0000950135-05-006961.txt : 20111205
0000950135-05-006961.hdr.sgml : 20111205
20051214152305
ACCESSION NUMBER: 0000950135-05-006961
CONFORMED SUBMISSION TYPE: 485APOS
PUBLIC DOCUMENT COUNT: 1
FILED AS OF DATE: 20051214
DATE AS OF CHANGE: 20051214
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: 485APOS
SEC ACT: 1940 Act
SEC FILE NUMBER: 811-04347
FILM NUMBER: 051263742
BUSINESS ADDRESS:
STREET 1: 40 ROWES WHARF
CITY: BOSTON
STATE: MA
ZIP: 02110
BUSINESS PHONE: 6173307500
MAIL ADDRESS:
STREET 1: 40 ROWES WHARF
CITY: BOSTON
STATE: MA
ZIP: 02110
FORMER COMPANY:
FORMER CONFORMED NAME: GMO CORE TRUST
DATE OF NAME CHANGE: 19900927
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: 485APOS
SEC ACT: 1933 Act
SEC FILE NUMBER: 002-98772
FILM NUMBER: 051263743
BUSINESS ADDRESS:
STREET 1: 40 ROWES WHARF
CITY: BOSTON
STATE: MA
ZIP: 02110
BUSINESS PHONE: 6173307500
MAIL ADDRESS:
STREET 1: 40 ROWES WHARF
CITY: BOSTON
STATE: MA
ZIP: 02110
FORMER COMPANY:
FORMER CONFORMED NAME: GMO CORE TRUST
DATE OF NAME CHANGE: 19900927
485APOS
1
b58188dae485apos.txt
GMO TRUST
File Nos. 2-98772
811-4347
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON December 14, 2005
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. __ /_/
Post-Effective Amendment No. 115 /X/
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
Amendment No. 143 /X/
GMO TRUST
(Exact Name of Registrant as Specified in Charter)
40 Rowes Wharf, Boston, Massachusetts 02110
(Address of principal executive offices)
617-330-7500
(Registrant's telephone number, including area code)
with a copy to:
J.B. Kittredge, Esq. Thomas R. Hiller, Esq.
GMO Trust Ropes & Gray
40 Rowes Wharf One International Place
Boston, Massachusetts 02110 Boston, Massachusetts 02110
(Name and address of agents for service)
It is proposed that this filing will become effective:
/ / Immediately upon filing pursuant to paragraph (b), or
/ / 60 days after filing pursuant to paragraph (a)(1), or
/ / On __________, pursuant to paragraph (b), or
/X/ 75 days after filing pursuant to paragraph (a)(2), of Rule 485.
================================================================================
No information contained herein is intended to amend or supercede any prior
filing relating to any other series of the Registrant.
GMO TRUST
Prospectus
[________] [__], 2006
- GMO SHORT-DURATION COLLATERAL SHARE FUND
-----------------------------
- INFORMATION ABOUT OTHER FUNDS OFFERED BY
GMO TRUST IS CONTAINED IN SEPARATE
PROSPECTUSES.
- SHARES OF THE FUND DESCRIBED IN THIS
PROSPECTUS MAY NOT BE AVAILABLE FOR
PURCHASE IN ALL STATES. THIS PROSPECTUS
DOES NOT OFFER SHARES IN ANY STATE WHERE
THEY MAY NOT LAWFULLY BE OFFERED.
GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC
40 ROWES WHARF - BOSTON, MASSACHUSETTS 02110
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
TABLE OF CONTENTS
Page
-----------
FUND SUMMARY....................................................................... 1
DESCRIPTION OF PRINCIPAL RISKS..................................................... 4
MANAGEMENT OF THE FUND............................................................. 8
DETERMINATION OF NET ASSET VALUE................................................... 9
DISCLOSURE OF PORTFOLIO HOLDINGS.................................................. 11
HOW TO PURCHASE SHARES............................................................ 11
HOW TO REDEEM SHARES.............................................................. 14
MULTIPLE CLASSES.................................................................. 16
DISTRIBUTIONS AND TAXES........................................................... 18
ADDITIONAL INFORMATION.................................................... back cover
SHAREHOLDER INQUIRIES..................................................... back cover
DISTRIBUTOR............................................................... back cover
GMO SHORT-DURATION COLLATERAL SHARE FUND
Fund Inception Date: [_____]
Fund Codes
-------------------------
Ticker Symbol Cusip
------ ------ -----
Class III [___] [___] [___]
Class IV [___] [___] [___]
Class V [___] [___] [___]
Class VI [___] [___] [___]
FUND SUMMARY
This summary is not all-inclusive, and the GMO Short-Duration Collateral
Share Fund (the "Fund") may make investments, employ strategies, and be exposed
to risks that are not described in this summary. More information about the
Fund's investments and strategies is contained in the Fund's Statement of
Additional Information ("SAI"). Except for policies identified in the SAI as
"fundamental," the Fund's Board of Trustees (the "Trustees") may change the
Fund's investment objective, strategies, and policies without shareholder
approval. The Fund's investment manager is Grantham, Mayo, Van Otterloo & Co.
LLC (the "Manager" or "GMO") (see "Management of the Fund" for a description of
the Manager).
INVESTMENT OBJECTIVE
Total return in excess of its benchmark.
PRINCIPAL INVESTMENT STRATEGIES
The Fund invests substantially all of its assets in GMO Short-Duration
Collateral Fund, another series of GMO Trust, ("SDCF") (an arrangement often
referred to as a "master-feeder" structure) and, to a limited extent, in cash
and high quality money market instruments. Its investment objective and
principal investment strategies, therefore, are identical to those of SDCF.
SDCF invests primarily in relatively high quality U.S. and foreign
floating rate fixed income securities. SDCF may invest in government securities,
corporate debt securities, residential and commercial mortgage-related
securities and other asset-backed securities, collateralized debt obligations,
money market instruments, commercial paper, reverse repurchase agreements, and
repurchase agreements. Fixed income instruments in which SDCF invests include
securities issued by federal, state, local, and foreign governments (including
securities neither guaranteed nor insured by the U.S. government), and a wide
range of private issuers. SDCF's fixed income investments primarily have
floating interest rates (or will be hedged to convert the fixed rate interest
payments into floating rate interest payments), but may also include all types
of interest rate, payment, and reset terms, including fixed rate, zero coupon,
contingent, deferred, payment-in-kind, and auction rate features. Substantially
all of SDCF's holdings of fixed income instruments will be investment-grade,
except for instruments whose rating has been downgraded to below investment
grade (that is, rated below BBB- by Standard & Poor's Ratings Services ("S&P"),
below Baa3 by Moody's Investors Service, Inc. ("Moody's"), or comparable unrated
securities) after purchase by SDCF. The Manager considers investment grade
securities that are given a rating of Aa3/AA- or better by Moody's/S&P, or, if
unrated, determined to be of comparable quality by the Manager, to be relatively
high quality.
In selecting fixed income securities for SDCF's portfolio, the Manager
employs fundamental and proprietary research techniques to seek to identify bond
investments with yield spreads that are high
1
relative to other fixed income securities with similar credit quality and
average lives. SDCF also may use derivative instruments, including options,
futures, options on futures, forward currency contracts, and swap contracts. In
addition to investing directly in fixed income securities, SDCF may gain
indirect exposure to securities through the use of synthetic bonds, which are
created by the Manager by combining a futures contract, swap contract, or option
on a fixed income security with cash, a cash equivalent, or another fixed income
security.
The Manager employs a variety of techniques to adjust the sensitivity of
SDCF's value to changes in interest rates. This sensitivity is often measured
by, and correlates strongly with, SDCF's portfolio duration. Under normal
circumstances, the Manager expects that SDCF's dollar-weighted average portfolio
duration will be six months or less. The Manager determines SDCF's
dollar-weighted average portfolio duration by aggregating the durations of
SDCF's individual holdings and weighting each holding based on its outstanding
principal amount. Duration may be determined by traditional means or through
empirical analysis, which may vary from traditional methods of calculating
duration. Efforts are made to control exposure to interest rate volatility, for
example, by investing in bonds with longer maturities while shortening their
effective duration by hedging the interest rate exposure through the use of
derivatives. As a result, SDCF's dollar-weighted average portfolio maturity may
be substantially longer than SDCF's dollar-weighted average portfolio duration.
In addition, SDCF's resulting exposure to interest rates through the use of
hedging may vary as compared to direct investment in bonds with shorter
maturities, and the Manager's investment in longer-term bonds may expose SDCF to
additional credit risk. See "Principal Risks--Market Risk--Fixed Income
Securities" below.
From time to time, SDCF may invest directly or indirectly in the fixed
income securities of emerging markets issuers and lend SDCF's securities.
WHEN USED IN THIS PROSPECTUS, THE TERMS "INVEST" OR "INVESTMENTS" INCLUDE
BOTH DIRECT INVESTING AND INDIRECT INVESTING AND/OR MAKING DIRECT INVESTMENTS
AND INDIRECT INVESTMENTS (E.G. MAKING INVESTMENTS IN DERIVATIVES AND SYNTHETIC
INSTRUMENTS WITH ECONOMIC CHARACTERISTICS SIMILAR TO THE UNDERLYING ASSET). The
Manager is not obligated to and generally will not consider tax consequences
when seeking to achieve the Fund's investment objective (e.g., the Fund may
engage in transactions that are not tax efficient for shareholders subject to
U.S. federal income tax). Portfolio turnover is not a principal consideration
when the Manager makes investment decisions for the Fund. Based on its
assessment of market conditions, the Manager may trade the Fund's investments
more frequently at some times than at others. High turnover rates may adversely
affect the Fund's performance by generating additional expenses and may result
in additional taxable income for its shareholders.
BENCHMARK
The Fund's benchmark is the JPMorgan U.S. 3 Month Cash Index, which is
independently maintained and published by JPMorgan.
PRINCIPAL RISKS OF INVESTING IN THE FUND
The value of an investment in the Fund 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 most significant risks of an investment in the
Fund are the risks the Fund is exposed to through SDCF, which include those
outlined in the following brief summary of principal risks. For a more complete
discussion of these risks, see "Description of Principal Risks."
- Market Risk - Fixed Income Securities - The value of SDCF's fixed
income investments will typically decline during periods of rising
interest rates. SDCF also has market risk through its investment in
asset-backed securities, which varies based on those securities'
deal structure, the
2
quality of the underlying assets, the level or credit support
provided, if any, and the credit quality of the credit-support
provider, if any.
- Credit and Counterparty Risk - This is the risk that the issuer or
guarantor of a fixed income security, the counterparty to an OTC
derivatives contract, or a borrower of SDCF's securities, will be
unable or unwilling to make timely principal, interest, or
settlement payments, or otherwise to honor its obligations.
- Derivatives Risk - The use of derivatives may involve risks
different from, or potentially greater than, risks associated with
direct investments in securities and other assets. Derivatives may
increase other Fund risks, including market risk, liquidity risk,
and credit risk, and their value may or may not correlate with the
value of the relevant underlying asset. The risk to SDCF of using
derivatives may be particularly pronounced because SDCF creates
"synthetic" bonds to replace direct investments.
Other principal risks of an investment in the Fund include Liquidity Risk
(difficulty in selling Fund investments), Leveraging Risk (increased risk from
the use of derivatives), Foreign Investment Risk (risks attendant to investments
in markets that may be less stable, smaller, less liquid, and less regulated,
and have higher trading costs relative to the U.S. market), Non-Diversification
Risk (the Fund is non-diversified 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), and Management Risk (risk that the
strategies and techniques of the Manager will fail to produce the desired
results).
PERFORMANCE
The Fund has not commenced operations as of the date of this Prospectus,
and therefore no performance information is available for the Fund.
FEES AND EXPENSES
The tables below show, for each class of shares, the expected cost of
investing in the Fund.
ANNUAL FUND OPERATING EXPENSES
(expenses that are paid from Fund assets as a percentage
of average daily net assets) CLASS III CLASS IV CLASS V CLASS VI
-------------------------------------------------------- ------------ ------------ ------------- --------------
Management fee 0.05% 0.05% 0.05% 0.05%
Shareholder service fee 0.15% 0.10% 0.085% 0.055%
Other expenses 0.03%(1,2,3) 0.03%(1,2,3) 0.03%(1,2,3) 0.03%(1,2,3)
Total annual operating expenses 0.23%(1,2,3) 0.18%(1,2,3) 0.17%(1,2,3) 0.14%(1,2,3)
Expense reimbursement 0.03%(3,4) 0.03%(3,4) 0.03%(3,4) 0.03%(3,4)
Net annual expenses 0.20%(1,2,3) 0.15%(1,2,3) 0.14%(1,2,3) 0.11%(1,2,3)
(1) The Fund invests substantially all of its assets in shares of SDCF and
indirectly bears the expenses applicable to SDCF. Total annual operating
expenses and the example below represent the combined fees and expenses of
both Funds.
(2) The amounts indicated above represent an annualized estimate of the Fund's
operating expenses for its initial fiscal year.
(3) Expense ratios reflect the inclusion of interest expense incurred by SDCF
when entering into reverse repurchase agreements. For the fiscal year ended
February 28, 2005, SDCF incurred no interest expenses; however, it may incur
interest expenses in the future.
(4) The Manager has contractually agreed to reimburse the Fund for Fund expense
through at least June 30, 2007 to the extent the Fund's total annual
operating expenses (excluding shareholder service fees and other expenses
described on page 9 of this Prospectus) exceed 0.05% of the Fund's average
daily net assets.
3
EXAMPLE
This example helps you compare the cost of investing in the Fund with the
cost of investing in other mutual funds. The example assumes that you invest
$10,000 in the Fund for the time periods indicated. The example also assumes
that your investment has a 5% return each year, that the Fund's operating
expenses remain the same as shown in the table, and that all dividends and
distributions are reinvested. Your actual costs may be higher or lower.
1 YEAR* 3 YEARS
------- -------
Class III $[ ] $[ ]
Class IV $[ ] $[ ]
Class V $[ ] $[ ]
Class VI $[ ] $[ ]
* After reimbursement
DESCRIPTION OF PRINCIPAL RISKS
Investing in mutual funds involves risk, including the risk that the
strategies and techniques of the Manager will fail to produce the desired
results (see "Management of the Fund" for a description of the Manager and
"Management Risk" below). The Fund is subject to risks based on the types of
investments in the Fund's portfolio and on the investment strategies it employs.
Factors that may affect the Fund's portfolio as a whole are called "principal
risks" and are summarized in this section. This summary describes the nature of
these principal risks and certain related risks, but is not intended to include
every potential risk. The Fund could be subject to additional risks because the
types of investments made by the Fund may change over time. In addition, because
the Fund invests in SDCF, the Fund will be exposed to all the risks of
investments in SDCF's portfolio. Therefore, the principal risks summarized below
include both direct and indirect principal risks of the Fund, and all references
to investments made by the Fund in this section include those made both directly
by the Fund and indirectly by the Fund through SDCF. The SAI includes more
information about the Fund and its investments. You should keep in mind that an
investment in the Fund is not a bank deposit and therefore is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. By itself, the Fund does not constitute a complete investment program.
- MARKET RISK. SDCF is subject to market risk, which is the risk of
unfavorable changes in the value of the securities owned by SDCF. General market
risks associated with investments in fixed income securities include the
following:
FIXED INCOME SECURITIES. The value of SDCF's fixed income investments
(including bonds, notes, and asset-backed securities) typically changes as
interest rates fluctuate. During periods of rising interest rates, fixed income
securities generally decline in value. Conversely, during periods of falling
interest rates, fixed income securities generally rise in value. This kind of
market risk, also called "interest rate risk," is generally greater for fixed
income securities and portfolios with longer durations. This risk is also
present, but to a lesser extent, in securities with shorter durations. SDCF may
be less sensitive to interest rate changes because SDCF invests primarily in
fixed income securities with floating interest rates. However, fixed income
securities with floating interest rates may decline in value if their interest
rates do not rise as much as interest rates in general. Because rates on certain
floating rate securities reset only periodically, changes in prevailing interest
rates (and particularly sudden and significant changes) can be expected to cause
fluctuations in SDCF's net asset value.
4
A related market risk exists for SDCF by virtue of its investments in
asset-backed securities, which represent a significant portion of its assets.
Those securities may be backed by many types of assets, including pools of
automobile loans, residential and commercial mortgages, educational loans, home
equity loans, credit card receivables, secured or unsecured bonds issued by
corporate or sovereign obligors, unsecured loans made to a variety of corporate
commercial and industrial loan customers or one or more lending banks, or a
combination of these bonds and loans. Payment of interest and repayment of
principal on asset-backed securities largely depends on the cash flows generated
by the underlying assets backing the securities. The amount of market risk
associated with investments in asset-backed securities depends on many factors,
including the deal structure (i.e., determination as to the required amount of
underlying assets or other support needed to produce the cash flows necessary to
service interest and principal payments), the quality of the underlying assets,
the level of credit support, if any, provided for the securities, 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 in
payment of the obligations, and the obligations in default exceed the credit
support. The underlying obligations also are subject to unscheduled prepayment,
particularly during periods of falling interest rates. SDCF may be unable to
invest the prepaid proceeds in an investment that provides as high a yield as
the asset-backed security. SDCF will make significant investments in
asset-backed securities secured by specific types of loans and/or bonds (e.g.,
credit-card receivables). As a result, economic developments adversely affecting
a particular type of collateral may result in harm to SDCF. In addition, certain
types of collateral may have strong positive correlations, meaning that their
value may be impaired by similar economic conditions (e.g., an increase in
personal bankruptcies could reduce the value of asset-backed securities secured
by credit card receivables, automobile loans, educational loans, and home equity
loans).
The value of asset-backed securities may depend on the servicing of the
underlying asset and is, therefore, subject to risks associated with the
negligence or defalcation of their servicers. In some circumstances, the
mishandling of related documentation also may affect the rights of the security
holders in and to the underlying collateral. The insolvency of entities that
generate receivables or that utilize the assets may result in added costs and
delays in addition to losses associated with a decline in the value of the
underlying assets. The risks associated with asset-backed securities are
particularly pronounced for SDCF because it invests a significant portion of its
assets in asset-backed securities.
- CREDIT AND COUNTERPARTY RISK. This is the risk that the issuer or
guarantor of a fixed income security, the counterparty to an OTC derivatives
contract, or a borrower of SDCF's securities will be unable or unwilling to make
timely principal, interest, or settlement payments, or otherwise to honor its
obligations.
Credit risk associated with investments in fixed income securities relates
to the ability of the issuer to make scheduled payments of principal and
interest. SDCF is subject to the risk that the issuers of the securities it owns
will have their credit ratings downgraded or will default, potentially reducing
the value of SDCF's portfolio and its income. Nearly all fixed income securities
are subject to some credit risk. This varies depending upon whether the issuers
of the securities are corporations or domestic or foreign governments or their
subdivisions or instrumentalities. U.S. government securities are subject to
varying degrees of credit risk depending upon whether the securities are
supported by the full faith and credit of the United States, supported by the
ability to borrow from the U.S. Treasury, supported only by the credit of the
issuing U.S. government agency, instrumentality, or corporation, or otherwise
supported by the United States. For example, issuers of many types of U.S.
government securities (e.g., the Federal Home Loan Mortgage Corporation
("Freddie Mac"), Federal National Mortgage Association ("Fannie Mae"), and
Federal Home Loan Banks), although chartered or sponsored by Congress, are not
funded by Congressional appropriations, and their fixed income securities,
including asset-backed and mortgage-backed securities, are neither guaranteed
nor insured by the U.S. government. These securities are subject to more credit
risk than U.S. government securities that are supported by the full faith and
credit of the
5
United States (e.g., U.S. Treasury bonds). Asset-backed securities, whose
principal and interest payments are supported by pools of other assets, such as
credit card receivables and automobile loans, are subject to further risks,
including the risk that the obligors of the underlying assets default on their
obligations. See "Market Risk - Fixed Income Securities" below for a discussion
of these risks.
Credit risk is particularly pronounced for below investment grade
securities (also called "junk bonds"), which are fixed income securities rated
lower than Baa3 by Moody's or BBB- by S&P or determined by the Manager to be of
comparable quality to securities so rated. SDCF may hold instruments whose
rating has been downgraded to below investment grade after purchase by SDCF.
Junk bonds offer the potential for higher investment returns than higher-rated
securities. However, junk bonds are often less liquid than higher quality
securities. In addition, the continuing ability of issuers of junk bonds to meet
principal and interest payments is considered speculative, and they are more
susceptible to real or perceived adverse economic and competitive industry
conditions.
In addition, SDCF is exposed to credit risk as a result of its significant
use of OTC derivatives (such as forward foreign currency contracts and/or swap
contracts, as described in "Derivatives Risk" below) and lending of SDCF's
portfolio securities, and its use of repurchase agreements or reverse repurchase
agreements. If the counterparty defaults, SDCF will have contractual remedies,
but there is no assurance that the counterparty will meet its contractual
obligations or that, in the event of default, SDCF will succeed in enforcing
them. While the Manager intends to monitor the creditworthiness of
counterparties, there can be no assurance that a counterparty will meet its
obligations, especially during unusually adverse market conditions.
- DERIVATIVES RISK. SDCF may invest in derivatives, which are financial
contracts whose value depends on, or is derived from, the value of underlying
assets, reference rates, or indices. Derivatives may relate to stocks, bonds,
interest rates, currencies or currency exchange rates, commodities, and related
indices. SDCF may use derivatives for many purposes, including hedging and as a
substitute for direct investment in securities. SDCF also may use derivatives as
a way to adjust efficiently the exposure of SDCF to various securities, markets,
and currencies without SDCF actually having to sell existing investments and
make new investments. This generally will be done when the adjustment is
expected to be relatively temporary or in anticipation of effecting the sale of
SDCF assets and making new investments over time. For a description of the
various derivative instruments that SDCF may utilize, refer to the SAI.
The use of derivative instruments may involve risks different from, or
potentially greater than, the risks associated with investing directly in
securities and other more traditional assets. In particular, the use of
derivative instruments exposes SDCF to the risk that the counterparty to an OTC
derivatives contract will be unable or unwilling to make timely settlement
payments or otherwise to honor its obligations. OTC derivatives transactions
typically can only be closed out with the other party to the transaction,
although either party may engage in an offsetting transaction that puts that
party in the same economic position as if it had closed out the transaction with
the counterparty or may obtain the other party's consent to assign the
transaction to a third party. If the counterparty defaults, SDCF will have
contractual remedies, but there is no assurance that the counterparty will meet
its contractual obligations or that, in the event of default, SDCF will succeed
in enforcing them. For example, because the contract for each OTC derivatives
transaction is individually negotiated with a specific counterparty, SDCF is
subject to the risk that a counterparty may interpret contractual terms (e.g.,
the definition of default) differently than SDCF when SDCF seeks to enforce its
contractual rights. If that occurs, the cost and unpredictability of the legal
proceedings required for SDCF to enforce its contractual rights may lead SDCF to
decide not to pursue its claims against the counterparty. SDCF, therefore,
assumes the risk that it may be unable to obtain payments owed to it under OTC
derivatives contracts or that those payments may be delayed or made only after
SDCF has incurred the costs of litigation. While the Manager intends
6
to monitor the creditworthiness of counterparties, there can be no assurance
that a counterparty will be in a position to meet its obligations, especially
during unusually adverse market conditions. To the extent SDCF contracts with a
limited number of counterparties, SDCF's risk will be concentrated and events
that affect the creditworthiness of any of those counterparties may have a
pronounced effect on SDCF.
Derivatives also are subject to a number of other risks described
elsewhere in this section, including market risk and liquidity risk. Since the
value of derivatives is calculated and derived from the value of other assets,
instruments, or references, there is a risk that they will be improperly valued.
Derivatives also involve the risk that changes in their value may not correlate
perfectly with the assets, rates, or indices they are designed to hedge or
closely track. The use of derivatives also may increase the taxes payable by
shareholders.
Suitable derivative transactions may not be available in all
circumstances. In addition, the Manager may determine not to use derivatives to
hedge or otherwise reduce risk.
The risks of using derivatives is pronounced for SDCF because it uses
derivatives, in particular synthetic bonds (created by the Manager by combining
a futures contract, swap contract, or option on a fixed income security with
cash, a cash equivalent, or another fixed income security), to gain exposure to
fixed income securities.
- LIQUIDITY RISK. SDCF is exposed to liquidity risk when limited trading
volume, lack of a market maker, or legal restrictions impair SDCF's ability to
sell particular securities or close derivative positions at an advantageous
price. Derivatives tend to have the greatest exposure to liquidity risk. These
securities are more likely to be fair valued (see "Determination of Net Asset
Value"). Liquidity risk also may exist when SDCF has an obligation to purchase
particular securities (e.g., as a result of entering into reverse repurchase
agreements or closing out a short position).
- LEVERAGING RISK. SDCF's use of reverse repurchase agreements and other
derivatives may cause its portfolio to be leveraged. Leverage increases SDCF's
portfolio losses when the value of its investments declines. SDCF's portfolio
may be leveraged temporarily if it borrows money to meet redemption requests
and/or to settle investment transactions.
SDCF is not limited in the extent to which it may use derivatives. As a
result, its net long exposure may exceed 100% of its assets. However, the
Manager seeks to manage the effective market exposure of SDCF by controlling the
projected tracking error relative to SDCF's benchmark.
- FOREIGN INVESTMENT RISK. Because SDCF may invest in fixed income
securities traded principally in securities markets outside the United States,
it is subject to additional and more varied risks, because the value of those
securities may change more rapidly and to a greater degree than U.S. securities.
The securities markets of many foreign countries are relatively small, involving
securities of a limited number of companies in a small number of industries.
Additionally, issuers of foreign securities may not be subject to the same
degree of regulation as U.S. issuers. Reporting, accounting, and auditing
standards of foreign countries differ, in some cases significantly, from U.S.
standards. Foreign portfolio transactions generally involve higher commission
rates, transfer taxes, and custodial costs, and holders of foreign securities
may be subject to foreign taxes on dividends and interest payable on those
securities. Also, for investments in lesser developed countries,
nationalization, expropriation or confiscatory taxation, adverse changes in
investment or exchange control regulations (which may include suspension of the
ability to transfer currency from a country), political changes, or diplomatic
developments could adversely affect the Fund. In the event of a nationalization,
expropriation, or other confiscation, SDCF could lose its entire investment in a
foreign security.
7
- NON-DIVERSIFICATION RISK. Investing in securities of many different
issuers can reduce overall risk while investing in securities of a small number
of issuers can increase it. The Fund may invest substantially all of its assets
in shares of SDCF, which is not "diversified" within the meaning of the
Investment Company Act of 1940, as amended (the "1940 Act"). This means that
SDCF is allowed to invest in the securities of a relatively small number of
issuers and/or foreign currencies. As a result, credit, market, and other risks
associated with SDCF's investment strategies or techniques may be more
pronounced for SDCF than if SDCF were "diversified."
- MANAGEMENT RISK. The Fund and SDCF are subject to management risk
because they rely on the Manager's ability to pursue their objectives. The
Manager applies investment techniques and risk analyses in making investment
decisions for the Fund and SDCF, but there is no assurance that the Manager will
achieve the desired results. As noted above in "Derivatives Risk," the Manager,
for example, may fail to use derivatives effectively, choosing to hedge or not
to hedge positions when it is least advantageous to do so. The Fund and SDCF
generally do not attempt to time the market and instead generally stay fully
invested in fixed income securities and related derivative instruments.
Notwithstanding its benchmark, SDCF may buy securities not included in its
benchmark or hold securities in very different proportions than its benchmark.
To the extent SDCF invests in those securities, SDCF's performance depends on
the ability of the Manager to choose securities that perform better than
securities that are included in SDCF's benchmark.
MANAGEMENT OF THE FUND
GMO, 40 Rowes Wharf, Boston, Massachusetts 02110 provides investment
advisory services to the funds of GMO Trust (the "Trust"). GMO is a private
company, founded in 1977. As of October 31, 2005, GMO managed on a worldwide
basis more than $100 billion for the GMO Funds and institutional investors such
as pension plans, endowments, and foundations.
Subject to the approval of the Trust's Board of Trustees, the Manager
establishes and modifies when necessary the investment strategies of the Fund
and SDCF. In addition to its management services to the Fund, the Manager
administers the Fund's business affairs.
Each class of shares of the Fund pays the Manager a shareholder service
fee for providing direct client service and reporting, such as performance
information reporting, client account information, personal and electronic
access to Fund information, access to analysis and explanations of Fund reports,
and assistance in maintaining and correcting client-related information.
The Manager receives a management fee from the Fund as compensation for
services rendered to the Fund. The Fund will commence operations on or following
the date of this Prospectus, and, therefore, the Fund has not yet paid the
Manager a management fee. However, once the Fund commences operations, it will
pay to the Manager a management fee at the annual rate of 0.05% of the Fund's
average daily net assets.
A discussion of the basis for the Trustees' approval of the Fund's
investment advisory contract will be included in the shareholders' report for
the period during which the Trustees approved such contract.
GMO's Fixed Income Division is responsible for day-to-day management of
the Fund. The Division's investment professionals work collaboratively to manage
the Fund's portfolio, and no one person is primarily responsible for day-to-day
management of the Fund.
8
William Nemerever and Thomas Cooper are the senior members of the Fixed
Income Division. As director and senior member of the Fixed Income Division, Mr.
Nemerever and Mr. Cooper allocate responsibility for portions of the Fund's
portfolio to members of the Division, oversee the implementation of trades,
review the overall composition of the portfolio, including compliance with its
stated investment objective and strategies, and monitor cash flows.
Mr. Nemerever and Mr. Cooper each has served as senior member of the
Fund's portfolio management team since the Fund's inception. At GMO, Mr.
Nemerever and Mr. Cooper are responsible for the portfolio management of all
global fixed income portfolios. Each has served as co-director of global fixed
income since 1993. Both Mr. Nemerever and Mr. Cooper are CFA charterholders.
The SAI contains other information about how GMO determines the
compensation of the senior members, other accounts they manage, and their
ownership of the Fund.
CUSTODIAN, TRANSFER AGENT, AND FUND ACCOUNTING AGENT
Investors Bank & Trust Company, 200 Clarendon Street, Boston,
Massachusetts 02116, serves as the Fund's custodian, transfer agent, and fund
accounting agent.
EXPENSE REIMBURSEMENT
As more fully described in the Fund's "Fees and expenses" table, the
Manager has contractually agreed to reimburse the Fund for a portion of its
expenses through at least June 30, 2007. The following expenses are specifically
excluded from the Manager's reimbursement obligation: Shareholder Service Fees,
expenses indirectly incurred by investment in other funds of the Trust, fees and
expenses (including legal fees) of the independent trustees of the Trust,
compensation and expenses of the Trust's Chief Compliance Officer (excluding any
employee benefits), brokerage commissions and other investment-related costs,
hedging transaction fees, extraordinary, non-recurring and certain other unusual
expenses (including taxes), securities lending fees and expenses, interest
expense, and transfer taxes.
DETERMINATION OF NET ASSET VALUE
The net asset value or "NAV" of a share is determined as of the close of
regular trading on the New York Stock Exchange ("NYSE"), generally 4:00 p.m.
Eastern time. The Fund will not determine its NAV on any day when the NYSE is
closed for business. The Fund also may not determine its NAV on days during
which no security is tendered for redemption and no order to purchase or sell a
security is received by the Fund. The Fund's net asset value is determined by
dividing the total value of the Fund's portfolio investments and other assets,
less any liabilities, by the total outstanding shares of the Fund. The value of
the Fund's investments is generally determined as follows:
Exchange listed securities
- Last sale price or
- Official closing price or
- Most recent bid price (if no reported sale or official closing
price) or
- Broker bid (if the private market is more relevant in determining
market value than the exchange), based on where the securities are
principally traded and their intended disposition
9
(Also, see discussion in "Fair Value Pricing" below regarding foreign
equity securities.)
Unlisted securities (if market quotations are readily available)
- Most recent quoted bid price
Certain debt obligations (if less than sixty days remain until maturity)
- Amortized cost (unless circumstances dictate otherwise; for example,
if the issuer's creditworthiness has become impaired)
All other fixed income securities and options on those securities (except for
options written by the Fund) (includes bonds, loans, structured notes)
- Closing bid supplied by a primary pricing source chosen by the
Manager
Options written by the Fund
- Most recent ask price
"Fair Value" Pricing
For all other assets and securities, including derivatives, and in cases
where market prices are not readily available or circumstances render an
existing methodology or procedure unreliable, the Fund's investments will be
valued at "fair value," as determined in good faith by the Trustees or pursuant
to procedures approved by the Trustees.
With respect to the Fund's use of "fair value" pricing, you should note
the following:
- In certain cases, a significant percentage of SDCF's assets
may be "fair valued." The value of assets that are "fair
valued" is determined by the Trustees or persons acting at
their direction pursuant to procedures approved by the
Trustees. Some of the factors that may be considered in
determining "fair value" are the value of other financial
instruments traded on other markets, trading volumes, changes
in interest rates, observations from financial institutions,
significant events (which may be considered to include changes
in the value of U.S. securities or securities indices) that
occur after the close of the relevant market and before the
time that the Fund's net asset value is calculated, and other
news events. 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 subjective and variable nature of fair value pricing,
the value determined for a particular security may be
materially different than the value realized upon its sale.
- Many foreign equity securities markets and exchanges close
prior to the close of the NYSE, and, therefore, the closing
prices for foreign securities in those markets or on those
exchanges do not reflect events that occur after they close
but before the close of the NYSE. As a result, the Trust has
adopted fair value pricing procedures that, among other
things, generally require that the Fund's foreign equity
securities be valued using fair value prices based on modeling
tools by third party vendors to the extent that those fair
value prices are available.
10
The values of foreign securities quoted in foreign currencies are
translated into U.S. dollars at current exchange rates or at such other rates as
the Trustees or persons acting at their direction may determine in computing net
asset value.
The Manager evaluates primary pricing sources on an ongoing basis, and may
change any pricing source at any time. However, the Manager does not normally
evaluate the prices supplied by the pricing sources on a day-to-day basis. The
Manager is kept informed of erratic or unusual movements (including unusual
inactivity) in the prices supplied for a security and may in its discretion
override a price supplied by a source (by taking a price supplied from another)
when the Manager believes that the price supplied is not reliable. Some
securities may be valued on the basis of a price provided by a principal market
maker. Prices provided by principal market makers may vary from the value that
would be realized if the securities were sold. In addition, because SDCF may
hold portfolio securities listed on foreign exchanges that trade on days on
which the NYSE is closed, the net asset value of the Fund's shares may change
significantly on days when you cannot redeem your shares.
DISCLOSURE OF PORTFOLIO HOLDINGS
The Fund has established a policy with respect to disclosure of its
portfolio holdings. A description is provided in the Statement of Additional
Information. Information regarding the Fund's portfolio holdings as of each
month's end is made available to shareholders of the Trust, qualified potential
shareholders as determined by GMO ("potential shareholders"), and their
consultants or agents through a secured link on GMO's website approximately five
days after month end.
To access this information on GMO's website
(http://www.gmo.com/america/strategies), shareholders, potential shareholders,
and their consultants and agents must contact GMO to obtain a password and user
name (to the extent they do not already have them) and enter into a
confidentiality agreement with GMO and the Trust that permits the information to
be used only for purposes determined by senior management of GMO to be in the
best interest of the shareholders of the Fund to which the information relates.
Beneficial owners of shares of the Trust who have invested in the Trust through
a broker or agent should contact that broker or agent for information on how to
obtain access to information on the website regarding the Fund's portfolio
holdings.
The Fund or GMO may suspend the posting of the portfolio holdings or
modify the disclosure policy without notice to shareholders. Once posted, the
Fund's portfolio holdings will remain available on the website at least until
the Fund files a Form N-CSR or Form N-Q for the period that includes the date of
those holdings.
HOW TO PURCHASE SHARES
You may purchase the Fund's shares from the Trust on any day when the NYSE
is open for business. In addition, certain brokers and agents may be authorized
to accept purchase and redemption orders on the Fund's behalf. These brokers and
agents may impose transaction fees and/or other restrictions (in addition to
those described in this Prospectus) for purchasing Fund shares through them. For
instructions on purchasing shares, call the Trust at (617) 346-7646, send an
e-mail to SHS@GMO.com, or contact your broker or agent. The Trust will not
accept a purchase request unless a completed GMO Trust Application is on file
with GMO.
PURCHASE POLICIES. You must submit a purchase request in good order to
avoid having it rejected by the Trust or its agent. A purchase request is in
good order if it includes:
11
- The name of the Fund being purchased;
- The dollar amount of the shares to be purchased;
- The date on which the purchase is to be made (subject to
receipt prior to the close of regular trading on that date);
- Your name and/or the account number (if any) set forth with
sufficient clarity to avoid ambiguity;
- The signature of an authorized signatory as identified in the
GMO Trust Application; and
- Payment in full (by check, wire, or securities).
- If payment is not received prior to the close of regular
trading on the intended purchase date, the request may be
rejected unless prior arrangements have been approved for
later payment.
If the purchase request is received by the Trust or its agent prior to the
close of regular trading on the NYSE (generally 4:00 p.m. Eastern time), the
purchase price is the net asset value per share determined on that day for the
Fund shares to be purchased. If the purchase request is received after the close
of regular trading on the NYSE, the purchase price is the net asset value per
share determined on the next business day for the Fund shares to be purchased.
To help the government fight the funding of terrorism and money laundering
activities, federal law requires the Trust to verify identifying information in
your GMO Trust Application. Additional identifying documentation also may be
required. If the Trust is unable to verify the information shortly after your
account is opened, the account may be closed and your shares redeemed at their
net asset value at the time of the redemption.
The Trust and its agent reserve the right to reject any order. In
addition, without notice the Fund may temporarily or permanently suspend sales
of its shares to new investors and, in some circumstances, existing
shareholders.
Minimum investment amounts (by class) are set forth in the table on page
16 of this Prospectus. No minimum additional investment is required to purchase
additional shares of the Fund. The Trust may waive initial minimums for some
investors.
Funds advised or sub-advised by GMO ("Top Funds") may purchase shares of
the Fund after the close of regular trading on the NYSE (the "Cut-off Time") and
receive the current day's price if the following conditions are met: (i) the Top
Fund received a purchase request prior to the Cut-off Time on that day; and (ii)
the purchases by the Top Funds of shares of the Fund are executed pursuant to an
allocation predetermined by GMO prior to that day's Cut-off Time.
SUBMITTING YOUR PURCHASE ORDER FORM. Completed purchase order forms can be
submitted by MAIL or by FACSIMILE to the Trust at:
GMO Trust
c/o Grantham, Mayo, Van Otterloo & Co. LLC
40 Rowes Wharf
12
Boston, Massachusetts 02110
Facsimile: (617) 439-4192
Attention: Shareholder Services
Call the Trust at (617) 346-7646 or send an e-mail to SHS@GMO.com to
CONFIRM RECEIPT of your purchase order form. Do not send cash, checks or
securities directly to the Trust. Purchase requests submitted by mail are
"received" by the Trust when actually delivered to the Trust or its agent.
Funding Your Investment. You may purchase shares:
- with cash (via wire transfer or check)
- BY WIRE. Instruct your bank to wire the amount of your
investment to:
Investors Bank & Trust Company, Boston, Massachusetts
ABA#: 011-001-438
Attn: Transfer Agent
Credit: GMO Deposit Account 55555-4444
Further credit: GMO Short-Duration Collateral Share Fund/Account name
and number
- BY CHECK. All checks must be made payable to the Fund or to
GMO Trust. The Trust will not accept checks payable to a third
party that have been endorsed by the payee to the Trust. Mail
checks to:
By U.S. Postal Service: By Overnight Courier:
Investors Bank & Trust Company Investors Bank & Trust Company
GMO Transfer Agent MFD 23 GMO Transfer Agent MFD 23
P.O. Box 642 200 Clarendon Street, 16th Floor
Boston, MA 02117-0642 Boston, MA 02116
- by exchange (from another Fund)
- written instruction should be sent to GMO Shareholder Services
at (617) 439-4192 (facsimile)
- in exchange for securities acceptable to the Manager
- securities must be approved by the Manager prior to transfer
to the Fund
- securities will be valued as set forth under "Determination of
Net Asset Value"
- by a combination of cash and securities
The Trustees have approved policies and procedures designed to detect and
prevent frequent trading activity that is harmful to certain other funds of the
Trust and their shareholders. Frequent trading strategies may be disruptive to
the efficient management of such funds, materially increase portfolio
transaction costs and taxes, dilute the value of shares held by long-term
investors, or otherwise be harmful to such funds and their shareholders.
Notwithstanding the foregoing, these policies and procedures do not limit
frequent trading of the Fund or SDCF because the nature of their investments
make the Fund and SDCF less susceptible to the effects of market timing.
13
HOW TO REDEEM SHARES
You may redeem the Fund's shares on any day when the NYSE is open for
business. Redemption requests should be submitted to the Trust unless the Fund
shares to be redeemed were purchased through a broker or agent, in which case
the redemption request should be processed through that broker or agent. The
broker or agent may impose transaction fees and/or other restrictions (in
addition to those described in this Prospectus) for redeeming Fund shares
through it. For instructions on redeeming shares, call the Trust at (617)
346-7646, send an e-mail to SHS@GMO.com, or contact your broker or agent.
REDEMPTION POLICIES. You must submit a redemption request in good order to
avoid having it rejected by the Trust or its agent. A redemption request is in
good order if it includes:
- The name of the Fund being redeemed;
- The number of shares or the dollar amount of the shares to be
redeemed;
- The date on which the redemption is to be made (subject to
receipt prior to the close of regular trading on that date);
- Your name and/or the account number set forth with sufficient
clarity to avoid ambiguity;
- The signature of an authorized signatory as identified in the
GMO Trust Application; and
- Wire instructions or registration address that match the wire
instructions or registration address on file at GMO.
If the redemption request is received by the Trust or its agent prior to
the close of regular trading on the NYSE (generally 4:00 p.m. Eastern time), the
redemption price for the Fund shares to be redeemed is the net asset value per
share determined on that day. If the redemption request is received after the
close of regular trading on the NYSE, the redemption price for the Fund shares
to be redeemed is the net asset value per share determined on the next business
day unless you have instructed GMO Shareholder Services in writing to defer the
redemption to another day. If you have instructed GMO Shareholder Services to
defer the redemption to another day you may revoke your redemption request at
any time prior to 4:00 p.m. Eastern time on the redemption date.
The Trust may take up to seven days to remit proceeds. Failure to provide
the Trust with a properly authorized redemption request or otherwise satisfy the
Trust as to the validity of any change to the wire instructions or registration
address will result in a delay in processing a redemption request or a rejection
of the redemption request.
If the Manager determines, in its sole discretion, that a redemption
payment wholly or partly in cash would be detrimental to the best interests of
the remaining shareholders, the Fund may pay the redemption price in whole or in
part with securities held by the Fund instead of cash.
If a redemption is paid in cash:
14
- payment will be made in federal funds transferred to the bank
account designated in writing by an authorized signatory in the GMO
Trust Application to purchase the Fund shares being redeemed
- designation of one or more additional bank accounts or any
change in the bank accounts originally designated in the GMO
Trust Application must be made in writing by an authorized
signatory according to the procedures in the GMO Trust
Redemption Order Form
- upon request, payment will be made by check mailed to the
registration address (unless another address is specified according
to the procedures in the GMO Trust Redemption Order Form).
If a redemption is paid with securities, it is important for you to note:
- securities used to redeem Fund shares will be valued as set forth
under "Determination of Net Asset Value"
- securities distributed by the Fund will be selected by the Manager
in light of the Fund's objective and may not represent a pro rata
distribution of each security held in the Fund's portfolio
- you may incur brokerage charges on the sale of any securities
received as a result of an in-kind redemption
- in-kind redemptions will be transferred and delivered by the Trust
as directed in writing by an authorized person.
The Fund may suspend the right of redemption and may postpone payment for
more than seven days:
- if the NYSE is closed on days other than weekends or holidays
- during periods when trading on the NYSE is restricted
- during an emergency which makes it impracticable for the Fund to
dispose of its securities or to fairly determine the net asset value
of the Fund
- during any other period permitted by the Securities and Exchange
Commission for your protection.
Pursuant to the Trust's Amended and Restated Agreement and Declaration of
Trust, the Trust has the right to redeem Fund shares held by a shareholder
unilaterally at any time if at that time: (i) the shares of the Fund or a class
held by the shareholder have an aggregate net asset value of less than an amount
determined from time to time by the Trustees; or (ii) the shares of the Fund or
a class held by the shareholder exceed a percentage of the outstanding shares of
the Fund or a class determined from time to time by the Trustees. The Trustees
currently have not determined a minimum amount or a maximum percentage for any
of the Funds or classes.
Top Funds may redeem shares of the Fund after the Cut-off Time and receive
the current day's price if the following conditions are met: (i) the Top Fund
received a redemption request prior to the Cut-
15
off Time on that day; and (ii) the redemption of the shares of the Fund is
executed pursuant to an allocation predetermined by GMO prior to that day's Cut-
off Time.
SUBMITTING YOUR REDEMPTION REQUEST. Redemption requests can be submitted
by MAIL or by FACSIMILE to the Trust at the address/facsimile number set forth
under "How to Purchase Shares - Submitting Your Purchase Order Form." Redemption
requests submitted by mail are "received" by the Trust when actually delivered
to the Trust or its agent. Call the Trust at (617)346-7646 or send an e-mail to
SHS@GMO.com to CONFIRM RECEIPT of redemption requests.
MULTIPLE CLASSES
The Fund offers multiple classes of shares. The sole economic difference
among the various classes of shares described in this Prospectus is the level of
Shareholder Service Fee that these classes bear for client and shareholder
service, reporting and other support, reflecting the fact that, as the size of a
client relationship increases, the cost to service that client decreases as a
percentage of the assets in that account. Thus, the Shareholder Service Fee
generally is lower for classes that require greater total assets under GMO's
management.
MINIMUM INVESTMENT CRITERIA FOR CLASS III ELIGIBILITY
SHAREHOLDER SERVICE FEE
MINIMUM TOTAL FUND MINIMUM TOTAL (AS A % OF AVERAGE DAILY NET
INVESTMENT INVESTMENT(1) ASSETS)
------------------ ------------- ----------------------------
Class III Shares N/A $5 million 0.15%
MINIMUM INVESTMENT CRITERIA FOR CLASS IV ELIGIBILITY
SHAREHOLDER SERVICE FEE
MINIMUM TOTAL FUND MINIMUM TOTAL (AS A % OF AVERAGE DAILY NET
INVESTMENT INVESTMENT(1) ASSETS)
------------------ ----------------- ----------------------------
Class IV Shares $125 million $250 million plus 0.10%
$35 million
in Fund
MINIMUM INVESTMENT CRITERIA FOR CLASS V ELIGIBILITY
SHAREHOLDER SERVICE FEE
MINIMUM TOTAL FUND MINIMUM TOTAL (AS A % OF AVERAGE DAILY NET
INVESTMENT INVESTMENT(1) ASSETS)
------------------ --------------- ----------------------------
Class V Shares $250 million $500 million plus 0.085%
$35 million
in Fund
MINIMUM INVESTMENT CRITERIA FOR CLASS VI ELIGIBILITY
MINIMUM TOTAL INVESTMENT SHAREHOLDER SERVICE FEE
MINIMUM TOTAL FUND PLUS MINIMUM FUND (AS A % OF AVERAGE DAILY NET
INVESTMENT INVESTMENT ASSETS)
------------------ ------------------------ ----------------------------
Class VI Shares $300 million $750 million plus $35 0.055%
million in Fund
(1) The eligibility requirements in the table above are subject to certain
exceptions and special rules for certain plan investors and for certain
clients with continuous client relationships with GMO since May 31, 1996.
16
Eligibility to purchase different classes of the Fund shares depends on
the client's meeting either (i) the minimum "Total Fund Investment" set forth in
the above table, which includes only a client's total investment in the Fund, or
(ii) the minimum "Total Investment" set forth in the above table, calculated as
described below; provided that clients who qualify for Class IV, Class V, and
Class VI Shares of the Fund as a result of satisfying the minimum Total
Investment requirements for the class must also make a minimum investment in the
Fund, as set forth in the above table.
DETERMINATION OF TOTAL INVESTMENT
A client's Total Investment equals the market value of all the client's
assets managed by GMO and its affiliates (1) at the time of initial investment,
(2) at close of business on the last business day of each calendar quarter, or
(3) at other times as determined by the Manager (each, a "Determination Date").
GMO may permit a client to undertake in writing to meet the applicable
Total Fund Investment or Total Investment over a period not to exceed 12 months.
If the client's goal is not met by the time specified in the letter (Commitment
Date), the client will be converted on the next Determination Date to the class
of shares for which the client satisfied all minimum investment requirements as
of the Commitment Date.
For clients with GMO accounts as of May 31, 1996: Any client whose Total
Investment as of May 31, 1996 (prior to the issuance of multiple classes of
shares) was equal to or greater than $7 million will remain eligible for Class
III Shares indefinitely, provided that the client does not make a withdrawal or
redemption that causes the client's Total Investment to fall below $7 million.
You should note:
- No minimum additional investment is required to purchase additional
shares of the Fund for any class of shares.
- The Manager will make all determinations as to the aggregation of
client accounts for purposes of determining eligibility. See the SAI
for a discussion of factors the Manager considers relevant when
making aggregation determinations.
- Eligibility requirements for each class of shares are subject to
change upon notice to shareholders.
- The Trust may waive eligibility requirements for certain accounts or
special situations (e.g., certain GMO Asset Allocation Funds
generally invest in the least expensive class of other GMO Funds in
operation at the time of investment).
- All investments by defined contribution plans through an
intermediary are invested in Class III Shares.
CONVERSIONS BETWEEN CLASSES
Each client's Total Fund Investment and Total Investment are determined by
GMO on each Determination Date. Based on this determination, and subject to the
following, each client's shares of the Fund identified for conversion will be
converted to the class of shares of the Fund with the lowest Shareholder Service
Fee for which the client satisfies all minimum investment requirements (or, to
the extent the client already holds shares of that class, the client will remain
in that class). With respect to the Fund:
17
- To the extent a client satisfies all minimum investment requirements
for a class of shares then being offered that bears a lower
Shareholder Service Fee than the class held by the client on the
Determination Date, the client's shares identified for conversion
will be automatically converted to that class within 45 calendar
days following the Determination Date on a date selected by the
Manager.
- To the extent a client no longer satisfies all minimum investment
requirements for the class of shares held by the client on the last
Determination Date of a calendar year, the Trust will convert the
client's shares to the class that is then being offered bearing the
lowest Shareholder Service Fee for which the client satisfies all
minimum investment requirements (and which class will typically bear
a higher Shareholder Service Fee than the class held by the client).
To the extent the client no longer satisfies all minimum investment
requirements for any class of the Fund as of the last Determination
Date of a calendar year, the Trust will convert the client's shares
to the class of the Fund then being offered bearing the highest
Shareholder Service Fee. Notwithstanding the foregoing, a client's
shares will not be converted to a class of shares bearing a higher
Shareholder Service Fee without at least 15 calendar days' prior
notice by the Trust so that the client has a reasonable opportunity,
by making an additional investment, to remain eligible for the
client's current class of shares. If the client is not able to make
an additional investment in the Fund solely because the Fund is
closed to new investments or is capacity constrained, the client
will remain in the class of shares then held by the client. Any
conversion of a client's shares to a class of shares bearing a
higher Shareholder Service Fee will occur within 60 calendar days
following the last Determination Date of a calendar year.
The Trust has been advised by counsel that, for tax purposes, the
conversion of a client's investment from one class of shares of the Fund to
another class of shares of the Fund should not result in the recognition of gain
or loss in the shares that are converted. The client's tax basis in the new
class of shares immediately after the conversion should equal the client's basis
in the converted shares immediately before conversion, and the holding period of
the new class of shares should include the holding period of the converted
shares.
DISTRIBUTIONS AND TAXES
The Fund's policy is to declare and pay distributions of its net income,
if any, semi-annually. The Fund also intends to distribute net gains, whether
from the sale of securities held by the Fund for not more than one year (i.e.,
net short-term capital gains) or from the sale of securities held by the Fund
for more than one year (i.e., net long-term capital gains), if any, at least
annually. The Fund is treated as a separate taxable entity for federal income
tax purposes and intends to qualify each year as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended.
Distributions of net income may include (without limitation) income from
securities, certain derivatives and other investments, regular dividends from
other regulated investment companies and income allocations from partnerships,
and net gains from foreign currency transactions. Short-term capital gain and
long-term capital gain distributions may include (without limitation) amounts
from the sale of securities and other investments, closing or offsetting of
certain derivatives, and capital gains from investment companies and
partnerships. Notwithstanding the foregoing, shareholders should see the
description below for information regarding the tax character of distributions
from the Fund to shareholders.
18
All dividends and/or distributions are paid in shares of the Fund, at net
asset value, unless a shareholder elects to receive cash. Shareholders may elect
to receive cash by marking the appropriate box on the purchase order form, by
writing to the Trust, or by notifying their broker or agent. There is no
purchase premium on reinvested dividends or distributions.
It is important for you to note:
- For federal income tax purposes, distributions of investment income
are generally taxable as ordinary income. Taxes on distributions of
capital gains are determined by how long the Fund owned the
investments that generated them, rather than by how long a
shareholder has owned shares in the Fund. Distributions of net
capital gains derived from the sale of investments that the Fund
owned for more than one year and the receipt of properly designated
capital gain dividends from the Fund's investment in SDCF are
taxable to shareholders as long-term capital gains if such
distributions are properly designated by the Fund as capital gain
dividends. Distributions of gains derived from the sale of
investments that the Fund owned for one year or less and the receipt
of dividends (other than properly designated capital gain dividends)
from the Fund's investment in SDCF are taxable to shareholders as
ordinary income.
- If the Fund has capital losses in excess of capital gains for any
taxable year, these excess losses will carry over and offset capital
gains in succeeding taxable years until either (a) the end of the
eighth succeeding taxable year or (b) until such losses have been
fully utilized to offset Fund capital gains, whichever comes first.
The Fund's ability to utilize these losses in succeeding taxable
years may be limited by reason of direct or indirect changes in the
actual or constructive ownership of the Fund.
- For taxable years beginning on or before December 31, 2008,
distributions of investment income properly designated by the Fund
as derived from "qualified dividend income" will be taxable to
shareholders taxed as individuals at the rates applicable to
long-term capital gain, provided holding period and other
requirements are met at both the shareholder and Fund levels.
Long-term capital gain rates applicable to most individuals have
been temporarily reduced to 15% (with lower rates applying to
taxpayers in the 10% and 15% rate brackets) for taxable years
beginning on or before December 31, 2008.
- Distributions by the Fund to retirement plans that qualify for
tax-exempt treatment under the federal income tax laws will not be
taxable. Special tax rules apply to investments through such plans.
You should consult your tax adviser to determine the suitability of
the Fund as an investment through such a plan and the tax treatment
of distributions (including distributions of amounts attributable to
an investment in the Fund) from such a plan.
- Distributions by the Fund are taxable to a shareholder even if they
are paid from income or gains earned by the Fund before that
shareholder invested in the Fund (and accordingly the income or
gains were included in the price the shareholder paid for the Fund's
shares). Distributions are taxable whether shareholders receive them
in cash or reinvest them in additional shares. Any gain resulting
from a shareholder's sale, exchange, or redemption of Fund shares
generally will be taxable to the shareholder as capital gain.
- Investments by SDCF in foreign securities may be subject to foreign
withholding taxes on dividends, interest or capital gains. Those
taxes will reduce SDCF's yield. The foreign withholding tax rates
applicable to a Fund's investments in certain foreign jurisdictions
may be higher if the Fund has a significant number of non-U.S.
shareholders than if it has fewer
19
non-U.S. shareholders. In certain instances, shareholders may be
entitled to claim a credit or deduction for foreign taxes. See the
SAI for more information regarding foreign withholding taxes.
- Investments by the Fund or SDCF in foreign securities, foreign
currencies, debt obligations issued or purchased at a discount,
asset-backed and mortgage-backed securities, assets "marked to the
market" for federal income tax purposes, and, potentially, so-called
"indexed securities" (including inflation-indexed bonds) may
increase or accelerate the Fund's or SDCF's recognition of income,
including the recognition of taxable income in excess of the cash
generated by those investments. These investments, therefore, may
affect the timing or amount of the Fund's or SDCF's distributions
and may cause the Fund to liquidate other investments at a time when
it is not advantageous to do so to satisfy the distribution
requirements that apply to entities taxed as regulated investment
companies.
- The Fund's or SDCF's use of derivatives and securities lending may
increase the amount of taxes payable by the Fund's shareholders.
- The Fund's investment in SDCF and investments by SDCF in other
investment companies taxed as partnerships or regulated investment
companies could affect the amount, timing and character of
distributions. See "Taxes" in the SAI for more information.
The above is a general summary of the principal federal income tax
consequences of investing in the Fund for shareholders who are U.S. citizens,
residents, or domestic corporations. You should consult your own tax advisers
about the precise tax consequences of an investment in the Fund in light of your
particular tax situation, including possible foreign, state, local, or other
applicable taxes (including the federal alternative minimum tax). Please see the
SAI for additional information regarding the tax aspects of investing in the
Fund.
For information on how you may be affected by the American Jobs Creation
Act of 2004, including new rules for Fund distributions of gain attributable to
"U.S. real property interests," see the SAI.
20
GMO TRUST
ADDITIONAL INFORMATION
The Fund's SAI is available free of charge at http://www.gmo.com or by
writing to GMO, 40 Rowes Wharf, Boston, Massachusetts 02110 or by calling
collect (617) 346-7646. The SAI contains more detailed information about the
Fund and is incorporated by reference into this Prospectus, which means that it
is legally considered to be part of this Prospectus.
You can review and copy the Prospectus and SAI at the SEC's Public
Reference Room in Washington, D.C. Information regarding the operation of the
Public Reference Room may be obtained by calling the SEC at 1-202-942-8090.
Other information about the Fund is available on the EDGAR database on the SEC's
Internet site at http://www.sec.gov. Copies of this information may be obtained,
upon payment of a duplicating fee, by electronic request at the following E-mail
address: publicinfo@sec.gov, or by writing the Public Reference Section of the
SEC, Washington, D.C. 20549-0102.
Shareholders who wish to communicate with the Trustees must do so by
mailing a written communication, addressed as follows: To the Attention of the
Board of Trustees, c/o GMO Trust Chief Compliance Officer, 40 Rowes Wharf,
Boston, MA 02110.
SHAREHOLDER INQUIRIES
Shareholders may request additional
information from and direct inquiries to:
Shareholder Services at
Grantham, Mayo, Van Otterloo & Co. LLC
40 Rowes Wharf
Boston, MA 02110
1-617-346-7646 (CALL COLLECT)
1-617-439-4192 (FAX)
SHS@GMO.com
website: http://www.gmo.com
DISTRIBUTOR
Funds Distributor, Inc.
100 Summer Street, 15th Floor
Boston, Massachusetts 02110
INVESTMENT COMPANY ACT FILE NO. 811-4347
21
GMO TRUST
GMO Short-Duration Collateral Share Fund
STATEMENT OF ADDITIONAL INFORMATION
[_______] [__], 2006
This Statement of Additional Information is not a prospectus. It relates to the
GMO Short-Duration Collateral Share Fund Prospectus dated [_______] [__], 2006,
as amended from time to time thereafter (the "Prospectus"), and should be read
in conjunction therewith. Information from the Prospectus and the annual report
to shareholders of each Fund offered through the Prospectus is incorporated by
reference into this Statement of Additional Information. The Prospectus may be
obtained free of charge from GMO Trust, 40 Rowes Wharf, Boston, Massachusetts
02110, or by calling the Trust collect at (617) 346-7646.
TABLE OF CONTENTS
INVESTMENT OBJECTIVES AND POLICIES................................................... 2
FUND INVESTMENTS..................................................................... 3
DESCRIPTIONS AND RISKS OF FUND INVESTMENTS........................................... 4
USES OF DERIVATIVES.................................................................. 22
INVESTMENT RESTRICTIONS.............................................................. 26
DETERMINATION OF NET ASSET VALUE..................................................... 28
DISTRIBUTIONS........................................................................ 29
TAXES................................................................................ 29
MANAGEMENT OF THE TRUST.............................................................. 37
INVESTMENT ADVISORY AND OTHER SERVICES............................................... 46
PORTFOLIO TRANSACTIONS............................................................... 50
PROXY VOTING POLICIES AND PROCEDURES................................................. 52
DISCLOSURE OF PORTFOLIO HOLDINGS..................................................... 52
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES..................................... 55
MULTIPLE CLASSES..................................................................... 56
VOTING RIGHTS........................................................................ 56
SHAREHOLDER AND TRUSTEE LIABILITY.................................................... 57
APPENDIX A -- COMMERCIAL PAPER AND CORPORATE DEBT RATINGS............................ A-1
APPENDIX B -- PROXY VOTING POLICIES AND PROCEDURES................................... B-1
The GMO Short-Duration Collateral Share Fund (the "Fund") is a series of GMO
Trust (the "Trust"). The Trust is a "series investment company" that consists of
separate series of investment portfolios (the "Series"), each of which is
represented by a separate series of shares of beneficial interest. Each Series'
manager is Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO").
Shares of the other Series of the Trust are offered pursuant to separate
prospectuses or private placement memoranda and statements of additional
information.
Throughout this Statement of Additional Information, it is noted that the Fund
will typically make "investments" in a particular type of security or other
asset. Investors should understand that when used in this Statement of
Additional Information, the word "investments" includes both direct and indirect
investments (e.g., investments in GMO Short-Duration Collateral Fund ("SDCF")).
INVESTMENT OBJECTIVES AND POLICIES
The principal strategies and risks of investing in the Fund are described
in the Prospectus. Unless otherwise indicated in the Prospectus or this
Statement of Additional Information, the investment objective and policies of
the Fund may be changed without shareholder approval.
-2-
FUND INVESTMENTS
Because the Fund invests substantially all of its assets in SDCF, it is
indirectly exposed to the investment practices of SDCF and is, therefore,
subject to all risks associated with those practices. The following list
indicates the types of investments that SDCF is generally permitted (but not
required) to make. SDCF may, however, make other types of investments provided
such an investment is consistent with SDCF's investment objective and policies
and SDCF's investment restrictions do not expressly prohibit it from so doing:
- asset-backed and mortgage-backed securities (including CMOs, CDOs,
strips, and residuals)
- securities issued by federal, state, local and foreign governments
(traded in the U.S. and abroad)
- convertible bonds
- fixed income securities of private issuers
- foreign issues traded in the U.S. and abroad
- investment companies (open & closed end)
- illiquid securities
- 144A securities and restricted securities
- repurchase agreements
- reverse repurchase agreements
- warrants and rights
- securities purchased and sold on a when-issued or delayed delivery
basis
- indexed securities
- structured notes
- firm commitments (with banks or broker-dealers)
- interest rate/bond futures and related options
- exchange-traded and OTC options on securities and indexes (including
writing covered options)
- foreign currency transactions (including forward foreign currency
contracts)
- interest rate, total return, and credit default swap contracts
- interest rate caps, floors and collars
- adjustable rate securities
- zero coupon securities
- dollar roll agreements
-3-
DESCRIPTIONS AND RISKS OF FUND INVESTMENTS
The following is a description of investment practices in which the Fund
may engage and the risks associated with their use. THE INVESTMENT PRACTICES AND
ASSOCIATED RISKS DETAILED BELOW ALSO INCLUDE THOSE TO WHICH THE FUND INDIRECTLY
MAY BE EXPOSED THROUGH ITS INVESTMENT IN SDCF. ANY REFERENCES TO INVESTMENTS
MADE BY THE FUND INCLUDE THOSE MADE BOTH DIRECTLY BY THE FUND AND INDIRECTLY BY
THE FUND THROUGH SDCF. Please refer to "Fund Summary" and "Description of
Principal Risks" in the Prospectus and "Fund Investments" in this Statement of
Additional Information for additional information regarding the practices in
which the Fund may engage.
PORTFOLIO TURNOVER
Based on the Manager's assessment of market conditions, the Manager may
trade the Fund's investments more frequently at some times than at others,
resulting in a higher portfolio turnover rate. High portfolio turnover involves
correspondingly greater brokerage commissions and other transaction costs, which
will be borne directly by the Fund, and may involve realization of capital gains
that are taxable when ultimately distributed to shareholders of the other funds
of the Trust investing in the Fund. If portfolio turnover results in the
recognition of short-term capital gains, those gains are typically taxed to
shareholders at ordinary income tax rates. See "Distributions and Taxes" in the
Prospectus and "Distributions" and "Taxes" in this Statement of Additional
Information.
NON-DIVERSIFIED PORTFOLIO
As stated in the Prospectus, the Fund is a "non-diversified" fund under
the Investment Company Act of 1940, as amended (the "1940 Act") and, as such, is
not required to satisfy the requirements for "diversified" funds, which require
that at least 75% of the value of a fund's total assets be represented by cash
and cash items (including receivables), Government securities, securities of
other investment companies, and other securities that for the purposes of this
calculation are limited in respect of any one issuer to not greater than 5% of
the value of a fund's total assets and not more than 10% of the outstanding
voting securities of any single issuer.
As a non-diversified fund, the Fund is permitted (but is not required) to
invest a higher percentage of its assets in the securities of fewer issuers.
That concentration could increase the risk of loss to the Fund resulting from a
decline in the market value of particular portfolio securities. Investment in a
non-diversified fund may entail greater risks than investment in a diversified
fund. The Fund must, however, meet certain diversification standards to qualify
as a "regulated investment company" under the Internal Revenue Code of 1986.
DEBT AND OTHER FIXED INCOME SECURITIES
Debt and other fixed income securities include fixed income and floating
rate securities of any maturity. Fixed income securities pay a specified rate of
interest or dividends. Floating rate securities pay a rate that is adjusted
periodically by reference to a specified index or market
-4-
rate. Fixed income and floating rate securities include securities issued by
federal, state, local, and foreign governments and related agencies, and by a
wide range of private issuers, and generally are referred to in this Statement
of Additional Information as "fixed income securities." See also "Adjustable
Rate Securities" below.
Holders of fixed income securities are exposed to both market and credit
risk. Market risk relates to changes in a security's value as a result of
changes in interest rates generally. In general, the values of fixed income
securities increase when interest rates fall and decrease when interest rates
rise. The Fund may be less sensitive to interest rate changes because the Fund
invests primarily in fixed income securities with floating interest rates and
related interest rate derivatives. However, fixed income securities with
floating interest rates may cause fluctuations in the Fund's net asset value if
their interest rates do not rise as much as interest rates in general or their
rates reset only periodically (particularly during a period of sudden and
significant changes in prevailing rates). Credit risk relates to the ability of
the issuer to make payments of principal and interest. Obligations of issuers
are subject to bankruptcy, insolvency and other laws that affect the rights and
remedies of creditors. Fixed income securities denominated in foreign currencies
also are subject to the risk of a decline in the value of the denominating
currency.
Because interest rates vary, the future income of the Fund, which invests
in fixed income securities, cannot be predicted with certainty.
CASH AND OTHER HIGH QUALITY INVESTMENTS
The Fund may temporarily invest a portion of its assets in cash or cash
items pending other investments or in connection with the earmarking and
maintenance of liquid assets required in connection with some of the Fund's
investments. These cash items and other high quality corporate debt securities
may include money market instruments such as securities issued by the United
States Government and its agencies, bankers' acceptances, commercial paper, and
bank certificates of deposit. The Fund seeks to minimize credit risk by
investing only in high quality money market securities.
MORTGAGE-BACKED SECURITIES, ASSET-BACKED SECURITIES, COLLATERALIZED MORTGAGE
OBLIGATIONS, AND COLLATERALIZED DEBT OBLIGATIONS.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities may be issued by
agencies or instrumentalities of the U.S. government (including those whose
securities are neither guaranteed nor insured by the U.S. government, such as
the Federal Home Loan Mortgage Corporation ("Freddie Mac"), Federal National
Mortgage Association ("Fannie Mae") and Federal Home Loan Banks ("FHLBs")), by
foreign governments, or by non-governmental issuers. Mortgage-backed securities
include securities backed by pools of residential and commercial mortgages.
Interest and principal payments (including prepayments) on the mortgage loans
underlying mortgage-backed securities are passed through to the holders of the
mortgage-backed securities. Prepayments occur when the mortgagor on an
individual mortgage loan prepays the remaining principal before the mortgage
loan's scheduled maturity date. Unscheduled prepayments of the underlying
mortgage loans will result in early payment of the applicable mortgage-backed
securities held by the Fund. The Fund may be unable to invest the proceeds from
the early
-5-
payment of the mortgage-backed securities in an investment that provides as high
a yield as the mortgage-backed securities. Consequently, early payment
associated with mortgage-backed securities may cause these securities to
experience significantly greater price and yield volatility than traditional
fixed income securities. Many factors affect the rate of mortgage loan
prepayments, including changes in interest rates, general economic conditions,
the location of the property underlying the mortgage, the age of the mortgage
loan, and social and demographic conditions. During periods of falling interest
rates, the rate of mortgage loan prepayments usually increases, which tends to
decrease the life of mortgage-backed securities. If the life of a
mortgage-backed security is inaccurately predicted, the Fund may not be able to
realize the rate of return it expected.
Mortgage-backed securities are subject to varying degrees of credit risk,
depending on whether they are issued by agencies or instrumentalities of the
U.S. government (including those whose securities are neither guaranteed nor
insured by the U.S. government) or by non-governmental issuers. Mortgage-backed
securities are subject to the risk of loss of principal if the obligors of the
underlying obligations default in their payment obligations.
Mortgage-backed securities may include Adjustable Rate Securities as such
term is defined in "Adjustable Rate Securities" below.
ASSET-BACKED SECURITIES. Asset-backed securities may be issued by agencies
or instrumentalities of the U.S. government (including those whose securities
are neither guaranteed nor insured by the U.S. government) or by
non-governmental issuers. Asset-backed securities include securities backed by
pools of automobile loans, educational loans, home equity loans, credit card
receivables, and secured or unsecured bonds issued by corporate or sovereign
obligors, unsecured loans made to a variety of corporate commercial and
industrial loan customers of one or more lending banks, or a combination of
those bonds and loans. The underlying pools of assets are securitized through
the use of trusts and special purpose entities. Asset-backed securities are
subject to risks associated with changes in interest rates and prepayment of
underlying obligations similar to the risks of investment in mortgage-backed
securities. (See "Mortgage-Backed Securities" immediately above.)
Asset-backed securities also present certain risks that are not presented
by mortgage-backed securities. In particular, certain types of asset-backed
securities may not have the benefit of a security interest in the related
assets. These may include securities backed by credit card receivables, many of
which are unsecured. In addition, as noted above, the Fund may invest in
securities backed by unsecured commercial or industrial loans or unsecured
corporate or sovereign debt. Even when security interests are present, the
ability of an issuer of certain types of asset-backed securities to enforce
those interests may be more limited than that of an issuer of mortgage-backed
securities. For instance, automobile receivables generally are secured, but by
automobiles, rather than by real property. Most issuers of automobile
receivables permit loan servicers to retain possession of the underlying assets.
In addition, because of the large number of underlying vehicles involved in a
typical issue of asset-backed securities and technical requirements under state
law, the trustee for the holders of the automobile receivables may not have a
proper security interest in all the automobiles. Therefore, recoveries on
repossessed automobiles may not be available to support payments on these
securities.
-6-
In addition, payment of interest and repayment of principal on
asset-backed securities largely depends on the cash flows generated by the
underlying assets backing the securities and, in certain cases, may be supported
by letters of credit, surety bonds, or other credit enhancements. The amount of
market risk associated with investments in asset-backed securities depends on
many factors, including the deal structure (i.e., determinations as to the
required amount of underlying assets or other support needed to produce the cash
flows necessary to service interest and principal payments), the quality of the
underlying assets, the level of credit support, if any, provided for the
securities, 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 amounts defaulted exceed the securities'
credit support.
In addition, asset-backed securities may experience losses on the
underlying assets as a result of certain rights provided to consumer debtors
under federal and state law. In the case of certain consumer debt, such as
credit card debt, debtors are entitled to the protection of a number of state
and federal consumer credit laws, many of which give such debtors the right to
set off certain amounts owed on their credit cards (or other debt), thereby
reducing their balances due. For instance, a debtor may be able to offset
certain damages for which a court has determined that the creditor is liable to
the debtor against amounts owed to the creditor by the debtor on his or her
credit card.
The value of asset-backed securities may be affected by the factors
described above and other factors, such as the availability of information
concerning the pool and its structure, the creditworthiness of the servicing
agent for the pool, the originator of the underlying assets, or the entities
providing the credit enhancement. The value of asset-backed securities also can
depend on the ability of their servicers to service the underlying collateral
and is, therefore, subject to risks associated with servicers' performance. In
some circumstances, the mishandling of documentation related to the underlying
collateral by a servicer or originator of the underlying collateral may affect
the rights of the security holders in and to the underlying collateral (e.g.,
failure to properly document a security interest in the underlying collateral).
In addition, the insolvency of entities that generate receivables or that
utilize the underlying assets may result in costs and delays that are in
addition to losses associated with a decline in the value of the underlying
assets.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOs"): STRIPS AND RESIDUALS. A CMO
is a debt obligation backed by a portfolio of mortgages or mortgage-backed
securities held under an indenture. The issuer of a CMO generally pays interest
and prepaid principal on a monthly basis. These payments are secured by the
underlying portfolio, which typically includes mortgage pass-through securities
guaranteed by Freddie Mac, Fannie Mae, or the Government National Mortgage
Association ("Ginnie Mae") and their income streams, and which may also include
whole mortgage loans and private mortgage bonds.
CMOs are issued in multiple classes, often referred to as "tranches." Each
class has a different maturity and is entitled to a different schedule for
payments of principal and interest, including pre-payments.
-7-
In a typical CMO transaction, the issuer of the CMO bonds uses proceeds
from the CMO offering to buy mortgages or mortgage pass-through certificates
(the "Collateral"). The issuer then pledges the Collateral to a third party
trustee as security for the CMOs. The issuer uses principal and interest
payments from the Collateral to pay principal on the CMOs, paying the tranche
with the earliest maturity first. Thus the issuer pays no principal on one
tranche until all other tranches with earlier maturities are paid in full. The
early retirement of a particular class or series has the same effect as the
prepayment of mortgage loans underlying a mortgage-backed pass-through security.
CMOs may be less liquid and may exhibit greater price volatility than
other types of mortgage- or asset -backed securities.
The Fund may also invest in CMO residuals, which are issued by agencies or
instrumentalities of the U.S. government or by private lenders of, or investors
in, mortgage loans, including savings and loan associations, homebuilders,
mortgage banks, commercial banks, and investment banks. A CMO residual
represents excess cash flow generated by the Collateral after the issuer of the
CMO makes all required principal and interest payments and after the issuer's
management fees and administrative expenses have been paid. Thus, CMO residuals
have value only to the extent income from the Collateral exceeds the amount
necessary to satisfy the issuer's debt obligations on all other outstanding
CMOs. The amount of residual cash flow resulting from a CMO will depend on,
among other things, the characterization of the mortgage assets, the coupon rate
of each class of CMO, prevailing interest rates, the amount of administrative
expenses, and the pre-payment experience on the mortgage assets.
CMOs also include certificates representing undivided interests in
payments of interest-only or principal-only ("IO/PO Strips") on the underlying
mortgages. IO/PO Strips and CMO residuals tend to be more volatile than other
types of securities. If the underlying securities are prepaid, holders of IO/PO
Strips and CMO residuals may lose a substantial portion or the entire value of
their investment. In addition, if a CMO pays interest at an adjustable rate, the
cash flows on the related CMO residual will be extremely sensitive to rate
adjustments.
COLLATERALIZED DEBT OBLIGATIONS ("CDOs"). The Fund may invest in CDOs,
which include collateralized bond obligations ("CBOs"), collateralized loan
obligations ("CLOs"), and other similarly structured securities. CBOs and CLOs
are asset-backed securities. A CBO is a trust or other special purpose vehicle
backed by a pool of high risk, usually below investment-grade fixed income
securities. A CLO is an obligation of a trust typically collateralized by a pool
of loans, which may include domestic and foreign senior secured loans, senior
unsecured loans, and subordinate corporate loans, including loans that may be
rated below investment-grade or equivalent unrated loans.
For both CBOs and CLOs, the cash flows from the trust are split into two
or more portions, called tranches, which vary in risk and yield. The riskier
portion is the residual or "equity" tranche which bears some or all of the risk
of default by the bonds or loans in the trust, and therefore protects the other,
more senior tranches from default in all but the most severe circumstances.
Since it is partially protected from defaults, a senior tranche of a CBO trust
or CLO trust typically has higher ratings and lower yields than its underlying
securities, and can be
-8-
rated investment grade. Despite the protection provided by the equity tranche,
senior CBO or CLO tranches can experience substantial losses due to actual
defaults, increased sensitivity to defaults due to collateral default, the total
loss of the equity tranche due to losses in the collateral, market anticipation
of defaults, fraud by the trust, and the illiquidity of CBO or CLO securities.
The risks of an investment in a CDO depend largely on the type of
underlying collateral securities and the tranche in which a Fund invests.
Typically, CBOs, CLOs and other CDOs are privately offered and sold, and thus,
are not registered under the securities laws. As a result, investments in CDOs
may be characterized by the Fund as illiquid, unless an active dealer market for
a particular CDO allows it to be purchased and sold in Rule 144A transactions.
CDOs are subject to the typical risks associated with debt instruments discussed
elsewhere in this Statement of Additional Information and the Prospectus (e.g.,
interest rate risk and default risk). Additional risks of CDOs include: (i) the
possibility that distributions from collateral securities will be insufficient
to make interest or other payments, (ii) a decline in the quality of the
collateral, and (iii) the possibility that the Fund may invest in a subordinate
tranche of a CDO. In addition, due to the complex nature of a CDO, an investment
in a CDO may not perform as expected. An investment in a CDO also is subject to
the risk that the issuer and the investors may interpret the terms of the
instrument differently, giving rise to disputes.
U.S. GOVERNMENT SECURITIES AND FOREIGN GOVERNMENT SECURITIES
U.S. government securities include securities issued or guaranteed by the
U.S. government or its authorities, agencies, or instrumentalities. Foreign
government securities include securities issued or guaranteed by foreign
governments (including political subdivisions) or their authorities, agencies,
or instrumentalities or by supra-national agencies. Different kinds of U.S.
government securities and foreign government securities have different kinds of
government support. For example, some U.S. government securities (e.g., U.S.
Treasury bonds) are supported by the full faith and credit of the United States.
Other U.S. government securities are issued or guaranteed by federal agencies or
government-chartered or-sponsored enterprises but are neither guaranteed nor
insured by the U.S. government (e.g., debt securities issued by Freddie Mac,
Fannie Mae, and FHLBs). Similarly, some foreign government securities are
supported by the full faith and credit of a foreign national government or
political subdivision and some are not. Foreign government securities of some
countries may involve varying degrees of credit risk as a result of financial or
political instability in those countries and the possible inability of the Fund
to enforce its rights against the foreign government.
Supra-national agencies are agencies whose member nations make capital
contributions to support the agencies' activities, and include the International
Bank for Reconstruction and Development (the World Bank), the Asian Development
Bank, the European Coal and Steel Community, and the Inter-American Development
Bank.
As with other fixed income securities, U.S. government securities and
foreign government securities expose their holders to market risk because their
values typically change as interest rates fluctuate. For example, the value of
U.S. government securities or foreign government securities may fall during
times of rising interest rates. Yields on U.S. government
-9-
securities and foreign government securities tend to be lower than those of
corporate securities of comparable maturities.
In addition to investing directly in U.S. government securities and
foreign government securities, the Fund may purchase certificates of accrual or
similar instruments evidencing undivided ownership interests in interest
payments and/or principal payments of U.S. government securities and foreign
government securities. Certificates of accrual and similar instruments may be
more volatile than other government securities.
ADJUSTABLE RATE SECURITIES
Adjustable rate securities are securities with interest rates that reset
at periodic intervals, usually by reference to an interest rate index or market
interest rate. Adjustable rate securities include U.S. government securities and
securities of other issuers. Some adjustable rate securities are backed by pools
of mortgage loans. Although the rate adjustment feature may act as a buffer to
reduce sharp changes in the value of adjustable rate securities, changes in
market interest rates or changes in the issuer's creditworthiness may still
affect their value. Because the interest rate is reset only periodically,
changes in the interest rates on adjustable rate securities may lag behind
changes in prevailing market interest rates. Also, some adjustable rate
securities (or, in the case of securities backed by mortgage loans, the
underlying mortgages) are subject to caps or floors that limit the maximum
change in interest rate during a specified period or over the life of the
security. Because of the rate adjustments, adjustable rate securities are less
likely than non-adjustable rate securities of comparable quality and maturity to
increase significantly in value when market interest rates fall.
BELOW INVESTMENT GRADE SECURITIES
The Fund may hold securities whose ratings have been downgraded to below
investment grade (that is, below BBB- by Standard & Poor's or below Baa3 by
Moody's Investors Service, Inc. ("Moody's") or determined by the Manager to be
of comparable quality to securities so rated) after purchase by the Fund,
including securities in the lowest rating categories and comparable unrated
securities ("Below Investment Grade Securities") (commonly referred to as "junk
bonds"). Compared to higher quality fixed income securities, Below Investment
Grade Securities offer the potential higher investment returns but subject
holders to greater credit and market risk. The ability of an issuer of Below
Investment Grade Securities to meet principal and interest payments is
considered speculative. The Fund's investments in Below Investment Grade
Securities is more dependent on the Manager's own credit analysis it is for
investments in higher quality bonds. The market for Below Investment Grade
Securities may be more severely affected than other financial markets by
economic recession or substantial interest rate increases, changing public
perceptions, or legislation that limits the ability of certain categories of
financial institutions to invest in Below Investment Grade Securities. In
addition, the market may be less liquid for Below Investment Grade Securities.
Reduced liquidity can affect the values of Below Investment Grade Securities,
make their valuation and sale more difficult, and result in greater volatility.
Because Below Investment Grade Securities are difficult to value, particularly
during erratic markets, the values realized on their sale may differ from the
values at which they are carried by the Fund. Some Below Investment Grade
Securities in which the Fund invests may be in poor standing or in default.
-10-
Securities in the lowest investment grade category (BBB or Baa) also have
some speculative characteristics. See "Commercial Paper and Corporate Debt
Ratings" below for more information concerning commercial paper and corporate
debt ratings.
ZERO COUPON SECURITIES
The Fund, when investing in "zero coupon" fixed income securities, accrues
interest income at a fixed rate based on the initial purchase price and the
length to maturity, but the securities do not pay interest in cash on a current
basis. The Fund is required to distribute the accrued income to its
shareholders, even though the Fund is not receiving the income in cash on a
current basis. Thus, the Fund may have to sell other investments to obtain cash
to make income distributions. The market value of zero coupon securities is
often more volatile than that of non-zero coupon fixed income securities of
comparable quality and maturity. Zero coupon securities include IO/PO Strips.
INDEXED SECURITIES
Indexed securities are securities the redemption values and/or the coupons
of which are indexed to the prices of a specific instrument or statistic.
Indexed securities typically, but not always, are debt securities or deposits
whose value at maturity or coupon rate is determined by reference to other
securities, securities indexes, currencies, precious metals or other
commodities, or other financial indicators. For example, the maturity value of
gold-indexed securities depends on the price of gold and, therefore, their price
tends to rise and fall with gold prices. Currency-indexed securities typically
are short-term to intermediate-term debt securities whose maturity values or
interest rates are determined by reference to the values of one or more
specified foreign currencies. Currency-indexed securities may be positively or
negatively indexed; that is, their maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign-denominated instrument, or their maturity value may
decline when foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on the underlying currency.
Currency-indexed securities also may have maturity values or interest rates that
depend on the values of a number of different foreign currencies relative to
each other.
The performance of indexed securities depends to a great extent on the
performance of the security, security index, currency, or other instrument to
which they are indexed. Performance also may be influenced by interest rate
changes in the U.S. and abroad. Indexed securities also are subject to the
credit risks of the issuer, and their values are adversely affected by declines
in the issuer's creditworthiness. Recent issuers of indexed securities have
included banks, corporations, and U.S. government agencies.
The Fund may invest in indexed securities called "inverse floating
obligations" or "residual interest bonds" on which the interest rates typically
decline as short-term interest rates increase and increase as short-term
interest rates decline. Inverse floating obligations have the effect of
investment leverage, since they will generally increase or decrease in value in
response to changes in interest rates at a rate that is a multiple of the rate
at which fixed-rate long-term securities increase or decrease in value in
response to such changes. As a result, the market
-11-
values of inverse floating obligations generally will be more volatile than the
market values of fixed-rate securities.
The Fund may invest in inflation indexed bonds. Inflation-indexed bonds
are fixed income securities whose principal value is periodically adjusted
according to the rate of inflation. The interest rate on inflation indexed bonds
is fixed at issuance, but is paid on an increasing or decreasing principal value
as a result of inflation rate adjustments.
Repayment of an inflation indexed bond's original principal value upon
maturity (as adjusted for inflation) is guaranteed in the case of some bonds
(e.g., U.S. Treasury inflation indexed bonds), even during a period of
deflation. The current market value of an inflation indexed bond is not
guaranteed, however, and will fluctuate. The Fund may invest in inflation
indexed bonds that do not guarantee repayment of the bonds' original principal
value upon maturity. As a result, the adjusted principal value of the bond
repaid at maturity may be less than the original principal.
The value of inflation indexed bonds fluctuates in response to changes in
real interest rates, which in turn reflect the relationship between the stated
interest rate of the bond (i.e., the "nominal interest rate") minus inflation.
Therefore, if inflation rises at a faster rate than nominal interest rates, real
interest rates are likely to 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 are likely to rise, leading to a
decrease in value of inflation indexed bonds.
Although inflation indexed securities protect holders from long-term
inflationary trends, short-term increases in inflation may result in a decline
in value. In addition, inflation indexed securities do not protect holders from
increases in interest rates due to reasons other than inflation (such as changes
in currency exchange rates).
The periodic adjustment of U.S. inflation-indexed bonds is tied to the
Consumer Price Index for Urban Consumers ("CPI-U"), which is calculated monthly
by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in
the cost of living, made up of components such as housing, food, transportation
and energy. Inflation-indexed bonds issued by a foreign government are generally
adjusted to reflect changes in a comparable inflation index calculated by the
foreign government. No assurance can be given that the CPI-U or any foreign
inflation index will accurately measure the real rate of inflation in the prices
of goods and services. In addition, no assurance can be given that the rate of
inflation in a foreign country will correlate to the rate of inflation in the
United States.
Coupon payments received by the Fund from inflation indexed bonds are
included in the Fund's gross income in the period in which they accrue. In
addition, any increase in the principal amount of an inflation indexed bond
constitutes taxable ordinary income to investors in the Fund, even though
principal is not paid until maturity.
The Fund's investments in indexed securities, including inflation indexed
securities, may generate taxable income in excess of the interest they pay to
the Fund. As a result, the Fund may be required to sell assets to generate the
cash necessary to distribute as dividends to its shareholders all of its income
and gains and therefore to eliminate any tax liability at the Fund
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level. See "Distributions" and "Taxes" in the Prospectus and in this Statement
of Additional Information.
STRUCTURED NOTES
Similar to indexed securities described above, structured notes are
derivative debt securities, the interest rate or principal of which is
determined by reference to changes in the value of a specific asset, reference
rate, or index (the "reference") or the relative change in two or more
references. The interest rate or the principal amount payable upon maturity or
redemption may be increased or decreased, depending upon changes in the
reference. The terms of a structured note may provide that in certain
circumstances no principal is due at maturity and, therefore, may result in a
loss of invested capital. Structured notes may be positively or negatively
indexed, so that appreciation of the reference may produce an increase or a
decrease in the interest rate or value of the principal at maturity. In
addition, changes in the interest rate or the value of the principal at maturity
may be fixed at a specified multiple of the change in the value of the
reference, making the value of the note very volatile.
Structured notes may entail a greater degree of market risk than other
types of debt securities because the investor bears the risk of the reference.
Structured notes also may be more volatile, less liquid, and more difficult to
price accurately than less complex securities or more traditional debt
securities.
RISKS OF FOREIGN INVESTMENTS
GENERAL. Investment in foreign issuers or securities principally traded
outside the United States may involve special risks due to foreign economic,
political and legal developments, including favorable or unfavorable changes in
currency exchange rates, exchange control regulations (including currency
blockage), expropriation or nationalization of assets, imposition of withholding
taxes on dividend or interest payments, and possible difficulty in obtaining and
enforcing judgments against foreign entities. Issuers of foreign securities are
subject to different, often less comprehensive, accounting, reporting and
disclosure requirements than U.S. issuers. The securities of some foreign
governments, companies and securities markets are less liquid, and at times more
volatile, than comparable U.S. securities and securities markets. Foreign
brokerage commissions and other related fees also are generally higher than in
the United States. The laws of some foreign countries may limit the Fund's
ability to invest in securities of certain issuers located in those countries.
Special tax considerations also apply to investments in securities of foreign
issuers and securities principally traded outside the United States.
EMERGING MARKETS. The risks described above apply to an even greater
extent to investments in emerging markets. The securities markets of emerging
countries are generally smaller, less developed, less liquid, and more volatile
than the securities markets of the United States and developed foreign countries
and disclosure and regulatory standards in many respects are less stringent. In
addition, the securities markets of emerging countries are typically subject to
a lower level of monitoring and regulation. Government enforcement of existing
securities regulations is limited, and any such enforcement may be arbitrary and
the results may be difficult to predict. Many emerging countries have
experienced substantial, and in some periods
-13-
extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have very negative
effects on their economies and securities markets. Economies of emerging
countries generally are heavily dependent on international trade and,
accordingly, have been and may continue to be affected adversely by trade
barriers, exchange controls, managed adjustments in relative currency values,
and other protectionist measures imposed or negotiated by the countries with
which they trade. Economies of emerging countries also have been and may
continue to be adversely affected by economic conditions in the countries in
which they trade. The economies of emerging countries also may be predominantly
based on only a few industries or dependent on revenues from particular
commodities.
In many cases, governments of emerging countries continue to exercise
significant control over their economies, and government actions relative to the
economy, as well as economic developments generally, may affect the capacity of
creditors in those countries to make payments on their debt obligations,
regardless of their financial condition. Custodial services may be more
expensive and other investment-related costs may be higher in emerging markets
than in many developed foreign markets, which could reduce the Fund's income
from investments in securities or debt instruments of emerging markets issuers.
Emerging countries are more likely than developed countries to experience
political uncertainty and instability, including the risk of war, terrorism,
nationalization, limitations on the removal of funds or other assets, or
diplomatic developments that affect U.S. investments in these countries. No
assurance can be given that adverse political changes will not cause the Fund to
suffer a loss of any or all of its investments in such countries (or, in the
case of fixed-income securities, interest) in emerging countries.
SECURITIES LENDING
The Fund may make secured loans of its portfolio securities. The Manager
intends to limit the portfolio securities on loan at a given time to not more
than one-third of its total assets. For these purposes, total assets include the
proceeds of the loans. Securities loans are made to broker-dealers that the
Manager believes to be of relatively high credit standing pursuant to agreements
requiring that the loans be continuously collateralized by cash, liquid
securities, or by shares of other investment companies with a value at least
equal to the market value of the loaned securities. If a loan is collateralized
by U.S. government securities, the Fund receives a fee from the borrower. If a
loan is collateralized by cash, the Fund typically invests the cash collateral
for its own account in interest-bearing, short-term securities and pays a fee to
the borrower that normally represents a portion of the Fund's earnings on the
collateral. As with other extensions of credit, the Fund bears the risk of delay
in the recovery of the securities and of loss of rights in the collateral should
the borrower fail financially. The Fund also bears the risk that the value of
the investments made with collateral may decline. Voting rights or rights to
consent with respect to the loaned securities pass to the borrower. The Fund has
the right to call the loans at any time on reasonable notice and will do so if
the holders of a loaned security are asked to take action on a material matter.
However, the Fund bears the risk of delay in the return of the security,
impairing the Fund's ability to vote on such matters. The Fund also pays various
fees in connection with securities loans, including shipping fees and custodian
fees.
-14-
The Fund's securities loans may or may not be structured to preserve qualified
dividend income treatment on dividends paid on the loaned securities. The Fund
may receive substitute payments under its loans (instead of dividends on the
loaned securities) that are not eligible for treatment as qualified dividend
income or the long-term capital gain tax rates applicable to qualified dividend
income. See "Taxes" below for further discussion of qualified dividend income.
CONVERTIBLE SECURITIES
A convertible security is a security (a bond or preferred stock) that may
be converted at a stated price within a specified period of time into a
specified number of shares of common stock of the same or a different issuer.
Convertible securities are senior to common stock in a corporation's capital
structure, but are usually subordinated to senior debt obligations of the
issuer. Convertible securities provide holders, through their conversion
feature, an opportunity to participate in increases in the market price advance
of their underlying securities. The price of a convertible security is
influenced by the market price of the underlying securities, and tends to
increase as the market price rises and decrease as the market price declines.
The Manager regards convertible securities as a form of equity security.
WARRANTS AND RIGHTS
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 stated price. The Fund typically uses warrants and
rights in a manner similar to its use of options on securities as described in
"Options and Futures" below. Risks associated with the use of warrants and
rights are generally similar to risks associated with its use of options as
described below in "Options and Futures." Unlike most options, however, warrants
and rights are issued in set amounts, and warrants generally have longer terms
than options. Warrants and rights are not likely to be as liquid as
exchange-traded options backed by a recognized clearing agency. In addition, the
terms of warrants or rights may limit the Fund's ability to exercise the
warrants or rights at such time, or in such quantities, as the Fund would
otherwise wish.
OPTIONS AND FUTURES
The Fund may use options and futures for hedging purposes, as a substitute
for direct investment in securities, or as a way to efficiently adjust the
exposure of the Fund to various securities, markets, and currencies without the
Fund actually having to sell current assets and make new investments. Such
transactions may involve options, futures, and related options on futures
contracts, and those instruments may relate to particular equity and fixed
income securities, equity and fixed income indexes, and foreign currencies. The
Fund may also enter into a combination of long and short positions (including
spreads and straddles) for a variety of investment strategies, including
protecting against changes in certain yield relationships.
The use of options contracts, futures contracts, and options on futures
contracts involves risk. Thus, while the Fund may benefit from the use of
options, futures, and options on futures, unanticipated changes in interest
rates, securities prices, or currency exchange rates may adversely affect the
Fund's performance.
-15-
The Fund may enter into options and futures contracts and buy and sell
options on futures contracts for hedging purposes. For example, if the Fund
wants to hedge certain of its fixed income securities against a decline in value
resulting from a general increase in market rates of interest, it might sell
futures contracts with respect to fixed income securities or indexes of fixed
income securities. If the hedge is effective, then should the anticipated change
in market rates cause a decline in the value of the Fund's fixed income
security, the value of the futures contract should increase. The Fund may also
use futures contracts in anticipatory hedge transactions by taking a long
position in a futures contract with respect to a security, index or foreign
currency that the Fund intends to purchase (or whose value is expected to
correlate closely with the security or currency to be purchased) pending receipt
of cash from other transactions to be used for the actual purchase. Then if the
cost of the security or foreign currency to be purchased by the Fund increases
and if the anticipatory hedge is effective, that increased cost should be
offset, at least in part, by the value of the futures contract. Options on
futures contracts may be used for hedging as well. For example, if the value of
a fixed-income security in the Fund's portfolio is expected to decline as a
result of an increase in rates, the Fund might purchase put options or write
call options on futures contracts rather than selling futures contracts.
Similarly, for anticipatory hedging, the Fund may purchase call options or write
put options as a substitute for the purchase of futures contracts.
FOREIGN CURRENCY TRANSACTIONS
The Fund may buy or sell foreign currencies or deal in forward foreign
currency contracts, currency futures contracts and related options, and options
on currencies. The Fund may use such currency instruments for currency risk
management. Currency risk management may include taking active currency
positions relative to both the securities portfolio of the Fund and the Fund's
performance benchmark.
Forward foreign currency contracts are contracts between two parties to
purchase and sell a specific quantity of a particular currency at a specified
price, with delivery and settlement to take place on a specified future date.
Currency futures contracts are contracts to buy or sell a standard quantity of a
particular currency at a specified future date and price. Options on currency
futures contracts give their holder the right, but not the obligation, to buy
(in the case of a call option) or sell (in the case of a put option) a specified
currency futures contract at a fixed price during a specified period. Options on
currencies give their holder the right, but not the obligation, to buy (in the
case of a call option) or sell (in the case of a put option) a specified
quantity of a particular currency at a fixed price during a specified period.
The Fund may enter into forward contracts for hedging under three
circumstances. First, when the Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock in"
the U.S. dollar price of the security. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transaction, the Fund will be able
to protect itself against a possible loss resulting from an adverse change in
the relationship between the U.S. dollar and the subject foreign currency during
the period between the date on which the security is purchased or sold and the
date on which payment is made or received.
-16-
Second, when the Manager of the Fund believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of the Fund's portfolio securities denominated in such foreign currency.
Maintaining a match between the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures.
Third, the Fund may engage in currency "cross hedging" when, in the
opinion of the Manager, the historical relationship among foreign currencies
suggests that the Fund may achieve the same protection for a foreign security at
reduced cost through the use of a forward foreign currency contract relating to
a currency other than the U.S. dollar or the foreign currency in which the
security is denominated. By engaging in cross hedging transactions, the Fund
assumes the risk of imperfect correlation between the subject currencies. These
practices may present risks different from or in addition to the risks
associated with investments in foreign currencies.
The Fund is not required to enter into hedging transactions with regard to
its foreign currency-denominated securities and will not do so unless deemed
appropriate by the Manager. By entering into the above hedging transactions, the
Fund may be required to forego the benefits of advantageous changes in the
exchange rates.
SWAP CONTRACTS AND OTHER TWO-PARTY CONTRACTS
The Fund may enter into swaps contracts for hedging and/or investment
purposes. When using swaps contracts for hedging, the Fund may enter into an
interest rate, currency, or total return swap, as the case may be, on either an
asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities. When using swaps for investment purposes, the Fund
may enter into total return or credit default swaps.
SWAP CONTRACTS. Swap contracts are two-party contracts entered into
primarily by institutional investors for periods ranging from a few weeks to
more than one year. In a standard "swap", two parties agree to exchange returns
(or differentials in rates of return) calculated on a "notional amount," e.g.,
the return on or increase in value of a particular dollar amount invested at a
particular interest rate in a particular foreign currency or in a "basket" of
securities representing a particular index.
INTEREST RATE AND CURRENCY SWAP CONTRACTS. The parties to interest rate
swaps agree to pay or receive interest on a notional principal amount (e.g., an
exchange of payments based on a floating interest rate for payments based on a
fixed interest rate). The parties to currency swaps agree to pay or receive
fluctuations in the notional amount of two different currencies (e.g., an
exchange of payments on fluctuations in the value of the U.S. dollar relative to
the Japanese yen).
-17-
INTEREST RATE CAPS, FLOORS, AND COLLARS. The Fund may use interest rate
caps, floors, and collars for the same or similar purposes as they use interest
rate futures contracts and related options, as a result, will be subject to
similar risks. See "Options and Futures" above. Like interest rate contracts,
interest rate caps, floors, and collars are two-party agreements in which the
parties agree to pay or receive interest on a notional principal amount. The
purchaser of an interest rate cap receives interest payments from the seller to
the extent that the return on a specified index exceeds a specified interest
rate. The purchaser of an interest rate floor receives interest payments from
the seller to the extent that the return on a specified index falls below a
specified interest rate. The purchaser of an interest rate collar receives
interest payments from the seller to the extent that the return on a specified
index falls outside the range of two specified interest rates.
TOTAL RETURN SWAPS. The Fund may generally use total return swaps to gain
investment exposure to fixed income securities where direct ownership is either
not legally possible or is economically unattractive. Total return swap
agreements involve commitments to pay interest in exchange for a market-linked
return, both based on notional amounts. To the extent the total return of the
fixed income security, basket of securities, or index underlying the transaction
exceeds or falls short of the offsetting interest rate obligation, the Fund will
receive a payment from or make a payment to the counterparty, respectively.
CREDIT DEFAULT SWAPS. The Fund may (but is not obligated to) use credit
default swaps for investment purposes. In a credit default swap, one party pays
what is, in effect, an insurance premium through a stream of payments to another
party in exchange for the right to receive a specified return in the event of
default (or similar events) by a third party on its obligations. When using
credit default swaps for investment purposes, the Fund receives a premium in
return for its taking on the obligation to pay the par (or other agreed-upon)
value upon issuer default (or similar events).
RISK FACTORS IN SWAP CONTRACTS, OTC OPTIONS AND OTHER TWO-PARTY CONTRACTS.
The Fund may only close out a swap, cap, floor, collar, or OTC option only with
the particular counterparty, and may only transfer a position with the consent
of the particular counterparty. If the counterparty defaults, the Fund will have
contractual remedies, but there is no assurance that the counterparty will be
able to meet its contractual obligations or that, in the event of default, the
Fund will succeed in enforcing them. For example, because the contract for each
OTC derivatives transaction is individually negotiated with a specific
counterparty, the Fund is subject to the risk that a counterparty may interpret
contractual terms (e.g., the definition of default) differently than the Fund
when the Fund seeks to enforce its contractual rights. If that occurs, the cost
and unpredictability of the legal proceeding required for the Fund to enforce
its contractual rights may lead it to decide not to pursue its claim against the
counterparty. The Fund, therefore, assumes the risk that it may be unable to
obtain payments owed to it under OTC derivatives contracts or that those
payments may be delayed or made only after the Fund has incurred the costs of
litigation.
The Manager monitors the creditworthiness of OTC derivatives
counterparties. Typically, the Fund will enter into these transactions only with
counterparties who, at the time it enters into a transaction, have a long-term
debt rating of A or higher (by Standard & Poor's or
-18-
Moody's Investors Service, Inc. ("Moody's") or Fitch, Inc. ("Fitch") or if the
counterparty has a comparable credit rating, as determined by the Manager).
Short-term derivatives may be entered into with counterparties that do not have
long-term debt ratings if they have short-term debt ratings of A-1 by Standard &
Poor's and/or a comparable rating by Moody's or Fitch. The credit rating of a
counterparty may be adversely affected by larger-than-average volatility in the
markets, even if the counterparty's net market exposure is small relative to its
capital.
ADDITIONAL REGULATORY LIMITATIONS ON THE USE OF FUTURES AND RELATED
OPTIONS, INTEREST RATE FLOORS, CAPS AND COLLARS AND INTEREST RATE AND CURRENCY
SWAP CONTRACTS. The Fund has claimed an exclusion from the definition of
"commodity pool operator" under the Commodity Exchange Act and, therefore, is
not subject to registration or regulation as a pool operator under that Act.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with banks and
broker-dealers. A repurchase agreement is a contract under which the Fund
acquires a security (usually an obligation of the government where the
transaction is initiated or in whose currency the agreement is denominated) for
a relatively short period (usually not more than a week) for cash and subject to
the commitment of the seller to repurchase the security for an agreed-on price
on a specified date. The repurchase price is in excess of the acquisition price
and reflects an agreed-upon market rate unrelated to the coupon rate on the
purchased security. Repurchase agreements afford the Fund the opportunity to
earn a return on temporarily available cash at no market risk, although the Fund
does run the risk of a seller's defaulting in its obligation to pay the
repurchase price when it is required to do so. Such a default may subject the
Fund to expenses, delays and risks of loss including: (i) possible declines in
the value of the underlying security while the Fund is seeking to enforce its
rights, (ii) possible reduced levels of income and lack of access to income
during this period, and (iii) inability to enforce its rights and the expenses
involved in attempted enforcement.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLL AGREEMENTS
The Fund may enter into reverse repurchase agreements and dollar roll
agreements with banks and brokers to enhance return. Reverse repurchase
agreements involve sales by the Fund of portfolio securities concurrently with
an agreement by the Fund to repurchase the same securities at a later date at a
fixed price. During the reverse repurchase agreement period, the Fund continues
to receive principal and interest payments on the securities and also has the
opportunity to earn a return on the collateral furnished by the counterparty to
secure its obligation to redeliver the securities.
Dollar rolls are transactions in which the Fund sells securities for
delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type and coupon) securities on a specified future
date. During the roll period, the Fund foregoes principal and interest paid on
the securities. The Fund is compensated by the difference between the current
sales price and the forward price for the future purchase (often referred to as
the "drop") as well as by the interest earned on the cash proceeds of the
initial sale.
-19-
The Fund, when entering into reverse repurchase agreements and dollar roll
agreements, maintains cash, U.S. government securities, or other liquid assets
equal in value to its obligations under those agreements. If the buyer in a
reverse repurchase agreement or dollar roll agreement files for bankruptcy or
becomes insolvent, the Fund's use of proceeds from the sale of its securities
may be restricted pending a determination by the other party or its trustee or
receiver whether to enforce the Fund's obligation to repurchase the securities.
Reverse repurchase agreements and dollar rolls are not considered borrowings by
the Fund for purposes of the Fund's fundamental investment restriction on
borrowings.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in illiquid securities.
For this purpose, "illiquid securities" are securities that the Fund may not
sell or dispose of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities.
A repurchase agreement maturing in more than seven days is considered
illiquid, unless it can be terminated after a notice period of seven days or
less.
As long as the SEC maintains the position that most swap contracts, caps,
floors, and collars are illiquid, the Fund will continue to designate these
instruments as illiquid unless the instrument includes a termination clause or
has been determined to be liquid based on a case-by-case analysis pursuant to
procedures approved by the Trustees.
PRIVATE PLACEMENTS AND RESTRICTED INVESTMENTS. Illiquid securities may
include certain securities of private issuers, securities traded in unregulated
or shallow markets, and securities that are purchased in private placements and
are subject to legal or contractual restrictions on resale. Because relatively
few purchasers of these securities may exist, especially in the event of adverse
market or economic conditions or adverse changes in the issuer's financial
condition, the Fund could have difficulty selling them when the Manager believes
it advisable to do so or may be able to sell them only at prices that are lower
than if they were more widely held. Disposing of illiquid securities may involve
time-consuming negotiation and legal expenses, and selling them promptly at an
acceptable price may be difficult or impossible.
While private placements may offer attractive opportunities not otherwise
available in the open market, the securities purchased are usually "restricted
securities" or are "not readily marketable." Restricted securities cannot be
sold without being registered under the Securities Act of 1933 or pursuant to an
exemption from registration (such as Rules 144 or 144A). Securities that are not
readily marketable are subject to other legal or contractual restrictions on
resale. A Fund may have to bear the expense of registering restricted securities
for resale and the risk of substantial delay in effecting registration. A Fund
selling its securities in a registered offering may be deemed to be an
"underwriter" for purposes of Section 11 of the Securities Act of 1933 when
selling its securities in a registered public offering. In such event, the Fund
may be liable to purchasers of the securities under Section 11 if the
registration statement prepared by the issuer, or the prospectus forming a part
of it, is materially inaccurate or misleading, although the Fund may have a due
diligence defense.
-20-
At times, the inability to sell illiquid securities can make it more
difficult to determine their fair value for purposes of computing the Fund's net
asset value. The judgment of the Manager normally plays a greater role in
valuing these securities than in valuing publicly traded securities.
FIRM COMMITMENTS AND WHEN-ISSUED SECURITIES
The Fund may enter into firm commitments and other similar agreements with
banks or broker-dealers for the purchase or sale of securities at an agreed-upon
price on a specified future date. For example, the Fund may enter into a firm
commitment agreement when it invests in fixed income securities and the Manager
anticipates a decline in interest rates and believes it is able to obtain a more
advantageous future yield by committing currently to purchase securities to be
issued later. When the Fund purchases securities this way (on a when-issued or
delayed-delivery basis), it is required to maintain on its custodian's books and
records cash, U.S. government securities. or other liquid securities in an
amount equal to or greater than, on a daily basis, the amount of the Fund's
when-issued or delayed-delivery commitments. The Fund generally does not earn
income on the securities that it has committed to purchase until after delivery.
The Fund may take delivery of the securities or, if deemed advisable as a matter
of investment strategy, may sell the securities before the settlement date. When
payment is due on when-issued or delayed-delivery securities, the Fund funds
payment from then available cash flow or the sale of securities, or from the
sale of the when-issued or delayed-delivery securities themselves (which may
have a value greater or less than what the Fund paid for them).
INVESTMENTS IN OTHER INVESTMENT COMPANIES
The Fund may invest in shares of both open- and closed-end investment
companies (including money market funds and exchange-traded funds ("ETFs")).
Investing in another investment company exposes the Fund to all the risks of
that investment company and, in general, subjects it to a pro rata portion of
the other investment company's fees and expenses.
ETFs are hybrid investment companies that are registered as open-end
investment companies or unit investment trusts ("UITs") but possess some of the
characteristics of closed-end funds. ETFs typically hold a portfolio of common
stocks that is intended to track the price and dividend performance of a
particular index. Common examples of ETFs include S&P Depositary Receipts
("SPDRs") and iShares, which may be purchased from the UIT or investment company
issuing the securities or in the secondary market (SPDRs are listed on the
American Stock Exchange and iShares are listed on the New York Stock Exchange).
The market price for ETF shares may be higher or lower than the ETF's net asset
value. The sale and redemption prices of ETF shares purchased from the issuer
are based upon issuer's net asset value.
-21-
USES OF DERIVATIVES
INTRODUCTION AND OVERVIEW
DERIVATIVE POLICIES. This overview outlines the principal ways the Fund
may use derivatives.
FUNCTION OF DERIVATIVES IN THE FUND. The Fund may use financial
derivatives to implement investment decisions. The types of derivatives it
employs may include futures, swaps, options, forward contracts and,
periodically, structured notes. These instruments may be exchange-traded or
over-the-counter. To a significant extent, specific market conditions influence
the choice of derivative strategies for the Fund.
DERIVATIVE EXPOSURE. To the extent the Fund uses derivatives, bond
futures, currency options, forwards, swaps, and other derivatives would be the
primary means of implementing their investment strategies.
COUNTERPARTY CREDITWORTHINESS. The Manager monitors the creditworthiness
of the counterparties of over-the-counter derivatives. Typically, the Fund will
enter into derivatives only with counterparties with long-term debt ratings of A
or higher by either Standard & Poor's or Moody's or, in the case of short-term
derivatives, with short-term debt ratings of A-1 by Standard & Poor's and/or
Prime-1 by Moody's (but do not have long-term debt ratings). (See "Commercial
Paper and Corporate Debt Ratings" for an explanation of short-term ratings.) In
addition to checking agency ratings to assess creditworthiness, the Manager
considers news reports and market activity, such as the price at which a
counterparty's long-term debt trades. Furthermore, the Manager monitors the
amount of credit extended to each counterparty by the Fund. Besides
creditworthiness, the Manager reviews, on a regular basis, the exposures the
Fund has to a counterparty and may have collateral arrangements with a
counterparty that further reduce its exposure.
DERIVATIVES IN THE FUND. The Fund may employ derivatives for hedging,
investment, and risk management.
Hedging: The Fund may use derivatives to hedge against a market or
credit risk already generally present in the Fund. In
addition, if the Fund receives significant cash, the Fund
may hedge market risk (the risk of not being invested in
the market) by purchasing long futures contracts or
entering into long swap contracts to obtain market exposure
until direct investments can be made efficiently.
Investment: The Fund may use derivatives (particularly long futures
contracts, related options and long swap contracts) instead
of investing directly in securities. Because a foreign
derivative generally only provides a return in local
currency, the Fund may purchase a foreign currency forward
in conjunction with using foreign equity derivatives to
achieve the effect of investing directly.
Risk Management: The Fund may use options, futures, and related
options as well as swap contracts to achieve what the
Manager believes to be optimal exposure to individual
-22-
countries and issuers. The Fund may from time to time use
such derivatives prior to actual sales and purchases.
Foreign Currency: Forward sales and purchases of foreign currency
contracts may be used to: (1) take active overweighted and
underweighted positions in particular bond markets and
currencies relative to the Fund's performance benchmark, if
any; (2) hedge currency exposure embedded in foreign
securities; (3) buy currency in advance to settle security
purchases; (4) cross-hedge currency risks; and (5) create
synthetic foreign bonds in conjunction with bond futures.
Other Uses of Swaps: The Fund may employ additional strategies to
help implement the Fund's investment strategies. As an
example, the Fund may use total return swaps to gain
investment exposure to fixed income securities where direct
ownership is either not legally possible or is economically
unattractive.
Leverage: The Fund is not subject to any limits on the extent to
which derivatives may be used or with respect to the
absolute face value of the derivative positions. As a
result, to the extent the Fund engages in derivatives
transactions, it may be leveraged if measured in terms of
aggregate exposure of its assets. However, to the extent
the Fund engages in derivatives transactions, the Manager
may seek to manage the effective market exposure of the
Fund by controlling the projected "tracking error" relative
to a designated performance benchmark. "Tracking error" is
a measure of the risk of the Fund's portfolio return
relative to that performance benchmark. It is a calculation
of the standard deviation of the returns of the Fund's
portfolio less the performance benchmark.
USE OF DERIVATIVES BY THE FUND
TYPES OF DERIVATIVES USED BY THE FUND (OTHER THAN FOREIGN CURRENCY
DERIVATIVE TRANSACTIONS)
Futures contracts and related options on bonds as well as baskets or indexes of
securities Options on bonds and other securities Swap contracts, including
interest rate swaps, total return swaps, and credit default swaps Structured
notes
USES OF DERIVATIVES BY THE FUND (OTHER THAN FOREIGN CURRENCY DERIVATIVE
TRANSACTIONS)
Hedging
Traditional Hedging: The Fund may use bond futures, related options, bond
options, and swap contracts to hedge against a market or credit risk already
generally present in the Fund.
Anticipatory Hedging: In anticipation of significant purchases of a
security or securities, the Fund may hedge market risk (the risk of not being
invested in the securities) by purchasing long futures contracts or entering
into long swap contracts to obtain market exposure until the purchase is
completed. Conversely, in anticipation of a significant demand for cash
redemptions (or otherwise has a significant need for cash), the Fund may sell
futures contracts or enter into short swap contracts to allow it to dispose of
securities in a more orderly fashion.
-23-
Investment
The Fund is not subject to any limit on the extent to which derivatives
may be used or on the absolute face value of its derivative positions. As a
result, to the extent the Fund engages in derivatives transactions, the Fund may
be leveraged in terms of aggregate exposure of its assets. The Manager seeks to
manage the effective market exposure of the Fund by controlling the projected
tracking error relative to a designated performance benchmark.
The Fund may use derivatives (particularly long futures contracts, related
options, and long swap contracts) in place of investing directly in securities.
Because a foreign derivative generally only provides a return in local currency
terms, the Fund may purchase a foreign currency forward in conjunction with
using derivatives to give the effect of investing directly.
Risk Management
The Fund may use options, futures, and related options as well as swap
contracts to achieve what the Manager believes to be optimal exposure to
individual countries and issuers. The Fund may from time to time use these
transactions prior to actual sales and purchases.
Other Uses
In general, the Fund may use total return swaps and credit default swaps
to gain investment exposure to fixed income securities in situations where
direct ownership is not permitted or is economically unattractive. Total return
swap agreements involve commitments to pay interest in exchange for a
market-linked return, both based on notional amounts. To the extent the total
return of the fixed income security, basket of securities, or index underlying
the derivative exceeds or falls short of the offsetting interest rate
obligation, the Fund will receive a payment from or make a payment to the
counterparty, respectively. With credit default swaps, the Fund receives what
is, in effect, an insurance premium, and, in return, is obligated to pay the par
(or other agreed-upon) value of certain bonds or loans upon issuer default (or
similar events).
Often the debt instruments in which the Fund may invest may not be
available with precisely the duration or other interest rate terms that the
Manager would prefer. The Manager may decide to alter the interest rate exposure
of these debt instruments by employing interest rate swaps. The Fund can then
maintain its investment in the credit of the issuer through the debt instrument
but adjust its interest rate exposure through the swap. With these swaps, the
Fund and the counterparties exchange interest rate exposure, such as fixed vs.
variable and shorter duration vs. longer duration.
FOREIGN CURRENCY DERIVATIVE TRANSACTIONS USED BY THE FUND
Buying and selling spot currencies
Forward foreign currency contracts
Currency futures contracts and related options
Options on currencies
Currency swap contracts
-24-
USES OF FOREIGN CURRENCY DERIVATIVE TRANSACTIONS BY THE FUND
Hedging
Traditional Hedging: The Fund may use derivatives - generally short
forward or futures contracts - to hedge back into U.S. dollars the foreign
currency risk inherent in its portfolio. The Fund is not required to hedge any
of its currency risk.
Anticipatory Hedging: If the Fund enters into a contract for the purchase
or anticipates the need to purchase a security denominated in a foreign
currency, it may "lock in" the U.S. dollar price of the security by buying the
foreign currency or using currency forwards or futures.
Proxy Hedging: The Fund may hedge the exposure of a given foreign currency
by using an instrument denominated in a different currency that the Manager
believes is highly correlated to the currency being hedged.
Investment
The Fund may enter into currency forwards or futures contracts in
conjunction with entering into a futures contract on a foreign index to create
synthetic foreign currency denominated securities.
Risk Management
Subject to the certain limitations, the Fund may use foreign currency
derivatives for risk management. Thus, the Fund may have foreign currency
exposure that is significantly different than the currency exposure represented
by its portfolio investments. That exposure may include long and short exposure
to particular currencies beyond the exposure represented by the Fund's
investment in securities denominated in that currency.
-25-
INVESTMENT RESTRICTIONS
Fundamental Restrictions:
The following are Fundamental Investment Restrictions, which may not be
changed without shareholder approval:
1. The Fund may not borrow money except under the following
circumstances: (i) the Fund may borrow money from banks so long as
after such a transaction, the total assets (including the amount
borrowed) less liabilities other than debt obligations, represent at
least 300% of outstanding debt obligations; (ii) the Fund may also
borrow amounts equal to an additional 5% of its total assets without
regard to the forgoing limitation for temporary purposes, such as
for the clearance and settlement of portfolio transactions and to
meet shareholder redemption requests; and (iii) the Fund may enter
into transactions that are technically borrowings under the
Investment Company Act of 1940 (the "1940 Act") because they involve
the sale of a security coupled with an agreement to repurchase that
security (e.g., reverse repurchase agreements, dollar rolls, and
other similar investment techniques) without regard to the asset
coverage restriction described in (i) above, so long as and to the
extent that the Fund's custodian earmarks and maintains cash and/or
liquid securities equal in value to its obligations in respect of
these transactions.
2. The Fund may not purchase securities on margin except such
short-term credits as may be necessary for the clearance of
purchases and sales of securities. (For this purpose, the deposit or
payment of initial or variation margin in connection with futures
contracts or related options transactions is not considered the
purchase of a security on margin.)
3. The Fund may not make short sales of securities or maintain a short
position for the Fund's account unless at all times when a short
position is open the Fund owns an equal amount of such securities or
owns securities which, without payment of any further consideration,
are convertible into or exchangeable for securities of the same
issue as, and equal in amount to, the securities sold short.
4. The Fund may not underwrite securities issued by other persons
except to the extent that, in connection with the disposition of its
portfolio investments, it may be deemed to be an underwriter under
federal securities laws.
5. The Fund may not purchase or sell real estate, although it may
purchase securities of issuers which deal in real estate, including
securities of real estate investment trusts, and may purchase
securities which are secured by interests in real estate.
6. The Fund may not make loans, except by purchase of debt obligations
or by entering into repurchase agreements or through the lending of
the fund's portfolio securities. Loans of portfolio securities may
be made with respect to up to 33 1/3% of the Fund's total assets.
-26-
7. The Fund may not concentrate more than 25% of the value of its total
assets in any one industry.
8. The Fund may not purchase or sell commodities or commodity
contracts, except that the Fund may purchase and sell financial
futures contracts and options thereon.
9. The Fund may not issue senior securities, as defined in the 1940 Act
and as amplified by rules, regulations and pronouncements of the
SEC. The SEC has concluded that even though reverse repurchase
agreements, firm commitment agreements and standby commitment
agreements fall within the functional meaning of the term "evidence
of indebtedness", the issue of compliance with Section 18 of the
1940 Act will not be raised with the SEC by the Division of
Investment Management if the fund covers such securities by
earmarking and maintaining certain assets on the books and records
of the Fund's custodian. Similarly, so long as such earmarked assets
are maintained, the issue of compliance with Section 18 will not be
raised with respect to any of the following: any swap contract or
contract for differences; any pledge or encumbrance of assets
permitted by Non-Fundamental Restriction (4) below; any borrowing
permitted by Fundamental Restriction (1) above; any collateral
arrangements with respect to initial and variational margin; and the
purchase or sale of options, forward contracts, futures contracts or
options on futures contracts.
Non-Fundamental Restrictions:
The following are Non-Fundamental Investment Restrictions, which may be
changed by the Trustees without shareholder approval:
1. The Fund may not buy or sell oil, gas, or other mineral leases,
rights or royalty contracts.
2. The Fund may not make an investment for the purpose of gaining
control of a company's management.
3. The Fund may not invest more than 15% of net assets in illiquid
securities. For this purpose, "illiquid securities" may include
certain restricted securities under the federal securities laws
(including illiquid securities eligible for resale under Rules 144
or 144A), repurchase agreements, and securities that are not readily
marketable. To the extent the Trustees determine that restricted
securities eligible for resale under Rules 144 or 144A (safe harbor
rules for resales of securities acquired under Section 4(2) private
placements) under the Securities Act of 1933, repurchase agreements
and securities that are not readily marketable, are in fact liquid,
they will not be included in the 15% limit on investment in illiquid
securities.
-27-
Repurchase agreements maturing in more than seven days are
considered illiquid, unless an agreement can be terminated after a
notice period of seven days or less.
For so long as the SEC maintains the position that most swap
contracts, caps, floors and collars are illiquid, the Fund will
continue to designate these instruments as illiquid for purposes of
its 15% illiquid limitation unless the instrument includes a
termination clause or has been determined to be liquid based on a
case-by-case analysis pursuant to procedures approved by the
Trustees.
4. The Fund may not pledge, hypothecate, mortgage, or otherwise
encumber its assets in excess of 33 1/3% of the Fund's total assets
(taken at cost). (For the purposes of this restriction, collateral
arrangements with respect to swap agreements, the writing of
options, stock index, interest rate, currency or other futures,
options on futures contracts and collateral arrangements with
respect to initial and variation margin are not deemed to be a
pledge or other encumbrance of assets. The deposit of securities or
cash or cash equivalents in escrow in connection with the writing of
covered call or put options, respectively, is not deemed to be a
pledge or encumbrance.)
Except as indicated above in Fundamental Restriction (1), all percentage
limitations on investments set forth herein and in the Prospectus will apply at
the time of the making of an investment and shall not be considered violated
unless an excess or deficiency occurs or exists immediately after and as a
result of such investment.
The phrase "shareholder approval," as used in the Prospectus and in this
Statement of Additional Information, and the phrase "vote of a majority of the
outstanding voting securities," as used herein with respect to the Fund, means
the affirmative vote of the lesser of (1) more than 50% of the outstanding
shares of the Fund, or (2) 67% or more of the shares of the Fund present at a
meeting if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy. Except for policies that are explicitly described
as fundamental in the Prospectus or this Statement of Additional Information,
the investment policies of the Fund (including all policies, restrictions and
limitations set forth in the "Investment Guidelines") may be changed by the
Trust's Trustees without the approval of shareholders.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Fund will be determined as of the
close of regular trading on the New York Stock Exchange, generally 4:00 p.m.
Eastern time. Please refer to "Determination of Net Asset Value" in the
Prospectus for additional information.
-28-
DISTRIBUTIONS
The Prospectus describes the distribution policies of the Fund under the
heading "Distributions and Taxes." The Fund maintains a policy in all cases to
pay its shareholders, as dividends, substantially all net investment income and
to distribute at least annually all net realized capital gains, if any, after
offsetting any available capital loss carryovers. The Fund generally maintains a
policy to make distributions at least annually, sufficient to avoid the
imposition of a nondeductible 4% excise tax on certain undistributed amounts of
investment company taxable income and capital gain net income. The Fund also may
make unscheduled distributions of net income, short-term capital gains, and/or
long-term capital gains prior to large shareholder redemptions of the Fund.
TAXES
TAX STATUS AND TAXATION OF THE FUND
The Fund is treated as a separate taxable entity for federal income tax
purposes. The Fund intends to qualify each year as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). In order to qualify for the special tax treatment accorded regulated
investment companies and their shareholders, the Fund must, among other things:
(a) derive at least 90% of its gross income from dividends, interest, payments
with respect to certain securities loans, and gains from the sale of
stock, securities and foreign currencies, or other income (including but
not limited to gains from options, futures, or forward contracts) derived
with respect to its business of investing in such stock, securities, or
currencies;
(b) distribute with respect to each taxable year at least 90% of the sum of
its investment company taxable income (as that term is defined in the Code
without regard to the deduction for dividends paid--generally, taxable
ordinary income and the excess, if any, of net short-term capital gains
over net long-term capital losses) and net tax-exempt interest income, for
such year; and
(c) diversify its holdings so that, at the end of each quarter of the Fund's
taxable year, (i) at least 50% of the market value of the Fund's total
assets is represented by cash and cash items, U.S. Government securities,
securities of other regulated investment companies ("underlying funds"),
and other securities limited in respect of any one issuer to a value not
greater than 5% of the value of the Fund's total assets and not more than
10% of the outstanding voting securities of such issuer, and (ii) not more
than 25% of the value of the Fund's total assets is invested in the
securities (other than those of the U.S. Government or other regulated
investment companies) of any one issuer or of two or more issuers which
the Fund controls and which are engaged in the same, similar, or related
trades or businesses, or in the securities of one or more qualified
publicly traded partnerships (as defined below). In the case of a Fund's
investments in loan
-29-
participations, the Fund shall treat a financial intermediary as an issuer
for the purposes of meeting this diversification requirement.
In general, for purposes of the 90% gross income requirement described in
paragraph (a) above, income derived from a partnership will be treated as
qualifying income only to the extent such income is attributable to items of
income of the partnership which would be qualifying income if realized by the
regulated investment company. However, 100% of the net income derived from an
interest in a "qualified publicly traded partnership" (defined as a partnership
(i) interests in which are traded on an established securities market or readily
tradable on a secondary market or the substantial equivalent thereof and (ii)
that derives less than 90% of its income from the qualifying income described in
paragraph (a) above) will be treated as qualifying income. In addition, although
in general the passive loss rules of the Code do not apply to regulated
investment companies, such rules do apply to a regulated investment company with
respect to items attributable to an interest in a qualified publicly traded
partnership. Finally, for purposes of paragraph (c) above, the term "outstanding
voting securities of such issuer" will include the equity securities of a
qualified publicly traded partnership.
If the Fund qualifies as a regulated investment company that is accorded
special tax treatment, the Fund will not be subject to federal income tax on
income distributed in a timely manner to its shareholders in the form of
dividends (including Capital Gain Dividends, defined below).
If the Fund were to fail to distribute in a calendar year substantially
all of its ordinary income for such year and substantially all of its capital
gain net income for the one-year period ending October 31 (or later if the Fund
is permitted so to elect and so elects), plus any retained amount from the prior
year, the Fund will be subject to a 4% excise tax on the undistributed amounts.
The Fund intends generally to make distributions sufficient to avoid imposition
of the 4% excise tax, although the Fund reserves the right to pay an excise tax
rather than make an additional distribution when circumstances warrant (e.g.,
the payment of excise tax amount deemed by the Fund to be de minimis).
Capital losses in excess of capital gains ("Net Capital Losses") are not
permitted to be deducted against other income. A Fund may carry Net Capital
Losses forward for eight years. However, a Fund will not be able to utilize any
Net Capital Losses remaining at the conclusion of the eighth taxable year
succeeding the taxable year in which such Net Capital Loss arose. All Net
Capital Losses carried forward are treated as short term and will offset
short-term capital gain before offsetting long-term capital gain in the year in
which they are utilized. While the issuance or redemption of shares in a Fund
will generally not affect the Fund's ability to use Net Capital Losses in
succeeding taxable years, the Fund's ability to utilize Net Capital Losses may
be limited as a result of certain (i) acquisitive reorganizations and (ii)
shifts in the ownership of the Fund by a shareholder owning or treated as owning
5 percent of the stock of the Fund.
-30-
TAXATION OF FUND DISTRIBUTIONS AND SALES OF FUND SHARES
The Fund's shareholders will include other funds of the Trust. The
following summary does not discuss the tax consequences to the shareholders of
those other funds of distributions by those funds or of the sale of shares of
those funds. Shareholders of those funds should consult the prospectuses and
statements of additional information of those funds for a discussion of the tax
consequences to them.
The sale, exchange, or redemption of Fund shares may give rise to a gain
or loss. In general, any gain or loss realized upon a taxable disposition of
shares will be treated as long-term capital gains if the shares have been held
for more than one year and as short-term capital gains if the shares have been
held for not more than one year. However, depending on a shareholder's
percentage ownership in the Fund, a partial redemption of Fund shares could
cause the shareholder to be treated as receiving a dividend, taxable as ordinary
income in an amount equal to the full amount of the distribution, rather than
capital gain income.
For federal income tax purposes, distributions of investment income are
generally taxable as ordinary income. Taxes on distributions of capital gains
are determined by how long the Fund owned the investments that generated them,
rather than how long a shareholder may have owned shares in the Fund.
Distributions of net capital gains from the sale of investments that the Fund
owned for more than one year and that are properly designated by the Fund as
capital gain dividends ("Capital Gain Dividends") will be taxable to
shareholders as long-term capital gains. Distributions of gains from the sale of
investments that the Fund owned for one year or less will be taxable to
shareholders as ordinary income. For taxable years beginning on or before
December 31, 2008, "qualified dividend income" received by an individual will be
taxed at the rates applicable to long-term capital gain. In order for some
portion of the dividends received by a Fund shareholder to be qualified dividend
income, the Fund must meet holding period and other requirements with respect to
some portion of the dividend-paying stocks in its portfolio and the shareholder
must meet holding period and other requirements with respect to the Fund's
shares. A dividend will not be treated as qualified dividend income (at either
the Fund or shareholder level) (i) if the dividend is received with respect to
any share of stock held for fewer than 61 days during the 121-day period
beginning on the date which is 60 days before the date on which such share
becomes ex-dividend with respect to such dividend (or, in the case of certain
preferred stock, 91 days during the 181-day period beginning 90 days before such
date), (ii) to the extent that the recipient is under an obligation (whether
pursuant to a short sale or otherwise) to make related payments with respect to
positions in substantially similar or related property, (iii) if the recipient
elects to have the dividend income treated as investment interest, or (iv) if
the dividend is received from a foreign corporation that is (a) not eligible for
the benefits of a comprehensive income tax treaty with the United States (with
the exception of dividends paid on stock of such a foreign corporation readily
tradable on an established securities market in the United States) or (b)
treated as a passive foreign investment company.
In general, distributions of investment income designated by the Fund as
derived from qualified dividend income will be treated as qualified dividend
income by a shareholder taxed as an individual provided the shareholder meets
the holding period and other requirements described above with respect to the
Fund's shares. In any event, if the qualified dividend income received by the
Fund during any taxable year is 95% or more of its gross income, then 100% of
-31-
the Fund's dividends (other than Capital Gain Dividends) will be eligible to be
treated as qualified dividend income. For this purpose, the only gain included
in the term "gross income" is the excess of net short-term capital gain over net
long-term capital loss.
If the Fund receives dividends from an underlying fund, and the underlying
fund designates such dividends as "qualified dividend income," then the Fund
may, in turn, designate a portion of its distributions as "qualified dividend
income" as well, provided the Fund meets the holding period and other
requirements with respect to shares of the underlying fund.
Long-term capital gain rates applicable to most individuals have been
temporarily reduced to 15% (with lower rates applying to taxpayers in the 10%
and 15% rate brackets) for taxable years beginning on or before December 31,
2008.
Any loss realized upon a taxable disposition of shares held for six months
or less will be treated as long-term capital loss to the extent of any Capital
Gain Dividends received by the shareholder with respect to those shares. All or
a portion of any loss realized upon a taxable disposition of Fund shares will be
disallowed if other shares of the Fund are purchased within 30 days before or
after the disposition. In such a case, the basis of the newly purchased shares
will be adjusted to reflect the disallowed loss.
A distribution paid to shareholders by the Fund in January of a year
generally is deemed to have been received by shareholders on December 31 of the
preceding year, if the distribution was declared and payable to shareholders of
record on a date in October, November, or December of that preceding year. The
Trust will provide federal tax information annually, including information about
dividends and distributions paid during the preceding year to taxable investors
and others requesting such information.
If the Fund makes a distribution to its shareholders in excess of its
current and accumulated "earnings and profits" in any taxable year, the excess
distribution will be treated as a return of capital to the extent of each
shareholder's tax basis in its shares, and thereafter as capital gain. A return
of capital is not taxable, but it reduces the shareholder's tax basis in its
shares, thus reducing any loss or increasing any gain on a subsequent taxable
disposition by such shareholder of the shares.
Dividends and distributions on the Fund's shares are generally subject to
federal income tax as described herein to the extent they do not exceed the
Fund's realized income and gains, even though such dividends and distributions
may economically represent a return of a particular shareholder's investment.
Such dividends and distributions are likely to occur in respect of shares
purchased at a time when the Fund's net asset value reflects gains that are
either unrealized, or realized but not distributed.
Special tax rules apply to investments through defined contribution plans
and other tax-qualified plans. Shareholders should consult their tax advisor to
determine the suitability of shares of the Fund as an investment through such
plans.
-32-
BACKUP WITHHOLDING
The Fund generally is required to withhold and remit to the U.S. Treasury
a percentage of the taxable dividends and other distributions paid to and
proceeds of share sales, exchanges, or redemptions made by any individual
shareholder (including any foreign individual) who fails to furnish the Fund
with a correct taxpayer identification number, who has under-reported dividends
or interest income, or who fails to certify to the Fund that he or she is a
United States person and is not subject to such withholding. The backup
withholding tax rate is 28% for amounts paid through 2010. The backup
withholding tax rate will be 31% for amounts paid after December 31, 2010.
Distributions will not be subject to backup withholding to the extent they are
subject to the withholding tax on foreign persons described in the next
paragraph. Any tax withheld as a result of backup withholding does not
constitute an additional tax imposed on the record owner of the account, and may
be claimed as a credit on the record owner's Federal income tax return.
WITHHOLDING ON DISTRIBUTIONS TO FOREIGN INVESTORS
Dividend distributions (including distributions derived from short-term
capital gains) are in general subject to a U.S. withholding tax of 30% when paid
to a nonresident alien individual, foreign estate or trust, a foreign
corporation, or a foreign partnership ("foreign shareholder"). Persons who are
resident in a country, such as the U.K., that has an income tax treaty with the
U.S. may be eligible for a reduced withholding rate (upon filing of appropriate
forms), and are urged to consult their tax advisors regarding the applicability
and effect of such a treaty. Distributions of Capital Gain Dividends paid by the
Fund to a foreign shareholder, and any gain realized upon the sale of Fund
shares by such a shareholder, will ordinarily not be subject to U.S. taxation,
unless the recipient or seller is a nonresident alien individual who is present
in the United States for more than 182 days during the taxable year. However,
such distributions and sale proceeds may be subject to backup withholding,
unless the foreign investor certifies his non-U.S. residency status. Also,
foreign shareholders with respect to whom income from the Fund is "effectively
connected" with a U.S. trade or business carried on by such shareholder will in
general be subject to U.S. federal income tax on the income derived from the
Fund at the graduated rates applicable to U.S. citizens, residents or domestic
corporations, whether such income is received in cash or reinvested in shares,
and, in the case of a foreign corporation, may also be subject to a branch
profits tax. Again, foreign shareholders who are residents in a country with an
income tax treaty with the United States may obtain different tax results, and
are urged to consult their tax advisors.
Under the American Jobs Creation Act of 2004 (the "2004 Act"), effective
for taxable years of the Fund beginning after December 31, 2004 and before
January 1, 2008, the Fund will not be required to withhold any amounts (i) with
respect to distributions (other than distributions to a foreign shareholder that
has not provided a satisfactory statement that the beneficial owner is not a
U.S. person, to the extent that the dividend is attributable to certain interest
on an obligation if the foreign shareholder is the issuer or is a 10%
shareholder of the issuer, that is within certain foreign countries that have
inadequate information exchange with the United States, or to the extent the
dividend is attributable to interest paid by a person that is a related person
of an individual foreign shareholder and the foreign shareholder is a controlled
foreign corporation)
-33-
from U.S.-source interest income that would not be subject to U.S. federal
income tax if earned directly by an individual foreign shareholder, to the
extent such distributions are properly designated by the Fund (the
"interest-related dividends"), and (ii) with respect to distributions (other
than distributions to an individual foreign shareholder who is present in the
United States for a period or periods aggregating 183 days or more during the
year of the distribution) of net short-term capital gains in excess of net
long-term capital losses, to the extent such distributions are properly
designated by the Fund (the "short-term capital gain dividends"). The Fund may
opt not to designate dividends as interest-related dividends or short-term
capital gain dividends to the full extent permitted by the Code.
The fact that the Fund may achieve its investment objective by investing
in underlying funds will generally not adversely affect the Fund's ability to
pass on to foreign shareholders the full benefit of the interest-related
dividends and short-term capital gain dividends that it receives from its
underlying investments in the funds, except possibly to the extent that (i)
interest-related dividends received by the Fund are offset by deductions
allocable to the Fund's qualified interest income or (ii) short-term capital
gain dividends received by the Fund are offset by the Fund's net short- or
long-term capital losses, in which case the amount of a distribution from the
Fund to a foreign shareholder that is properly designated as either an
interest-related dividend or a short-term capital gain dividend, respectively,
may be less than the amount that such shareholder would have received had they
invested directly in the underlying funds.
If a beneficial holder who is a foreign shareholder has a trade or
business in the United States, and the dividends are effectively connected with
the conduct by the beneficial holder of a trade or business in the United
States, the dividend will be subject to U.S. federal net income taxation at
ordinary income tax rates.
The 2004 Act modifies the tax treatment of distributions from the Fund
that are paid to a foreign shareholder and are attributable to gain from "U.S.
real property interests" ("USRPIs"), which the Code defines to include direct
holdings of U.S. real property and interests (other than solely as a creditor)
in "U.S. real property holding corporations" such as REITs. The Code deems any
corporation that holds (or held during the previous five-year period) USRPIs
with a fair market value equal to 50% or more of the fair market value of the
corporation's U.S. and foreign real property assets and other assets used or
held for use in a trade or business to be a U.S. real property holding
corporation; however, if any class of stock of a corporation is traded on an
established securities market, stock of such class shall be treated as a USRPI
only in the case of a person who holds more than 5% of such class of stock at
any time during the previous five-year period. Under the 2004 Act, which is
generally effective for taxable years of regulated investment companies
beginning after December 31, 2004 and which applies to dividends paid or deemed
paid on or before December 31, 2007, distributions to foreign shareholders
attributable to gains from the sale or exchange of USRPIs will give rise to an
obligation for those foreign shareholders to file a U.S. tax return and pay tax,
and may well be subject to withholding under future regulations.
Under U.S. federal tax law, a beneficial holder of shares who is a foreign
shareholder is not, in general, subject to U.S. federal income tax on gains (and
is not allowed a deduction for losses) realized on the sale of shares of the
Fund or on Capital Gain Dividends unless (i) such gain or Capital Gain Dividend
is effectively connected with the conduct of a trade or business
-34-
carried on by such holder within the United States, (ii) in the case of an
individual holder, the holder is present in the United States for a period or
periods aggregating 183 days or more during the year of the sale or Capital Gain
Dividend and certain other conditions are met, or (iii) the shares constitute
USRPIs or (effective for taxable years of the Fund beginning after December 31,
2004) the Capital Gain Dividends are paid or deemed paid on or before December
31, 2007 and are attributable to gains from the sale or exchange of USRPIs.
Effective after December 31, 2004, and before January 1, 2008, if the Fund is a
U.S. real property holding corporation (as described above) the Fund's shares
will nevertheless not constitute USRPIs if the Fund is a "domestically
controlled qualified investment entity," which is defined to include a RIC that,
at all times during the shorter of the 5-year period ending on the date of the
disposition or the period during which the RIC was in existence, had less than
50 percent in value of its stock held directly or indirectly by foreign
shareholders. Foreign shareholders in the Fund should consult their tax advisors
with respect to the potential application of the 2004 Act.
FOREIGN TAXES
The Fund's investments in foreign securities may be subject to foreign
withholding taxes on dividends, interest, or capital gains which will decrease
the Fund's yield. Foreign withholding taxes may be reduced under income tax
treaties between the United States and certain foreign jurisdictions. Depending
on the number of non-U.S. shareholders in the Fund, however, such reduced
foreign withholding tax rates may not be available for investments in certain
jurisdictions. The Fund may, at times, have a significant number of non-U.S.
investors.
If, at the end of the fiscal year, more than 50% of the value of the total
assets of the Fund is represented by direct investments in stock or securities
of foreign corporations, the Fund may make an election with respect to the
relevant Fund which allows shareholders whose income from the Fund is subject to
U.S. taxation at the graduated rates applicable to U.S. citizens, residents or
domestic corporations to claim a foreign tax credit or deduction (but not both)
on their U.S. income tax return. In such a case, the amount of qualified foreign
income taxes paid by the Fund would be treated as additional income to Fund
shareholders from non-U.S. sources and as foreign taxes paid by Fund
shareholders. Investors should consult their tax advisors for further
information relating to the foreign tax credit and deduction, which are subject
to certain restrictions and limitations (including a holding period requirement
applied at both the Fund and shareholder level imposed by the Code).
Shareholders of the Fund whose income from the Fund is not subject to U.S.
taxation at the graduated rates applicable to U.S. citizens, residents or
domestic corporations may receive substantially different tax treatment of
distributions by the Fund, and may be disadvantaged as a result of the election
described in this paragraph.
Under current law, the Fund cannot pass through to shareholders foreign
tax credits borne in respect of foreign securities income earned by underlying
funds. In general, the Fund may only elect to pass through to its shareholders
foreign income taxes it pays provided that it directly holds more than 50% of
its assets in foreign stock and securities at the close of its taxable year.
Foreign securities held indirectly through an underlying fund do not contribute
to this 50% threshold. Due to the complexity and uncertainty surrounding the
appropriate U.S. treatment of some foreign country withholding taxes, the Fund
may opt not to pass through to shareholders all or some of the foreign taxes
paid by the Fund.
-35-
TAX IMPLICATIONS OF CERTAIN INVESTMENTS
Certain of the Fund's investments, including investments in
mortgage-backed and other asset-backed securities, assets "marked to the market"
for federal income tax purposes, debt obligations issued or purchased at a
discount and potentially so-called "indexed securities" (including inflation
indexed bonds), may create taxable income in excess of the cash they generate.
In such cases, the Fund may be required to sell assets (including when it is not
advantageous to do so) to generate the cash necessary to distribute as dividends
to its shareholders all of its income and gains and therefore to eliminate any
tax liability at the Fund level.
The Fund's transactions in options, futures contracts, hedging
transactions, forward contracts, straddles, swaps, swaptions, and foreign
currencies may accelerate income, defer losses, cause adjustments in the holding
periods of the Fund's securities and convert long-term capital gains into
short-term capital gains and short-term capital losses into long-term capital
losses. These transactions may affect the amount, timing, and character of
distributions to shareholders.
The Fund's participation in repurchase agreements and loans of securities
may affect the amount, timing and character of distributions to shareholders.
With respect to any security subject to a repurchase agreement or a securities
loan, any (i) amounts received by the Fund in place of dividends earned on the
security during the period that such security was not directly held by the Fund
will not give rise to qualified dividend income and (ii) withholding taxes
accrued on dividends during the period that such security was not directly held
by the Fund will not qualify as a foreign tax paid by the Fund and therefore
cannot be passed through to shareholders even if the Fund meets the requirements
described in "Foreign Taxes," above.
If the Fund invests in shares of underlying funds taxed as regulated
investment companies, its distributable income and gains will normally consist,
in part, of distributions from underlying funds and gains and losses on the
disposition of shares of underlying funds. To the extent that an underlying fund
realizes net losses on its investments for a given taxable year, the Fund will
not be able to recognize its share of those losses (so as to offset
distributions of net income or capital gains from other underlying funds) until
it disposes of shares of the underlying fund. Moreover, even when the Fund does
make such a disposition, a portion of its loss may be recognized as a long-term
capital loss, which will not be treated as favorably for federal income tax
purposes as a short-term capital loss or an ordinary deduction. In particular,
the Fund will not be able to offset any capital losses from its dispositions of
underlying fund shares against its ordinary income (including distributions of
any net short-term capital gains realized by an underlying fund). As a result of
the foregoing rules, and certain other special rules, the amounts of net
investment income and net capital gains that the Fund will be required to
distribute to shareholders may be greater than such amounts would have been had
the Fund invested directly in the securities held by the underlying funds,
rather than investing in shares of the underlying funds. For similar reasons,
the character of distributions from the Fund (e.g., long-term capital gain,
exempt interest, eligibility for dividends-received deduction, etc.) will not
necessarily be the same as it would have been had the Fund invested directly in
the securities held by the underlying funds.
-36-
Depending on the Fund's percentage ownership in an underlying fund both
before and after a redemption of underlying fund shares, the Fund's redemption
of shares of such underlying fund may cause the Fund to be treated as receiving
a dividend taxable as ordinary income on the full amount of the distribution
instead of receiving capital gain income on the shares of the underlying fund.
This would be the case where the Fund holds a significant interest in an
underlying fund and redeems only a small portion of such interest.
Special tax considerations apply if the Fund investments in investment
companies taxed as partnerships. In general, the Fund will not recognize income
earned by such an investment company until the close of the investment company's
taxable year. However, the Fund will recognize such income as it is earned by
the investment company for purposes of determining whether it is subject to the
4 percent excise tax. Therefore, if the Fund and such an investment company have
different taxable years, the Fund may be compelled to make distributions in
excess of the income recognized from such an investment company in order to
avoid the imposition of the 4 percent excise tax.
The Fund's investments in certain passive foreign investment companies
("PFICs") could subject the Fund to a U.S. federal income tax (including
interest charges) on distributions received from the company or on proceeds
received from the disposition of shares in the company, which tax cannot be
eliminated by making distributions to Fund shareholders. However, if a Fund is
in a position to treat such a passive foreign investment company as a "qualified
electing fund" ("QEF"), the Fund will be required to include its share of the
company's income and net capital gain annually, regardless of whether it
receives any distribution from the company. Alternately, a Fund may make an
election to mark the gains (and to a limited extent losses) in such holdings "to
the market" as though it had sold and repurchased its holdings in those PFICs on
the last day of the Fund's taxable year. Such gains and losses are treated as
ordinary income and loss. The QEF and mark-to-market elections may have the
effect of accelerating the recognition of income (without the receipt of cash)
and increasing the amount required to be distributed for the Fund to avoid
taxation. Making either of these elections therefore may require the Fund to
liquidate other investments (including when it is not advantageous to do so) to
meet its distribution requirement, which also may accelerate the recognition of
gain and affect the Fund's total return. A fund that indirectly invests in PFICs
by virtue of the fund's investment in other investment companies may not make
such elections; rather, the underlying investment companies directly investing
in PFICs would decide whether to make such elections. Dividends paid by PFICs
will not be eligible to be treated as "qualified dividend income."
A PFIC is any foreign corporation in which (i) 75% or more of the gross
income for the taxable year is passive income, or (ii) the average percentage of
the assets (generally by value, but by adjusted tax basis in certain cases) that
produce or are held for the production of passive income is at least 50%.
Generally, passive income for this purpose means dividends, interest (including
income equivalent to interest), royalties, rents, annuities, the excess of gains
over losses from certain property transactions and commodities transactions, and
foreign currency gains. Passive income for this purpose does not include rents
and royalties received by the foreign corporation from active business and
certain income received from related persons.
-37-
LOSS OF REGULATED INVESTMENT COMPANY STATUS
The Fund may experience particular difficulty qualifying as a regulated
investment company in the case of highly unusual market movements or in the case
of high redemption levels. If the Fund were to not qualify for taxation as a
regulated investment company for any taxable year, the Fund's income would be
taxed at the Fund level at regular corporate rates, and all distributions from
earnings and profits, including distributions of net long-term capital gains and
net tax-exempt income, generally would be taxable to shareholders as ordinary
income. Such distributions generally would be eligible (i) to be treated as
"qualified dividend income" in the case of shareholders taxed as individuals and
(ii) for the dividends-received deduction in the case of corporate shareholders.
In addition, in order to requalify for taxation as a regulated investment
company that is accorded special tax treatment, the Fund may be required to
recognize unrealized gains, pay substantial taxes and interest on such gains,
and make certain substantial distributions.
TAX SHELTER REPORTING REGULATIONS
If a shareholder realizes a loss on disposition of the Fund's shares of $2
million or more for an individual shareholder or $10 million or more for a
corporate shareholder, the shareholder must file with the Internal Revenue
Service a disclosure statement on Form 8886. Direct shareholders of portfolio
securities are in many cases excepted from this reporting requirement, but under
current guidance, shareholders of a regulated investment company are not
excepted. Future guidance may extend the current exception from this reporting
requirement to shareholders of most or all regulated investment companies.
This section relates only to U.S. federal income tax consequences of
investing in the Fund for shareholders who are U.S. citizens, residents or
domestic corporations. The consequences under other tax laws may differ.
Shareholders should consult their tax advisors about the precise tax
consequences of an investment in the Fund in light of their particular tax
situation, including possible foreign, state, local or other applicable tax
laws.
-38-
MANAGEMENT OF THE TRUST
The following tables present information regarding each Trustee and
officer of GMO Trust (the "Trust") as of the date of this Statement of
Additional Information. 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 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
is not an "interested person" of the Trust, as such term is used in the 1940
Act. Because the Fund does 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.
NUMBER OF
NAME, DATE OF BIRTH, PRINCIPAL PORTFOLIOS IN
AND OCCUPATION(S) FUND OTHER
POSITION(S) HELD DURING PAST 5 COMPLEX DIRECTORSHIPS
WITH THE TRUST LENGTH OF TIME SERVED YEARS OVERSEEN HELD
-------------- --------------------- ----- -------- ----
Donald W. Glazer, Esq. Chairman of the Board of Consultant-- [55] None
Chairman of the Board of Trustees since March 2005; Lead Business and Law(1);
Trustees Independent Trustee (September Vice Chair (since
DOB: 07/26/1944 2004- March 2005); Trustee since 2002) and Secretary,
December 2000. Provant, Inc.;
Author of Legal
Treatises.
----------
(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, 2003, December 31, 2004, and
December 31, 2005 these entities paid $469,752, $373,499, and $[______]
respectively, in legal fees and disbursements to Goodwin.
-39-
Jay O. Light Since May 1996 Acting Dean (since [55] Director of
Trustee 2005), Senior Harvard
DOB: 10/03/1941 Associate Dean Management
(1998-2005), and Company, Inc.
Professor of and Verde, Inc.;
Business Director of
Administration, Partners
Harvard Business HealthCare
School. System, Inc. and
Chair of its
Investment
Committee.
W. Nicholas Thorndike Since March 2005 Director or trustee [55] Director of
Trustee of various Courier
DOB: 03/28/1933 corporations and Corporation (a
charitable book publisher
organizations, and
including Courier manufacturer);
Corporation (a book Member of the
publisher and Investment
manufacturer) (July Committee of
1989- present); Partners
Putnam Funds HealthCare
(December 1992- June System, Inc.
2004); and
Providence Journal
(a newspaper
publisher) (December
1986- December 2003).
OFFICERS
POSITION(S) HELD
NAME AND DATE WITH LENGTH PRINCIPAL OCCUPATION(S)
OF BIRTH THE TRUST OF TIME SERVED DURING PAST 5 YEARS
-------- --------- -------------- -------------------
Scott Eston President and Chief President and Chief Chief Financial Officer, Chief
DOB: 01/20/1956 Executive Officer Executive Officer Operating Officer (2000-present)
since October 2002; and Member, Grantham, Mayo, Van
Vice President, Otterloo & Co. LLC.
August 1998 -
October 2002.
Susan Randall Harbert Chief Financial Chief Financial Member, Grantham, Mayo, Van
DOB: 04/25/1957 Officer and Officer since Otterloo & Co. LLC.
Treasurer February 2000;
Treasurer since
February 1998.
Brent C. Arvidson Assistant Treasurer Since August 1998. Senior Fund Administrator,
DOB: 06/26/1969 Grantham, Mayo, Van Otterloo &
Co. LLC.
-40-
Sheppard N. Burnett Assistant Treasurer Since September Fund Administration Staff,
DOB: 10/24/1968 2004. Grantham, Mayo, Van Otterloo &
Co. LLC (June 2004 - present);
Vice President, Director of Tax,
Columbia Management Group
(2002-2004) and Senior Tax
Manager (2000-2002) and Tax
Manager (1999-2000),
PricewaterhouseCoopers LLP.
Michael E. Gillespie Chief Compliance Since March 2005. Vice President of Compliance
DOB: 02/18/1958 Officer (June 2004- February 2005) and
Director of Domestic Compliance
(March 2002- June 2004),
Fidelity Investments; Vice
President and Senior Counsel,
State Street Bank and Trust
Company (May 1998- March 2002).
David L. Bohan Vice President and Since March 2005. Legal Counsel, Grantham, Mayo,
DOB: 06/21/1964 Clerk Van Otterloo & Co. LLC.
(September 2003- present);
Attorney, Goodwin Procter LLP
(September 1996- September 2003).
Scott D. Hogan Vice President and Since June 2005; Legal Counsel, Grantham, Mayo,
DOB: 01/06/1970 Secretary Acting Chief Van Otterloo & Co. LLC (since
Compliance Officer, 2000) and Senior Legal Product
October 2004 - Specialist, Scudder Kemper
February 2005. Investments, Inc. (1999-2000).
Julie L. Perniola Vice President Vice President, Anti-Money Laundering Reporting
DOB: 10/07/1970 February, Officer (February 2003- December
2003-present; 2004) and Chief Compliance
Anti-Money Officer (April 1995-present),
Laundering Grantham, Mayo, Van Otterloo &
Compliance Officer, Co. LLC.
February
2003-December 2004.
Cheryl Wakeham Vice President and Since December 2004. Manager, Client Service
DOB: 10/29/1958 Anti-Money Laundering Officer Administration, Grantham, Mayo,
Van Otterloo & Co. LLC (February
1999-present).
TRUSTEES' RESPONSIBILITIES. Under the provisions of the GMO Declaration of
Trust, the Trustees manage the business of the Trust, an open-end management
investment company. The Trustees have all powers necessary or convenient to
carry out that responsibility, including the power to engage in securities
transactions on behalf of the Trust. Without limiting the foregoing, the
Trustees may: adopt By-Laws not inconsistent with the Declaration of Trust
providing for
-41-
the regulation and management of the affairs of the Trust; amend and repeal
By-Laws to the extent that such By-Laws do not reserve that right to the
shareholders; fill vacancies in or remove members of the Board of Trustees
(including any vacancies created by an increase in the number of Trustees);
remove members of the Board of Trustees with or without cause; elect and remove
such officers and appoint and terminate agents as they consider appropriate;
appoint members of the Board of Trustees to one or more committees consisting of
two or more Trustees which may exercise the powers and authority of the
Trustees, and terminate any such appointments; employ one or more custodians of
the assets of the Trust and authorize such custodians to employ subcustodians
and to deposit all or any part of such assets in a system or systems for the
central handling of securities or with a Federal Reserve Bank; retain a transfer
agent or a shareholder servicing agent, or both; provide for the distribution of
Shares by the Trust, through one or more principal underwriters or otherwise;
set record dates for the determination of Shareholders with respect to various
matters; and in general delegate such authority as they consider desirable to
any officer of the Trust, to any committee of the Trustees and to any agent or
employee of the Trust or to any such custodian or underwriter.
Prior to March 24, 2005, the Board of Trustees had two standing committees: the
Independent Trustees/Audit Committee and the Pricing Committee. Mr. Glazer and
Mr. Light were members of the Independent Trustees/Audit Committee. During the
fiscal year ended February 28, 2005, the Independent Trustees/Audit Committee
held nine meetings. Mr. Glazer and Mr. Light also were members of the Pricing
Committee, and R. Jeremy Grantham (who served as an interested Trustee until
March 2005) was an alternate member of the Pricing Committee. During the fiscal
year ended February 28, 2005, the Pricing Committee held seven meetings.
Effective March 24, 2005, the Independent Trustees/Audit Committee was renamed
the "Audit Committee" and the Board formed a third standing committee, the
"Governance Committee." The Committees assist the Board of Trustees in
performing its functions under the 1940 Act and Massachusetts law. The Audit
Committee provides oversight with respect to the Trust's accounting, its
financial reporting policies and practices, the quality and objectivity of the
Trust's financial statements and the independent audit of those statements. In
addition, the Audit Committee appoints, determines the independence and
compensation of, and oversees the work of the Fund's independent auditors and
acts as liaison between the Trust's independent auditors and the Board of
Trustees. Mr. Thorndike and Mr. Glazer are members of the Audit Committee, and
Mr. Light is an alternate member of the Audit Committee. Mr. Thorndike is the
Chairman of the Audit Committee. The Pricing Committee oversees the valuation of
the Fund's securities and other assets. The Pricing Committee also reviews and
makes recommendations regarding the Trust's Pricing Policies and, to the extent
required by the Pricing Policies, determines the fair value of the Fund's
securities or other assets, as well as performs such other duties as may be
delegated to it by the Board. Mr. Light and Mr. Thorndike are members of the
Pricing Committee, and Mr. Glazer is an alternate member of the Pricing
Committee. Mr. Light is the Chairman of the Pricing Committee. The Governance
Committee oversees general Fund governance-related matters, including making
recommendations to the Board of Trustees relating to Trust governance,
performing functions mandated by the Investment Company Act, as delegated to it
by the Board of Trustees, considering the skills, qualifications, and
independence of the Trustees, proposing candidates to serve as Trustees, and
overseeing the determination that any person serving as legal counsel for the
Independent Trustees meets the Investment Company Act requirements for being
"independent legal counsel." Mr. Glazer and Mr. Light are members
-42-
of the Governance Committee, and Mr. Thorndike is an alternate member of the
Governance Committee. Mr. Glazer is the Chairman of the Governance Committee.
Shareholders may recommend nominees to the Board of Trustees by writing the
Board of Trustees, c/o GMO Trust Chief Compliance Officer, GMO Trust, 40 Rowes
Wharf, Boston, Massachusetts 02110. A recommendation must (i) be in writing and
signed by the shareholder, (ii) identify the Fund to which it relates, and (iii)
identify the class and number of shares held by the shareholder.
Trustee Fund Ownership
The following table sets forth ranges of the current Trustees' direct
beneficial share ownership in Funds of the Trust as of December 31, 2005.
AGGREGATE DOLLAR RANGE OF SHARES
DIRECTLY OWNED IN ALL
DOLLAR RANGE OF FUNDS OF THE TRUST (WHETHER OR NOT
SHARES OF THE FUND OFFERED HEREUNDER)
NAME DIRECTLY OWNED* OVERSEEN BY TRUSTEE
---- --------------- -------------------
NON-INTERESTED TRUSTEES
Jay O. Light None $[___]
Donald W. Glazer None $[___]
W. Nicholas Thorndike None $[___]
* The Fund will commence operations on or following the date of this Statement
of Additional Information and, therefore, has not yet offered any shares for
sale.
The following table sets forth ranges of Mr. Glazer's indirect beneficial
share ownership in Funds of the Trust, as of December 31, 2005, by virtue of his
direct ownership of shares of certain Funds (as disclosed in the table
immediately above) that invest in other Funds of the Trust and of other private
investment companies managed by the Manager that invest in Funds of the Trust.
AGGREGATE DOLLAR RANGE OF SHARES
INDIRECTLY OWNED IN ALL
DOLLAR RANGE OF FUNDS OF THE TRUST (WHETHER OR NOT
SHARES OF THE FUND OFFERED HEREUNDER)
NAME INDIRECTLY OWNED* OVERSEEN BY TRUSTEE
---- ----------------- -------------------
NON-INTERESTED TRUSTEE
Donald W. Glazer None $[___]
* The Fund will commence operations on or following the date of this Statement
of Additional Information and, therefore, has not yet offered any shares for
sale.
Trustee Ownership of Securities Issued by the Manager
None.
Trustee Ownership of Related Companies
-43-
The following table sets forth information about securities owned by the
Trustees and their family members as of December 31, 2005 in entities directly
or indirectly controlling, controlled by, or under common control with the
Manager.
NAME OF
NAME OF OWNER(S) AND
NON-INTERESTED RELATIONSHIP TITLE OF
TRUSTEE TO TRUSTEE COMPANY CLASS VALUE OF SECURITIES % OF CLASS
------- ---------- ------- ----- ------------------- ----------
Jay O. Light [N/A] [None] [N/A] [N/A] [N/A]
Donald W. Glazer [Self] [GMO Tax-Managed [Limited $[___] [___]%(2)
Absolute Return partnership
Fund, a private interest-Class
investment company C]
managed by the
Manager.](1)
[GMO Multi-Strategy [Limited $[___] [___]%(2)
Fund (Onshore), a partnership
private investment interest-Class
company managed by A]
the Manager.](1)
[GMO Brazil [Limited $[___] [___]%
Sustainable Forest partnership
Fund, LP, a private interest]
investment company
managed by
Renewable Resources
LLC, an affiliate
of the Manager.](3)
[GMO Brazil [Limited $[___] [___]%
Sustainable Forest partnership
Fund 2, LP, a interest]
private investment
company managed by
Renewable Resources
LLC, an affiliate
of the Manager.](3)
W. Nicholas Thorndike [N/A] [None] [N/A] [N/A] [N/A]
(1) The Manager may be deemed to "control" this fund by virtue of its serving as
investment manager of the fund.
(2) Mr. Glazer owns less than 1% of the outstanding voting securities of the
fund.
(3) The Manager may be deemed to "control" this fund by virtue of its
affiliation with and role as managing member of Renewable Resources LLC.
REMUNERATION. The Trust has adopted a compensation policy for its
Trustees. Each Trustee receives an annual retainer from the Trust for his
services. In addition, each the
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Chairman of the Trust's standing committees and Chairman of the Board of
Trustees receive an annual fee. Each Trustee is also paid a fee for
participating in in-person and telephone meetings of the Board of Trustees and
committees and a fee for consideration of actions proposed to be taken by
written consent. The Trust pays no additional compensation for travel time to
meetings, attendance at director's educational seminars or conferences, service
on industry or association committees, participation as speakers at directors'
conferences or service on special director task forces or subcommittees,
although the Trust does reimburse Trustees for seminar or conference fees and
for travel expenses incurred in connection with attendance at seminars or
conferences. Trustees do not receive any employee benefits such as pension or
retirement benefits or health insurance. All current Trustees of the Trust are
non-interested Trustees.
Other than as set forth in the table below, no Trustee or officer of the
Trust received any direct compensation from the Trust or any series thereof,
including the Fund, during the fiscal year ended February 28, 2005:
AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL
COMPENSATION BENEFITS ACCRUED AS PART BENEFITS UPON TOTAL COMPENSATION
NAME OF PERSON, POSITION FROM THE FUND OF FUND EXPENSES RETIREMENT FROM THE TRUST
------------------------ ------------- ------------------------ ---------------- ------------------
Jay O. Light, Trustee N/A(1) N/A N/A $ 165,195
Donald W. Glazer, N/A(1) N/A N/A $ 169,975
Esq., Trustee
W. Nicholas Thorndike, --(1,2) N/A(2) N/A(2) --(2)
Trustee
------------------
(1) The Fund will commence operations on or following the date of this
Statement of Additional Information and, therefore, has not yet paid any
compensation to the Trustees.
(2) Mr. Thorndike was elected as a Trustee in March 2005 and, therefore, did
not receive any compensation from the Trust during the fiscal year ended
February 28, 2005.
Mr. Eston and Ms. Harbert do not receive any compensation from the Trust,
but as members of the Manager will benefit from the management fees paid by the
Fund of the Trust. Mr. Hogan received compensation from the Trust in respect of
his duties as the Trust's Acting Chief Compliance Officer during the fiscal year
ended February 28, 2005, but no Fund paid Mr. Hogan more than $60,000 in
aggregate compensation.
The Fund will commence operations on or following the date of this
Statement of Additional Information. Therefore, as of the date hereof, the
Trustees and officers of the Trust as a group owned less than 1% of the
outstanding shares of each class of shares of each Fund.
CODE OF ETHICS. The Trust and the Manager have each adopted a Code of
Ethics pursuant to the requirements of the 1940 Act. Under the Code of Ethics,
personnel are permitted to engage in personal securities transactions only in
accordance with specified conditions relating to their position, the identity of
the security, the timing of the transaction, and similar factors. Transactions
in securities that may be held by the Fund are permitted, subject to compliance
with the Code. Personal securities transactions must be reported quarterly and
broker confirmations must be provided for review.
-45-
INVESTMENT ADVISORY AND OTHER SERVICES
Management Contracts
As disclosed in the Prospectus under the heading "Management of the Fund,"
under the Management Contract (the "Management Contract") between the Trust, on
behalf of the Fund, and the Manager, subject to such policies as the Trustees of
the Trust may determine, the Manager furnishes continuously an investment
program for the Fund and makes investment decisions on behalf of the Fund and
places all orders for the purchase and sale of portfolio securities. Subject to
the control of the Trustees, the Manager also manages, supervises, and conducts
the other affairs and business of the Trust, furnishes office space and
equipment, provides bookkeeping and certain clerical services, and pays all
salaries, fees, and expenses of officers and Trustees of the Trust who are
affiliated with the Manager. As indicated under "Portfolio
Transactions--Brokerage and Research Services," the Trust's portfolio
transactions may be placed with broker-dealers who furnish the Manager, at no
cost, research, statistical and quotation services of value to the Manager in
advising the Trust or its other clients.
The Manager has contractually agreed to reimburse the Fund for all of the
Fund's total annual operating expenses (not including fees and expenses
(including legal fees) of the independent Trustees of the Trust, brokerage
commissions and other investment-related costs, hedging transaction fees,
extraordinary, non-recurring and certain other unusual expenses (including
taxes), securities lending fees and expenses, interest expense, and transfer
taxes) through at least June 30, 2007.
The Management Contract provides that the Manager shall not be subject to
any liability in connection with the performance of its services in the absence
of willful misfeasance, bad faith, gross negligence, or reckless disregard of
its obligations and duties.
The Management Contract was approved by the Trustees of the Trust
(including a majority of the Trustees who were not "interested persons" of the
Manager) and by the Fund's sole initial shareholder in connection with the
organization of the Trust and the establishment of the Fund. The Management
Contract continues in effect for a period of two years from the date of its
execution and continuously thereafter so long as its continuance is approved at
least annually by (i) the vote, cast in person at a meeting called for that
purpose, of a majority of those Trustees who are not "interested persons" of the
Manager or the Trust, and by (ii) the majority vote of either the full Board of
Trustees or the vote of a majority of the outstanding shares of the Fund. The
Management Contract automatically terminates on assignment, and is terminable on
not more than 60 days' notice by the Trust to the Manager. In addition, the
Management Contract may be terminated on not more than 60 days' written notice
by the Manager to the Trust.
The Fund's Management Fee is calculated based on a fixed percentage of the
Fund's average daily net assets. The Fund will commence operations on or
following the date of this Statement of Additional Information and, therefore,
has not yet paid the Manager any Management Fees as of the date hereof. However,
once the Fund commences operations, it will pay to the Manager a Management Fee
at an annual rate of 0.05% of the Fund's average daily
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net assets. In the event that the Manager ceases to be the Manager of the Fund,
the right of the Trust to use the identifying name "GMO" may be withdrawn.
PORTFOLIO MANAGEMENT
Day-to-day management of the Fund is the responsibility of GMO's Fixed
Income Division, which is comprised of investment professionals associated with
the Manager. The Fixed Income Division's members work collaboratively to manage
the Fund's portfolio, and no one person is primarily responsible for day-to-day
management of the Fund.
The following table sets forth information about accounts overseen or
managed by Mr. William Nemerever and Mr. Thomas Cooper, the senior members of
the Fixed Income Division, as of February 28, 2005.
-47-
REGISTERED
INVESTMENT
COMPANIES MANAGED
(INCLUDING NON-GMO OTHER POOLED SEPARATE
MUTUAL FUND INVESTMENT ACCOUNTS
SENIOR SUBADVISORY VEHICLES MANAGED
MEMBERS RELATIONSHIPS) MANAGED (WORLD-WIDE) (WORLD-WIDE)
--------------- ------------------------------------ ----------------------------- --------------------------------------
Number of Total Number of Total Number of Total
accounts(1) assets(1) accounts assets accounts assets
----------- --------- -------- ----------------- --------- ------------------
Thomas Cooper 13 $11,174,467,519.35 7 $2,665,889,384.51 8 $1,293,955,459.32
and William
Nemerever
REGISTERED INVESTMENT
COMPANIES MANAGED FOR
WHICH GMO RECEIVES A SEPARATE ACCOUNTS
PERFORMANCE-BASED OTHER POOLED INVESTMENT MANAGED (WORLD-WIDE)
FEE (INCLUDING NON-GMO VEHICLES MANAGED FOR WHICH GMO
MUTUAL FUND (WORLD-WIDE) FOR WHICH GMO RECEIVES
SUBADVISORY RECEIVES A A PERFORMANCE-BASED
RELATIONSHIPS) PERFORMANCE-BASED FEE FEE
------------------------------------ ------------------------------ --------------------------------------
Number of Total Number of Total Number of Total
accounts assets accounts assets accounts assets
--------- --------- --------- ----------------- --------- ------------------
Thomas Cooper 0 0 4 $2,019,064,049.07 4 $ 712,537,644.01
and William
Nemerever
--------
(1) Includes the Fund.
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Because the senior member manages other accounts, including accounts that pay
higher fees or accounts that pay performance-based fees, potential conflicts of
interest exist, including potential conflicts between the investment strategy of
the fund and the investment strategy of the other accounts and potential
conflicts in the allocation of investment opportunities between the fund and the
other accounts. GMO believes several factors limit those conflicts. First, the
Manager maintains trade allocation policies which seek to ensure such conflicts
are managed appropriately. Second, where similar accounts are traded in a common
trading environment, performance attribution with full transparency of holdings
and identification of contributors to gains and losses act as important controls
on conflicts. Third, GMO's investment divisions and GMO's Investment Analysis
team periodically examine performance dispersion among accounts employing the
same investment strategy but with different fee structures to ensure that any
divergence in expected performance is adequately explained by differences in the
client's investment guidelines and timing of cash flows. Fourth, the fact that
the investment programs of most of the Funds of the Trust and other similar
accounts are determined based on quantitative models imposes discipline and
constraint on the GMO investment divisions.
The senior members are members (partners) of GMO. The compensation of each
senior member consists of a fixed annual base salary, a partnership interest in
the firm's profits and possibly an additional, discretionary, bonus related to
the senior member's contribution to GMO's success. The compensation program does
not disproportionately reward outperformance by higher fee/performance fee
products. GMO's Compensation Committee determines the base salary, taking into
account current industry norms and market data to ensure that GMO pays a
competitive base salary. GMO's Compensation Committee also determines the level
of partnership interest, taking into account the individual's contribution to
GMO and its mission statement. The Committee may decide to pay a discretionary
bonus to recognize specific business contributions and to ensure that the total
level of compensation is competitive with the market. Because each person's
compensation is based on his or her individual performance, GMO does not have a
typical percentage split among base, bonus and other compensation. GMO
membership interest is the primary incentive for persons to maintain employment
with GMO. GMO believes this is the best incentive to maintain stability of
portfolio management personnel.
The Fund will commence operations on or following the date of this Statement of
Additional Information. Therefore, as of the date hereof, neither Mr. Cooper nor
Mr. Nemerever beneficially owned any shares of the Fund.
Custodial Arrangements. Investors Bank & Trust Company ("IBT"), 200
Clarendon Street, Boston, Massachusetts 02116, serves as the Trust's custodian
on behalf of the Fund. As such, IBT holds in safekeeping certificated securities
and cash belonging to the Fund and, in such capacity, is the registered owner of
securities in book-entry form belonging to the Fund. Upon instruction, IBT
receives and delivers the Fund's cash and securities in connection with Fund
transactions and collects all dividends and other distributions made with
respect to Fund portfolio securities. IBT also maintains certain accounts and
records of the Trust and calculates the total net asset value, total net income
and net asset value per share of the Fund on a daily basis.
-49-
Shareholder Service Arrangements. As disclosed in the Prospectus, pursuant
to the terms of a single Servicing Agreement with each Fund of the Trust, GMO
provides direct client service, maintenance, and reporting to shareholders of
the Fund. The Servicing Agreement was approved by the Trustees of the Trust
(including a majority of the Trustees who are not "interested persons" of the
Manager or the Trust). The Servicing Agreement will continue in effect for a
period of more than one year from the date of its execution only so long as its
continuance is approved at least annually by (i) the vote, cast in person at a
meeting called for the purpose, of a majority of those Trustees who are not
"interested persons" of the Manager or the Trust, and (ii) the majority vote of
the full Board of Trustees. The Servicing Agreement automatically terminates on
assignment (except as specifically provided in the Servicing Agreement) and is
terminable by either party upon not more than 60 days' written notice to the
other party.
The Trust entered into the Servicing Agreement with GMO on May 30, 1996.
Pursuant to the terms of the Servicing Agreement, the Class III, IV, V, and VI
Shares of the Fund each pay the Manager a Shareholder Service Fee in exchange
for shareholder services rendered by the Manager. The Fund will commence
operations on or following the date of this Statement of Additional Information
and, therefore, the Fund has not yet paid the Manager a Shareholder Service Fee.
However, once the Fund commences operations, the Class III, IV, V, and VI Shares
of the Fund will pay the Manager a Shareholder Service Fee of 0.15%, 0.10%,
0.085%, and 0.055%, respectively, of the Fund's average daily net assets
attributable to the relevant class of shares of the Fund.
Independent Registered Public Accounting Firm. The Trust's independent
registered public accounting firm is PricewaterhouseCoopers LLP, 125 High
Street, Boston, Massachusetts 02110. PricewaterhouseCoopers LLP conducts annual
audits of the Trust's financial statements, assists in the preparation of the
Fund's federal and state income tax returns, consults with the Trust as to
matters of accounting and federal and state income taxation, and provides
assistance in connection with the preparation of various Securities and Exchange
Commission filings.
Distributor. Funds Distributor, Inc. ("FDI"), 100 Summer Street, 15th
Floor, Boston, Massachusetts 02110, serves as the Trust's distributor on behalf
of the Fund. GMO pays all distribution-related expenses of the Fund.
Counsel. Ropes & Gray LLP, One International Place, Boston, Massachusetts
02110, serves as counsel to the Trust. Bingham McCutchen LLP, 150 Federal
Street, Boston, Massachusetts 02110, serves as independent counsel to the
non-interested Trustees of the Trust.
PORTFOLIO TRANSACTIONS
The Manager effects purchases and sales of portfolio securities for the
Fund and for its other investment advisory clients with a view to achieving
their respective investment objectives. Thus, some clients may purchase or sell
a particular security while others do not. Likewise, some clients may purchase a
particular security that other clients are selling. In some instances,
therefore, one client may indirectly sell a particular security to another
client. In addition, two or
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more clients may simultaneously buy or sell the same security, in which event
purchases or sales are effected on a pro rata, rotating or other equitable basis
so as to avoid any one account being preferred over any other account.
Transactions involving the issuance of Fund shares for securities or
assets other than cash will be limited to a bona fide reorganization or
statutory merger and to other acquisitions of portfolio securities that meet all
of the following conditions: (i) such securities meet the investment objectives
and policies of the Fund; (ii) such securities are acquired for investment and
not for resale; and (iii) such securities can be valued pursuant to the Trust's
pricing policies.
Brokerage and Research Services. In placing orders for the portfolio
transactions of the Fund, the Manager seeks the best price and execution
available, except to the extent it is permitted to pay higher brokerage
commissions for brokerage and research services as described below. The
determination of what may constitute best price and execution by a broker-dealer
in effecting a securities transaction involves many considerations, including,
without limitation, the overall net economic result to the Fund (involving price
paid or received and any commissions and other costs paid), the efficiency with
which the transaction is effected, the ability to effect the transaction at all
where a large block is involved, availability of the broker to stand ready to
execute possibly difficult transactions in the future, and the financial
strength and stability of the broker. Because of such factors, a broker-dealer
effecting a transaction may be paid a commission higher than that charged by
another broker-dealer. Most of the foregoing are subjective considerations.
Over-the-counter transactions often involve dealers acting for their own
account. The Manager's policy is to place over-the-counter market orders for the
Fund with primary market makers unless better prices or executions are available
elsewhere.
Although the Manager does not consider the receipt of research services as
a factor in selecting brokers to effect portfolio transactions for the Fund, the
Manager receives research services from brokers who handle a substantial portion
of the Fund's portfolio transactions. Research services include a wide variety
of analyses, reviews and reports on such matters as economic and political
developments, industries, companies, securities and portfolio strategy. The
Manager uses research from brokers in servicing other clients as well as the
Fund.
As permitted by Section 28(e) of the Securities Exchange Act of 1934 (the
"1934 Act"), the Manager may pay an unaffiliated broker or dealer that provides
"brokerage and research services" (as defined in the 1934 Act) to the Manager an
amount of commission for effecting a portfolio investment transaction in excess
of the amount of commission another broker or dealer would have charged for
effecting that transaction.
The Fund will commence operations on or following the date of this
Statement of Additional Information and, therefore, to date, the Trust, on
behalf of the Fund, has not yet paid any brokerage commissions.
-51-
PROXY VOTING POLICIES AND PROCEDURES
The Trust has adopted a proxy voting policy under which responsibility to
vote proxies related to its portfolio securities has been delegated to the
Manager. The Board of Trustees of the Trust has reviewed and approved the proxy
voting policies and procedures the Manager follows when voting proxies on behalf
of the Fund. The Trust's proxy voting policy and the Manager's proxy voting
policies and procedures are attached to this Statement of Additional Information
as Appendix B.
The Manager's proxy voting policies on a particular issue may or may not
reflect the views of individual members of the Board of Trustees of the Trust,
or a majority of the Board of Trustees.
Information regarding how the Fund voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30 will be
available on the Fund's website at www.gmo.com and on the Securities and
Exchange Commission's website at www.sec.gov no later than August 31 of each
year.
DISCLOSURE OF PORTFOLIO HOLDINGS.
The policy of the Trust is to protect the confidentiality of the Fund's
portfolio holdings and to prevent inappropriate selective disclosure of its
holdings. The Board of Trustees has approved this policy and material amendments
require its approval.
Registered investment companies that are sub-advised by GMO may be subject to
different portfolio holdings disclosure policies, and neither GMO nor the Board
of Trustees exercises control over those policies. In addition, separate account
clients of GMO have access to their portfolio holdings and are not subject to
the Fund's portfolio holdings disclosure policies. Some of the funds that are
sub-advised by GMO and some of the separate accounts managed by GMO have
substantially similar investment objectives and strategies, and therefore
potentially similar portfolio holdings.
Neither GMO nor the Fund will receive any compensation or other consideration in
connection with its disclosure of the Fund's portfolio holdings.
GMO may disclose the Fund's portfolio holdings (together with any other
information from which the Fund's portfolio holdings could reasonably be
derived, as reasonably determined by GMO) (the "Portfolio Holdings Information")
to shareholders, qualified potential shareholders as determined by GMO, and
their consultants and agents ("Permitted Recipients") by means of the GMO
website. The Fund's prospectus describes the type of information disclosed on
GMO's website, as well as the frequency with which it is disclosed and the lag
between the date of the information and the date of its disclosure. GMO also may
make Portfolio Holdings Information available to Permitted Recipients by email
or by any other means in such scope and form and with such frequency as GMO may
reasonably determine no earlier than the day next following
-52-
the day on which the Portfolio Holdings Information is posted on the GMO website
(provided that the Fund's prospectus describes the nature and scope of the
Portfolio Holdings Information that will be available on the GMO website, when
the information will be available and the period for which the information will
remain available, and the location on the Fund's website where the information
will be made available) or on the same day as a publicly available, routine
filing with the Securities and Exchange Commission ("SEC") that includes the
Portfolio Holdings Information.
To receive Portfolio Holdings Information, Permitted Recipients must enter into
a confidentiality agreement with GMO and the Trust that requires that the
Portfolio Holdings Information be used solely for purposes determined by senior
management of GMO to be in the best interest of the shareholders of the Fund.
In some cases, GMO may disclose to a third party Portfolio Holdings Information
that has not been made available to Permitted Recipients on the GMO website or
in a publicly available, routine filing with the SEC. That disclosure may only
be made if senior management of GMO determines that it is in the best interests
of the shareholders of the Fund. In addition, the third party receiving the
Portfolio Holdings Information must enter into a confidentiality agreement with
GMO and the Trust that requires that the Portfolio Holdings Information be used
solely for purposes determined by GMO senior management to be in the best
interest of the Fund's shareholders. GMO will seek to monitor a recipient's use
of the Portfolio Holdings Information provided under these agreements and, if
the terms of the agreements are violated, terminate disclosure and take
appropriate action.
The procedures pursuant to which GMO may disclose to a third party Portfolio
Holdings Information that has not been made available to Permitted Recipients do
not apply to Portfolio Holdings Information provided to entities who provide
on-going services to the Fund in connection with its day-to-day operations and
management, including GMO, GMO's affiliates, the Fund's custodian and auditor,
the Fund's pricing service vendor, broker-dealers when requesting bids for or
price quotations on securities, brokers in the normal course of trading on a
Fund's behalf, and persons assisting the Fund in the voting of proxies. In
addition, when an investor indicates that it wants to purchase shares of a Fund
in exchange for securities acceptable to GMO, GMO may make available a list of
securities that it would be willing to accept for the Fund, and, from time to
time, the securities on the list overlap with securities currently held by the
Fund.
No provision of this policy is intended to restrict or prevent the disclosure of
Portfolio Holdings Information as may be required by applicable law, rules or
regulations.
Senior management of GMO may authorize any exceptions to these procedures.
Exceptions must be disclosed to the Chief Compliance Officer of the Trust.
If senior management of GMO identifies a potential conflict with respect to the
disclosure of Portfolio Holdings Information between the interests of the Fund's
shareholders, on the one hand, and GMO or an affiliated person of GMO or the
Fund, on the other, GMO is required to inform the Trust's Chief
-53-
Compliance Officer of the potential conflict, and the Trust's Chief Compliance
Officer has the power to decide whether, in light of the potential conflict,
disclosure should be permitted under the circumstances. He also is required to
report his decision to the Board of Trustees.
GMO regularly reports the following information to the Board of Trustees:
- Determinations made by senior management of GMO relating to the use
of Portfolio Holdings Information by Permitted Recipients and third
parties;
- The nature and scope of disclosure of Portfolio Holdings Information
to third parties;
- Exceptions to the disclosure policy authorized by senior management
of GMO; and
- Any other information the Trustees may request relating to the
disclosure of Portfolio Holdings Information.
ONGOING ARRANGEMENTS TO MAKE PORTFOLIO HOLDINGS AVAILABLE. Portfolio Holdings
Information is disclosed on an on-going basis (generally, daily, except with
respect to PricewaterhouseCoopers LLP, which receives holdings quarterly and as
necessary in connection with the services it provides to the Fund) to the
following entities that provide on-going services to the Fund in connection with
their day-to-day operations and management, provided that they agree or have a
duty to maintain this information in confidence:
NAME OF RECIPIENT PURPOSE OF DISCLOSURE
----------------- ---------------------
Investors Bank & Trust Company Custodial and securities lending
services and compliance testing
PricewaterhouseCoopers LLP Independent registered public accounting
firm
Institutional Shareholder Services Corporate actions services
FactSet Data service provider
Senior management of GMO has authorized disclosure of Portfolio Holdings
Information on an on-going basis (daily) to the following recipients, provided
that they agree or have a duty to maintain this information in confidence and
are limited to using the information for the specific purpose for which it was
provided:
NAME OF RECIPIENT PURPOSE OF DISCLOSURE
----------------- ---------------------
Epstein & Associates, Inc. Software provider for Code of Ethics monitoring system
Financial Models Company Inc. Recordkeeping system
-54-
DESCRIPTION OF THE TRUST AND OWNERSHIP OF SHARES
The Trust is organized as a Massachusetts business trust under the laws of
Massachusetts by an Agreement and Declaration of Trust ("Declaration of Trust")
dated June 24, 1985, as amended and restated June 23, 2000, and as such
Declaration of Trust may be amended from time to time. A copy of the Declaration
of Trust is on file with the Secretary of The Commonwealth of Massachusetts. The
fiscal year for the Fund ends on the last day of February.
Pursuant to the Declaration of Trust, the Trustees have currently
authorized the issuance of an unlimited number of full and fractional shares of
[fifty-five] series: U.S. Core Fund; Tobacco-Free Core Fund; U.S. Quality Equity
Fund; Value Fund; Intrinsic Value Fund; Growth Fund; Small/Mid Cap Value Fund;
Small/Mid Cap Growth Fund; Real Estate Fund; Tax-Managed U.S. Equities Fund;
Tax-Managed Small/Mid Cap Fund; International Disciplined Equity Fund;
International Intrinsic Value Fund; International Growth Fund; Currency Hedged
International Equity Fund; Foreign Fund; Foreign Small Companies Fund;
International Small Companies Fund; Emerging Markets Fund; Emerging Countries
Fund; Emerging Markets Quality Fund; Tax-Managed International Equities Fund;
Domestic Bond Fund; Core Plus Bond Fund; International Bond Fund; Currency
Hedged International Bond Fund; Global Bond Fund; Emerging Country Debt Fund;
Short-Duration Investment Fund; Alpha Only Fund; Inflation Indexed Bond Fund;
Emerging Country Debt Share Fund; Benchmark-Free Allocation Fund; International
Equity Allocation Fund; Global Balanced Asset Allocation Fund; Global (U.S.+)
Equity Allocation Fund; U.S. Sector Fund; Special Purpose Holding Fund;
Short-Duration Collateral Fund; Taiwan Fund; Global Growth Fund; World
Opportunity Overlay Fund; Alternative Asset Opportunity Fund; Strategic Balanced
Allocation Fund; World Opportunities Equity Allocation Fund; Developed World
Stock Fund; U.S. Growth Fund; International Core Equity Fund; International
Growth Equity Fund; U.S. Intrinsic Value Fund; U.S. Small/Mid Cap Growth Fund;
U.S. Small/Mid Cap Value Fund; U.S. Core Equity Fund; U.S. Value Fund; and
[Short-Duration Collateral Share Fund]. Interests in each portfolio are
represented by shares of the corresponding series. Each share of each series
represents an equal proportionate interest, together with each other share, in
the corresponding series. The shares of such series do not have any preemptive
rights. Upon liquidation of a series, shareholders of the corresponding series
are entitled to share pro rata in the net assets of the series available for
distribution to shareholders. The Declaration of Trust also permits the Trustees
to charge shareholders directly for custodial, transfer agency and servicing
expenses, but the Trustees have no present intention to make such charges.
The Declaration of Trust also permits the Trustees, without shareholder
approval, to subdivide any series of shares into various sub-series or classes
of shares with such dividend preferences and other rights as the Trustees may
designate. This power is intended to allow the Trustees to provide for an
equitable allocation of the effect of any future regulatory requirements that
might affect various classes of shareholders differently. The Trustees have
currently authorized the establishment and designation of up to nine classes of
shares for each series of the Trust: Class I Shares, Class II Shares, Class III
Shares, Class IV Shares, Class V Shares, Class VI Shares, Class VII Shares,
Class VIII Shares, and Class M Shares.
-55-
The Trustees may also, without shareholder approval, establish one or more
additional separate portfolios for investments in the Trust or merge two or more
existing portfolios (i.e., a new fund). Shareholders' investments in such a
portfolio would be evidenced by a separate series of shares.
The Declaration of Trust provides for the perpetual existence of the
Trust. The Trust, however, may be terminated at any time by vote of at least
two-thirds of the outstanding shares of the Trust. While the Declaration of
Trust further provides that the Trustees may also terminate the Trust upon
written notice to the shareholders, the 1940 Act requires that the Trust receive
the authorization of a majority of its outstanding shares in order to change the
nature of its business so as to cease to be an investment company.
MULTIPLE CLASSES
The Manager makes all decisions relating to aggregation of accounts for
purposes of determining eligibility for the various classes of shares offered by
the Fund. When making decisions regarding whether accounts should be aggregated
because they are part of a larger client relationship, the Manager considers
several factors including, but not limited to, whether: the multiple accounts
are for one or more subsidiaries of the same parent company; the multiple
accounts are for the same institution regardless of legal entity; the investment
mandate is the same or substantially similar across the relationship; the asset
allocation strategies are substantially similar across the relationship; GMO
reports to the same investment board; the consultant is the same for the entire
relationship; GMO services the relationship through a single GMO relationship
manager; the relationships have substantially similar reporting requirements;
and the relationship can be serviced from a single geographic location.
VOTING RIGHTS
Shareholders are entitled to one vote for each full share held (with
fractional votes for fractional shares held) and to vote by individual Fund (to
the extent described below) in the election of Trustees and the termination of
the Trust and on other matters submitted to the vote of shareholders.
Shareholders vote by individual Fund on all matters except (i) when required by
the 1940 Act, shares are voted in the aggregate and not by individual Fund, and
(ii) when the Trustees have determined that the matter affects the interests of
more than one Fund, then shareholders of the affected Funds are entitled to
vote. Shareholders of one Fund are not entitled to vote on matters exclusively
affecting another Fund, including, without limitation, such matters as the
adoption of or change in the investment objectives, policies, or restrictions of
the other Fund and the approval of the investment advisory contract of the other
Fund. Shareholders of a particular class of shares do not have separate class
voting rights except for matters that affect only that class of shares and as
otherwise required by law.
Normally the Trust does not hold meetings of shareholders to elect
Trustees except in accordance with the 1940 Act (i) the Trust will hold a
shareholders' meeting for the election of Trustees at such time as less than a
majority of the Trustees holding office have been elected by shareholders, and
(ii) if, as a result of a vacancy in the Board of Trustees, less than two-thirds
of the Trustees holding office have been elected by the shareholders, that
vacancy may only be
-56-
filled by a vote of the shareholders. In addition, Trustees may be removed from
office by a written consent signed by the holders of two-thirds of the
outstanding shares and filed with the Trust's custodian or by a vote of the
holders of two-thirds of the outstanding shares at a meeting duly called for the
purpose, which meeting shall be held upon the written request of the holders of
not less than 10% of the outstanding shares. Upon written request by the holders
of at least 1% of the outstanding shares stating that such shareholders wish to
communicate with the other shareholders for the purpose of obtaining the
signatures necessary to demand a meeting to consider removal of a Trustee, the
Trust has undertaken to provide a list of shareholders or to disseminate
appropriate materials (at the expense of the requesting shareholders). Except as
set forth above, the Trustees will continue to hold office and may appoint
successor Trustees. Voting rights are not cumulative.
No amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the Trust except (i)
to change the Trust's name or to cure technical problems in the Declaration of
Trust and (ii) to establish, designate, or modify new and existing series or
sub-series of Trust shares or other provisions relating to Trust shares in
response to applicable laws or regulations.
SHAREHOLDER AND TRUSTEE LIABILITY
Under Massachusetts law, shareholders could, under some circumstances, be
held personally liable for the obligations of the Trust. However, the
Declaration of Trust disclaims shareholder liability for acts or obligations of
the Trust and requires that notice of that disclaimer be given in each
agreement, obligation, or instrument entered into or executed by the Trust or
the Trustees. The Declaration of Trust provides for indemnification out of all
the property of a Fund for all loss and expense of any shareholder of the Fund
held personally liable for the obligations of the Trust. Thus, the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which the disclaimer is inoperative and the Fund is
unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, nothing in
the Declaration of Trust protects a Trustee against any liability to which the
Trustee would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office. The By-Laws of the Trust provide for indemnification by the Trust of
the Trustees and the officers of the Trust except for any matter as to which any
such person did not act in good faith in the reasonable belief that his action
was in or not opposed to the best interests of the Trust. Trustees and officers
may not be indemnified against any liability to the Trust or the Trust
shareholders to which they would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of their office.
-57-
Appendix A
COMMERCIAL PAPER AND CORPORATE DEBT RATINGS
COMMERCIAL PAPER RATINGS
Commercial paper ratings of Standard & Poor's are current assessments of
the likelihood of timely payment of debts having original maturities of no more
than 365 days. Commercial paper rated A-1 by Standard & Poor's indicates that
the degree of safety regarding timely payment is either overwhelming or very
strong. Those issues determined to possess overwhelming safety characteristics
are denoted A-1+. Commercial paper rated A-2 by Standard & Poor's indicates that
capacity for timely payment on issues is strong. However, the relative degree of
safety is not as high as for issues designated A-1. Commercial paper rated A-3
indicates capacity for timely payment. It is, however, somewhat more vulnerable
to the adverse effects of changes in circumstances than obligations carrying the
higher designations.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations. Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics of Prime-1 rated issuers,
but to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variations. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternative
liquidity is maintained. Issuers rated Prime-3 have an acceptable capacity for
repayment of short-term promissory obligations. The effect of industry
characteristics and market composition may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and the requirement of relatively high financial leverage. Adequate
alternative liquidity is maintained.
CORPORATE DEBT RATINGS
STANDARD & POOR'S. A Standard & Poor's corporate debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. The following is a summary of the ratings used by Standard & Poor's
for corporate debt:
AAA -- This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
principal.
AA -- Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay interest and repay principal is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
A-1
Appendix A
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC -- Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C -- The rating C is reserved for income bonds on which no interest is being
paid.
D -- Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
MOODY'S. The following is a summary of the ratings used by Moody's for
corporate debt:
Aaa -- Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large, or by an exceptionally
stable, margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa -- Bonds that are rated Aa are judged to be high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds that are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
A-2
Appendix A
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often, the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Should no rating be assigned by Moody's, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not
rated as a matter of policy.
3. There is lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1 and B1.
A-3
Appendix B
GMO TRUST
PROXY VOTING POLICY
I. STATEMENT OF POLICY
GMO Trust (the "Fund") delegates the authority and responsibility to vote
proxies related to portfolio securities to Grantham, Mayo, Van Otterloo & Co.
LLC, its investment adviser (the "Adviser").
Therefore, the Board of Trustees (the "Board") of the Fund has reviewed and
approved the use of the proxy voting policies and procedures of the Adviser
("Proxy Voting Procedures") on behalf of the Fund when exercising voting
authority on behalf of the Fund.
II. STANDARD
The Adviser shall vote proxies related to portfolio securities in the best
interests of the Fund and their shareholders.
III. REVIEW OF PROXY VOTING PROCEDURES
The Board shall periodically review the Proxy Voting Procedures presented by the
Adviser.
The Adviser shall provide periodic reports to the Board regarding any proxy
votes where a material conflict of interest was identified EXCEPT in
circumstances where the Adviser caused the proxy to be voted consistent with the
recommendation of the independent third party.
The Adviser shall notify the Board promptly of any material change to its Proxy
Voting Procedures.
IV. DISCLOSURE
The following disclosure shall be provided:
A. The Adviser shall make available its proxy voting records, for
inclusion in the Fund's Form N-PX.
B. The Adviser shall cause the Fund to include the proxy voting
policies and procedures required in the Fund's annual filing on Form
N-CSR or the statement of additional information.
C. The Adviser shall cause the Fund's shareholder reports to include a
statement that (i) a copy of these policies and procedures is
available on the Fund's web site (if the Fund so chooses) and (ii)
information is available regarding how the Funds voted proxies
during the most recent twelve-month period without charge, on or
through the Fund's web site.
B-1
Appendix B
GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC
GMO AUSTRALASIA LLC
(TOGETHER "GMO")
PROXY VOTING POLICIES AND PROCEDURES
I. INTRODUCTION AND GENERAL PRINCIPLES
GMO provides investment advisory services primarily to institutional, including
both ERISA and non-ERISA clients, and commercial clients. GMO understands that
proxy voting is an integral aspect of security ownership. Accordingly, in cases
where GMO has been delegated authority to vote proxies, that function must be
conducted with the same degree of prudence and loyalty accorded any fiduciary or
other obligation of an investment manager.
This policy permits clients of GMO to: (1) delegate to GMO the responsibility
and authority to vote proxies on their behalf according to GMO's proxy voting
polices and guidelines; (2) delegate to GMO the responsibility and authority to
vote proxies on their behalf according to the particular client's own proxy
voting policies and guidelines; or (3) elect to vote proxies themselves. In
instances where clients elect to vote their own proxies, GMO shall not be
responsible for voting proxies on behalf of such clients.
GMO believes that the following policies and procedures are reasonably designed
to ensure that proxy matters are conducted in the best interest of its clients,
in accordance with GMO's fiduciary duties, applicable rules under the Investment
Advisers Act of 1940 and fiduciary standards and responsibilities for ERISA
clients set out in the Department of Labor interpretations.
II. PROXY VOTING GUIDELINES
GMO has engaged Institutional Shareholder Services, Inc. ("ISS") as its proxy
voting agent to:
(1) research and make voting recommendations or, for matters for which
GMO has so delegated, to make the voting determinations;
(2) ensure that proxies are voted and submitted in a timely manner;
(3) handle other administrative functions of proxy voting;
(4) maintain records of proxy statements received in connection with
proxy votes and provide copies of such proxy statements promptly
upon request;
(5) maintain records of votes cast; and
(6) provide recommendations with respect to proxy voting matters in
general.
Proxies will be voted in accordance with the voting recommendations contained in
the applicable domestic or global ISS Proxy Voting Manual, as in effect from
time to time. Copies of the current domestic and global ISS proxy voting
guidelines are attached to these Voting Policies
B-2
Appendix B
and Procedures as Exhibit A. GMO reserves the right to amend any of ISS's
guidelines in the future. If any such changes are made an amended Proxy Voting
Policies and Procedures will be made available for clients.
Except in instances where a GMO client retains voting authority, GMO will
instruct custodians of client accounts to forward all proxy statements and
materials received in respect of client accounts to ISS.
III. PROXY VOTING PROCEDURES
GMO has a Corporate Actions Group with responsibility for administering the
proxy voting process, including:
1. Implementing and updating the applicable domestic and global ISS
proxy voting guidelines;
2. Overseeing the proxy voting process; and
3. Providing periodic reports to GMO's Compliance Department and
clients as requested.
There may be circumstances under which a portfolio manager or other GMO
investment professional ("GMO Investment Professional") believes that it is in
the best interest of a client or clients to vote proxies in a manner
inconsistent with the recommendation of ISS. In such an event, the GMO
Investment Professional will inform GMO's Corporate Actions Group of its
decision to vote such proxy in a manner inconsistent with the recommendation of
ISS. GMO's Corporate Actions Group will report to GMO's Compliance Department no
less than quarterly any instance where a GMO Investment Professional has decided
to vote a proxy on behalf of a client in that manner.
IV. CONFLICTS OF INTEREST
As ISS will vote proxies in accordance with the proxy voting guidelines
described in Section II, GMO believes that this process is reasonably designed
to address conflicts of interest that may arise between GMO and a client as to
how proxies are voted.
In instances where GMO has the responsibility and authority to vote proxies on
behalf of its clients for shares of GMO Trust, a registered mutual fund for
which GMO serves as the investment adviser, there may be instances where a
conflict of interest exists. Accordingly, GMO will (i) vote such proxies in the
best interests of its clients with respect to routine matters, including proxies
relating to the election of Trustees; and (ii) with respect to matters where a
conflict of interest exists between GMO and GMO Trust, such as proxies relating
to a new or amended investment management contract between GMO Trust and GMO, or
a re-organization of a series of GMO Trust, GMO will either (a) vote such
proxies in the same proportion as the votes cast with respect to that proxy, or
(b) seek instructions from its clients.
B-3
Appendix B
In addition, if GMO is aware that one of the following conditions exists with
respect to a proxy, GMO shall consider such event a potential material conflict
of interest:
1. GMO has a business relationship or potential relationship with the
issuer;
2. GMO has a business relationship with the proponent of the proxy
proposal; or
3. GMO members, employees or consultants have a personal or other
business relationship with the participants in the proxy contest,
such as corporate directors or director candidates.
In the event of a potential material conflict of interest, GMO will (i) vote
such proxy according to the specific recommendation of ISS; (ii) abstain; or
(iii) request that the client votes such proxy. All such instances shall be
reported to GMO's Compliance Department at least quarterly.
V. RECORDKEEPING
GMO will maintain records relating to the implementation of these proxy voting
policies and procedures, including:
(1) a copy of these policies and procedures which shall be made
available to clients, upon request;
(2) a record of each vote cast (which ISS maintains on GMO's behalf);
and
(3) each written client request for proxy records and GMO's written
response to any client request for such records.
Such proxy voting records shall be maintained for a period of five years.
VI. REPORTING
GMO's Compliance Department will provide GMO's Conflict of Interest Committee
with periodic reports that include a summary of instances where GMO has (i)
voted proxies in a manner inconsistent with the recommendation of ISS, (ii)
voted proxies in circumstances in which a material conflict of interest may
exist as set forth in Section IV, and (iii) voted proxies of shares of GMO Trust
on behalf of its clients.
VII. DISCLOSURE
Except as otherwise required by law, GMO has a general policy of not disclosing
to any issuer or third party how GMO or its voting delegate voted a client's
proxy.
Effective: August 6, 2003
B-4
Appendix B
ISS PROXY VOTING GUIDELINES SUMMARY
The following is a concise summary of ISS's proxy voting policy guidelines.
1. AUDITORS
Vote FOR proposals to ratify auditors, unless any of the following apply:
- An auditor has a financial interest in or association with the
company, and is therefore not independent
- Fees for non-audit services are excessive, or
- There is reason to believe that the independent auditor has rendered
an opinion which is neither accurate nor indicative of the company's
financial position.
2. BOARD OF DIRECTORS
VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS
Votes on director nominees should be made on a CASE-BY-CASE basis, examining the
following factors: independence of the board and key board committees attendance
at board meetings corporate governance provisions and takeover activity,
long-term company performance responsiveness to shareholder proposals, any
egregious board actions, and any excessive non-audit fees or other potential
auditor conflicts.
CLASSIFICATION/DECLASSIFICATION OF THE BOARD
Vote AGAINST proposals to classify the board.
Vote FOR proposals to repeal classified boards and to elect all directors
annually.
INDEPENDENT CHAIRMAN (SEPARATE CHAIRMAN/CEO)
Vote on a CASE-BY-CASE basis shareholder proposals requiring that the positions
of chairman and CEO be held separately. Because some companies have governance
structures in place that counterbalance a combined position, certain factors
should be taken into account in determining whether the proposal warrants
support. These factors include the presence of a lead director, board and
committee independence, governance guidelines, company performance, and annual
review by outside directors of CEO pay.
B-5
Appendix B
MAJORITY OF INDEPENDENT DIRECTORS/ESTABLISHMENT OF COMMITTEES
Vote FOR shareholder proposals asking that a majority or more of directors be
independent unless the board composition already meets the proposed threshold by
ISS's definition of independence.
Vote FOR shareholder proposals asking that board audit, compensation, and/or
nominating committees be composed exclusively of independent directors if they
currently do not meet that standard.
3. SHAREHOLDER RIGHTS
SHAREHOLDER ABILITY TO ACT BY WRITTEN CONSENT
Vote AGAINST proposals to restrict or prohibit shareholder ability to take
action by written consent.
Vote FOR proposals to allow or make easier shareholder action by written
consent.
SHAREHOLDER ABILITY TO CALL SPECIAL MEETINGS
Vote AGAINST proposals to restrict or prohibit shareholder ability to call
special meetings.
Vote FOR proposals that remove restrictions on the right of shareholders to act
independently of management.
SUPERMAJORITY VOTE REQUIREMENTS
Vote AGAINST proposals to require a supermajority shareholder vote.
Vote FOR proposals to lower supermajority vote requirements.
CUMULATIVE VOTING
Vote AGAINST proposals to eliminate cumulative voting.
Vote proposals to restore or permit cumulative voting on a CASE-BY-CASE
basis relative to the company's other governance provisions.
CONFIDENTIAL VOTING
Vote FOR shareholder proposals requesting that corporations adopt confidential
voting, use independent vote tabulators and use independent inspectors of
election, as long as the proposal includes a provision for proxy contests as
follows: In the case of a contested election, management should be permitted to
request that the dissident group honor its confidential voting
B-6
Appendix B
policy. If the dissidents agree, the policy remains in place. If the dissidents
will not agree, the confidential voting policy is waived.
Vote FOR management proposals to adopt confidential voting.
4. PROXY CONTESTS
VOTING FOR DIRECTOR NOMINEES IN CONTESTED ELECTIONS
Votes in a contested election of directors must be evaluated on a CASE-BY-CASE
basis, considering the factors that include the long-term financial performance,
management's track record, qualifications of director nominees (both slates),
and an evaluation of what each side is offering shareholders.
REIMBURSING PROXY SOLICITATION EXPENSES
Vote CASE-BY-CASE. Where ISS recommends in favor of the dissidents, we also
recommend voting for reimbursing proxy solicitation expenses.
5. POISON PILLS
Vote FOR shareholder proposals that ask a company to submit its poison
pill for shareholder ratification. Review on a CASE-BY-CASE basis shareholder
proposals to redeem a company's poison pill and management proposals to ratify a
poison pill.
6. MERGERS AND CORPORATE RESTRUCTURINGS
Vote CASE-BY-CASE on mergers and corporate restructurings based on such features
as the fairness opinion, pricing, strategic rationale, and the negotiating
process.
7. REINCORPORATION PROPOSALS
Proposals to change a company's state of incorporation should be evaluated on a
CASE-BY-CASE basis, giving consideration to both financial and corporate
governance concerns, including the reasons for reincorporating, a comparison of
the governance provisions, and a comparison of the jurisdictional laws. Vote FOR
reincorporation when the economic factors outweigh any neutral or negative
governance changes.
B-7
Appendix B
8. CAPITAL STRUCTURE
COMMON STOCK AUTHORIZATION
Votes on proposals to increase the number of shares of common stock authorized
for issuance are determined on a CASE-BY-CASE basis using a model developed by
ISS.
Vote AGAINST proposals at companies with dual-class capital structures to
increase the number of authorized shares of the class of stock that has superior
voting rights.
Vote FOR proposals to approve increases beyond the allowable increase when a
company's shares are in danger of being delisted or if a company's ability to
continue to operate as a going concern is uncertain.
DUAL-CLASS STOCK
Vote AGAINST proposals to create a new class of common stock with superior
voting rights.
Vote FOR proposals to create a new class of nonvoting or subvoting common stock
if:
- It is intended for financing purposes with minimal or no dilution to
current shareholders
- It is not designed to preserve the voting power of an insider or
significant shareholder
9. EXECUTIVE AND DIRECTOR COMPENSATION
Votes with respect to compensation plans should be determined on a CASE-BY-CASE
basis. Our methodology for reviewing compensation plans primarily focuses on the
transfer of shareholder wealth (the dollar cost of pay plans to shareholders
instead of simply focusing on voting power dilution). Using the expanded
compensation data disclosed under the SEC's rules, ISS will value every award
type. ISS will include in its analyses an estimated dollar cost for the proposed
plan and all continuing plans. This cost, dilution to shareholders' equity, will
also be expressed as a percentage figure for the transfer of shareholder wealth,
and will be considered long with dilution to voting power. Once ISS determines
the estimated cost of the plan, we compare it to a company-specific dilution
cap.
Vote AGAINST equity plans that explicitly permit repricing or where the company
has a history of repricing without shareholder approval.
MANAGEMENT PROPOSALS SEEKING APPROVAL TO REPRICE OPTIONS
Votes on management proposals seeking approval to reprice options are evaluated
on a CASE-BY-CASE basis giving consideration to the following:
- Historic trading patterns
- Rationale for the repricing
- Value-for-value exchange
- Option vesting
B-8
Appendix B
- Term of the option
- Exercise price
- Participation
EMPLOYEE STOCK PURCHASE PLANS
Votes on employee stock purchase plans should be determined on a CASE-BY-CASE
basis.
Vote FOR employee stock purchase plans where all of the following apply:
- Purchase price is at least 85 percent of fair market value
- Offering period is 27 months or less, and
- Potential voting power dilution (VPD) is ten percent or less.
Vote AGAINST employee stock purchase plans where any of the opposite conditions
obtain.
SHAREHOLDER PROPOSALS ON COMPENSATION
Vote on a CASE-BY-CASE basis for all other shareholder proposals regarding
executive and director pay, taking into account company performance, pay level
versus peers, pay level versus industry, and long term corporate outlook.
10. SOCIAL AND ENVIRONMENTAL ISSUES
These issues cover a wide range of topics, including consumer and public safety,
environment and energy, general corporate issues, labor standards and human
rights, military business, and workplace diversity.
In general, vote CASE-BY-CASE. While a wide variety of factors goes into each
analysis, the overall principal guiding all vote recommendations focuses on how
the proposal will enhance the economic value of the company.
B-9
Appendix B
Concise Summary of ISS Global Proxy Voting Guidelines
Following is a concise summary of general policies for voting global
proxies. In addition, ISS has country- and market-specific policies, which are
not captured below.
FINANCIAL RESULTS/DIRECTOR AND AUDITOR REPORTS
Vote FOR approval of financial statements and director and auditor reports,
unless:
- there are concerns about the accounts presented or audit procedures
used; or
- the company is not responsive to shareholder questions about
specific items that should be publicly disclosed.
APPOINTMENT OF AUDITORS AND AUDITOR COMPENSATION
Vote FOR the reelection of auditors and proposals authorizing the board to fix
auditor fees, unless:
- there are serious concerns about the accounts presented or the audit
procedures used;
- the auditors are being changed without explanation; or
- nonaudit-related fees are substantial or are routinely in excess of
standard annual audit fees.
Vote AGAINST the appointment of external auditors if they have previously served
the company in an executive capacity or can otherwise be considered affiliated
with the company.
ABSTAIN if a company changes its auditor and fails to provide shareholders with
an explanation for the change.
APPOINTMENT OF INTERNAL STATUTORY AUDITORS
Vote FOR the appointment or reelection of statutory auditors, unless:
- there are serious concerns about the statutory reports presented or
the audit procedures used;
- questions exist concerning any of the statutory auditors being
appointed; or
- the auditors have previously served the company in an executive
capacity or can otherwise be considered affiliated with the company.
ALLOCATION OF INCOME
Vote FOR approval of the allocation of income, unless:
- the dividend payout ratio has been consistently below 30 percent
without adequate explanation; or
- the payout is excessive given the company's financial position.
STOCK (SCRIP) DIVIDEND ALTERNATIVE
Vote FOR most stock (scrip) dividend proposals.
Vote AGAINST proposals that do not allow for a cash option unless management
demonstrates that the cash option is harmful to shareholder value.
B-10
Appendix B
AMENDMENTS TO ARTICLES OF ASSOCIATION
Vote amendments to the articles of association on a CASE-BY-CASE basis.
CHANGE IN COMPANY FISCAL TERM
Vote FOR resolutions to change a company's fiscal term unless a company's
motivation for the change is to postpone its AGM.
LOWER DISCLOSURE THRESHOLD FOR STOCK OWNERSHIP
Vote AGAINST resolutions to lower the stock ownership disclosure threshold below
five percent unless specific reasons exist to implement a lower threshold.
AMEND QUORUM REQUIREMENTS
Vote proposals to amend quorum requirements for shareholder meetings on a
CASE-BY-CASE basis.
TRANSACT OTHER BUSINESS
Vote AGAINST other business when it appears as a voting item.
DIRECTOR ELECTIONS
Vote FOR management nominees in the election of directors, unless:
- there are clear concerns about the past performance of the company
or the board; or
- the board fails to meet minimum corporate governance standards.
Vote FOR individual nominees unless there are specific concerns about the
individual, such as criminal wrongdoing or breach of fiduciary responsibilities.
Vote AGAINST shareholder nominees unless they demonstrate a clear ability to
contribute positively to board deliberations.
Vote AGAINST individual directors if they cannot provide an explanation for
repeated absences at board meetings (in countries where this information is
disclosed)
DIRECTOR COMPENSATION
Vote FOR proposals to award cash fees to nonexecutive directors unless the
amounts are excessive relative to other companies in the country or industry.
Vote nonexecutive director compensation proposals that include both cash and
share-based components on a CASE-BY-CASE basis.
Vote proposals that bundle compensation for both nonexecutive and executive
directors into a single resolution on a CASE-BY-CASE basis.
Vote AGAINST proposals to introduce retirement benefits for nonexecutive
directors.
B-11
Appendix B
DISCHARGE OF BOARD AND MANAGEMENT
Vote FOR discharge of the board and management, unless:
- there are serious questions about actions of the board or management
for the year in question; or
- legal action is being taken against the board by other shareholders.
DIRECTOR, OFFICER, AND AUDITOR INDEMNIFICATION AND LIABILITY PROVISIONS
Vote proposals seeking indemnification and liability protection for directors
and officers on a CASE-BY-CASE basis.
Vote AGAINST proposals to indemnify auditors.
BOARD STRUCTURE
Vote FOR proposals to fix board size.
Vote AGAINST the introduction of classified boards and mandatory retirement ages
for directors.
Vote AGAINST proposals to alter board structure or size in the context of a
fight for control of the company or the board.
SHARE ISSUANCE REQUESTS
General Issuances:
Vote FOR issuance requests with preemptive rights to a maximum of 100 percent
over currently issued capital.
Vote FOR issuance requests without preemptive rights to a maximum of 20 percent
of currently issued capital.
Specific Issuances:
Vote on a CASE-BY-CASE basis on all requests, with or without preemptive rights.
INCREASES IN AUTHORIZED CAPITAL
Vote FOR nonspecific proposals to increase authorized capital up to 100 percent
over the current authorization unless the increase would leave the company with
less than 30 percent of its new authorization outstanding.
Vote FOR specific proposals to increase authorized capital to any amount,
unless:
- the specific purpose of the increase (such as a share-based
acquisition or merger) does not meet ISS guidelines for the purpose
being proposed; or
- the increase would leave the company with less than 30 percent of
its new authorization outstanding after adjusting for all proposed
issuances (and less than 25 percent for companies in Japan).
B-12
Appendix B
Vote AGAINST proposals to adopt unlimited capital authorizations.
REDUCTION OF CAPITAL
Vote FOR proposals to reduce capital for routine accounting purposes unless the
terms are unfavorable to shareholders.
Vote proposals to reduce capital in connection with corporate restructuring on a
CASE-BY-CASE basis.
CAPITAL STRUCTURES
Vote FOR resolutions that seek to maintain or convert to a one share, one vote
capital structure.
Vote AGAINST requests for the creation or continuation of dual class capital
structures or the creation of new or additional supervoting shares.
PREFERRED STOCK
Vote FOR the creation of a new class of preferred stock or for issuances of
preferred stock up to 50 percent of issued capital unless the terms of the
preferred stock would adversely affect the rights of existing shareholders.
Vote FOR the creation/issuance of convertible preferred stock as long as the
maximum number of common shares that could be issued upon conversion meets ISS's
guidelines on equity issuance requests.
Vote AGAINST the creation of a new class of preference shares that would carry
superior voting rights to the common shares.
Vote AGAINST the creation of blank check preferred stock unless the board
clearly states that the authorization will not be used to thwart a takeover bid.
Vote proposals to increase blank check preferred authorizations on a
CASE-BY-CASE basis.
DEBT ISSUANCE REQUESTS
Vote nonconvertible debt issuance requests on a CASE-BY-CASE basis, with or
without preemptive rights.
Vote FOR the creation/issuance of convertible debt instruments as long as the
maximum number of common shares that could be issued upon conversion meets ISS's
guidelines on equity issuance requests.
Vote FOR proposals to restructure existing debt arrangements unless the terms of
the restructuring would adversely affect the rights of shareholders.
PLEDGING OF ASSETS FOR DEBT
Vote proposals to approve the pledging of assets for debt on a CASE-BY-CASE
basis.
B-13
Appendix B
INCREASE IN BORROWING POWERS
Vote proposals to approve increases in a company's borrowing powers on a
CASE-BY-CASE basis.
SHARE REPURCHASE PLANS:
Vote FOR share repurchase plans, unless:
- clear evidence of past abuse of the authority is available; or
- the plan contains no safeguards against selective buybacks.
REISSUANCE OF SHARES REPURCHASED:
Vote FOR requests to reissue any repurchased shares unless there is clear
evidence of abuse of this authority in the past.
CAPITALIZATION OF RESERVES FOR BONUS ISSUES/INCREASE IN PAR VALUE:
Vote FOR requests to capitalize reserves for bonus issues of shares or to
increase par value.
REORGANIZATIONS/RESTRUCTURINGS:
Vote reorganizations and restructurings on a CASE-BY-CASE basis.
MERGERS AND ACQUISITIONS:
Vote FOR mergers and acquisitions, unless:
- the impact on earnings or voting rights for one class of
shareholders is disproportionate to the relative contributions of
the group; or
- the company's structure following the acquisition or merger does not
reflect good corporate governance.
Vote AGAINST if the companies do not provide sufficient information upon request
to make an informed voting decision.
ABSTAIN if there is insufficient information available to make an informed
voting decision.
MANDATORY TAKEOVER BID WAIVERS:
Vote proposals to waive mandatory takeover bid requirements on a CASE-BY-CASE
basis.
REINCORPORATION PROPOSALS:
Vote reincorporation proposals on a CASE-BY-CASE basis.
EXPANSION OF BUSINESS ACTIVITIES:
Vote FOR resolutions to expand business activities unless the new business takes
the company into risky areas.
RELATED-PARTY TRANSACTIONS:
Vote related-party transactions on a CASE-BY-CASE basis.
B-14
Appendix B
COMPENSATION PLANS:
Vote compensation plans on a CASE-BY-CASE basis.
ANTITAKEOVER MECHANISMS:
Vote AGAINST all antitakeover proposals unless they are structured in such a way
that they give shareholders the ultimate decision on any proposal or offer.
SHAREHOLDER PROPOSALS:
Vote all shareholder proposals on a CASE-BY-CASE basis.
Vote FOR proposals that would improve the company's corporate governance or
business profile at a reasonable cost.
Vote AGAINST proposals that limit the company's business activities or
capabilities or result in significant costs being incurred with little or no
benefit.
B-15
GMO TRUST
PART C. OTHER INFORMATION
Item 23. Exhibits
(a) 1. Amended and Restated Agreement and Declaration of Trust;(1)
and
2. Amendment No. __ to Amended and Restated Agreement and
Declaration of Trust.*
(b) Amended and Restated By-laws of the Trust.(1)
(c) Please refer to Article 5 of the Trust's Amended and Restated
Declaration of Trust, which is hereby incorporated by reference.
(d) 1. Forms of Management Contracts between the Trust, on behalf of
each of its GMO U.S. Core Fund (formerly "GMO Core Fund"), GMO
Tobacco-Free Core Fund, GMO U.S. Quality Equity Fund, GMO
Value Fund (formerly "GMO Value Allocation Fund"), GMO Growth
Fund (formerly "GMO Growth Allocation Fund"), GMO Small/Mid
Cap Value Fund (formerly "GMO Core II Secondaries Fund"), GMO
Small/Mid Cap Growth Fund, GMO Real Estate Fund (formerly "GMO
REIT Fund"), GMO International Intrinsic Value Fund (formerly
"GMO International Core Fund"), GMO Currency Hedged
International Equity Fund (formerly "GMO Currency Hedged
International Core Fund"), GMO International Disciplined
Equity Fund, GMO International Growth Fund, GMO Foreign Fund,
GMO Foreign Small Companies Fund, GMO International Small
Companies Fund, GMO Emerging Markets Fund, GMO Emerging
Countries Fund (formerly "GMO Evolving Countries Fund"), GMO
Emerging Markets Quality Fund (formerly "GMO Asia Fund"), GMO
Alpha Only Fund (formerly "GMO Global Hedged Equity Fund"),
GMO Domestic Bond Fund, GMO Core Plus Bond Fund (formerly "GMO
U.S. Bond/Global Alpha A Fund" and "GMO Global Fund"), GMO
International Bond Fund, GMO Currency Hedged International
Bond Fund (formerly "GMO SAF Core Fund"), GMO Global Bond
Fund, GMO Emerging Country Debt Fund, GMO Short-Duration
Investment Fund (formerly "GMO Short-Term Income Fund"), GMO
Inflation Indexed Bond Fund, GMO Intrinsic Value Fund, GMO
Tax-Managed Small/Mid Cap Fund (formerly "GMO U.S. Small Cap
Fund"), GMO International Equity Allocation Fund, GMO Global
Balanced Asset Allocation Fund
--------------
* To be filed by amendment.
(1) Previously filed with the Securities and Exchange Commission and
incorporated herein by reference.
(formerly "GMO World Equity Allocation Fund" and "GMO World
Balanced Allocation Fund"), GMO Global (U.S.+) Equity
Allocation Fund, GMO U.S. Sector Fund (formerly "GMO U.S.
Sector Allocation Fund"), GMO Tax-Managed U.S. Equities Fund,
GMO Special Purpose Holding Fund (formerly "GMO Alpha LIBOR
Fund"), GMO Tax-Managed International Equities Fund, GMO
Emerging Country Debt Share Fund, GMO Taiwan Fund, GMO
Short-Duration Collateral Fund, GMO Benchmark-Free Allocation
Fund, GMO Global Growth Fund, GMO World Opportunity Overlay
Fund, GMO Strategic Balanced Allocation Fund, GMO World
Opportunities Equity Allocation Fund, GMO Alternative Asset
Opportunity Fund, GMO Developed World Stock Fund, GMO U.S.
Core Equity Fund, GMO U.S. Value Fund, GMO U.S. Intrinsic
Value Fund, GMO U.S. Growth Fund, GMO U.S. Small/Mid Cap Value
Fund, GMO U.S. Small/Mid Cap Growth Fund, GMO International
Core Equity Fund, and GMO International Growth Equity Fund and
Grantham, Mayo, Van Otterloo & Co. LLC ("GMO");(1) and
2. Form of Management Contract between the Trust, on behalf of
its GMO Short-Duration Collateral Share Fund and GMO.*
(e) Distribution Agreement between the Trust on behalf of each of GMO
U.S. Core Fund (formerly "GMO Core Fund"), GMO Tobacco-Free Core
Fund, GMO U.S. Quality Equity Fund, GMO Value Fund (formerly "GMO
Value Allocation Fund"), GMO Growth Fund (formerly "GMO Growth
Allocation Fund"), GMO Small/Mid Cap Value Fund (formerly "GMO Core
II Secondaries Fund"), GMO Small/Mid Cap Growth Fund, GMO Real
Estate Fund (formerly "GMO REIT Fund"), GMO International
Disciplined Equity Fund, GMO International Intrinsic Value Fund
(formerly "GMO International Core Fund"), GMO International Growth
Fund, GMO Currency Hedged International Equity Fund (formerly "GMO
Currency Hedged International Core Fund"), GMO Foreign Fund, GMO
Foreign Small Companies Fund, GMO International Small Companies
Fund, GMO Emerging Markets Fund, GMO Emerging Countries Fund
(formerly "GMO Evolving Countries Fund"), GMO Emerging Markets
Quality Fund (formerly "GMO Asia Fund"), GMO Alpha Only Fund
(formerly "GMO Global Hedged Equity Fund"), GMO Domestic Bond Fund,
GMO Core Plus Bond Fund (formerly "GMO U.S. Bond/Global Alpha A
Fund" and "GMO Global Fund"), GMO International Bond Fund, GMO
Currency Hedged International Bond Fund (formerly "GMO SAF Core
Fund"), GMO Global Bond Fund, GMO Emerging Country Debt Fund, GMO
Short-Duration Investment Fund (formerly "GMO Short-Term Income
Fund"), GMO Inflation Indexed Bond Fund, GMO Intrinsic
----------------
* To be filed by amendment.
(1) Previously filed with the Securities and Exchange Commission and
incorporated herein by reference.
-2-
Value Fund, GMO Tax-Managed Small/Mid Cap Fund (formerly "GMO U.S.
Small Cap Fund"), GMO International Equity Allocation Fund, GMO
Global Balanced Asset Allocation Fund (formerly, "GMO World Equity
Allocation Fund" and "GMO World Balanced Allocation Fund"), GMO
Global (U.S.+) Equity Allocation Fund, GMO U.S. Sector Fund
(formerly "GMO U.S. Sector Allocation Fund"), GMO Special Purpose
Holding Fund (formerly "GMO Alpha LIBOR Fund"), GMO Tax-Managed U.S.
Equities Fund, GMO Tax-Managed International Equities Fund, GMO
Emerging Country Debt Share Fund, GMO Taiwan Fund, GMO Short
Duration Collateral Fund, GMO Benchmark-Free Allocation Fund, GMO
Global Growth Fund, GMO World Opportunity Overlay Fund, GMO
Strategic Balanced Allocation Fund, GMO World Opportunities Equity
Allocation Fund, GMO Alternative Asset Opportunity Fund, GMO
Developed World Stock Fund, GMO U.S. Core Equity Fund, GMO U.S.
Value Fund, GMO U.S. Intrinsic Value Fund, GMO U.S. Growth Fund, GMO
U.S. Small/Mid Cap Value Fund, GMO U.S. Small/Mid Cap Growth Fund,
GMO International Core Equity Fund, GMO International Growth Equity
Fund, and [GMO Short-Duration Collateral Share Fund] and Funds
Distributor, Inc.(1)
(f) None.
(g) 1. Custodian Agreement (the "IBT Custodian Agreement") among the
Trust, on behalf of certain Funds, GMO and Investors Bank & Trust
Company ("IBT");(1)
2. Form of Custodian Agreement (the "BBH Custodian Agreement")
between the Trust, on behalf of certain Funds, and Brown Brothers
Harriman & Co. ("BBH");(1)
3. Forms of Letter Agreements with respect to the IBT Custodian
Agreement among the Trust, on behalf of certain Funds, GMO and
IBT;(1)
4. Letter Agreement with respect to the IBT Custodian Agreement
among the Trust, on behalf of certain Funds, GMO and IBT, dated May
30, 2003;(1)
5. Form of Letter Agreement with respect to the IBT Custodian
Agreement among the Trust, on behalf of GMO Short-Duration
Collateral Share Fund, GMO and IBT.*
6. Forms of Letter Agreements with respect to the BBH Custodian
Agreement between the Trust, on behalf of certain Funds, and BBH;(1)
7. Letter Agreement with respect to the BBH Custodian Agreement
between the Trust, on behalf of certain Funds, and BBH, dated June
4, 2003;(1)
-----------------
* To be filed by amendment.
(1) Previously filed with the Securities and Exchange Commission and
incorporated herein by reference.
-3-
8. Form of Accounting Agency Agreement (the "Accounting Agency
Agreement") between the Trust, on behalf of certain Funds, and
BBH;(1)
9. Form of Letter Agreement with respect to the Accounting Agency
Agreement between the Trust, on behalf of certain Funds, and BBH;(1)
10. Form of 17f-5 Delegation Schedule between the Trust, on behalf
of certain Funds, and BBH;(1)
11. Form of Letter Agreement with respect to the 17f-5 Delegation
Schedule between the Trust, on behalf of certain Funds, and BBH;(1)
12. Form of Amended and Restated Delegation Agreement between IBT
and the Trust, on behalf of certain Funds of the Trust;(1) and
13. Form of Letter Agreement with respect to the Amended and
Restated Delegation Agreement between IBT and the Trust, on behalf
of certain Funds.(1)
(h) 1. Transfer Agency Agreement among the Trust, on behalf of certain
Funds, GMO and IBT;(1)
2. Forms of Letter Agreements to the Transfer Agency Agreement among
the Trust, on behalf of certain Funds, GMO and IBT;(1)
3. Form of Letter Agreement to the Transfer Agency Agreement among
the Trust, on behalf of GMO Short-Duration Collateral Share Fund,
GMO and IBT;*
4. Form of Notification of Obligation to Reimburse Certain Fund
Expenses by GMO to the Trust;* and
5. Form of Amended and Restated Servicing Agreement between the
Trust, on behalf of certain Funds, and GMO.*
(i) Form of Opinion and Consent of Ropes & Gray.(1)
(j) Consent of PricewaterhouseCoopers LLP.*
(k) Financial Statements - Not applicable.
(l) None.
(m) 1. Form of GMO Trust Amended and Restated Distribution and Service
Plan (Class M);(1)
--------------
* To be filed by amendment.
(1) Previously filed with the Securities and Exchange Commission and
incorporated herein by reference.
-4-
2. Form of Amended and Restated Administration Agreement;(1)
3. Form of Service Agreement between American Express Financial
Advisors Inc. and the Trust, on behalf of certain Funds;(1)
4. Form of Services Agreement between the Fidelity Brokerage
Services LLC and National Financial Services LLC (together
"Fidelity"), and the Trust, on behalf of certain Funds;(1)
5. Form of Shareholder Service Agreement between Deutsche Bank Trust
Company Americas and the Trust, on behalf of certain Funds;(1)
6. Form of Shareholder Service Agreement between GE Financial Trust
Company and the Trust, on behalf of certain Funds;(1)
7. Form of Funds Trading Agreement between Fidelity Investments
Institutional Operations Company, Inc., IBT, BBH, GMO, and the
Trust, on behalf of certain Funds;(1)
8. Form of First Amendment to the Funds Trading Agreement between
Fidelity Investments Institutional Operations Company, Inc., IBT,
BBH, GMO, and the Trust, on behalf of certain Funds;(1)
9. Form of Shareholder Services Agreement between Citistreet LLC and
the Trust, on behalf of certain Funds, as amended;(1) and
10. Form of Shareholder Service Agreement between NYLIM Service
Company LLC, NYLIFE Distributors LLC, and the Trust, on behalf of
certain Funds.(1)
(n) Plan pursuant to Rule 18f-3 under the Investment Company Act of
1940, effective June 1, 1996 as amended and restated February 26,
2004.(1)
(o) Reserved.
(p) Code of Ethics adopted by the Trust, GMO, GMO Australasia LLC, GMO
Australia Ltd., GMO Singapore PTE Ltd., GMO Switzerland GMBH, GMO
U.K. Ltd, GMO Woolley Ltd., and Renewable Resources LLC.(1)
Item 24. Persons Controlled by or Under Common Control with Registrant
None.
-----------------------
(1) Previously filed with the Securities and Exchange Commission and
incorporated herein by reference.
-5-
Item 25. Indemnification
See Item 27 of Pre-Effective Amendment No. 1 which is hereby incorporated
by reference.
Item 26. Business and Other Connections of Investment Adviser
A description of the business of Grantham, Mayo, Van Otterloo & Co.
LLC, the investment adviser of the Funds of the Registrant (the
"Investment Adviser"), is set forth under the captions "Management of the
Funds" in the prospectus and "Investment Advisory and Other Services" in
the statement of additional information, each forming part of this
Registration Statement.
Except as set forth below, the directors, officers, and members of
the Investment Adviser, have been engaged during the past two fiscal years
in no business, profession, vocation or employment of a substantial nature
other than as directors, officers, or members of the Investment Adviser or
certain of its affiliates. Certain directors, officers, and members of the
Investment Adviser serve as officers or trustees of the Registrant as set
forth under the caption "Management of the Trust" in the Registrant's
statement of additional information, forming part of this Registration
Statement, and/or as officers and/or directors of certain private
investment companies managed by the Investment Adviser or certain of its
affiliates. The address of the Investment Adviser and the Registrant is 40
Rowes Wharf, Boston, Massachusetts 02110.
POSITION WITH
NAME INVESTMENT ADVISER OTHER CONNECTIONS
------------------ -------------------- -------------------------------------
Forrest Berkley Member Member of Board of Directors and
Member of Investment Committee, Maine
Community Foundation, 245 Main
Street, Ellsworth, ME 04605
Paul J. Bostock Member Director, Inquire UK, Baldocks Barn
Chiddingstone Causway, Tonbridge,
Kent TN11 8JX
Arjun Divecha Member and Member of Director, Frog Hollow Fresh LLC, P.O.
the Board of Box 872, Brentwood, CA 94513
Directors
Robert P. Goodrow Member Trustee, The Batterymarch Trust, c/o
GMO LLC, 40 Rowes Wharf, Boston, MA
02110
R. Jeremy Grantham Founding Member and MSPCC Investment Committee, 555 Amory
Chairman of the Street, Jamaica Plain, MA 02130
Board of Directors
Jon Hagler Member of the Board Overseer, WGBH Boston, 125 Western
of Directors Ave., Boston, MA
-6-
02134; Trustee Emeritus, Texas A&M
Foundation, Texas A&M University,
College Station, TX 77843; Chairman,
Vision 2020 Advisory Council, Texas
A&M University, College Station, TX
77843; Convening Chair, One
Spirit-One Vision Capital Campaign,
Texas A&M University, College
Station, TX 77843;
John McKinnon Member Director, J&S McKinnon Pty Ltd., 10
Dubarda Street, Engadine, Australia,
NSW 2233; Quant Partners Pty Ltd.,
Level 7, 2 Bulletin Place, Sydney,
Australia, NSW 2000; GMO Australia
Nominees Ltd., Level 7, 2 Bulletin
Place, Sydney, Australia, NSW 2000;
Trex Advisors Pty Ltd, Level 7, 2
Bulletin Place, Sydney NSW 2000
John Rosenblum Vice Chairman of the Director; The Chesapeake Corporation,
Board of Directors 1021 East Cary Street, Richmond, VA
23219; Thomas Rutherfoord, Inc., One
South Jefferson Street, SW, Roanoke,
VA 24011; The Providence Journal, a
division of Belo Corporation, 75
Providence Street, Providence, RI
02902; Trustee, Landmark Volunteers,
P.O. Box 455, Sheffield, MA 01257;
Jamestown-Yorktown Foundation, Inc.,
P.O. Box 1607, Williamsburg, VA
23187-1607; Tredegar National Civil
War Center Foundation, 200 S. Third
St., Richmond, VA 23219; Atlantic
Challenge Foundation, 643 Main St.,
-7-
Rockland, ME 04841; MBA Tech
Connection, Inc., P.O. Box 5769,
Charlottesville, VA 22905;
Charlottesville and University
Symphony Society, 112 Old Cabell
Hall, Charlottesville, VA 22903;
Trustee, Farnsworth Art Museum, 16
Museum Street, Rockland, Maine 04841
Anthony Ryan Member Trustee of the Woods Hole
Oceanographic Institution. Woods
Hole, MA
Eyk Van Otterloo Founding Member and Board Member, Chemonics
Member of the Board International, 1133 20th Street, NW,
of Directors Suite 600, Washington, D.C. 20036;
Breevast B.V., J.J. Viottastraat 39,
1071 JP Amsterdam, The Netherlands;
Committee; Chairman of the Board,
OneCoast Network LLC, 408
Jamesborough Drive, Pittsburgh, PA
15238
Item 27. Principal Underwriters
Item 27(a). Funds Distributor, Inc. ("FDI" or the "Distributor") acts as
principal underwriter for the following investment companies:
GMO Trust
Merrimac Series
Munder Series Trust
Munder Series Trust II
Skyline Funds
TD Waterhouse Family of Funds, Inc.
TD Waterhouse Trust
TD Waterhouse Plus Funds, Inc.
FDI is registered with the Securities and Exchange Commission as a
broker-dealer and is a member of the National Association of Securities Dealers.
FDI has its main address at 100 Summer Street, 15th Floor, Boston, Massachusetts
02110. FDI is an indirect wholly-owned subsidiary of The BISYS Group, Inc.
Item 27(b). Information about Directors and Officers of FDI is as follows:
-8-
Director or Officer Positions and Offices with FDI
------------------- ------------------------------
William J. Tomko President
Kevin J. Dell Secretary and Director
Edward S. Forman Assistant Secretary
Robert A. Bucher Financial and Operations Principal
Charles L. Booth Vice President and Assistant Compliance Officer
Richard F. Froio Vice President and Chief Compliance Officer
James L. Fox Director
Steven E. Hoffman Treasurer
The above FDI directors and officers do not have positions or offices with the
Trust.
Item 27(c). Other Compensation received by FDI from the certain Funds of the
Trust with respect to the last fiscal year:
Not applicable.
Item 28. Location of Accounts and Records
The accounts, books, and other documents required to be maintained by
Section 31(a) and the rules thereunder will be maintained at the offices
of the Registrant, 40 Rowes Wharf, Boston, MA 02110; the Registrant's
investment adviser, Grantham, Mayo, Van Otterloo & Co. LLC, 40 Rowes
Wharf, Boston, MA 02110; the Registrant's distributor, Funds Distributor,
Inc., 100 Summer Street, 15th Floor, Boston, MA 02110; the Registrant's
custodian for certain of the Funds, Brown Brothers Harriman & Co., 40
Water Street, Boston, MA 02109; and the Registrant's custodian and
transfer agent for certain of the Funds, Investors Bank & Trust Company,
200 Clarendon Street, Boston, MA 02116.
Item 29. Management Services
Not Applicable.
Item 30. Undertakings
None.
-9-
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 (the
"Securities Act") and the Investment Company Act of 1940 (the "1940 Act"), the
Registrant, GMO Trust, has duly caused this Post-Effective Amendment No. 115
under the Securities Act and Post-Effective Amendment No. 143 under the 1940 Act
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Boston and The Commonwealth of Massachusetts, on the 14th day of
December 2005.
GMO Trust
By: SCOTT E. ESTON*
---------------------------------
Scott E. Eston
Title: President; Chief Executive Officer;
Principal Executive Officer
Pursuant to the requirements of the Securities Act, this Post-Effective
Amendment No. 115 to the GMO Trust's Registration Statement under the Securities
Act has been signed below by the following persons in the capacities and on the
date indicated.
Signatures Title Date
---------- ----- ----
SCOTT E. ESTON* President; Chief Executive Officer; December 14, 2005
---------------------- Principal Executive Officer
Scott E. Eston
SUSAN RANDALL HARBERT* Chief Financial Officer and Treasurer; December 14, 2005
-------------------------- Principal Financial and Accounting Officer
Susan Randall Harbert
DONALD W. GLAZER* Trustee December 14, 2005
-----------------------
Donald W. Glazer
JAY O. LIGHT* Trustee December 14, 2005
----------------------
Jay O. Light
W. NICHOLAS THORNDIKE* Trustee December 14, 2005
--------------------------
W. Nicholas Thorndike
* By: /s/ David L. Bohan
------------------------------
David L. Bohan
Attorney-in-Fact
POWER OF ATTORNEY
I, the undersigned trustee of GMO Trust, a Massachusetts business trust,
hereby constitute and appoint each of Scott Eston, Susan Randall Harbert and
David Bohan, singly, my true and lawful attorney, with full power to him or her
to sign for me, and in my name and in the capacity indicated below, any and all
amendments to the Registration Statement filed with the Securities and Exchange
Commission for the purpose of registering shares of beneficial interest of GMO
Trust, hereby ratifying and confirming my signature as it may be signed by my
said attorney on said Registration Statement.
Witness my hand and common seal on the date set forth below.
(Seal)
Signature Title Date
--------- ----- ----
/S/ Jay O. Light Trustee April 11, 2005
------------------
Jay O. Light
POWER OF ATTORNEY
I, the undersigned trustee of GMO Trust, a Massachusetts business trust,
hereby constitute and appoint each of Scott Eston, Susan Randall Harbert and
David Bohan, singly, my true and lawful attorney, with full power to him or her
to sign for me, and in my name and in the capacity indicated below, any and all
amendments to the Registration Statement filed with the Securities and Exchange
Commission for the purpose of registering shares of beneficial interest of GMO
Trust, hereby ratifying and confirming my signature as it may be signed by my
said attorney on said Registration Statement.
Witness my hand and common seal on the date set forth below.
(Seal)
Signature Title Date
--------- ----- ----
/S/ Donald W. Glazer Trustee April 11, 2005
--------------------
Donald W. Glazer
POWER OF ATTORNEY
I, the undersigned officer of GMO Trust, a Massachusetts business trust,
hereby constitute and appoint each of Susan Randall Harbert and David Bohan,
singly, my true and lawful attorney, with full power to him or her to sign for
me, and in my name and in the capacity indicated below, any and all amendments
to the Registration Statement filed with the Securities and Exchange Commission
for the purpose of registering shares of beneficial interest of GMO Trust,
hereby ratifying and confirming my signature as it may be signed by my said
attorney on said Registration Statement.
Witness my hand and common seal on the date set forth below.
(Seal)
Signature Title Date
--------- ----- ----
/S/ Scott E. Eston President; Chief Executive Officer; April 14, 2005
---------------------- Principal Executive Officer
Scott E. Eston
POWER OF ATTORNEY
I, the undersigned officer of GMO Trust, a Massachusetts business trust,
hereby constitute and appoint each of Scott Eston and David Bohan, singly, my
true and lawful attorney, with full power to him or her to sign for me, and in
my name and in the capacity indicated below, any and all amendments to the
Registration Statement filed with the Securities and Exchange Commission for the
purpose of registering shares of beneficial interest of GMO Trust, hereby
ratifying and confirming my signature as it may be signed by my said attorney on
said Registration Statement.
Witness my hand and common seal on the date set forth below.
(Seal)
Signature Title Date
--------- ----- ----
/S/ Susan Randall Harbert Chief Financial Officer and Treasurer; April 11, 2005
------------------------- Principal Financial and Accounting Officer
Susan Randall Harbert
POWER OF ATTORNEY
I, the undersigned trustee of GMO Trust, a Massachusetts business trust,
hereby constitute and appoint each of Scott Eston, Susan Randall Harbert and
David Bohan, singly, my true and lawful attorney, with full power to him or her
to sign for me, and in my name and in the capacity indicated below, any and all
amendments to the Registration Statement filed with the Securities and Exchange
Commission for the purpose of registering shares of beneficial interest of GMO
Trust, hereby ratifying and confirming my signature as it may be signed by my
said attorney on said Registration Statement.
Witness my hand and common seal on the date set forth below.
(Seal)
Signature Title Date
--------- ----- ----
/S/ W. Nicholas Thorndike Trustee April 20, 2005
-------------------------
W. Nicholas Thorndike