home Equity Loan Trust, Series 07-NS1, Class A1, 1 mo. LIBOR + .12%, 0.38%, due 01/25/37     1,724,270  
      3,600,000     Specialty Underwriting & Residential Finance, Series 06-BC3, Class A2C, 1 mo. LIBOR + .15%, 0.41%, due 06/25/37     1,651,680  
      1,636,218     Structured Asset Investment Loan Trust, Series 06-1, Class A3, 1 mo. LIBOR + .20%, 0.46%, due 01/25/36     1,284,431  
      586,585     Structured Asset Securities Corp., Series 05-S6, Class A2, 1 mo. LIBOR + .29%, 0.55%, due 11/25/35     495,664  
                     
            Total Residential Asset-Backed Securities (United States)     93,623,290  
                     
                     
            Residential Mortgage-Backed Securities (Australian) — 1.4%        
      1,836,182     Crusade Global Trust, Series 06-1, Class A1, 144A, 3 mo. LIBOR + .06%, 0.36%, due 07/20/38     1,765,022  
      4,459,489     Interstar Millennium Trust, Series 04-2G, Class A, 3 mo. LIBOR + .20%, 0.70%, due 03/14/36     4,237,406  
      1,983,494     Interstar Millennium Trust, Series 05-1G, Class A, 3 mo. LIBOR + .12%, 0.70%, due 12/08/36     1,894,237  

         
8
  See accompanying notes to the financial statements.    

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
 
 		           
 
 		           
Par Value ($)     Description   Value ($)  
            Residential Mortgage-Backed Securities (Australian) — continued        
      1,130,353     Medallion Trust, Series 05-1G, Class A1, 3 mo. LIBOR + .08%, 0.39%, due 05/10/36     1,091,940  
      2,873,970     Puma Finance Ltd., Series G5, Class A1, 144A, 3 mo. LIBOR + .07%, 0.38%, due 02/21/38     2,752,688  
                     
            Total Residential Mortgage-Backed Securities (Australian)     11,741,293  
                     
                     
            Residential Mortgage-Backed Securities (European) — 3.4%        
      7,175,205     Aire Valley Mortgages, Series 06-1A, Class 1A, 144A, 3 mo. LIBOR + .11%, 0.41%, due 09/20/66     6,121,167  
      4,728,344     Brunel Residential Mortgages, Series 07-1A, Class A4C, 144A, 3 mo. LIBOR + .10%, 0.40%, due 01/13/39     4,266,385  
      3,041,025     Granite Master Issuer Plc, Series 06-3, Class A3, 1 mo. LIBOR + .04%, 0.30%, due 12/20/54     2,858,563  
      4,721,694     Kildare Securities Ltd., Series 07-1A, Class A2, 144A, 3 mo. LIBOR + .06%, 0.36%, due 12/10/43     4,296,741  
      2,819,864     Paragon Mortgages Plc, Series 12A, Class A2C, 144A, 3 mo. LIBOR + .11%, 0.42%, due 11/15/38     2,361,918  
      2,571,597     Paragon Mortgages Plc, Series 14A, Class A2C, 144A, 3 mo. LIBOR + .10%, 0.40%, due 09/15/39     2,089,423  
      2,700,000     Permanent Master Issuer Plc, Series 06-1, Class 5A, 3 mo. LIBOR + .11%, 0.41%, due 07/15/33     2,634,930  
      4,500,000     Permanent Master Issuer Plc, Series 07-1, Class 4A, 3 mo. LIBOR + .08%, 0.38%, due 10/15/33     4,454,100  
                     
            Total Residential Mortgage-Backed Securities (European)     29,083,227  
                     
                     
            Student Loans — 0.8%        
      1,271,607     College Loan Corp. Trust, Series 07-1, Class A1, 3 mo. LIBOR + .01%, 0.31%, due 01/25/23     1,270,463  
      3,100,000     College Loan Corp. Trust, Series 07-2, Class A1, 3 mo. LIBOR + .25%, 0.55%, due 01/25/24     3,096,497  
      127,159     Montana Higher Education Student Assistance Corp., Series 05-1, Class A, 3 mo. LIBOR + .04%, 0.34%, due 06/20/15     127,136  
      1,675,546     National Collegiate Student Loan Trust, Series 05-2, Class A2, 1 mo. LIBOR + .15%, 0.41%, due 02/25/26     1,662,979  

         
    See accompanying notes to the financial statements.   9

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
Par Value ($) /
 		           
Principal Amount     Description   Value ($)  
            Student Loans — continued        
      285,908     National Collegiate Student Loan Trust, Series 06-1, Class A2, 1 mo. LIBOR + .14%, 0.40%, due 08/25/23     280,190  
                     
            Total Student Loans     6,437,265  
                     
            Total Asset-Backed Securities     364,547,106  
                     
                     
            Foreign Government Obligations — 4.7%        
GBP
    25,000,000     U.K. Treasury Bond, 4.25%, due 12/07/46 (a)     40,027,538  
                     
                     
            U.S. Government — 45.3%        
         119,615,538     U.S. Treasury Inflation Indexed Note, 2.00%, due 04/15/12 (b) (c)     124,923,477  
      150,000,000     U.S. Treasury Note, 1.38%, due 01/15/13 (c)     152,062,500  
      65,000,000     U.S. Treasury Strip Coupon, due 05/15/22     41,878,135  
      105,000,000     U.S. Treasury Strip Coupon, due 08/15/22     66,651,270  
                     
            Total U.S. Government     385,515,382  
                     
                     
            U.S. Government Agency — 0.1%        
      800,000     U.S. Department of Transportation, 144A, 6.00%, due 12/07/21     794,496  
                     
                     
            TOTAL DEBT OBLIGATIONS (COST $878,787,958)     790,884,522  
                     
                     
            OPTIONS PURCHASED — 1.6%        
                     
            Currency Options — 0.1%        
EUR
    3,000,000     EUR Call/CHF Put, Expires 06/16/15, Strike 1.56 One Touch     741,774  
                     
                     
            Options on Credit Default Swaps — 0.0%        
USD
    500,000,000     USD CDX Swaption Call, Expires 03/16/11, Strike 100.00     77,500  
                     
                     
            Options on Interest Rate Swaps — 1.5%        
USD
    64,000,000     USD Swaption Straddle, Expires 04/23/18, Strike TBD     4,041,344  
USD
    64,000,000     USD Swaption Straddle, Expires 04/10/18, Strike TBD     4,056,576  

         
10
  See accompanying notes to the financial statements.    

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)
Schedule of Investments — (Continued)
(showing percentage of total net assets)
February 28, 2011
 
                     
Principal Amount /
 		           
Shares /
 		           
Par Value ($)     Description   Value ($)  
            Options on Interest Rate Swaps — continued        
USD
    64,000,000     USD Swaption Straddle, Expires 05/01/18, Strike TBD     4,025,280  
USD
    450,000,000     USD Swaption Call, Expires 11/02/11, Strike 0.63%     318,600  
                     
            Total Options on Interest Rate Swaps     12,441,800  
                     
                     
            TOTAL OPTIONS PURCHASED (COST $12,957,925)     13,261,074  
                     
                     
            SHORT-TERM INVESTMENTS — 15.2%        
                     
            Money Market Funds — 4.4%        
      37,474,053     State Street Institutional Treasury Money Market Fund-Institutional Class     37,474,053  
                     
                     
            U.S. Government — 10.8%        
      47,900,000     U.S. Treasury Bill, 0.12%, due 04/14/11 (d)     47,892,901  
      44,000,000     U.S. Treasury Bill, 0.11%, due 04/28/11 (d)     43,991,906  
                     
            Total U.S. Government     91,884,807  
                     
                     
            TOTAL SHORT-TERM INVESTMENTS (COST $129,358,860)     129,358,860  
                     
                     
            TOTAL INVESTMENTS — 109.8%
(COST $1,021,104,743) 		    933,504,456  
            Other Assets and Liabilities (net) — (9.8%)     (83,312,293 )
                     
                     
            TOTAL NET ASSETS — 100.0%   $ 850,192,163  
                     

         
    See accompanying notes to the financial statements.   11

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
A summary of outstanding financial instruments at February 28, 2011 is as follows:
 
Reverse Repurchase Agreements
 
                     
Face Value   Description   Market Value
 
GBP
    23,725,000     Barclays Bank PLC, 0.56%, dated 02/10/11, to be repurchased on demand at face value plus accrued interest with a stated maturity date of 03/14/11.   $ (38,577,457 )
                     
                     
                $ (38,577,457 )
                     
         
Average balance outstanding
  $ (35,953,356 )
Average interest rate
    0.59 %
Maximum balance outstanding
  $ (42,222,616 )
 
Average balance outstanding was calculated based on daily face value balances outstanding during the period that the Fund had entered into reverse repurchase agreements.
 
Futures Contracts
 
                             
                Net Unrealized
Number of
 		      Expiration
 		  Contract
 		  Appreciation
Contracts   Type   Date   Value   (Depreciation)
 
Buys
                           
12,960
    Euro Dollar 90 Day     June 2011   $ 3,228,174,000     $ 6,642,827  
                         
Sales
                           
12,960
    Euro Dollar 90 Day     March 2012   $ 3,211,812,000     $ (35,597,313 )
39
    EuroSwiss Interest Rate 3 Months     March 2011     10,471,193       476  
                         
                $ 3,222,283,193     $ (35,596,837 )
                         

         
12
  See accompanying notes to the financial statements.    

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Written Options
 
A summary of open written option contracts for the Fund at February 28, 2011 is as follows:
 
                                     
    Notional
 		  Expiration
 		              Market
    Amount   Date       Description   Premiums   Value
 
Call
    500,000,000     3/16/2011   USD   CDX Swaption Call, Strike 120.00   $ (700,000 )   $ (5,500 )
Call
    3,000,000     6/14/2013   EUR   EUR Call/CHF Put,
Strike 1.56% One Touch 		    (1,097,998 )     (412,288 )
                                     
                        $ (1,797,998 )   $ (417,788 )
                                     
 
Swap Agreements
 
Credit Default Swaps
 
                                                     
                            Maximum
 		   
                            Potential
 		   
                            Amount of
 		   
                            Future
 		   
                            Payments
 		   
                        Implied
 		      by the Fund
 		   
Notional
 		  Expiration
 		      Receive
 		  Annual
 		  Credit
 		  Deliverable
 		  Under the
 		  Market
Amount   Date   Counterparty   (Pay)Ù   Premium   Spread (1)   on Default   Contract (2)   Value
 
  96,449,886     USD   12/20/2012   Morgan Stanley
Capital Services Inc. 		  Receive   0.71%   0.07%   Reference security
within CDX index 		    96,449,886     USD   $ 1,249,799  
  250,769,703     USD   12/20/2012   Morgan Stanley
Capital Services Inc. 		  Receive   0.71%   0.07%   Reference security
within CDX Index 		    250,769,703     USD     3,249,477  
  100,000,000     USD   12/20/2012   Morgan Stanley
Capital Services Inc. 		  (Pay)   1.20%   0.10%   Reference security
within CDX Index 		    N/A           (2,228,709 )
  50,000,000     USD   12/20/2012   Morgan Stanley
Capital Services Inc. 		  (Pay)   1.93%   0.20%   Reference security
within CDX index 		    N/A           (1,761,351 )
  7,000,000     USD   3/20/2013   Morgan Stanley
Capital Services Inc. 		  Receive   0.25%   0.67%   MS Synthetic 2006-1     7,000,000     USD     (57,502 )
                                                     
                                                $ 451,714  
                                                     
Premiums to (Pay) Receive
  $ —  
         
 
Ù Receive - Fund receives premium and sells credit protection. If a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.

         
    See accompanying notes to the financial statements.   13

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
(Pay) - Fund pays premium and buys credit protection. If a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) receive from the seller of protection an amount equal to the notional amount of the swap and deliver the referenced obligation or underlying securities comprising the referenced index or (ii) receive a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.
(1) Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on the reference security, as of February 28, 2011, serve as an indicator of the current status of the payment/performance risk and reflect the likelihood or risk of default for the reference entity. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection. Wider (i.e.higher) credit spreads represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.
(2) The maximum potential amount the Fund could be required to pay as a seller of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.
 
Interest Rate Swaps
 
                                     
Notional
 		  Expiration
 		      Receive
 		  Fixed
 		      Market
Amount   Date   Counterparty   (Pay)#   Rate   Variable Rate   Value
 
  600,000,000     CHF   5/27/2011   Credit Suisse International   (Pay)   0.16%   3 Month CHF LIBOR   $ (18,284 )
  900,000,000     USD   5/12/2013   Barclays Bank PLC   (Pay)   0.77%   3 Month LIBOR     5,023,954  
  907,000,000     USD   5/12/2013   JPMorgan Chase Bank, N.A.   (Pay)   0.88%   3 Month LIBOR     3,088,474  
  131,000,000     USD   6/15/2013   Deutsche Bank AG   (Pay)   1.50%   3 Month USD LIBOR     (948,734 )
  30,000,000     GBP   6/15/2013   Merrill Lynch Capital Services   Receive   2.50%   6 Month GBP LIBOR     290,420  
  85,000,000     GBP   6/15/2013   Barclays Bank PLC   Receive   2.50%   6 Month GBP LIBOR     822,857  
  34,000,000     EUR   6/15/2013   Merrill Lynch Capital Services   Receive   2.50%   6 Month EUR LIBOR     149,721  
  915,000,000     SEK   6/15/2013   Barclays Bank PLC   Receive   3.25%   3 Month SEK STIBOR     (110,043 )
  805,000,000     SEK   6/15/2013   Citibank N.A.   Receive   3.25%   3 Month SEK STIBOR     (96,814 )
  915,000,000     SEK   6/15/2013   Credit Suisse International   Receive   3.25%   3 Month SEK STIBOR     (110,043 )
  22,700,000,000     JPY   6/15/2013   Citibank N.A.   (Pay)   0.50%   6 Month JPY LIBOR     (182,991 )
  34,500,000,000     JPY   6/15/2013   Merrill Lynch Capital Services   (Pay)   0.50%   6 Month JPY LIBOR     (278,114 )
  69,000,000     CAD   6/15/2013   JPMorgan Chase Bank, N.A.   (Pay)   2.50%   3 Month CAD BA’s     (409,520 )
  32,000,000     AUD   6/15/2013   Merrill Lynch Capital Services   Receive   5.50%   3 Month AUD BBSW     95,964  
  51,000,000     CHF   6/15/2013   Merrill Lynch Capital Services   Receive   1.00%   6 Month CHF LIBOR     68,863  
  129,000,000     CHF   6/15/2013   Credit Suisse International   Receive   1.00%   6 Month CHF LIBOR     174,182  
  378,000,000     USD   5/12/2016   Barclays Bank PLC   Receive   1.71%   3 Month LIBOR     (14,496,055 )
  378,000,000     USD   5/12/2016   JPMorgan Chase Bank, N.A.   Receive   1.89%   3 Month LIBOR     (11,224,386 )
  385,000,000     USD   6/10/2016   Merrill Lynch Capital Services   (Pay)   2.54%   3 Month USD LIBOR     778,917  
  212,000,000     USD   6/10/2021   Merrill Lynch Capital Services   Receive   3.67%   3 Month USD LIBOR     (129,995 )

         
14
  See accompanying notes to the financial statements.    

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
Interest Rate Swaps — continued
 
                                     
Notional
 		  Expiration
 		      Receive
 		  Fixed
 		      Market
Amount   Date   Counterparty   (Pay)#   Rate   Variable Rate   Value
 
  257,000,000     USD   6/10/2021   Morgan Stanley Capital Services, Inc.   Receive   3.68%   3 Month USD LIBOR   $ 63,141  
  30,000,000     USD   6/15/2021   Deutsche Bank AG   Receive   4.00%   3 Month USD LIBOR     825,976  
  7,000,000     GBP   6/15/2021   Merrill Lynch Capital Services   (Pay)   4.25%   6 Month GBP LIBOR     (335,542 )
  20,000,000     GBP   6/15/2021   Barclays Bank PLC   (Pay)   4.25%   6 Month GBP LIBOR     (958,690 )
  8,000,000     EUR   6/15/2021   Merrill Lynch Capital Services   (Pay)   3.75%   6 Month EUR LIBOR     (219,369 )
  213,000,000     SEK   6/15/2021   Barclays Bank PLC   (Pay)   4.00%   3 Month SEK STIBOR     (539,737 )
  188,000,000     SEK   6/15/2021   Citibank N.A.   (Pay)   4.00%   3 Month SEK STIBOR     (476,388 )
  213,000,000     SEK   6/15/2021   Credit Suisse International   (Pay)   4.00%   3 Month SEK STIBOR     (539,737 )
  4,800,000,000     JPY   6/15/2021   Citibank N.A.   Receive   1.50%   6 Month JPY LIBOR     639,466  
  7,300,000,000     JPY   6/15/2021   Merrill Lynch Capital Services   Receive   1.50%   6 Month JPY LIBOR     972,521  
  16,000,000     CAD   6/15/2021   JPMorgan Chase Bank, N.A.   Receive   4.00%   3 Month CAD BA’s     385,833  
  9,000,000     AUD   6/15/2021   Merrill Lynch Capital Services   (Pay)   6.25%   6 Month AUD BBSW     (114,230 )
  11,000,000     CHF   6/15/2021   Merrill Lynch Capital Services   (Pay)   2.50%   6 Month CHF LIBOR     (155,043 )
  29,000,000     CHF   6/15/2021   Credit Suisse International   (Pay)   2.50%   6 Month CHF LIBOR     (408,751 )
  65,000,000     USD   5/15/2022   JPMorgan Chase Bank, N.A.   (Pay)   0.00%   3 Month LIBOR     (6,158,753 )
  105,000,000     USD   8/15/2022   JPMorgan Chase Bank, N.A.   (Pay)   0.00%   3 Month LIBOR     (9,639,755 )
  127,000,000     USD   6/10/2041   Morgan Stanley Capital Services, Inc.   (Pay)   4.30%   3 Month USD LIBOR     715,147  
  25,000,000     GBP   12/7/2046   Merrill Lynch Capital Services   (Pay)   4.36%   6 month GBP LIBOR     (2,400,744 )
                                     
                                $ (35,856,282 )
                                     
Premiums to (Pay) Receive  
  $ 616,625  
         
 
# Receive - Fund receives fixed rate and pays variable rate.
(Pay) - Fund pays fixed rate and receives variable rate.
 
As of February 28, 2011, for forward currency contracts, futures contracts, swap agreements, written options, and reverse repurchase agreements, if any, the Fund had sufficient cash and/or securities to cover any commitments or collateral requirements of the relevant broker or exchange.
 
Notes to Schedule of Investments:
 
144A - Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors.

         
    See accompanying notes to the financial statements.   15

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)

Schedule of Investments — (Continued)
February 28, 2011
 
AMBAC - Insured as to the payment of principal and interest by AMBAC Assurance Corporation.
BBSW - Bank Bill Swap Reference Rate
CAD BA - Canadian Bankers Acceptance Rate
CDO - Collateralized Debt Obligation
CHF LIBOR - London Interbank Offered Rate denominated in Swiss Franc.
CMBS - Commercial Mortgage Backed Security
EUR LIBOR - London Interbank Offered Rate denominated in Euros.
FGIC - Insured as to the payment of principal and interest by Financial Guaranty Insurance Corporation.
FSA - Insured as to the payment of principal and interest by Financial Security Assurance.
GBP LIBOR - London Interbank Offered Rate denominated in British Pounds.
JPY LIBOR - London Interbank Offered Rate denominated in Japanese Yen
LIBOR - London Interbank Offered Rate
MBIA - Insured as to the payment of principal and interest by MBIA Insurance Corp.
SEK STIBOR - Stockholm Interbank Offered Rate denominated in Swedish Krona.
STIBOR - Stockholm Interbank Offered Rate
TBD - To Be Determined
USD LIBOR - London Interbank Offered Rate denominated in United States Dollars.
XL - Insured as to the payment of principal and interest by XL Capital Assurance.
The rates shown on variable rate notes are the current interest rates at February 28, 2011, which are subject to change based on the terms of the security.
◊ Theses securities are primarily backed by subprime mortgages.
(a) All or a portion of this security has been pledged to cover collateral requirements on reverse repurchase agreements (Note 2).
(b) Indexed security in which price and/or coupon is linked to the prices of a specific instrument or financial statistic (Note 2).
(c) All or a portion of this security has been pledged to cover margin requirements on futures contracts, collateral requirements on swap contracts, forward currency contracts, and/or written options, if any (Note 4).
(d) Rate shown represents yield-to-maturity.
 
Currency Abbreviations:
 
AUD - Australian Dollar
CAD - Canadian Dollar
CHF - Swiss Franc
EUR - Euro
GBP - British Pound
JPY - Japanese Yen
SEK - Swedish Krona
USD - United States Dollar

         
16
  See accompanying notes to the financial statements.    

 

GMO World Opportunity Overlay Fund
(A Series of GMO Trust)


Statement of Assets and Liabilities — February 28, 2011
 
         
Assets:
       
Investments, at value (cost $1,021,104,743) (Note 2)
  $ 933,504,456  
Interest receivable
    1,806,745  
Receivable for open swap contracts (Note 4)
    18,594,712  
Receivable for upfront payments on open swap contracts (Note 4)
    86,105  
Receivable for expenses reimbursed by Manager (Note 5)
    55,619  
         
Total assets
    954,047,637  
         
         
Liabilities:
       
Payable for investments purchased
    9,187,289  
Payable to affiliate for (Note 5):
       
Trustees and Trust Officers or agents unaffiliated with the Manager
    2,095  
Due to broker (including variation margin on futures contracts) (Note 4)
    460,230  
Interest payable for open swap contracts
    1,049,576  
Payable for open swap contracts (Note 4)
    53,999,280  
Payable for reverse repurchase agreements (Note 2)
    38,577,457  
Written options outstanding, at value (premiums $1,797,998) (Note 4)
    417,788  
Accrued expenses
    161,759  
         
Total liabilities
    103,855,474  
         
Net assets
  $ 850,192,163  
         
Shares outstanding
    37,486,637  
         
Net asset value per share
  $ 22.68  
         

         
    See accompanying notes to the financial statements.   17

 

GMO World Opportunity Overlay Fund
(A Series of GMO Trust)


Statement of Operations — Year Ended February 28, 2011
 
         
Investment Income:
       
Interest
  $ 15,683,322  
Dividends
    97,336  
         
Total investment income
    15,780,658  
         
Expenses:
       
Interest expense (Note 2)
    231,329  
Audit and tax fees
    144,972  
Custodian, fund accounting agent and transfer agent fees
    142,189  
Legal fees
    46,954  
Trustees fees and related expenses (Note 5)
    23,208  
Miscellaneous
    29,952  
         
Total expenses
    618,604  
Fees and expenses reimbursed by Manager (Note 5)
    (346,434 )
Expense reductions (Note 2)
    (2,111 )
         
Net expenses
    270,059  
         
Net investment income (loss)
    15,510,599  
         
Realized and unrealized gain (loss):
       
Net realized gain (loss) on:
       
Investments
    50,511,828  
Futures contracts
    21,009,178  
Written options
    (26,025,348 )
Swap contracts
    8,719,132  
Foreign currency, forward contracts and foreign currency related transactions
    273,053  
         
Net realized gain (loss)
    54,487,843  
         
Change in net unrealized appreciation (depreciation) on:
       
Investments
    33,942,218  
Futures contracts
    (29,600,517 )
Written options
    (311,404 )
Swap contracts
    (19,922,058 )
Foreign currency, forward contracts and foreign currency related transactions
    3,611,210  
         
Net unrealized gain (loss)
    (12,280,551 )
         
Net realized and unrealized gain (loss)
    42,207,292  
         
Net increase (decrease) in net assets resulting from operations
  $ 57,717,891  
         

         
18
  See accompanying notes to the financial statements.    

 

GMO World Opportunity Overlay Fund
(A Series of GMO Trust)


Statement of Changes in Net Assets
 
                 
    Year Ended
 		  Year Ended
    February 28, 2011   February 28, 2010
Increase (decrease) in net assets:
               
Operations:
               
Net investment income (loss)
  $ 15,510,599     $ 16,695,839  
Net realized gain (loss)
    54,487,843       50,943,742  
Change in net unrealized appreciation (depreciation)
    (12,280,551 )     131,254,348  
                 
                 
Net increase (decrease) in net assets from operations
    57,717,891       198,893,929  
                 
Cash distributions to shareholders
    —       (71,650,000 )
                 
Net share transactions (Note 9):
    (133,322,118 )     8,072,776  
                 
                 
Total increase (decrease) in net assets
    (75,604,227 )     135,316,705  
                 
Net assets:
               
Beginning of period
    925,796,390       790,479,685  
                 
End of period
  $ 850,192,163     $ 925,796,390  
                 

         
    See accompanying notes to the financial statements.   19

 

GMO World Opportunity Overlay Fund
(A Series of GMO Trust)

Financial Highlights
(For a share outstanding throughout each period)
 
                                         
    Year Ended February 28/29,
    2011   2010   2009   2008   2007
 
Net asset value, beginning of period
  $ 21.30     $ 18.35     $ 25.68     $ 25.99     $ 25.23  
                                         
                                         
Income (loss) from investment operations:
                                       
Net investment income (loss)†
    0.37       0.39       0.76       1.41       1.36  
Net realized and unrealized gain (loss)
    1.01       4.24       (8.09 )     (1.72 )     (0.60 )
                                         
                                         
Total from investment operations
    1.38       4.63       (7.33 )     (0.31 )     0.76  
                                         
                                         
Less distributions to shareholders:
                                       
From cash distributions
    —       (1.68 )     —       —       —  
                                         
                                         
Total distributions
    —       (1.68 )     —       —       —  
                                         
                                         
Net asset value, end of period
  $ 22.68     $ 21.30     $ 18.35     $ 25.68     $ 25.99  
                                         
                                         
Total Return(a)
    6.48 %     27.20 %     (28.54 )%     (1.19 )%     3.01 %
                                         
Ratios/Supplemental Data:
                                       
Net assets, end of period (000’s)
  $ 850,192     $ 925,796     $ 790,480     $ 1,478,176     $ 1,750,067  
Net operating expenses to average daily net assets
    0.00 %(b)(c)     0.00 %(b)(c)     0.00 %(b)     0.00 %(b)     0.00 %(b)
Interest expense to average daily net assets(d)
    0.03 %     0.05 %     —       0.07 %     0.00 %
Total net expenses to average daily net assets
    0.03 %(c)     0.05 %(c)     0.00 %(b)     0.07 %     0.00 %(b)
Net investment income (loss) to average daily net assets
    1.69 %     1.98 %     3.19 %     5.38 %     5.36 %
Portfolio turnover rate
    36 %     55 %     59 %     41 %     93 %
Fees and expenses reimbursed by the Manager to average daily net assets
    0.04 %     0.04 %     0.04 %     0.02 %     0.03 %
Redemption fees consisted of the following per share amounts†:
  $ 0.00 (e)   $ 0.00 (e)   $ 0.01       —       —  
 
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. Calculation excludes redemption fees which are borne by the shareholder.
(b) Ratio is less than 0.01%.
(c) The net expense ratio does not include the effect of expense reductions (Note 2).
(d) Interest expense incurred as a result of entering into reverse repurchase agreements and/or payables owed to Lehman Brothers in connection with the termination of derivative contracts in 2008 is included in the Fund’s net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income.
(e) There were no redemption fees during the period.
† Calculated using average shares outstanding throughout the period.

         
20
  See accompanying notes to the financial statements.    

 

GMO World Opportunity Overlay Fund
(A Series of GMO Trust)

Notes to Financial Statements
February 28, 2011
 
1. Organization
 
GMO World Opportunity Overlay Fund (the “Fund”) is a series of GMO Trust (the “Trust”). The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end management investment company with multiple series. The Fund is non-diversified as the term is defined in the 1940 Act. 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 of the Trust (“Trustees”) to create an unlimited number of series of shares (“Funds”) and to subdivide Funds into classes.
 
The Fund seeks total return greater than that of its benchmark, the J.P. Morgan U.S. 3 Month Cash Index. The Fund’s investment program has two principal components. One component of the Fund’s investment program involves the use of derivatives to seek to exploit misvaluations in world interest rates, currencies, and credit markets, and to add value relative to the Fund’s benchmark. The other component of the Fund’s investment program involves direct investments, primarily in asset-backed securities and other fixed income securities (including Treasury Separately Traded Registered Interest and Principal Securities (“STRIPS”), Inflation-Protected Securities issued by the U.S. Treasury (“TIPS”), Treasury Securities, and global bonds).
 
To add value relative to the Fund’s benchmark, the Manager seeks to identify and estimate the relative misvaluation of interest rate, currency, and credit markets. Based on such estimates, the Fund establishes its positions, mainly by using derivatives, across global interest rate, currency, and credit markets. Derivative positions taken by the Fund are implemented primarily through interest rate swaps and/or futures contracts, currency forwards and/or options, and credit default swaps on single-issuers or indexes. As a result of its derivative positions, the Fund typically will have a net notional value in excess of its net assets and will have a higher tracking error, along with concomitant volatility, relative to its benchmark. The Fund is not limited in the extent to which it may use derivatives or in the absolute face value of its derivatives positions, and, as a result, the Fund may be leveraged in relation to its assets.
 
The Fund has a substantial investment in asset-backed securities, including, but not limited to, securities backed by pools of residential and commercial mortgages, credit-card receivables, home equity loans, automobile loans, educational loans, corporate and sovereign bonds, and bank loans made to corporations. In addition, the Fund may invest in government securities, corporate debt securities, money market instruments, and commercial paper and enter into credit default swaps, reverse repurchase agreements, and repurchase agreements. The Fund’s fixed income securities may include all types of interest rate, payment, and reset terms, including fixed rate, zero coupon, contingent, deferred, payment-in-kind, and auction rate features. Because of the deterioration in credit markets that became acute in 2008, the Fund currently has and may continue to have material exposure to below investment grade securities. If deemed prudent by the Manager, the Fund will take temporary defensive measures until the Manager has determined that normal conditions have returned or that it is otherwise prudent to resume investing in accordance with the

         
        21

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Fund’s normal investment strategies. The Fund may not achieve its investment objective while it is taking temporary defensive measures.
 
As of the date of this report, shares of the Fund are principally available for purchase by other GMO Funds and certain accredited investors.
 
2. Significant accounting policies
 
The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have been consistently followed by the Fund in preparing its financial statements. The preparation of financial statements in accordance with U.S. GAAP 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. The accounting records of the Fund are maintained in U.S. dollars.
 
Portfolio valuation
Shares of the underlying funds and other investment funds are generally valued at their net asset value. Investments held by the underlying funds are valued as follows. Securities listed on a securities exchange (other than exchange-traded options) for which market quotations are readily available are valued at (i) the last sale price or (ii) official closing price as of the close of regular trading on the New York Stock Exchange (“NYSE”) or, (iii) if there is no such reported sale or official closing price (or in the event the Manager deems the over-the-counter (“OTC”) market to be a better indicator of market value), at the most recent bid price. Unlisted securities for which market quotations are readily available are generally valued at the most recent bid price. Non-emerging market debt instruments with a remaining maturity of sixty days or less may be valued at amortized cost, which approximates market value. Derivatives and other securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or persons acting at their direction pursuant to procedures approved by the Trustees. Although the goal of fair valuation is to determine the amount the owner of the securities might reasonably expect to receive upon their current sale, because of the uncertainty inherent in fair value pricing, the value determined for a particular security may be materially different from the value realized upon its sale. During the year ended February 28, 2011, the Manager has evaluated the Fund’s OTC derivatives contracts and determined that no reduction in value was warranted on account of the creditworthiness of a counterparty. See Note 4 for a further discussion on valuation of derivative financial instruments.
 
Typically the Fund values debt instruments based on the most recent bid supplied by a single pricing source chosen by the Manager. Although the Manager normally does not evaluate pricing sources on a day-to-day basis, it does evaluate pricing sources on an ongoing basis and may change a pricing source at any time. The Manager monitors erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and has discretion to override a price supplied by a source (e.g., by taking a price supplied by another) when it believes that the price supplied is not reliable. Although alternative prices are

         
22
       

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
available for securities held by the Fund, those alternative sources are not typically part of the valuation process and would not necessarily confirm the security price used by the Fund. Therefore, the existence of those alternative sources does not necessarily provide greater certainty about the prices used by the Fund. As of February 28, 2011, the total value of securities held for which no alternative pricing source was available represented 5.3% of the net assets of the Fund.
 
In accordance with the authoritative guidance on fair value measurements and disclosures under U.S. GAAP, the Fund discloses the fair value of its investments in a three-level hierarchy. The valuation hierarchy is based upon the relative observability of inputs to the valuation of the Fund’s investments. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
 
During the current year, the Fund became subject to an amendment to authoritative accounting guidance that requires new disclosures and clarifies existing disclosure requirements about fair value measurements. Specifically, the amendment requires (a) the disclosure of inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 positions, (b) disclosure of transfers between all levels (including Level 1 and Level 2) on a gross basis (i.e., transfers out must be disclosed separately from transfers in), and requires discussion of the reason(s) for significant transfers, and (c) purchases, sales, issuances and settlements be disclosed separately (i.e. gross) within the Level 3 roll-forward. The guidance also clarifies the levels of disaggregation in presenting fair value disclosures for each class of assets and liabilities. The effective date of the guidance was for interim and annual periods beginning after December 15, 2009; except for the requirement to provide Level 3 activity for purchases, sales, issuances and settlements on a gross basis, which was effective for interim and annual periods beginning after December 15, 2010.
 
The three levels are defined as follows:
 
Level 1 – Valuations based on quoted prices for identical securities in active markets.
 
Level 2 – Valuations determined using other significant direct or indirect observable inputs. These inputs may include most recent bid prices, interest rates, prepayment speeds, credit risk, yield curves and similar data. The Fund also used third party valuation services (which use industry models and inputs from pricing vendors) to value certain credit default swaps.
 
Level 3 – Valuations based primarily on inputs that are unobservable and significant. The Fund utilized a number of fair value techniques on Level 3 investments, including the following: The Fund valued certain securities using indicative bids or market values received from primary pricing sources. The Fund also used third party valuation services to value certain credit default swaps using unobservable inputs.

         
        23

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a summary of the respective levels assigned to the Fund’s investments and derivatives, if any, as of February 28, 2011:
 
ASSET VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Assets
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Debt Obligations
                               
Asset-Backed Securities
  $ —     $ 70,584,749     $ 293,962,357     $ 364,547,106  
Foreign Government Obligations
    —       40,027,538       —       40,027,538  
U.S. Government
    152,062,500       233,452,882       —       385,515,382  
U.S. Government Agency
    —       794,496       —       794,496  
                                 
TOTAL DEBT OBLIGATIONS
    152,062,500       344,859,665       293,962,357       790,884,522  
                                 
Options Purchased
    —       1,137,874       12,123,200       13,261,074  
Short-Term Investments
    37,474,053       91,884,807       —       129,358,860  
                                 
Total Investments
    189,536,553       437,882,346       306,085,557       933,504,456  
                                 
Derivatives*
                               
Swap Agreements
                               
Credit Risk
    —       4,499,276       —       4,499,276  
Interest Rate Risk
    —       14,095,436       —       14,095,436  
Futures Contracts
                               
Interest Rate Risk
    6,643,303       —       —       6,643,303  
                                 
Total
  $ 196,179,856     $ 456,477,058     $ 306,085,557     $ 958,742,471  
                                 

         
24
       

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
LIABILITY VALUATION INPUTS
 
                                 
    Quoted Prices
   Significant
        
    in Active
   Other
   Significant
    
    Markets for
   Observable
   Unobservable
    
    Identical Liabilities
   Inputs
   Inputs
    
Description
  (Level 1)   (Level 2)   (Level 3)   Total
 
Derivatives *
                               
Written Options
                               
Foreign Currency Risk
  $ —     $ (412,288 )   $ —     $ (412,288 )
Credit Risk
    —       (5,500 )     —       (5,500 )
Swap Agreements
                               
Credit Risk
    —       (3,990,060 )     (57,502 )     (4,047,562 )
Interest Rate Risk
    —       (49,951,718 )     —       (49,951,718 )
Futures Contracts
                               
Interest Rate Risk
    (35,597,313 )     —       —       (35,597,313 )
                                 
Total
  $ (35,597,313 )   $ (54,359,566 )   $ (57,502 )   $ (90,014,381 )
                                 
 
The risks referenced above are not intended to be inclusive of all risks. Please see the Investment Risks and Derivative Financial Instruments sections below for a further discussion of risks.
 
            * Because the tables above are based on market values or unrealized appreciation (depreciation) rather than the notional amounts of derivatives, the uncertainties surrounding the valuation inputs for a derivative are likely to be more significant to the Fund’s net asset value than the uncertainties surrounding inputs for a non-derivative security with the same market value.
 
The aggregate net values of the Fund’s direct investments in securities and derivative financial instruments using Level 3 inputs were 36.0% and (0.1)% of total net assets, respectively.
 
For the year ended February 28, 2011, there were no significant transfers between Level 1 and Level 2.

         
        25

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a reconciliation of investments and derivatives, if any, in which significant unobservable inputs (Level 3) were used in determining value:
 
                                                                           
 
                                      Net Change in
                                      Unrealized
                                      Appreciation
                                      (Depreciation)
                                      from
    Balances
               Change in
           Balances
     Investments
    as of
   Net
   Accrued
   Total
   Unrealized
   Transfer
   Transfers
   as of
     Still Held as of
    February 28,
   Purchases/
   Discounts/
   Realized
   Appreciation
   into
   out of
   February 28,
     February 28,
    2010   (Sales)   Premiums   Gain/(Loss)   (Depreciation)   Level 3*   Level 3*   2011     2011
Debt Obligations
                                                                         
Asset-Backed Securities
  $ 393,274,023     $ (138,163,022 )   $ 97,564     $ (541,033 )   $ 42,153,389     $ —     $ (2,858,564 )**   $ 293,962,357       $ 40,797,686  
Purchased Options
    —       —       —       —       1,395,392       10,727,808 **     —       12,123,200         1,395,392  
Swaps
    1,615,442       (360,867 )     —       360,867       (1,163,728 )     —       (509,216 )**     (57,502 )       360,635  
                                                                           
Total
  $ 394,889,465     $ (138,523,889 )   $ 97,564     $ (180,166 )   $ 42,385,053     $ 10,727,808     $ (3,367,780 )   $ 306,028,055       $ 42,553,713  
                                                                           
 
            * The Fund recognizes investments and derivatives transferred into Level 3 at the value at the beginning of the period and transferred out of Level 3 at the value at the end of the period.
            ** Financial assets transferred between Level 2 and Level 3 were due to a change in observable and/or unobservable inputs.
 
Foreign currency translation
The market values of foreign securities, currency holdings and related assets and liabilities are typically translated into U.S. dollars at the close of regular trading on the NYSE, generally at 4:00 pm. Income and expenses denominated in foreign currencies are typically translated into U.S. dollars at the close of regular trading on the NYSE on the business day the income and expenses are accrued or incurred. Fluctuations in the value of currency holdings and other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains or losses. Realized gains or losses and unrealized appreciation or depreciation on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not separated on the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.
 
Repurchase agreements
The Fund may enter into repurchase agreements. Under a repurchase agreement 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 it acquired under the repurchase agreement. The value of the securities acquired is required by contract to be marked to market daily and additional collateral is required to be transferred so that the market value is at least

         
26
       

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
equal to the amount owed to the Fund by the seller. If the seller of a repurchase agreement defaults or enters into insolvency proceedings and/or the value of the securities subject to the repurchase agreement is insufficient, the Fund’s recovery of cash from the seller may be delayed and the Fund may incur a loss equal to the difference between the cash it paid and the value of the securities. The Fund had no repurchase agreements outstanding at the end of the period.
 
Reverse repurchase agreements
The Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement the Fund sells portfolio assets subject to an agreement by the Fund to repurchase the same assets at an agreed upon price and date. The Fund can use the proceeds received from entering into a reverse repurchase agreement to make additional investments, which generally causes the Fund’s portfolio to behave as if it were leveraged. If the buyer in a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund may be unable to recover the securities it sold and as a result would realize a loss equal to the difference between the value of those securities and the payment it received for them. The size of this loss will depend upon the difference between what the buyer paid for the securities the Fund sold to it and the value of those securities (e.g., a buyer may pay $95 for a bond with a market value of $100). In the event of a buyer’s bankruptcy or insolvency, the Fund’s use of proceeds from the sale of its securities may be restricted while the other party or its trustee or receiver determines whether to honor the Fund’s right to repurchase the securities. As of February 28, 2011, the Fund had received $38,568,519 from reverse repurchase agreements relating to securities with a market value, plus accrued interest, of $40,426,097. Reverse repurchase agreements outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Inflation-indexed bonds
The Fund may invest in inflation indexed bonds. Inflation indexed bonds are fixed income securities whose principal value is adjusted periodically according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that reflects inflation in the principal value of the bond. Most other issuers pay out any inflation related accruals as part of a semiannual coupon.
 
The value of inflation indexed bonds is expected to change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates (i.e., stated interest rates) and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate than nominal interest rates, real interest rates (i.e. nominal interest rate minus inflation) might decline, leading to an increase in value of inflation indexed bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation indexed bonds. There can be no assurance, however, that the value of inflation indexed bonds will be directly correlated to changes in nominal interest rates, and short term increases in inflation may lead to a decline in their value. Coupon payments received by the Fund from inflation indexed bonds are included in the Fund’s gross income for the period in which they accrue. In addition, any increase or decrease in the principal amount of an inflation indexed bond will increase or decrease taxable ordinary income to the Fund, even though

         
        27

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
principal is not paid until maturity. Inflation-indexed bonds outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Taxes
The Fund has elected to be treated as a partnership for U.S. federal income tax purposes. As a partnership, the Fund is not itself subject to federal income tax. Instead, each shareholder is required to take into account in determining its tax liability its distributive share of items of Fund income, gain, loss, deduction, credit, and tax preference for each taxable year substantially as though such items have been realized directly by the shareholder and without regard to whether any distribution by the Fund has been or will be received. The Fund trades securities for its own account and, as such, is generally not subject to U.S. tax on such earnings (other than certain withholding taxes). The Manger intends to conduct the business of the Fund to the maximum extent practicable so that the Fund’s activities do not constitute a U.S. trade or business. Accordingly, no provision (benefit) for U.S. federal and state income tax is reflected in the accompanying financial statements. Dividends and other revenue may be subject to withholding or similar taxes imposed by the country in which such dividends or other revenue originate. The Fund may be subject to taxation on realized capital gains, repatriation proceeds and other transaction-based taxes imposed by certain countries in which it invests. Taxes and associated penalty and interest amounts related to capital gains realized during the year ended February 28, 2011, if any, are reflected as part of Net realized gain (loss) in the Statement of Operations. Changes in tax liabilities related to capital gain taxes on unrealized investment gains, if any, are reflected as part of Change in net unrealized appreciation (depreciation) in the Statement of Operations. Transaction-based charges are generally calculated as a percentage of the transaction amount and are paid upon the sale or transfer of portfolio securities subject to such taxes.
 
As of February 28, 2011, the approximate cost for U.S. federal income tax purposes and gross and net unrealized appreciation (depreciation) in value of investments were as follows:
 
                                     
                Net Unrealized
    
        Gross Unrealized
   Gross Unrealized
   Appreciation
    
    Aggregate Cost   Appreciation   (Depreciation)   (Depreciation)    
 
    $ 1,021,104,743     $ 13,961,380     $ (101,561,667 )   $ (87,600,287 )    
 
The Fund is subject to authoritative accounting guidance related to the accounting and disclosure of uncertain tax positions under U.S. GAAP. This guidance sets forth a minimum threshold for the financial statement recognition of tax positions taken based on the technical merits of such positions. The tax laws of the United States and non-U.S. countries are subject to change. Recently enacted and proposed legislation currently under consideration in various jurisdictions, including the U.S., might affect the way the Fund and its investors are taxed prospectively and retroactively. The Fund files tax returns and/or adopts certain tax positions in various jurisdictions. Prior to the expiration of the relevant statutes of limitations, if any, the Fund is subject to examination by U.S. federal, state, local and non-U.S. jurisdictions with respect to the tax returns it has filed and the tax positions it has adopted. The Fund did not have any unrecognized tax benefits or liabilities at period-end, nor did it have any increases or

         
28
       

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
decreases in unrecognized tax benefits or liabilities for the year ended February 28, 2011 that would materially impact its financial position. For U.S. federal and state tax filings, the tax years which are generally subject to examination by the relevant U.S. federal and state tax authorities include the years ended February 29, 2008 through February 28, 2011.
 
Distributions
Because the Fund has elected to be treated as a partnership for U.S. federal income tax purposes, it is not required to make distributions to its shareholders. It is the policy of the Fund to declare and pay distributions as determined by the Trustees (or their delegates). Distributions made by the Fund, if any, other than distributions made in partial or complete redemption of shareholders’ interests in the Fund, are reported in the Fund’s Statement of Changes in Net Assets as cash distributions to shareholders.
 
Security transactions and related investment income
Security transactions are accounted for in the financial statements on trade date. For purposes of daily net asset value calculations, the Fund’s policy is that security transactions are generally accounted for on the following business day. The Manager may override that policy and the Fund may account for security transactions on trade date if it experiences significant purchases or redemptions or engages in significant portfolio transactions. Dividend income, net of applicable foreign withholding taxes, if any, is recorded on the ex-dividend date or, if later, when the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and accretion of discounts. Principal on inflation indexed securities is adjusted for inflation and any increase or decrease is recorded as interest income or investment loss. Coupon income is not recognized on securities for which collection is not expected. Non-cash dividends, if any, are recorded at the fair market value of the asset received. In determining the net gain or loss on securities sold, the Fund uses the identified cost basis.
 
Expenses
Most of the expenses of the Trust are directly identifiable to an individual fund. Common expenses are allocated among the Funds based on, among other things, the nature and type of expense and the relative size of the Funds.
 
State Street Bank and Trust Company (“State Street”) serves as the Fund’s custodian, fund accounting agent and transfer agent. State Street’s fees may be reduced by an earnings allowance calculated on the average daily cash balances the Fund maintains with State Street. The Fund receives the benefit of the earnings allowance. Expense reimbursements are reported as a reduction of expenses in the Statement of Operations.
 
3. Investment risks
 
The value of the Fund’s shares changes with the value of the Fund’s investments. Many factors can affect this value, and you may lose money by investing in the Fund. The Fund is a non-diversified investment company under the Investment Company Act of 1940, as amended, and therefore a decline in the market value of a particular security held by the Fund may affect the Fund’s performance more than if the Fund

         
        29

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
were diversified. The principal risks of investing in the Fund are summarized below. This summary is not intended to include every potential risk of investing in the Fund. The Fund could be subject to additional risks because the types of investments it makes may change over time.
 
• Market Risk — Fixed Income Securities — Typically, the value of fixed income securities will decline during periods of rising interest rates and widening of credit spreads on asset-backed and other fixed income securities.
 
• Leveraging Risk — The Fund’s use of reverse repurchase agreements and other derivatives and securities lending may cause its portfolio to be leveraged. Leverage increases the Fund’s portfolio losses when the value of its investments decline.
 
• Credit and Counterparty Risk — The Fund runs the risk that the issuer or guarantor of a fixed income security, the counterparty to an over-the-counter derivatives contract, a borrower of the Fund’s securities or the obligor of an obligation underlying an asset-backed security will be unable or unwilling to make timely principal, interest, or settlement payments or otherwise honor its obligations. This risk is particularly pronounced for the Fund because it typically uses OTC derivatives, including swap contracts with longer term maturities, and may have significant exposure to a single counterparty. The risk of counterparty default is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions.
 
• Liquidity Risk — Low trading volume, lack of a market maker, a large position or legal restrictions may limit or prevent the Fund from selling particular securities or closing derivative positions at desirable prices. Holding less liquid securities increases the likelihood that the Fund will honor a redemption request in-kind.
 
• Derivatives Risk — The use of derivatives involves the risk that their value may not correlate with the value of the relevant underlying assets, rates or indices. Derivatives also present other Fund risks, including market risk, liquidity risk, currency risk, and credit and counterparty risk.
 
• Focused Investment Risk — Focusing investments in countries, regions, sectors or companies with high positive correlations to one another creates additional risk. This risk may be particularly pronounced for the Fund because of its exposure to asset-backed securities secured by different types of consumer debt (e.g., credit-card receivables, automobile loans and home equity loans).
 
Other principal risks of an investment in the Fund include Foreign Investment Risk (risk that the market prices of foreign securities will fluctuate more rapidly and to a greater extent than those of U.S. securities, which may adversely affect the value of the Fund’s foreign investments); Currency Risk (risk that fluctuations in exchange rates will adversely affect the value of the Fund’s foreign currency holdings and investments denominated in foreign currencies); Market Disruption and Geopolitical Risk (risk that geopolitical events will increase market volatility and have adverse long-term effects on U.S. and world

         
30
       

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
economies and markets generally); Large Shareholder Risk (risk that shareholders of the Fund, such as institutional investors, asset allocation funds, or other GMO Funds, will disrupt the Fund’s operations by purchasing or redeeming Fund shares in large amounts and/or on a frequent basis); and Management and Operational Risk (risk that the Manager’s strategies and techniques will fail to produce the desired results and that deficiencies in the Manager’s or a service provider’s internal systems or controls will cause losses for the Fund or hinder Fund operations).
 
The most significant market risk for Funds investing in fixed income securities is that the securities in which they invest experience severe credit downgrades, illiquidity, and declines in market value during periods of adverse market conditions, such as those that occurred in 2008. These risks apply to the Fund because it invests in asset-backed securities. Asset-backed securities may be backed by many types of assets, including pools of residential and commercial mortgages, automobile loans, educational loans, home equity loans, or credit-card receivables. They also may be backed by pools of corporate or sovereign bonds, bank loans made to corporations, or a combination of these bonds and loans (commonly referred to as “collateralized debt obligations” or “collateralized loan obligations”) and by the fees earned by service providers. Payment of interest on asset-backed securities and repayment of principal largely depend on the cash flows generated by the assets backing the securities. The market risk of a particular asset-backed security depends on many factors, including the deal structure (e.g., determination as to the amount of underlying assets or other support needed to produce the cash flows necessary to service interest and make principal payments), the quality of the underlying assets, the level of credit support, if any, and the credit quality of the credit-support provider, if any. Asset-backed securities involve risk of loss of principal if obligors of the underlying obligations default and the value of the defaulted obligations exceeds the credit support. The obligations of issuers (and obligors of underlying assets) also are subject to bankruptcy, insolvency and other laws affecting the rights and remedies of creditors. Many asset-backed securities owned by the Fund that were once rated investment grade are now rated below investment grade as of the date of this report.
 
The existence of insurance on an asset-backed security does not guarantee that principal and/or interest will be paid because the insurer could default on its obligations. In recent years, a significant number of asset-backed security insurers have defaulted on their obligations.
 
With the deterioration of worldwide economic and liquidity conditions that occurred and became acute in 2008, the markets for asset-backed securities became fractured, and uncertainty about the creditworthiness of those securities (and underlying assets) caused credit spreads (the difference between yields on the asset-backed securities and U.S. Government securities) to widen dramatically. Concurrently, systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions reduced the ability of financial institutions to make markets in many fixed income securities. These events reduced liquidity and contributed to substantial declines in the value of asset-backed and other fixed income securities. There can be no assurance these conditions will not occur again. Also, government actions and proposals affecting the terms of underlying home and consumer loans, changes in demand for products (e.g., automobiles) financed by those loans, and the inability of borrowers to refinance existing loans (e.g.,

         
        31

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
sub-prime mortgages) have had, and may continue to have, adverse valuation and liquidity effects on asset-backed securities.
 
The value of an asset-backed security may depend on the servicing of its underlying assets and is, therefore, subject to risks associated with the negligence or defalcation of its servicer. In some circumstances, the mishandling of related documentation also may affect the rights of security holders in and to the underlying assets. The insolvency of entities that generate receivables or that utilize the assets may result in a decline in the value of the underlying assets, as well as costs and delays. The obligations underlying asset-backed securities, in particular securities backed by pools of residential and commercial mortgages, also are subject to unscheduled prepayment, and a Fund may be unable to invest prepayments at as high a yield as is provided by the asset-backed security.
 
The risk of investing in asset-backed securities has increased because performance of the various sectors in which the assets underlying asset-backed securities are concentrated (e.g., auto loans, student loans, sub-prime mortgages, and credit card receivables) has become more highly correlated since the deterioration in worldwide economic and liquidity conditions referred to above. A single financial institution may serve as a trustee for multiple asset-backed securities. As a result, a disruption in that institution’s business may have a material impact on multiple investments.
 
4. Derivative financial instruments
 
Derivatives are financial contracts whose value depends on, or is derived from, the value of underlying assets, reference rates, or indices, to increase, decrease or adjust elements of the investment exposures of the Fund’s portfolio. Derivatives may relate to securities, interest rates, currencies, currency exchange rates, inflation rates, commodities and related indices, and include foreign currency contracts, swap contracts, reverse repurchase agreements, and other exchange-traded and OTC contracts.
 
The Fund may use derivatives as a substitute for direct investment in securities or other assets. In particular, the Fund may use swaps or other derivatives on an index, a single security or a basket of securities to gain investment exposures (e.g., by selling protection under a credit default swap). The Fund also may use currency derivatives (including forward currency contracts, futures contracts, swap contracts and options) to gain exposure to a given currency.
 
The Fund also may use derivatives in an attempt to reduce its investment exposures (which may result in a reduction below zero). For example, the Fund may use credit default swaps to take a short position with respect to the likelihood of default by an issuer. The Fund also may use currency derivatives in an attempt to reduce (which may result in a reduction below zero) some aspect of the currency exposure in its portfolio. For these purposes, the Fund may use an instrument denominated in a different currency that the Manager believes is highly correlated with the relevant currency.
 
The Fund may use derivatives in an attempt to adjust elements of its investment exposures to various securities, sectors, markets, indices and currencies without actually having to sell existing investments or

         
32
       

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
make new direct investments. For instance, the Manager may alter the interest rate exposure of debt instruments by employing interest rate swaps. Such a strategy is designed to maintain the Fund’s exposure to the credit of an issuer through the debt instrument, but adjust the Fund’s interest rate exposure through the swap. With these swaps, the Fund and its counterparties exchange interest rate exposure, such as fixed versus variable rates and shorter duration versus longer duration exposure. The Fund also may use currency derivatives in an attempt to adjust its currency exposure, seeking currency exposure that is different (in some cases, significantly different) from the currency exposure represented by its portfolio investments.
 
The Fund may use derivatives to effect transactions intended as a substitute for securities lending.
 
The use of derivatives involves risks different from, and potentially greater than, the risks associated with investing directly in securities and other more traditional assets. In particular, the use of OTC derivatives exposes the Fund to the risk that the counterparty to a derivatives contract will be unable or unwilling to make timely settlement payments or otherwise to honor its obligations. OTC derivatives contracts typically can be closed out only with the other party to the contract. If the counterparty defaults, the Fund will have contractual remedies, but may not be able to enforce them. Because the contract for each OTC derivative is individually negotiated, the counterparty may interpret contractual terms (e.g., the definition of default) differently than the Fund and if that occurs, the Fund may decide not to pursue its claims against the counterparty rather than incur the cost and unpredictability of legal proceedings. The Fund, therefore, may be unable to obtain payments the Manager believes are owed to it under OTC derivatives contracts or those payments may be delayed or made only after the Fund has incurred the costs of litigation.
 
Sometimes, the Fund may post or receive collateral related to changes in the market value of a derivative. In addition, the Fund may invest in derivatives that do not provide for the counterparty’s obligations to be secured by collateral (e.g., foreign currency forwards; see “Currency Risk” above), that require collateral but the Fund’s security interest in it is not perfected, that require a significant upfront deposit by the Fund unrelated to the derivative’s intrinsic value, or that do not require the collateral to be regularly marked-to-market (e.g., certain OTC derivatives). Even where obligations are required by contract to be collateralized, there is usually a lag between the day the collateral is called for and the day the Fund receives it. When a counterparty’s obligations are not fully secured by collateral, the Fund is exposed to the risk of having limited recourse if the counterparty defaults. The Fund may invest in derivatives with a limited number of counterparties, and events affecting the creditworthiness of any of those counterparties may have a pronounced effect on the Fund.
 
Derivatives risk is particularly acute in environments (like those experienced recently) in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers and subsequent market disruptions. During these periods of market disruptions, the Fund may have a greater need for cash to provide collateral for large swings in its mark-to-market obligations under the derivatives used by the Fund.

         
        33

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
Many derivatives, in particular OTC derivatives, are complex and their valuation often requires modeling and judgment, which increases the risk of mispricing or improper valuation, and there can be no assurance that the pricing models employed by the Fund’s third-party valuation services and/or the Manager will produce valuations that are consistent with the values realized when OTC derivatives are actually closed out or sold. This valuation risk is more pronounced when the Fund enters into OTC derivatives with specialized terms because the value of those derivatives in some cases is determined only by reference to similar derivatives with more standardized terms. As a result, improper valuations may result in increased cash payments to counterparties, undercollateralization and/or errors in the calculation of the Fund’s net asset value.
 
There can be no assurance that the Fund’s use of derivatives will be effective or will have the desired results. Moreover, suitable derivatives are not available in all circumstances. For example, the economic costs of taking some derivative positions may be prohibitive, and if a counterparty or its affiliate is deemed to be an affiliate of the Fund, the Fund will not be permitted to trade with that counterparty. In addition, the Manager may decide not to use derivatives to hedge or otherwise reduce the Fund’s risk exposures.
 
Derivatives also involve the risk that changes in their value may not correlate perfectly with the assets, rates, or indices they are designed to track. The use of derivatives also may increase the taxes payable by shareholders.
 
Forward currency contracts
The Fund may enter into forward currency contracts, including forward cross currency contracts. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date (or to pay or receive the amount of the change in relative values of the two currencies). The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. The value of each of the Fund’s forward currency contracts is marked to market daily using rates supplied by a quotation service and changes in value are recorded by the Fund as unrealized gains or losses. Realized gains or losses on the contracts are 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.
 
These contracts involve market risk in excess of the unrealized gain or loss. Forward currency contracts expose the Fund to the market risk of unfavorable movements in currency values and the risk that the counterparty will be unable or unwilling to meet the terms of the contracts. Most forward currency contracts are not collateralized. During the year ended February 28, 2011, the Fund used forward currency contracts to adjust exposure to foreign currencies. The Fund had no forward currency contracts outstanding at the end of the period.
 
Futures contracts
The Fund may purchase and sell futures contracts. A futures contract is a contract that obligates the holder to buy or sell an asset at a predetermined delivery price at a specified time in the future. Some futures contracts are net (cash) settled. Upon entering into a futures contract, the Fund is required to deposit cash,

         
34
       

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
U.S. government and agency obligations or other liquid assets with the futures clearing broker in accordance with the initial margin requirements of the broker or exchange. Futures contracts are generally valued at the settlement price established at the close of business each day by the board of trade or exchange on which they are traded. The value of each of the Fund’s futures contracts is 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 settled on the following business day. Gains or losses are recognized but not accounted for as realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin as recorded on the Statement of Assets and Liabilities. Under some circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day’s settlement price, thereby effectively preventing liquidation of unfavorable positions. Futures contracts expose the Fund to the risk that it may not be able to enter into a closing transaction due to an illiquid market. During the year ended February 28, 2011, the Fund used futures contracts to adjust exposure to certain markets and enhance the diversity and liquidity of the portfolio. Futures contracts outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Options
The Fund may purchase call and put options. A call option gives the holder the right to buy an asset; a put option gives the holder the right to sell an asset. By purchasing options the Fund alters its exposure to the underlying asset by, in the case of a call option, entitling it to purchase the underlying asset at a set price from the writer of the option and, in the case of a put option, entitling it to sell the underlying asset at a set price to the writer of the option. The Fund pays a premium for a purchased option. That premium is disclosed in the Schedule of Investments and is subsequently reflected in the marked-to-market value of the option. The potential loss associated with purchasing put and call options is limited to the premium paid. During the year ended February 28, 2011, the Fund used purchased option contracts to adjust exposure to currencies and certain markets as well as to enhance the diversity and liquidity of the portfolio. Option contracts purchased by the Fund and outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
The Fund may write (i.e., sell) call and put options. Writing options alters the Fund’s exposure to the underlying asset by, in the case of a call option, obligating the Fund to sell the underlying asset at a set price to the option-holder and, in the case of a put option, obligating the Fund to purchase the underlying asset at a set price from the option-holder. In some cases (e.g., index options), settlement will be in cash, based on a formula price. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and is subsequently included in the marked-to-market value of the option. As a writer of an option, the Fund has no control over whether it will be required to sell (call) or purchase (put) the underlying asset and as a result bears the risk of an unfavorable change in the price of the asset underlying the option. In the event that the Fund writes call options without an offsetting exposure (e.g., call options on an asset that the Fund does not own), it bears an unlimited risk of loss if the price of the underlying asset increases during the term of the option. OTC options expose the Fund to the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. During the year ended February 28, 2011, the Fund used written option contracts to adjust exposure to currencies

         
        35

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
and otherwise adjust currency exchange rate risk, as well as to enhance the diversity and liquidity of the portfolio and to adjust interest rate exposure. Written options outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
When an option contract is closed, 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 at the time it was closed. Realized gains and losses on purchased options are included in realized gains and losses on investment securities. If a written call option is exercised, the premium originally received is recorded as an addition to sales proceeds. If a written put option is exercised, the premium originally received is recorded as a reduction in the cost of investments purchased. Gains and losses from the expiration or closing of written option contracts are separately disclosed in the Statement of Operations.
 
For the year ended February 28, 2011, investment activity in options contracts written by the Fund was as follows:
 
                                                 
    Puts   Calls
    Principal
   Number
       Principal
   Number
    
    Amount
   of Future
       Amount
   of Future
    
    of Contracts   Contracts   Premiums   of Contracts   Contracts   Premiums
 
Outstanding, beginning of year
  $ (1,023,000,000 )     (6,000 )   $ (18,989,081 )   $ (4,838,000,000 )     (16,000 )   $ (15,976,151 )
Options written
    (167,750,000 )          —       (3,773,236 )     (1,260,000,000 )          —       (26,165,498 )
Options bought back
    925,750,000       2,000       14,699,190       3,195,000,000       16,000       39,185,057  
Options expired
    265,000,000       4,000       8,063,127       2,400,000,000       —       1,158,594  
Options sold
    —       —       —       —       —       —  
                                                 
Outstanding, end of year
  $ —       —     $ —     $ (503,000,000 )     —     $ (1,797,998 )
                                                 
 
Exchange-traded options are valued at the last sale price, provided that price is between the closing bid and ask prices. If the last sale price is not within this range, then they will be valued at the closing bid price for long positions and the closing ask price for short positions. The Fund values OTC options using inputs provided by primary pricing sources and industry models.
 
Swap agreements
The Fund may enter into various types of swap agreements, including, without limitation, swaps on securities and securities indices, interest rate swaps, total return swaps, credit default swaps, variance swaps, commodity swaps, inflation swaps and other types of available swaps. A swap agreement is an agreement to exchange the return generated by one asset for the return generated by another asset. Some swap contracts are net settled. When entering into a swap agreement and during the term of the

         
36
       

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
transaction, the Fund and/or the swap counterparty may post or receive cash or securities as collateral.
 
Initial upfront payments received or made upon entering into a swap agreement are included in the fair market value of the swap. The Fund does not amortize upfront payments. Net periodic payments made or received to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors) are recorded as realized gains or losses on the Statement of Operations. A liquidation payment received or made at the termination of the swap agreements is recorded as realized gain or losses the Statement of Operations.
 
Interest rate swap agreements involve an exchange by the parties of their respective commitments to pay or right to receive interest, (e.g., an exchange of floating rate interest payments for fixed rate interest payments with respect to the notional amount of principal).
 
Total return swap agreements involve a commitment by one party to pay interest to the other party in exchange for a payment to it from the other party based on the return of a reference asset (e.g., a security or basket of securities), both based on notional amounts. To the extent the return of the reference asset exceeds or falls short of the interest payments, one party is entitled to receive a payment from or obligated to make a payment to the other party.
 
In a credit default swap agreement, one party makes payments to another party in exchange for the right to receive a specified return (or to put a security) if a credit event (e.g., default or similar event) occurs with respect to a reference entity or entities. A seller of credit default protection receives periodic payments in return for its obligation to pay the principal amount of a debt security (or other agreed-upon value) to the other party upon the occurrence of a credit event. If no credit event occurs, the seller has no payment obligations so long as there is no early termination.
 
For credit default swap agreements on asset-backed securities, a credit event may be triggered by various occurrences, which may include an issuer’s failure to pay interest or principal on a reference security, a breach of a material representation or covenant, an agreement by the holders of an asset-backed security to a maturity extension, or a write-down on the collateral underlying the security. For credit default swap agreements on corporate or sovereign issuers, a credit event may be triggered by such occurrences as the issuer’s bankruptcy, failure to pay interest or principal, repudiation/moratorium and/or restructuring.
 
Variance swap agreements involve an agreement by two parties to exchange cash flows based on the measured variance (or square of volatility) of a specified underlying asset. One party agrees to exchange a “fixed rate” or strike price payment for the “floating rate” or realized price variance on the underlying asset with respect to the notional amount. At inception, the strike price chosen is generally fixed at a level such that the fair value of the swap is zero. As a result, no money changes hands at the initiation of the contract. At the expiration date, the amount payable by one party to the other is the difference between the realized price variance of the underlying asset and the strike price multiplied by the notional amount. A receiver of the realized price variance would be entitled to receive a payment when the realized price variance of the underlying asset is greater than the strike price and would be obligated to make a payment

         
        37

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
when that variance is less than the strike price. A payer of the realized price variance would be obligated to make a payment when the realized price variance of the underlying asset is greater than the strike price and would be entitled to receive a payment when that variance is less than the strike price. This type of agreement is essentially a forward contract on the future realized price variance of the underlying asset.
 
The Fund prices its swap agreements daily using models that may incorporate quotations from market makers and records the change in value, if any, as unrealized gain or loss in the Statement of Operations. Gains or losses are realized upon termination of the swap agreements or reset dates, as appropriate.
 
Swap agreements generally are not traded on publicly traded exchanges. The values assigned to them may differ significantly from the values that would be realized upon termination, and the differences could be material. Entering into swap agreements involves counterparty credit, legal, and documentation risk that is generally not reflected in the models used to price the swap agreement. Such risks include the possibility that the counterparty defaults on its obligations to perform or disagrees as to the meaning of contractual terms, that the Fund has amounts on deposit in excess of amounts owed by the Fund, or that any collateral the other party posts is insufficient or not timely received by the Fund. Credit risk is particularly acute in economic environments in which financial services firms are exposed to systemic risks of the type evidenced by the insolvency of Lehman Brothers in 2008 and subsequent market disruptions. During the year ended February 28, 2011, the Fund used swap agreements to hedge against default risk, to adjust exposures to certain interest rates, and to achieve exposure to a reference entity’s credit. Swap agreements outstanding at the end of the period are listed in the Fund’s Schedule of Investments.
 
Rights and warrants
The Fund may purchase or otherwise receive warrants or rights. Warrants and rights generally give the holder the right to receive, upon exercise, a security of the issuer at a set price. Funds typically use warrants and rights in a manner similar to their use of purchased options on securities, as described in options above. Risks associated with the use of warrants and rights are generally similar to risks associated with the use of purchased options. However, warrants and rights often do not have standardized terms, and may have longer maturities and may be less liquid than exchange-traded options. In addition, the terms of warrants or rights may limit the Fund’s ability to exercise the warrants or rights at such times and in such quantities as the Fund would otherwise wish. The Fund held no rights or warrants at the end of the period.

         
38
       

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
The following is a summary of the fair valuations of derivative instruments categorized by risk exposure:
 
Fair Values of Derivative Instruments on the Statement of Assets and Liabilities as of February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Assets:
                                               
Investments, at value (purchased options)
  $ 12,441,800     $ 741,774     $ 77,500     $      —     $      —     $ 13,261,074  
Unrealized appreciation on futures contracts *
    6,643,303       —       —       —       —       6,643,303  
Unrealized appreciation on swap agreements
    14,095,436       —       4,499,276       —       —       18,594,712  
                                                 
Total
  $ 33,180,539     $ 741,774     $ 4,576,776     $ —     $ —     $ 38,499,089  
                                                 
                                                 
Liabilities:
                                               
Written options outstanding
  $ —     $ (412,288 )   $ (5,500 )   $ —     $ —     $ (417,788 )
Unrealized depreciation on futures contracts *
    (35,597,313 )     —       —       —       —       (35,597,313 )
Unrealized depreciation on swap agreements
    (49,951,718 )     —       (4,047,562 )     —       —       (53,999,280 )
                                                 
Total
  $ (85,549,031 )   $ (412,288 )   $ (4,053,062 )   $ —     $ —     $ (90,014,381 )
                                                 
 
The Effect of Derivative Instruments on the Statement of Operations for the Period Ended February 28, 2011Ù:
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
Net Realized Gain (Loss) on:
                                               
Investments (purchased options)
  $ 52,953,788     $ (2,939,878 )   $ —     $      —     $      —     $ 50,013,910  
Written options
    (35,743,454 )     9,718,106       —       —       —       (26,025,348 )
Forwards currency contracts
    —       2,697,544       —       —       —       2,697,544  
Futures contracts *
    21,009,178       —       —       —       —       21,009,178  
Swap contracts
    8,660,039       —       59,093       —       —       8,719,132  
                                                 
Total
  $ 46,879,551     $ 9,475,772     $ 59,093     $ —     $ —     $ 56,414,416  
                                                 

         
        39

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
  
  The Effect of Derivative Instruments on the Statement of Operations for the Period Ended February 28, 2011Ù: — continued
 
                                                 
    Interest rate
   Foreign currency
   Credit
   Equity
   Other
    
    contracts   contracts   contracts   contracts   contracts   Total
 
                                                 
Change in Unrealized Appreciation (Depreciation) on:
                                               
Investments (purchased options)
  $ (19,387,252 )   $ (87,216 )   $ (1,397,500 )   $ —     $ —     $ (20,871,968 )
Written options
    4,976,657       (5,982,561 )     694,500       —       —       (311,404 )
Futures contracts *
    (29,600,517 )     —       —               —       (29,600,517 )
Forward currency contracts
    —       4,023,826       —       —       —       4,023,826  
Swap contracts
    (18,758,330 )     —       (1,163,728 )     —       —       (19,922,058 )
                                                 
Total
  $ (62,769,442 )   $ (2,045,951 )   $ (1,866,728 )   $ —     $ —     $ (66,682,121 )
                                                 
 
            Ù Because the Fund values its derivatives at fair value and recognizes changes in fair value through the Statement of Operations, it does not qualify for hedge accounting under authoritative guidance for derivative instruments. The Fund’s investments in derivatives may represent an economic hedge; however, they are considered to be non-hedge transactions for the purpose of these tables.
            * The Fair Values of Derivative Instruments table includes cumulative appreciation/depreciation of futures contracts as reported in the Schedule of Investments.
 
The volume of derivative activity, based on absolute values (forward currency contracts and futures contracts), or notional amounts (swap agreements), or principal amounts (options) outstanding at each month-end, was as follows for the year ended February 28, 2011:
 
                                 
    Forward
            
    currency
   Futures
   Swap
    
    contracts   contracts   agreements   Options
 
Average amount outstanding
  $ 109,935,037     $ 5,989,665,411     $ 4,084,791,267     $ 4,540,271,616  
 
5. Fees and other transactions with affiliates
 
GMO does not charge the Fund any management or service fees for its services. The Manager has contractually agreed to reimburse the Fund for the portion of the Fund’s total annual operating expenses that exceed 0.00% of the Fund’s average daily net assets (the “Expense Reimbursement Amount”) exclusive of “Excluded Fund Fees and Expenses.” “Excluded Fund Fees and Expenses” means fees and expenses of the independent Trustees of the Trust and their independent counsel, fees and expenses for legal services the Manager for the Trust has not undertaken to pay, any compensation and expenses of the Trust’s Chief Compliance Officer (“CCO”) (excluding any employee benefits), brokerage commissions, securities-lending fees and expenses, interest expense, transfer taxes, and other investment-related costs (including expenses associated with investments in any company that is an investment company (including an exchange-traded fund) or would be an investment company under the 1940 Act, but for the exceptions

         
40
       

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
to the definition of investment company provided in Sections 3(c)(1) and 3(c)(7) of the 1940 Act), hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes). The Fund’s contractual expense limitation will continue through at least June 30, 2011, and may not be terminated prior to this date without consent by the Fund’s Board of Trustees.
 
The Fund’s portion of the fees paid by the Trust to the Trust’s independent Trustees and their legal counsel and any Trust Officers or agents unaffiliated with the Manager during the year ending February 28, 2011 was $23,208 and $6,755, respectively. The compensation and expenses of the Trust Officers or agents unaffiliated with the Manager are included in miscellaneous expenses in the Statement of Operations.
 
6. Purchases and sales of securities
 
Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2011 were as follows:
 
                 
    Purchases   Sales
 
U.S. Government securities
  $ 280,413,100     $ 205,752,899  
Investments (non-U.S. Government securities)
    40,141,103       324,225,508  
 
7. Guarantees
 
In the normal course of business the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as it involves possible future claims that may or may not be made against the Fund. Based on experience, the Manager is of the view that the risk of loss to the Fund in connection with the Fund’s indemnification obligations is remote; however, there can be no assurance that such obligations will not result in material liabilities that adversely affect the Fund.
 
8. Principal shareholders and related parties
 
As of February 28, 2011, 63.42% of the outstanding shares of the Fund were held by one shareholder. On that date, no other shareholder owned more than 10% of the outstanding shares of the Fund. The shareholder is another fund of the Trust.
 
As of February 28, 2011, no shares of the Fund were held by senior management of the Manager and GMO Trust officers and all of the Fund’s shares were held by accounts for which the Manager had investment discretion.

         
        41

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)

Notes to Financial Statements — (Continued)
February 28, 2011
 
9. Share transactions
 
The Declaration of Trust permits each Fund 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, 2011   February 28, 2010
    Shares   Amount   Shares   Amount
                 
 
Shares sold
    467,420     $ 10,391,687       1,866,157     $ 38,085,686  
Shares repurchased
    (6,455,254 )     (143,713,805 )     (1,477,996 )     (30,012,910 )
                                 
Net increase (decrease)
    (5,987,834 )   $ (133,322,118 )     388,161     $ 8,072,776  
                                 

         
42
       

 

Report of Independent Registered Public Accounting Firm
 
To the Trustees of GMO Trust and the Shareholders of
GMO World Opportunity Overlay Fund:
 
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 Opportunity Overlay Fund (the “Fund”) (a series of GMO Trust) at February 28, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’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 the standards of the Public Company Accounting Oversight Board (United States). Those standards 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, 2011 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
 
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 25, 2011

         
        43

 

GMO World Opportunity Overlay Fund
(A Series of GMO Trust)

Fund Expenses
February 28, 2011 (Unaudited)
 
Expense Examples: The following information is in relation to expenses for the six month period ended February 28, 2011.
 
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including redemption fees; and (2) ongoing costs. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
 
These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period, September 1, 2010 through February 28, 2011.
 
Actual Expenses
 
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, a $10,000,000 account value divided by $1,000 = 10,000), then multiply the result by the number in the first line under the heading entitled “Net Expense Incurred” to estimate the expenses you paid on your account during this period.
 
Hypothetical Example for Comparison Purposes
 
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund with other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.

         
44
       

 

 
GMO World Opportunity Overlay Fund
(A Series of GMO Trust)

Fund Expenses — (Continued)
February 28, 2011 (Unaudited)
 
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
 
                                 
    Annualized
   Beginning
   Ending
   Net
    Net Expense
   Account
   Account
   Expense
    Ratio   Value   Value   Incurred*
1) Actual
    0.03 %   $ 1,000.00     $ 1,023.00     $ 0.15  
2) Hypothetical
    0.03 %   $ 1,000.00     $ 1,024.65     $ 0.15  
                                 
 
            * Expenses are calculated using the annualized expense ratio (including interest expense) for the six months ended February 28, 2011, multiplied by the average account value over the period, multiplied by 181 days in the period, divided by 365 days in the year.

         
        45

 

Trustees and Officers (Unaudited)
The following tables present information regarding each Trustee and officer of the Trust as of February 28, 2011. Each Trustee’s and officer’s date of birth (“DOB”) is set forth after his or her name. Unless otherwise noted, (i) each Trustee and officer has engaged in the principal occupation(s) noted in the table for at least the most recent five years, although not necessarily in the same capacity, and (ii) the address of each Trustee and officer is c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. Each Trustee serves in office until the earlier of (a) the election and qualification of a successor at the next meeting of shareholders called to elect Trustees or (b) the Trustee dies, resigns, or is removed as provided in the Trust’s governing documents. Each of the Trustees of the Trust, other than Mr. Kittredge, is not an “interested person” of the Trust, as such term is used in the 1940 Act (each, an “Independent Trustee”). Because the Funds do not hold annual meetings of shareholders, each Trustee will hold office for an indeterminate period. Each officer serves in office until his or her successor is elected and determined to be qualified to carry out the duties and responsibilities of the office, or until the officer resigns or is removed from office.
 
Independent Trustees:
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with the
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Trust   Time Served   Five Years   Overseen     Held
 
Donald W. Glazer, Esq.
DOB: 07/26/1944 		  Chairman of
the Board of
Trustees 		  Chairman of the Board of Trustees since March 2005; Lead Independent Trustee (September 2004 – March 2005); Trustee since December 2000.   Consultant – Law and Business1; Author of Legal Treatises.     63     None.
                         
Peter Tufano
DOB: 04/22/1957 		  Trustee   Since December 2008.   Sylvan C. Coleman Professor of Financial Management, Harvard Business School (since 1989).     63     Trustee of State Street Navigator Securities Lending Trust (3 Portfolios).

1 As part of Mr. Glazer’s work as a consultant, he provides part-time consulting services to Goodwin Procter LLP (“Goodwin”). Goodwin has provided legal services to Renewable Resources, LLC, an affiliate of GMO; GMO, in connection with its relationship with Renewable Resources; and funds managed by Renewable Resources. Mr. Glazer has represented that he has no financial interest in, and is not involved in the provision of, such legal services. In the calendar years ended December 31, 2008 and December 31, 2009, these entities paid $183,775 and $397,491, respectively, in legal fees and disbursements to Goodwin. In correspondence with the Staff of the SEC beginning in August 2006, the Independent Trustees’ legal counsel provided the Staff with information regarding Mr. Glazer’s relationship with Goodwin and his other business activities. On September 11, 2007, based on information that had been given to the Staff as of that date, the Staff provided oral no-action assurance consistent with the opinion of the Independent Trustees’ legal counsel that Mr. Glazer is not an “interested person” of the Trust.

         
46        

 

Independent Trustees: — (Continued)
 
                         
                Number of
      
            Principal
   Portfolios in
      
    Position(s)
       Occupation(s)
   Fund
     Other
Name and
   Held with the
   Length of
   During Past
   Complex
     Directorships
Date of Birth   Trust   Time Served   Five Years   Overseen     Held
 
                         
Paul Braverman
DOB: 01/25/1949 		  Trustee   Since March 2010.   Director of Courier Corporation (a book publisher and manufacturer) (January 2008 – present); Chief Financial Officer, Wellington Management Company, LLP (an investment adviser) (March 1986 – December 2007).     63     Director of Courier Corporation (a book publisher and manufacturer).
 
Interested Trustee and Officer:
 
                         
                Number of
    
            Principal
   Portfolios in
    
            Occupation(s)
   Fund
   Other
Name and
   Position(s)
   Length of Time
   During Past
   Complex
   Directorships
Date of Birth   Held with Trust   Served   Five Years   Overseen   Held
 
Joseph B. Kittredge, Jr.2
DOB: 08/22/1954 		  Trustee; President
and Chief Executive
Officer of the
Trust 		  Trustee since March
2010; President and
Chief Executive
Officer since March
2009. 		  General Counsel,
Grantham, Mayo, Van Otterloo & Co. LLC (October 2005 – present); Partner, Ropes & Gray LLP (prior to October 2005). 		    63     None.

2 Mr. Kittredge is an “interested person” of the Trust, as such term is used in the 1940 Act (an “Interested Trustee”), by virtue of his positions with the Trust and GMO indicated in the table above.

         
        47

 

Other Officers:
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
Sheppard N. Burnett
DOB: 10/24/1968 		  Treasurer and Chief
Financial Officer 		  Chief Financial Officer since March 2007; Treasurer since November 2006; Assistant Treasurer, September 2004 – November 2006.   Head of Fund Administration (December 2006 – present), Fund Administration Staff (June 2004 – November 2006), Grantham, Mayo, Van Otterloo & Co. LLC.
             
John L. Nasrah
DOB: 05/27/1977 		  Assistant Treasurer   Since March 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (September 2004 – present).
             
Mahmoodur Rahman
DOB: 11/30/1967 		  Assistant Treasurer   Since September 2007.   Fund Administrator, Grantham, Mayo, Van Otterloo & Co. LLC (April 2007 – present); Vice President and Senior Tax Manager, Massachusetts Financial Services Company (January 2000 – April 2007).
             
Carolyn Haley
DOB: 07/12/1966 		  Assistant Treasurer   Since June 2009.   Fund Administrator, Grantham,
Mayo, Van Otterloo & Co. LLC (May 2009 – present); Treasurer and Chief Compliance Officer, Hambrecht & Quist Capital Management LLC (April 2007 – April 2009); Senior Manager, PricewaterhouseCoopers LLP (2003 – 2007).
             
John McGinty
DOB: 08/11/1962 		  Chief Compliance
Officer 		  Since February 2011.   Chief Compliance Officer, Grantham, Mayo, Van Otterloo & Co. LLC (July 2009 – present); Senior Vice President and Deputy General Counsel (January 2007 – January 2009), Vice President and Associate General Counsel (February 2006 – December 2006), Fidelity Investments.
             
Jason B. Harrison
DOB: 01/29/1977 		  Vice President
and Clerk 		  Vice President since
November 2006; Clerk
since March 2006. 		  Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (since February 2006); Attorney, Ropes & Gray LLP (September 2002 – February 2006).

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
48        

 

Other Officers: — (Continued)
 
             
Name and
   Position(s)
   Length of
   Principal Occupation(s)
Date of Birth   Held with Trust   Time Served   During Past Five Years3
 
             
David L. Bohan
DOB: 06/21/1964 		  Vice President and
Assistant Clerk 		  Vice President since
March 2005;
Assistant Clerk
since March 2006. 		  Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Gregory L. Pottle
DOB: 07/09/1971 		  Vice President and
Assistant Clerk 		  Since November 2006.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC.
             
Anne K. Trinque
DOB: 04/15/1978 		  Vice President and
Assistant Clerk 		  Since September 2007.   Legal Counsel, Grantham, Mayo, Van Otterloo & Co. LLC (January 2007 – present); Attorney, Goodwin Procter LLP (September 2003 – January 2007).
             
Cheryl Wakeham
DOB: 10/29/1958 		  Vice President and
Anti-Money
Laundering Officer 		  Since December 2004.   Manager, Client Service
Administration, Grantham, Mayo,
Van Otterloo & Co. LLC.

3 Each of Messrs. Burnett, Bohan and Pottle and Ms. Haley serve as an officer and/or director of certain pooled investment vehicles of which GMO or an affiliate of GMO serves as the investment adviser.

         
        49

 

Item 2. Code of Ethics.
    As of February 28, 2011, the registrant has adopted a Code of Ethics that applies to the Principal Executive Officer and Principal Financial Officer pursuant to the Sarbanes-Oxley Act of 2002. During the year ended February 28, 2011, there were no amendments to a provision of the Code of Ethics nor were there any waivers granted from a provision of the Code of Ethics. A copy of the registrant’s Code of Ethics is filed with this Form N-CSR under item 12 (a).
Item 3. Audit Committee Financial Expert.
    The registrant’s Board of Trustees has determined that the registrant does not have an “audit committee financial expert” (as such term has been defined in Form N-CSR) serving on its audit committee. The registrant’s Board believes that, although none of its members individually meets all required elements of the definition of an “audit committee financial expert”, the members of the registrant’s audit committee collectively possess the knowledge and experience necessary to execute all of the audit committee’s functions, duties and powers.
Item 4. Principal Accountant Fees and Services. *
  (a)   AUDIT FEES: The aggregate fees billed to the registrant for professional services rendered by its independent auditors, PricewaterhouseCoopers LLP for the audit of the registrant’s annual financial statements for 2011 and 2010 were $2,480,460 and $2,429,214, respectively.
 
  (b)   AUDIT-RELATED FEES: The aggregate fees billed to the registrant in 2011 and 2010 for engagements for audit-related services rendered by PricewaterhouseCoopers LLP that related directly to the operations and financial reporting of the Funds were $45,500 and $102,848, respectively. The aggregate fees billed in 2011 and 2010 to the registrant’s Investment Advisor, and any entity controlling, controlled, or under common control with the Advisor that provides ongoing services to the Funds (each, a “Service Affiliate”) for engagements for audit-related services rendered by PricewaterhouseCoopers LLP that related directly to the operations and financial reporting of the Funds were $452,320 and $487,470, respectively.
 
  (c)   TAX FEES: The aggregate fees billed to the registrant in 2011 and 2010 for professional services rendered by PricewaterhouseCoopers LLP for tax compliance, tax advice, and tax planning, including the preparation of Form 1120 RIC, Form 8613 and review of excise tax distribution calculations, were $1,077,010 and $997,685, respectively. The aggregate fees billed in 2011 and 2010 to the registrant’s Service Affiliates for engagements for tax services rendered by PricewaterhouseCoopers LLP that related directly to the operations and financial reporting of the Funds were $13,590 and $13,590, respectively.
 
  (d)   ALL OTHER FEES: No such fees were billed by PricewaterhouseCoopers LLP to the registrant or to the registrant’s Service Affiliates that related directly to the operations and financial reporting of the Funds in 2011 or 2010.
 
  (e)   (1) The Audit Committee has adopted an Audit and Non-Audit Services Pre-Approval Policy (the “Policy”), which sets forth the procedures and the conditions pursuant to which services to be performed by the independent auditor are to be preapproved. Under the Policy, the Audit Committee pre-approves, on an annual basis, the following services: (1) the engagement, scope and terms of the annual audit; (2) certain audit-related services; (3) certain tax services that the Committee believes would not impair, and are consistent with the SEC’s rules on auditor independence; and (4) certain permissible non-audit services that the Committee believes are routine and recurring services and that would not impair, and are consistent with the SEC’s rules on auditor independence, subject to certain limitations on the projected fees associated with each service. All other types of services not included on the schedule to the policy, or for which the projected fees exceed those provided in the schedule, require the specific pre-approval by the Audit Committee or the Chairperson of the Committee (if timing necessitates that preapproval is required before the Committee’s next regularly scheduled meeting) if they are to be provided by the independent auditor.
 
  (e)   (2) None.
 
  (f)   Not applicable.

 

 

  (g)   NON-AUDIT FEES: The aggregate fees billed by PricewaterhouseCoopers LLP in 2011 and 2010 for non-audit services rendered to the registrant, the registrant’s Service Affiliates were $1,588,420 and $1,601,593, respectively. For the fiscal year ended February 28, 2011, this amount reflects the amounts disclosed above in Item 4(b),(c),(d), plus $0 in fees billed to the Funds’ Service Affiliates for non-audit services that did not relate directly to the operations and financial reporting of the Funds. For the fiscal year ended February 28, 2010, this amount reflects the amounts disclosed above in Item 4(b),(c),(d), plus $0 in fees billed to the Funds’ Service Affiliates for non-audit services that did not relate directly to the operations and financial reporting of the Funds.
 
  (h)   The Trust’s Audit Committee has considered whether the provision of non-audit services by registrant’s independent registered public accounting firm to the registrant’s Investment Advisor, and any entity controlling, controlled, or under common control with the Advisor that provided ongoing services to the registrant that were not pre-approved by the Committee (because such services did not relate directly to the operations and financial reporting of the registrant) was compatible with maintaining the independence of the independent registered public accounting firm.
 
*   Includes information regarding all series of GMO Trust.
Item 5. Audit Committee of Listed Registrants.
    Not applicable to this filing.
Item 6. Schedule of Investments.
    The complete schedule of investments for each series of the registrant is included as part of the annual reports to shareholders filed under Item 1 of this Form N-CSR.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
    Not applicable to this registrant.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
    Not applicable to this registrant.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
    Not applicable to this registrant.
Item 10. Submission of Matters to a Vote of Security Holders.
    There were no material changes to the procedures by which shareholders may recommend nominees to the registrant’s Board of Trustees.
Item 11. Controls and Procedures.
  (a)   The registrant’s Principal Executive Officer and Principal Financial Officer have concluded as of a date within 90 days of the filing of this report, based on their evaluation of the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) that the design and operation of such procedures are effective to provide reasonable assurance that information required to be disclosed by the registrant on Form N-CSR is recorded, processed, summarized, and reported within the time periods specified in the Commission’s rules and forms.

 

 

      (b)(1) The GMO Emerging Markets Division implemented a new order management/trading system on January 1, 2011. The new system allows for further automation of various processes.
 
      (b)(2) Except as may be described herein or in the prior paragraph regarding the Emerging Market Division’s order management/trading system there was no change in the Trust’s internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act) that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Trust’s internal control over financial reporting. After that period, the Trust’s manager, Grantham May Van Otterloo & Co. LLC (“GMO”) identified and corrected an error in the currency conversion for stock market components used to calculate a fair value adjustment (based on market changes after local close and prior to 4:00 pm New York time) to a swap contract used by GMO Alpha Only Fund to hedge a portion of its equity exposures. To the extent required under GMO Trust’s Pricing Policies and Procedures, GMO opted to make remediation directly to shareholders adversely affected by the error and the Fund retained its net gain. GMO has determined to put in place additional compensatory controls with respect to the pricing of the relevant swaps.
 
      The certifying officers express no view as to whether the changes in paragraphs (b) (1) and (2) are material.
Item 12. Exhibits.
(a)(1) Code of Ethics described in Item 2 is attached hereto as EX-99.CODEETH.
(a)(2) Certifications by the Principal Executive Officer and Principal Financial Officer of the registrant as required by Rule 30a-2(a) under the Investment Company Act of 1940 are attached hereto as EX-99.CERT.
(a)(3) Not applicable to this registrant.
  (b)   Certifications by the Principal Executive Officer and Principal Financial Officer of the registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(b) under the Investment Company Act of 1940 are attached hereto as EX-99.906CERT.

 

 

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
         
(Registrant)
  GMO Trust    
 
        
By (Signature and Title):
  /s/ J.B. Kittredge 
 
J.B. Kittredge, Chief Executive Officer 		   
 
        
 
  Date: May 3, 2011    
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
         
By (Signature and Title):
  /s/ J.B. Kittredge 
 
J.B. Kittredge, Principal Executive Officer 		   
 
        
 
  Date: May 3, 2011    
 
        
By (Signature and Title):
  /s/ Sheppard N. Burnett 
 
Sheppard N. Burnett, Principal Financial Officer 		   
 
        
 
  Date: May 3, 2011    

 

EX-99.CODEETH 2 b86187a1exv99wcodeeth.htm CODE OF ETHICS exv99wcodeeth
EX-99.CODEETH
GMO TRUST
CODE OF ETHICS
FOR
PRINCIPAL EXECUTIVE OFFICER AND
PRINCIPAL FINANCIAL OFFICER
I. Covered Officers/Purpose of the Code
This code of ethics (the “Code”) for GMO Trust (the “Trust”) and each series thereof constituting a separate investment portfolio (the “Funds”) applies to the Trust’s Principal Executive Officer and Principal Financial Officer (the “Covered Officers”). The Code is intended to promote:
  •   honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
 
  •   full, fair, accurate, timely and understandable disclosure in reports and documents that a registrant files with, or submits to, the SEC and in other public communications made by the Trust;
 
  •   compliance with applicable laws and governmental rules and regulations;
 
  •   the prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and
 
  •   accountability for adherence to the Code.
Each Covered Officer should adhere to high standards of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest.
II. Covered Officers Should Handle Ethically Actual and Apparent Conflicts of Interest
Overview. A “conflict of interest” occurs when a Covered Officer’s private interest interferes with the interests of, or that Officer’s service to, the Trust. For example, a conflict of interest would arise if a Covered Officer, or a member of his family, receives improper personal benefits as a result of that Officer’s position in the Trust.
Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between the Trust and Grantham, Mayo, Van Otterloo & Co. LLC (“GMO”), the Trust’s investment adviser, of which the Covered Officers are also members, officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the Trust or GMO, or for both), be involved in establishing policies and implementing decisions which will have different effects on GMO and the Trust. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the Trust and GMO and is consistent with the performance by the Covered Officers of their duties as officers of the Trust. In addition, it is recognized by the trustees of the Trust (the “Trustees”) that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other Codes. These types of conflicts are addressed by the Investment Company Act, the Investment Advisers Act and other policies and procedures of the Trust.
Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. In reading the following examples of conflicts of interest under the Code, Covered Officers should keep in mind that such a list cannot ever be exhaustive by covering every possible scenario. It follows that the overarching principle — that the personal interest of a Covered Officer should not be placed improperly before the interest of the Trust — should be the guiding principle in all circumstances.

 

 

Each Covered Officer must:
  •   not use personal influence or personal relationships improperly to influence investment decisions or financial reporting by the Trust whereby the Covered Officer would benefit personally to the detriment of the Trust;
 
  •   not cause the Trust to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than for the benefit of the Trust;
 
  •   not use material non-public knowledge of portfolio transactions made or contemplated for the Trust to profit personally or cause others to profit, by the market effect of such transactions;
 
  •   not retaliate against any employee or Covered Officer for reports of potential violations of law that are made in good faith.
There are some conflict of interest situations that should always be discussed with the Trust’s Chief Legal Officer if material. Examples of these include:
  •   any outside business activity other than with GMO and its affiliates that detracts from an individual’s ability to devote appropriate time and attention to his responsibilities with the Trust ;
 
  •   service as a director on the board (or equivalent position) of any company;
 
  •   the receipt of any non-nominal gifts in excess of the amount stated in the Trust’s and GMO’s Code of Ethics under Rule 17j-1 of the Investment Company Act;
 
  •   the receipt of any entertainment from any company with which the Trust has current or prospective business dealings unless such entertainment is business- related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety;
 
  •   any ownership interest in, or any consulting or employment relationship with, any of the Trust’s service providers, other than GMO and its affiliates;
 
  •   a direct or indirect financial interest in commissions, transaction charges or spreads paid by the Trust for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer’s employment, such as compensation or equity ownership.
III. Disclosure
  •   Each Covered Officer must be familiar with the disclosure requirements applicable to the Trust and the Funds’ disclosure controls and procedures;
 
  •   Each Covered Officer must not knowingly misrepresent, or cause others to misrepresent, facts about the Trust to others, whether within or outside the Trust, including to the Trustees and auditors, and to governmental regulators and self-regulatory organizations; and
 
  •   It is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable, laws, rules and regulations.
IV. Reporting and Accountability
Each Covered Officer must:
  •   upon adoption of the Code (or thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Trust that the Covered Officer has received, read, and understands the Code.
 
  •   annually thereafter affirm to the Trust that the Covered Officer has complied with the requirements of the Code by completing the Annual Certificate of Compliance within GMO’s online Code of Ethics system.
 
  •   report at least annually affiliations and potential conflicts by completing the Beneficial Ownership Report within GMO’s online Code of Ethics system.

 

 

  •   notify the Trust’s Chief Legal Officer and the Chairman of the Trust’s Audit Committee promptly if Covered Officer knows of any violation of this Code. Failure to do so is itself a violation of this Code.
The Trust’s Chief Legal Officer is responsible for applying this Code to specific situations in which questions are presented under it and has the authority to interpret this Code in any particular situation. However, any approvals or waivers sought by any Covered Officer must be considered by the Trust’s Audit Committee.
The Trust will follow these procedures in investigating and enforcing this Code:
  •   the Trust’s Chief Legal Officer will take all appropriate action to investigate any violations and potential violations reported to him;
 
  •   if, after such investigation, the Trust’s Chief Legal Officer believes that no violation has occurred, the Chief Legal Officer is not required to take any further action; any matter the Trust’s Chief Legal Officer believes is or may be a violation will be reported to the Trust’s Audit Committee;
 
  •   if the Audit Committee determines that a violation has occurred, it will inform and make a recommendation to the Trustees, which will consider appropriate action which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of GMO or its board; or a recommendation to dismiss the Covered Officer as an officer of the Trust; and
 
  •   any changes to or waivers of this Code will, to the extent required, be disclosed as provided by SEC rules.
V. Other Policies and Procedures
     The Trust’s and GMO’s Code of Ethics under Rule 17j-1 under the Investment Company Act and GMO’s more detailed policies and procedures are separate requirements applying to the Covered Officers and others, and are not part of this Code. This Code does not, and is not intended to, repeat or replace these programs and procedures.
VI. Amendments
     This Code may not be amended except in written form, which is specifically approved or ratified by a majority vote of the Trustees, including a majority of independent Trustees.
VII. Confidentiality
     All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code or in response to a request from a regulatory agency or self-regulatory organization, such matters shall not be disclosed to anyone other than the Audit Committee, the Trustees, their respective counsel, and GMO and its counsel.
VIII. Internal Use
     The Code is intended solely for the internal use by the Trust and does not constitute an admission, by or on behalf of any Trust, as to any fact, circumstance, or legal conclusion and does not create any rights of third parties.
Approved: November 20, 2003
Amended: April 25, 2007 and April 30, 2009

 

 

Acknowledgement of Receipt of Code
Section IV of the Code requires that each Covered Officer, upon adoption of the Code, affirm in writing to the Trust that the Covered Officer has received, read, and understands the Code. By executing this Acknowledgement , the undersigned hereby makes such affirmation.
         
By (Signature and Title):
  /s/ J.B. Kittredge 
 
J.B. Kittredge, Principal Executive Officer 		   
 
        
 
  Date: May 3, 2011    
 
        
By (Signature and Title):
  /s/ Sheppard N. Burnett 
 
Sheppard N. Burnett, Principal Financial Officer 		   
 
        
 
  Date: May 3, 2011    

 

EX-99.CERT 3 b86187a1exv99wcert.htm CERTIFICATIONS OF PEO AND PFO exv99wcert
EX-99.CERT
CERTIFICATION PURSUANT TO RULE 30(a)-2(a) UNDER THE 1940 ACT AND SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002:
I, J.B. Kittredge, Principal Executive Officer of the Registrant, certify that:
1. I have reviewed this report on Form N-CSR of the Series of GMO Trust;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
 
    /s/ J.B. Kittredge    
Date: May 3, 2011
 
 
J.B. Kittredge, Principal Executive Officer 		   

 

 

EX-99.CERT
CERTIFICATION PURSUANT TO RULE 30(a)-2(a) UNDER THE 1940 ACT AND SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002:
I, Sheppard N. Burnett, Principal Financial Officer of the Registrant, certify that:
1. I have reviewed this report on Form N-CSR of the Series of GMO Trust;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
(c) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
 
    /s/ Sheppard N. Burnett    
Date: May 3, 2011
 
 
Sheppard N. Burnett, Principal Financial Officer 		   

 

EX-99.906CERT 4 b86187a1exv99w906cert.htm SECTION 906 CERTIFICATIONS exv99w906cert
EX-99.906 CERT
CERTIFICATION PURSUANT TO RULE 30(a)-2(b) UNDER THE 1940 ACT AND SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
J.B. Kittredge, Principal Executive Officer of GMO Trust (the “Registrant”), certifies to the best of his knowledge that:
1.   The Registrant’s periodic report on Form N-CSR for the period ended February 28, 2011 (the “Form N-CSR”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2.   The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
         
 
  /s/ J.B. Kittredge
 
J.B. Kittredge 		   
 
  Principal Executive Officer    
 
        
 
  Date: May 3, 2011    
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission (the “Commission”) or its staff upon request.
This certification is being furnished to the Commission solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Form N-CSR with the Commission.

 

 

EX-99.906 CERT
CERTIFICATION PURSUANT TO RULE 30(a)-2(b) UNDER THE 1940 ACT AND SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Sheppard N. Burnett, Principal Financial Officer of GMO Trust (the “Registrant”), certifies to the best of his knowledge that:
1.   The Registrant’s periodic report on Form N-CSR for the period ended February 28, 2011 (the “Form N-CSR”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2.   The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
         
 
  /s/ Sheppard N. Burnett
 
Sheppard N. Burnett 		   
 
  Principal Financial Officer    
 
 
  Date: May 3, 2011    
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission (the “Commission”) or its staff upon request.
This certification is being furnished to the Commission solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Form N-CSR with the Commission.

 

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