-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WLsmjZhdFtIITYkZUR1ktH+/cIzo0ebH7HtrkbtY4YQriXsxjxzvZTrLNDhjAho6 7GZiJhGMb/gtY4P8zfie8g== 0001047469-03-017665.txt : 20030509 0001047469-03-017665.hdr.sgml : 20030509 20030509115848 ACCESSION NUMBER: 0001047469-03-017665 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030228 FILED AS OF DATE: 20030509 EFFECTIVENESS DATE: 20030509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GMO TRUST CENTRAL INDEX KEY: 0000772129 STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-04347 FILM NUMBER: 03689485 BUSINESS ADDRESS: STREET 1: 40 ROWES WHARF CITY: BOSTON STATE: MA ZIP: 02110 BUSINESS PHONE: 6173307500 MAIL ADDRESS: STREET 1: 40 ROWES WHARF CITY: BOSTON STATE: MA ZIP: 02110 FORMER COMPANY: FORMER CONFORMED NAME: GMO CORE TRUST DATE OF NAME CHANGE: 19900927 N-CSR 1 a2105575zn-csr.txt N-CSR OMB APPROVAL OMB Number: 3235-0570 Expires: Nov. 30, 2005 Estimated average burden hours per response: 5.0 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-04347 --------------------------------------------- GMO Trust ------------------------------------------------------- (Exact name of registrant as specified in charter) 40 Rowes Wharf, Boston, MA 02110 ------------------------------------------------------- (Address of principal executive offices) (Zip code) Scott Eston, Chief Executive Officer 40 Rowes Wharf, Boston, MA 02110 ------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: 617-330-7500 ---------------------------- Date of fiscal year end: 02/28/2003 ------------------------- Date of reporting period: 03/01/02 - 02/28/03 ------------------------- FORM N-CSR(2 OF 3) ITEM 1 (REPORT TO SHAREHOLDERS): The Annual Report is attached. ITEM 2 (CODE OF ETHICS): Not applicable to this filing. ITEM 3 (AUDIT COMMITTEE FINANCIAL EXPERT): Not applicable to this filing. ITEM 4 (PRINCIPAL ACCOUNTANT FEES AND SERVICES): Not applicable to this filing. ITEM 5 (RESERVED) ITEM 6 (RESERVED) ITEM 7 (DISCLOSURE OF PROXY VOTING POLICIES & PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES): Not applicable to this filing. ITEM 8 (RESERVED) ITEM 9 (CONTROLS AND PROCEDURES): SUB-ITEM 9a - Not applicable to this filing. SUB-ITEM 9b - Not applicable to this filing. ITEM 10 (EXHIBITS): SUB-ITEM 10a - Not applicable to this filing. SUB-ITEM 10b - Certification Exhibits are attached. FORM N-CSR(3 OF 3) Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GMO Trust By: /s/ Scott Eston ---------------------------------------------------- Scott Eston, Chief Executive Officer Date May 9, 2003 ------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities, and on the dates indicated. By: /s/ Scott Eston ---------------------------------------------------- Scott Eston, Chief Executive Officer Date May 9, 2003 ------------------------- By: /s/ Susan Randall Harbert ---------------------------------------------------- Susan Randall Harbert, Chief Financial Officer Date May 9, 2003 ------------------------- GMO ASIA FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO ASIA FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGEMENT Day-to-day management of the Fund's portfolio is the responsibility of the Emerging Markets Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Asia Fund returned -9.8% for the fiscal year ended February 28, 2003. The Fund's benchmark, the GMO Asia 7 Index, returned - -11.6% during the same period. The bulk of added value over the last 12 months came from stock selection. Like the previous three years, our largest overweight for 2002 came in the TIP (Thailand, Indonesia, Philippines) region. While Philippines disappointed this year (falling over 30%), Thailand and Indonesia were two of the top performing markets on the back of strengthening economies and political reforms. Both markets in the TIP region were approximately flat over the past 12 months, outperforming Asia by 12%. Our overweight of this region added over 2% to performance. However, our 10% underweight of Malaysia cost the portfolio 1% as strong commodity prices and a stable currency caused this market to also outperform for the year. Stock selection was strong after another good year for value stocks. The cheapest third of the region outperformed by 8% and the most expensive third underperformed by the same margin. Our positions in these groups added over 1% to performance. Stock selection was particularly strong in Thailand where our two largest holdings -- Siam Cement and Land and Houses -- both rose over 50%. OUTLOOK For the second year running, emerging Asia significantly outperformed its global counterparts in a difficult environment. The S&P 500 and MSCI EAFE fell 22.7% and 17.5%, respectively, over the year ended February 28, 2003. Nevertheless, there is even more hope for the future. A couple of secular trends fuel this optimism. First, there is a realization among emerging market policymakers that they need to reduce their dependence on export-led growth and boost their domestic economies. This has led to low interest rates, driving up consumption in most of our markets. Second, as western economies struggle to recover from the overhang of the bubble, cost control through outsourcing has become a mainstream strategy. Production and services are being moved aggressively to lower-cost destinations, primarily in emerging markets. As always, short-term (absolute) performance of the asset class will likely be driven by global equity moves, global growth, and any developments in the conflict with Iraq. But, trading at approximately 10 times price to earnings, with strong growth prospects, Asia has a safety net that the rest of global equities do not. We expect the region to continue to outperform global equities. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO ASIA FUND CLASS III SHARES AND THE MSCI EMF ASIA INDEX AS OF FEBRUARY 28, 2003 GMO Asia Fund MSCI EMF Asia Index GMO Asia 7 Index* 2/18/98 $9,920 $10,000 $10,000 3/31/98 $10,466 $10,689 $11,032 6/30/98 $6,825 $7,144 $6,790 9/30/98 $5,545 $6,122 $6,235 12/31/98 $8,474 $8,189 $9,722 3/31/99 $8,414 $9,095 $9,562 6/30/99 $13,450 $12,725 $15,265 9/30/99 $10,779 $11,748 $12,644 12/31/99 $14,194 $13,872 $16,224 3/31/2000 $13,311 $14,480 $15,977 6/30/2000 $10,898 $12,520 $13,757 9/30/2000 $9,306 $9,750 $11,077 12/31/2000 $8,394 $8,075 $9,511 3/31/2001 $7,980 $8,095 $9,455 6/30/2001 $8,311 $8,005 $9,819 9/30/2001 $7,444 $6,426 $8,296 12/31/2001 $8,117 $8,549 $9,850 3/31/2002 $10,474 $9,861 $11,842 6/30/2002 $10,221 $9,276 $11,549 9/30/2002 $8,470 $7,739 $9,768 12/31/2002 $8,809 $8,123 $9,994 2/28/2003 $8,703 $7,806 $9,854
AVERAGE ANNUAL TOTAL RETURN Since 1 Year 5 Year Inception 2/18/98 Class III -11.26% -3.56% -2.72%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 80 bp on the purchase and 80 bp on the redemption. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future results. Information is unaudited. * The GMO Asia 7 Index is composed of the IFC Investable Country Indexes, equally weighted, for seven Asian countries (China, Indonesia, Korea, Malaysia, the Philipines, Taiwan and Thailand). GMO ASIA FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------- COMMON STOCKS -- 99.5% CHINA -- 17.2% 571,000 Bengang Steel Plates Co Ltd Class B 231,355 3,146,000 Brilliance China Automotive Holdings Ltd 734,151 1,688,000 China Everbright Ltd 508,623 319,000 China International Marine Containers Co Ltd Class B 350,122 1,134,000 China Mobile Ltd* 2,442,743 45,200 China Mobile Ltd ADR* 494,488 4,508,000 China Petroleum & Chemical Corp 849,683 359,500 China Resources Enterprise Ltd 322,665 931,000 China Unicom* 564,036 24,000 China Unicom ADR* 148,080 1,012,000 Chongqing Changan Automobile Co Ltd Class B 512,546 815,000 CNOOC Ltd 1,144,267 14,500 CNOOC Ltd ADR 404,115 834,000 Cosco Pacific Ltd 753,895 304,000 CSG Technology Holding Co Ltd Class B 154,356 4,251,000 Denway Motors Ltd 1,635,189 834,000 Founder Holdings Ltd* 74,855 7,047,000 Guangdong Investments Ltd* 1,066,208 6,000 Huaneng Power International Inc ADR 217,560 358,000 Huaneng Power International Inc Class H 319,024 2,924,000 Maanshan Iron & Steel Co Ltd Class H 258,691 10,702,000 PetroChina Co Ltd Class H 2,236,702 1,406,000 Shandong International Power Development Co Ltd Class H 319,091 80,000 Shanghai Industrial Holdings Ltd Class H 124,117 629,000 Shenzhen SEG Co Ltd Class B* 272,598 1,582,000 Sinopec Shanghai Petrochemical Co Ltd Class H* 265,726 3,110,000 Stone Electronic Technology Ltd* 179,444 1,076,000 TCL International Holdings Ltd 279,378 736,000 Tsingtao Brewing Co Ltd 441,179 626,000 Yanzhou Coal Mining Co Ltd Class H 268,890 829,000 Zhejiang Southeast Electric Power Co Class B 512,322 ----------- 18,086,099 ----------- INDONESIA -- 20.4% 2,520,000 Astra International Tbk* 666,629 17,116,300 Bank Central Asia Tbk 4,768,711 1,744,600 Bimantara Citra Tbk PT 471,328 9,188,800 Citra Marga Nusaphala Persad* 351,685
See accompanying notes to the financial statements. 1 GMO ASIA FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------- INDONESIA -- CONTINUED 5,012,000 Gajah Tunggal Tbk* 118,480 452,500 Gudang Garam 384,575 7,171,000 HM Sampoerna Tbk 2,381,319 13,929,500 Indah Kiat Pulp & Paper* 274,403 17,050,500 Indofood Sukses Makmur Tbk 1,103,623 602,500 Indonesian Satellite Corp Tbk PT 532,406 5,135,000 Indorama Synthetics* 234,105 1,529,000 International Nickel* 1,101,548 7,415,000 PT Bank Pan Indonesia Tbk* 141,898 21,000 PT Indosat (Persero) Tbk Class B ADR 182,700 16,013,500 PT Matahari Putra Prima Tbk 703,019 1,000,000 Ramayana Lestari Sentosa 247,650 93,200 Telekomunikasi Indonesia Class B ADR 745,600 17,689,000 Telekomunikasi IndonesiaTbk PT Class B 7,118,610 ----------- 21,528,289 ----------- MALAYSIA -- 4.0% 460,600 Affin Holdings Berhad 99,393 38,000 Edaran Otomobil Berhad 78,000 781,000 Highlands and Lowlands Berhad 604,247 86,000 Kuala Lumpur Kepong Berhad 141,447 149,000 Malaysia Mining Corp 76,068 229,000 Malaysian International Shipping (Foreign Registered) 433,895 412,000 Maxis Communications Berhad* 585,474 339,000 Perusahaan Otomobil Nasional 713,684 70,000 Petronas Dagangan Berhad 99,474 1,654,000 Renong Berhad* 202,397 161,000 Resorts World Berhad 400,382 222,000 Sime Darby Berhad 297,947 99,000 Star Publications Malaysia Berhad 153,711 1,374,000 TA Enterprise Berhad 178,982 80,000 Tenaga Nasional Berhad 197,895 ----------- 4,262,996 ----------- PHILIPPINES -- 14.4% 4,141,325 Aboitiz Equity Ventures Inc* 173,172 5,317,756 Ayala Corp 414,497 55,302,700 Ayala Land Inc 4,716,324 681,995 Equitable Banking Corp* 287,682
2 See accompanying notes to the financial statements. GMO ASIA FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------- PHILIPPINES -- CONTINUED 15,208,850 Filinvest Land Inc* 242,672 2,577,190 First Philippine Holdings* 387,583 108,912 Globe Telecom Inc* 1,048,671 2,099,014 Ionics Circuits Inc 19,248 2,097,500 La Tondena Distillers Inc 1,230,995 14,213,000 Megaworld Corp* 151,188 380,260 Metropolitan Bank & Trust Co 191,786 371,770 Philippine Long Distance Telephone* 1,994,365 1,382,275 San Miguel Corp Class B 1,698,531 26,753,000 SM Prime Holdings 2,600,475 ----------- 15,157,189 ----------- SINGAPORE -- 2.6% 148,000 DBS Group Holdings Ltd 816,951 3,707 Haw Par Corp Ltd 7,375 273,000 Oversea-Chinese Banking Corp 1,381,364 90,690 United Overseas Bank 542,320 ----------- 2,748,010 ----------- SOUTH KOREA -- 5.2% 40,600 Chohung Bank* 124,999 75,500 Daesang Corp 122,075 2,300 Daum Communications Corp* 74,184 41,600 Hanjin Heavy Industry 98,803 17,680 Hyosung Corp 158,485 13,400 Hyundai Department Store Co Ltd* 111,363 3,100 Kangwon Land Inc 333,724 40,400 KIA Motors Corp 255,536 3,600 Kookmin Credit Card Co Ltd* 53,684 35,600 Korea Electric Power Corp 535,350 51,200 Korea Exchange Bank* 154,417 6,800 Korea Gas Corp 142,420 6,400 Korea Reinsurance 106,430 7,600 KT Corp 277,921 3,700 KT Corp ADR 68,450 25,000 KT&G Corp 350,815 2,500 LG Card Co Ltd 69,116 8,000 LG Chemicals Ltd 247,979 12,300 LG Investment & Securities Co Ltd 129,837
See accompanying notes to the financial statements. 3 GMO ASIA FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------- SOUTH KOREA -- CONTINUED 7,000 Samsung Electronics 1,639,090 32,500 Serome Technology Inc* 92,573 18,900 SK Corp 199,506 21,400 Ssangyong Motor* 102,191 ----------- 5,448,948 ----------- TAIWAN -- 10.9% 830,000 Ambassador Hotel* 240,043 44,000 Ambit Microsystems Corp 135,482 938,300 Asustek Computer Inc 1,593,085 829,000 Cheng Loong Corp* 249,296 1,479,000 China Bills Finance Corp* 378,794 4,940,001 China Development Financial Holding Corp* 1,862,274 1,729,000 China Steel Corp 1,074,717 1,129,000 Chinatrust Financial Holding Co* 906,449 434,000 Compal Electronics Inc 418,388 540,000 Hsinchu International Bank* 218,331 1,311,200 Inventec Co Ltd 754,647 4,106,000 Ritek Corp 1,937,796 477,000 Synnex Technology International Corp 667,114 1,229,716 Taiwan Cement Corp* 433,497 848,000 Taiwan Pulp & Paper Corp* 164,719 1,215,000 Waterland Financial Holdings* 244,748 578,000 Yieh Loong Co Ltd* 235,358 ----------- 11,514,738 ----------- THAILAND -- 24.8% 2,454,000 Advanced Info Service Pcl (Foreign Registered) 2,236,905 4,582,300 Bangkok Expressway Pcl (Foreign Registered)(a) 1,606,509 1,503,400 Bank of Ayudhya Pcl (Foreign Registered)* 281,108 452,600 Banpu Pcl (Foreign Registered)(a) 401,982 2,227,600 Central Pattana Pcl NVDR* 1,197,494 9,222,200 Charoen Pokphand Foods Pcl (Foreign Registered)(a) 905,300 307,330 Delta Electronics Pcl (Foreign Registered)(a) 173,832 191,000 Digital Onpa International Plc (Foreign Registered)*(a) 7,277 309,600 Electricity Generating Pcl (Foreign Registered) NVDR 289,447 414,100 Electricity Generating Pcl NVDR 382,306 2,164,000 Industrial Finance Corp of Thailand (Foreign Registered)* 249,858 17,699,000 Land & House Pcl (Foreign Registered) 3,205,966
4 See accompanying notes to the financial statements. GMO ASIA FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------- THAILAND -- CONTINUED 9,684,000 Land & House Pcl NVDR 1,686,240 1,653,100 National Finance Pcl NVDR* 506,150 671,000 National Petrochemical (Foreign Registered)(a) 791,995 999,200 PTT Exploration & Production Pcl (Foreign Registered)(a) 3,012,663 672,000 PTT Pcl (Foreign Registered)(a) 687,157 893,000 Quality House Co Ltd (Foreign Registered)*(a) 128,362 1,939,850 Sahaviriya Steel Industry (Foreign Registered)*(a) 398,987 130,000 Siam Cement Pcl (Foreign Registered) 3,907,444 59,250 Siam Cement Pcl NVDR 1,706,112 353,000 Siam Panich Leasing Ltd (Foreign Registered)(a) 264,018 2,439,000 Tanayong Co Ltd (Foreign Registered)*(a)(b) 570 204,100 Thai Airways International (Foreign Registered)(a) 140,726 1,563,600 Thai Farmers Bank NVDR* 1,050,684 1,299,265 Thai Petrochemical (Foreign Registered)* 97,783 1,338,500 Thai Union Frozen Products Pcl (Foreign Registered) 575,632 553,000 Tisco Finance Pcl (Foreign Registered)*(a) 242,992 ----------- 26,135,499 ----------- TOTAL COMMON STOCKS (COST $107,423,471) 104,881,768 ----------- PREFERRED STOCKS -- 0.2% SOUTH KOREA -- 0.2% 2,000 Samsung Electronics (Non Voting) 4.08% 224,521 ----------- TOTAL PREFERRED STOCKS (COST $289,113) 224,521 ----------- RIGHTS AND WARRANTS -- 0.1% MALAYSIA -- 0.0% 162,600 Affin Holdings Berhad Warrants, Expires 7/08/05* 5,990 ----------- THAILAND -- 0.1% 315,000 Adkinson Securities Warrants, Expires 6/14/03* -- 315,000 Adkinson Securities Warrants, Expires 6/14/05* -- 1,138,620 Charoen Pokphand Foods Pcl Warrants, Expires 4/29/05 (Foreign Registered)* 62,806
See accompanying notes to the financial statements. 5 GMO ASIA FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------- THAILAND -- CONTINUED 480,663 Telecomasia Corp Pcl Warrants, Expires 4/03/08* -- ----------- 62,806 ----------- TOTAL RIGHTS AND WARRANTS (COST $262,040) 68,796 ----------- TOTAL INVESTMENTS -- 99.8% (Cost $107,974,624) 105,175,085 Other Assets and Liabilities (net) -- 0.2% 178,719 ----------- TOTAL NET ASSETS -- 100.0% $105,353,804 =========== NOTES TO SCHEDULE OF INVESTMENTS:
ADR - American Depositary Receipt NVDR - Non-Voting Depository Receipt * Non-income producing security. (a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). (b) Bankrupt issuer. 6 See accompanying notes to the financial statements. GMO ASIA FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY (SHOWING PERCENTAGE OF EQUITY INVESTMENTS) FEBRUARY 28, 2003 (UNAUDITED) At February 28, 2003, industry sector diversification of the Fund's equity investments was as follows:
INDUSTRY SECTOR - -------------------------------------------------------------------- Financials 24.4% Telecommunication Services 17.5 Materials 12.4 Consumer Discretionary 12.1 Consumer Staples 8.6 Energy 8.6 Information Technology 7.9 Industrials 5.2 Utilities 3.3 ----- 100.0% =====
See accompanying notes to the financial statements. 7 GMO ASIA FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $107,974,624) (Note 1) $105,175,085 Cash 65,343 Foreign currency, at value (cost $3,984) (Note 1) 3,994 Receivable for investments sold 183,513 Dividends and interest receivable 107,530 Receivable for expenses reimbursed by Manager (Note 2) 4,536 ------------ Total assets 105,540,001 ------------ LIABILITIES: Payable to affiliate for (Note 2): Management fee 66,663 Shareholder service fee 12,345 Accrued expenses 107,189 ------------ Total liabilities 186,197 ------------ NET ASSETS $105,353,804 ============ NET ASSETS CONSIST OF: Paid-in capital $143,319,094 Accumulated undistributed net investment income 803,288 Accumulated net realized loss (35,970,805) Net unrealized depreciation (2,797,773) ------------ $105,353,804 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $105,353,804 ============ SHARES OUTSTANDING: Class III 14,540,112 ============ NET ASSET VALUE PER SHARE: Class III $ 7.25 ============
8 See accompanying notes to the financial statements. GMO ASIA FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $376,646) $ 2,396,064 Interest (net of withholding taxes of $186) 60,399 ------------ Total income 2,456,463 ------------ EXPENSES: Management fee (Note 2) 924,981 Custodian fees 430,650 Audit fees 42,762 Transfer agent fees 28,284 Legal fees 9,157 Trustees fees and related expenses (Note 2) 3,372 Registration fees 1,042 Miscellaneous 1,926 Fees reimbursed by Manager (Note 2) (72,393) ------------ 1,369,781 Shareholder service fee (Note 2) - Class III 171,293 ------------ Net expenses 1,541,074 ------------ Net investment income 915,389 ------------ REALIZED AND UNREALIZED GAIN (LOSS): Net realized loss on: Investments (3,473,126) Closed swap contracts (1,037,567) Foreign currency, forward contracts and foreign currency related transactions (1,361) ------------ Net realized loss (4,512,054) ------------ Change in net unrealized appreciation (depreciation) on: Investments (7,567,633) Open swap contracts (124,210) Foreign currency, forward contracts and foreign currency related transactions 1,884 ------------ Net unrealized loss (7,689,959) ------------ Net realized and unrealized loss (12,202,013) ------------ NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(11,286,624) ============
See accompanying notes to the financial statements. 9 GMO ASIA FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 915,389 $ 1,008,347 Net realized loss (4,512,054) (19,000,561) Change in net unrealized appreciation (depreciation) (7,689,959) 22,814,983 ------------ ------------ Net increase (decrease) in net assets from operations (11,286,624) 4,822,769 ------------ ------------ Distributions to shareholders from: Net investment income Class III (749,692) (1,563,464) ------------ ------------ Total distributions from net investment income (749,692) (1,563,464) ------------ ------------ Net share transactions (Note 5): Class III (487,810) 691,462 ------------ ------------ Increase (decrease) in net assets resulting from net share transactions (487,810) 691,462 ------------ ------------ Total increase (decrease) in net assets (12,524,126) 3,950,767 NET ASSETS: Beginning of period 117,877,930 113,927,163 ------------ ------------ End of period (including accumulated undistributed net investment income of $803,288 and $626,791, respectively) $105,353,804 $117,877,930 ============ ============
10 See accompanying notes to the financial statements. GMO ASIA FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ----------------------------------------------- 2003 2002 2001 2000 1999 -------- -------- -------- -------- ------- NET ASSET VALUE, BEGINNING OF PERIOD $ 8.09 $ 7.87 $ 12.35 $ 7.67 $ 10.44 -------- -------- -------- -------- ------- Income from investment operations: Net investment income 0.06 0.07 0.09 0.03 0.08(b) Net realized and unrealized gain (loss) (0.85) 0.26 (3.32) 5.01 (2.69) -------- -------- -------- -------- ------- Total from investment operations (0.79) 0.33 (3.23) 5.04 (2.61) -------- -------- -------- -------- ------- Less distributions to shareholders: From net investment income (0.05) (0.11) (0.01) (0.02) (0.16) From net realized gains -- -- (1.24) (0.34) -- -------- -------- -------- -------- ------- Total distributions (0.05) (0.11) (1.25) (0.36) (0.16) -------- -------- -------- -------- ------- NET ASSET VALUE, END OF PERIOD $ 7.25 $ 8.09 $ 7.87 $ 12.35 $ 7.67 ======== ======== ======== ======== ======= TOTAL RETURN(a) (9.82)% 4.41% (27.45)% 65.57% (25.03)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $105,354 $117,878 $113,927 $119,218 $77,404 Net expenses to average daily net assets 1.35% 1.28% 1.30% 1.25% 1.26% Net investment income to average daily net assets 0.80% 1.01% 1.22% 0.22% 1.04% Portfolio turnover rate 72% 68% 84% 121% 61% Fees and expenses reimbursed by the Manager to average daily net assets: 0.06% 0.09% 0.07% 0.07% 0.30% Purchase and redemption fees consisted of the following per share amounts:(c) $ 0.00(d) $ 0.00(d) $ 0.03 -- --
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. Calculation excludes subscription and redemption fees. (b) Computed using average shares outstanding throughout the period. (c) Effective March 1, 2000 the fund adopted the provisions of the revised AICPA Audit and Accounting Guide for Investment Companies which requires the disclosure of the per share effect of purchase and redemption fees. Periods prior to March 1, 2000 have not been restated to reflect this change. Amounts calculated using average shares oustanding throughout the period. (d) Purchase and redemption fees were less than $0.01 per share. See accompanying notes to the financial statements. 11 GMO ASIA FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Asia Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in equity securities traded in the Asian securities markets other than Japan. The Fund's benchmark is the GMO Asia 7 Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign 12 GMO ASIA FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in foreign currency values that are unfavorable to the Fund. There were no forward foreign currency contracts outstanding as of February 28, 2003. FUTURES CONTRACTS The Fund may purchase and sell futures contracts to manage its exposure to the financial markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are 13 GMO ASIA FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of February 28, 2003, there were no outstanding futures contracts. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 28, 2003, there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future, security or currency transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. At February 28, 2003, there were no open purchased option contracts. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed 14 GMO ASIA FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the financial markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. At February 28, 2003, there were no open swap agreements. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the 15 GMO ASIA FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- investment of the collateral, the risk of delay in recovery or loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 2003, the Fund did not have any securities on loan. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryover for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country's tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. Income dividends and capital gain distrbutions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003, the tax basis of distributions paid were a follows: ordinary income -- $1,563,464 and $749,692, respectively. As of February 28, 2003, the components of distributable earnings on a tax basis consisted of $803,288 of undistributed ordinary income. At February 28, 2003, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code of $6,035,369, $17,265,440 and $9,986,503 expiring in 2009, 2010 and 2011, respectively. The Fund has elected to defer to March 1, 2003 post- October capital losses of $2,072,583. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This 16 GMO ASIA FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus U.S. GAAP. The financial highlights exclude these adjustments.
Accumulated Undistributed Net Accumulated Net Investment Income Realized Loss ----------------- --------------- $10,800 $(10,800)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Interest income on U.S. Treasury inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities adjusted for inflation is recorded as interest income. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. PURCHASES AND REDEMPTIONS OF FUND SHARES Effective March 27, 2002, the level of purchase premiums and redemption fees are each 0.80%. Prior to March 27, 2002 the purchase premium on cash purchases and redemption fee was 1.20% and 0.40%, respectively, of the amount invested or redeemed. Shares acquired prior to March 27, 2002, will continue to be subject to a redemption fee of 0.40%. If the Manager determines that any portion of a cash purchase or redemption fee is offset by a corresponding cash redemption or purchase occurring on the same day, the purchase premium or redemption fee charged by the Fund will be reduced by 100% with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived if the Manager determines the Fund is either substantially overweighted or underweighted in cash so that a redemption or purchase will not 17 GMO ASIA FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- require a securities transaction. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the years ended February 28, 2002 and February 28, 2003, the Fund received $366 and $32,558 in purchase premiums and $31 and $25,581 in redemption fees, respectively. There is no premium for reinvested distributions. INVESTMENT RISK Investments in emerging countries present certain risks that are not inherent in many other securities. Many emerging countries present elements of political and/or economic instability. The securities markets of emerging countries are generally smaller and less developed than the securities markets of the U.S. and developed foreign markets. Further, countries may impose various types of foreign currency regulations or controls which may impede the Fund's ability to repatriate amounts it receives. The Fund may acquire interests in securities in anticipation of improving conditions in the related countries. These factors may result in significant volatility in the values of its holdings. The markets for emerging countries are relatively illiquid. Accordingly, the Fund may not be able to realize in an actual sale amounts approximating those used to value its holdings. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .81% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until at least June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, custody fees, fees and expenses of the independent Trustees of the Trust (including legal fees), 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) exceed the management fee. The Fund incurred fees and expenses indirectly as a shareholder in GMO Alpha LIBOR Fund. For the year ended February 28, 2003, indirect operating expenses (excluding investment-related expenses) were less than .001% of the Fund's average daily net assets, and indirect investment-related expenses (including, but not limited to, interest expense, foreign audit expense, and investment-related legal expense) were .001% of the Fund's average daily net assets. As of February 28, 2003, greater than 10% of the Fund's shares were held by accounts for which the Manager has investment discretion. 18 GMO ASIA FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- The Fund's portion of the fee paid by the Trust to the independent Trustees during the year ended February 28, 2003, was $2,639. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchase and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2003, were as follows:
Purchases Sales ----------- ----------- U.S. Government securities $ 496,344 $ 1,088,588 Investments (non-U.S. Government securities) 81,471,234 79,335,518
At February 28, 2003, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in the value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $108,585,533 $15,795,919 $(19,206,367) $(3,410,448)
4. PRINCIPAL SHAREHOLDERS At February 28, 2003, 69.4% of the outstanding shares of the Fund were held by three shareholders, each holding in excess of 10% of the outstanding shares of the Fund. Investment activities of these shareholders may have a material effect on the Fund. 19 GMO ASIA FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 --------------------- ----------------- Shares Amount Shares Amount Class III: -------- ----------- ------- -------- Shares sold 507,393 $ 4,075,321 6,316 $ 44,516 Shares issued to shareholders in reinvestment of distributions 39,072 330,158 97,208 668,789 Shares repurchased (583,805) (4,893,289) (3,197) (21,843) -------- ----------- ------- -------- Net increase (decrease) (37,340) $ (487,810) 100,327 $691,462 ======== =========== ======= ========
20 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO ASIA FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Asia Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 21 GMO ASIA FUND (A SERIES OF GMO TRUST) TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- During the year ended February 28, 2003, the Fund paid foreign taxes of $374,833 and recognized foreign source income of $2,772,710. 22 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Five Overseen Directorships and Age Held with Fund Time Served Years by Trustee Held by Trustee ------------------------- --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
(1) Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. (2) Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 23 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------- --------------- --------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the from February Boston, MA 02110 Trust 2002 - October Age: 64 2002.
(1) Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. (3) Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 24 PRINCIPAL OFFICERS:
Principal Occupation(s) Name, Address, Position(s) Term of Office(4) and Length During Past and Age Held with Fund of Time Served Five Years ------------------------- ------------------------- ---------------------------- ------------------------- Scott Eston President and Chief President and Chief Chief Financial Officer c/o GMO Trust Executive Officer of the Executive Officer since (1997 - present), Chief 40 Rowes Wharf Trust October 2002; Vice President Operating Officer Boston, MA 02110 from August 1998 - October (2000 - present) and Age: 47 2002. Member, Grantham, Mayo, Van Otterloo & Co. LLC. Susan Randall Harbert Chief Financial Officer Chief Financial Officer Member, Grantham, Mayo, c/o GMO Trust and Treasurer of the Since February 2000; Van Otterloo & Co. LLC. 40 Rowes Wharf Trust Treasurer since February Boston, MA 02110 1998. Age: 45 Brent Arvidson Assistant Treasurer of Since September 1998. Senior Fund c/o GMO Trust the Trust Administrator, Grantham, 40 Rowes Wharf Mayo, Van Otterloo & Co. Boston, MA 02110 LLC. Age: 33 William R. Royer, Esq. Vice President and Clerk Vice President since General Counsel, Anti- c/o GMO Trust 40 of the Trust February 1997; Clerk since Money Laundering Rowes Wharf March 2001; May 1999 - Reporting Officer (July Boston, MA 02110 August 1999. 2002 - February 2003) and Age: 37 Member, Grantham, Mayo, Van Otterloo & Co. LLC. Elaine M. Hartnett, Esq. Vice President and Vice President since August Associate General c/o GMO Trust Secretary of the Trust 1999; Secretary since March Counsel, Grantham, Mayo, 40 Rowes Wharf 2001. Van Otterloo & Co. LLC Boston, MA 02110 (June 1999 - present); Age: 58 Associate/ Junior Partner, Hale and Dorr LLP (1991 - 1999). Julie Perniola Vice President and Anti- Since February 2003. Anti-Money Laundering c/o GMO Trust Money Laundering Reporting Officer 40 Rowes Wharf Compliance Officer (February 2003 - present) Boston, MA 02110 and Compliance Officer, Age: 32 Grantham, Mayo, Van Otterloo & Co. LLC.
(4) Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 25 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGEMENT Day-to-day management of the Fund's portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Core Plus Bond Fund returned +6.5% for the fiscal year ended February 28, 2003, compared to +9.9% for the Lehman Brothers U.S. Aggregate Bond Index. The Fund's exposure to various issues is achieved directly and indirectly through its investment in the GMO Emerging Country Debt Fund, the GMO Alpha LIBOR Fund (ALF), and the GMO Short-Duration Collateral Fund. The Fund underperformed the benchmark during the fiscal year by 3.4%. Bond market, emerging debt, and currency selection added value during the fiscal year, while issue selection underperformed. Issue selection dramatically hurt performance in late 2002. Credit related spread widening in the assets underlying the Fund's investment in ALF and the default of certain healthcare receivable asset-backed bonds held by ALF, which were allegedly involved in a massive fraud, contributed to the underperformance. National Century Financial Enterprises, the sponsor of $3.35 billion of health care asset-backed receivables allegedly violated the terms of the bonds' indentures by, among other things, spending cash collateral, accepting collateral other than permitted receivables, moving receivables between trusts to meet compliance tests, and reimbursing healthcare providers for more than the value of receivables purchases. National Century, its affiliated operations, the trusts, and many healthcare providers have declared bankruptcy. This event had a negative effect on the net asset value of ALF, and an indirect effect on GMO Core Plus Bond Fund of -5.5% (through February 28, 2003). Overweight positions in Euro-member country bonds and the U.S. bond market as well as an underweight position in Japanese government bonds added value during the period. In addition, an underweight position in the U.S. dollar and overweight positions in the Australian dollar and Swedish krona generated significant gains. OUTLOOK The Fund is structured to benefit from outperformance in the Canadian, Euro-member country, Swedish, U.S., and emerging bond markets. We expect the Australian, Japanese government, and Swiss bond markets to underperform. Strong relative performance is expected from Canadian dollars, Swedish krona, and British gilt markets. The euro, Japanese yen and Australian and US dollars are expected to underperform. At the end of the period, 3.9% of the Fund was invested in Emerging Country Debt Fund. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO CORE PLUS BOND FUND CLASS III SHARES AND THE LEHMAN BROTHERS U.S. AGGREGATE BOND INDEX AS OF FEBRUARY 28, 2003 GMO CORE PLUS LEHMAN BROTHERS U.S. BOND FUND AGGREGATE BOND INDEX 4/30/97 $10,000 $10,000 6/30/97 $10,250 $10,214 9/30/97 $10,770 $10,554 12/31/97 $11,195 $10,864 3/31/98 $11,332 $11,033 6/30/98 $11,470 $11,291 9/30/98 $11,644 $11,769 12/31/98 $11,628 $11,808 3/31/99 $11,353 $11,750 6/30/99 $11,287 $11,646 9/30/99 $11,276 $11,726 12/31/99 $11,352 $11,711 3/31/2000 $11,675 $11,970 6/30/2000 $11,806 $12,178 9/30/2000 $12,176 $12,545 12/31/2000 $12,789 $13,073 3/31/2001 $13,256 $13,470 6/30/2001 $13,321 $13,545 9/30/2001 $13,971 $14,171 12/31/2001 $14,055 $14,176 3/31/2002 $14,055 $14,190 6/30/2002 $14,716 $14,714 9/30/2002 $15,322 $15,388 12/31/2002 $14,872 $15,630 2/28/2003 $15,240 $15,860
AVERAGE ANNUAL TOTAL RETURN SINCE INCEPTION 1 YEAR 5 YEAR 4/30/97 Class III 6.45% 6.32% 7.49%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 34.5% ALBANIA -- 1.4% USD 15,681,227 Republic of Albania Par Bond, Zero Coupon, 0.00%, due 08/31/25 3,920,307 ------------ AUSTRIA -- 2.1% GBP 500,000 Bank Austria AG Series EMTN, 8.38%, due 11/04/11 972,388 USD 4,175,000 Bank Austria AG, 144A, 7.25%, due 02/15/17 5,082,645 ------------ 6,055,033 ------------ BRAZIL -- 1.1% USD 10,000,000 Brazil Discount Bond, Principal Strip, Series D1A, Zero Coupon, 0.00%, due 04/15/24(a) 3,007,294 ------------ CAYMAN ISLANDS -- 1.0% CAD 4,000,000 Government of Canada (Cayman), 7.25%, due 06/01/08 2,991,006 ------------ CHILE -- 0.3% USD 750,000 Banco Santander Series MBIA, 6.50%, due 11/01/05 819,456 ------------ LUXEMBOURG -- 2.6% USD 8,000,000 Tyco International Group SA, 5.80%, due 08/01/06 7,560,000 ------------ MEXICO -- 1.2% USD 3,000,000 Pemex Finance Ltd Series 1A1, AMBAC 144A, 6.30%, due 05/15/10 3,334,620 ------------ UNITED STATES -- 24.8% U.S. GOVERNMENT -- 13.9% USD 10,100,000 U.S. Treasury 0.00% Receipts, due 02/15/10(a) 7,581,149 USD 10,100,000 U.S. Treasury 0.00% Receipts, due 02/15/12(a) 6,714,921 USD 10,100,000 U.S. Treasury 0.00% Receipts, due 08/15/12(a) 6,505,135 USD 16,797,450 U.S. Treasury Inflation Indexed Note, 3.63%, due 01/15/08(b) 18,975,869 ------------ 39,777,074 ------------
See accompanying notes to the financial statements. 1 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE/ SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- U.S. GOVERNMENT AGENCY -- 10.9% USD 30,000,000 Fannie Mae, TBA, 6.00%, due 03/01/33 31,209,375 ------------ TOTAL UNITED STATES 70,986,449 ------------ TOTAL DEBT OBLIGATIONS (COST $91,885,544) 98,674,165 ------------ MUTUAL FUNDS -- 72.5% 1,178,327 GMO Emerging Country Debt Fund, Class III 11,217,670 1,645,747 GMO Alpha LIBOR Fund(c) 39,037,123 6,281,038 GMO Short-Duration Collateral Fund 157,088,760 ------------ TOTAL MUTUAL FUNDS (COST $209,825,907) 207,343,553 ------------ PRINCIPAL AMOUNT ------------- CALL OPTIONS PURCHASED -- 0.5% CROSS CURRENCY OPTIONS -- 0.5% GBP 18,300,000 GBP Call/JPY Put, Expires 01/23/04, Strike 184.00 762,190 GBP 11,100,000 GBP Call/JPY Put, Expires 04/14/03, Strike 181.00 467,243 USD 8,600,000 JPY Call/USD Put, Expires 07/03/03, Strike 117.30 207,057 ------------ 1,436,490 ------------ TOTAL CALL OPTIONS PURCHASED (COST $2,010,027) 1,436,490 ------------ PUT OPTIONS PURCHASED -- 0.0% CROSS CURRENCY OPTIONS -- 0.0% GBP 19,500,000 GBP Put/USD Call, Expires 06/05/03, Strike 1.428 6,143 ------------ TOTAL PUT OPTIONS PURCHASED (COST $796,887) 6,143 ------------
See accompanying notes to the financial statements. 2 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- PREFERRED STOCKS -- 2.2% UNITED STATES -- 2.2% 10,000 Home Ownership Funding 2 Preferred 144A, 133.38% 6,276,149 ------------ TOTAL PREFERRED STOCKS (COST $6,387,253) 6,276,149 ------------ SHORT-TERM INVESTMENTS -- 0.4% CASH EQUIVALENTS -- 0.4% USD 1,255,790 Merrimac Cash Fund 1,255,790 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $1,255,790) 1,255,790 ------------ TOTAL INVESTMENTS -- 110.1% (Cost $312,161,408) 314,992,290 Other Assets and Liabilities (net) -- (10.1%) (28,962,276) ------------ TOTAL NET ASSETS -- 100.0% $286,030,014 ============
See accompanying notes to the financial statements. 3 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
NOTES TO SCHEDULE OF INVESTMENTS: 144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. AMBAC - Insured as to the payment of principal and interest by AMBAC Assurance Corporation EMTN - Euromarket Medium Term Note MBIA - Insured as to the payment of principal and interest by MBIA Insurance Corp TBA - To Be Announced (Note 1) CURRENCY ABBREVIATIONS:
AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc EUR - Euro GBP - British Pound JPY - Japanese Yen SEK - Swedish Krona USD - United States Dollar
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). (b) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 6). (c) All or a portion of this security has been segregated to cover collateral requirements on TBA obligations (Note 1). 4 See accompanying notes to the financial statements. GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $312,161,408) (Note 1) $314,992,290 Receivable for Fund shares sold 150,000 Interest receivable 373,252 Receivable for open forward foreign currency contracts (Notes 1 and 6) 3,418,913 Receivable for variation margin on open futures contracts (Notes 1 and 6) 303,674 Receivable for expenses reimbursed by Manager (Note 2) 16,834 ------------ Total assets 319,254,963 ------------ LIABILITIES: Payable for forward commitments (Note 1) 30,970,312 Payable to affiliate for (Note 2): Management fee 56,061 Shareholder service fee 33,636 Payable for open forward foreign currency contracts (Notes 1 and 6) 1,992,753 Net payable for open swap contracts (Notes 1 and 6) 126,436 Accrued expenses 45,751 ------------ Total liabilities 33,224,949 ------------ NET ASSETS $286,030,014 ============ NET ASSETS CONSIST OF: Paid-in capital $278,818,842 Distributions in excess of net investment income (3,041,202) Accumulated net realized gain 5,610,167 Net unrealized appreciation 4,642,207 ------------ $286,030,014 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $286,030,014 ============ SHARES OUTSTANDING: Class III 28,736,061 ============ NET ASSET VALUE PER SHARE: Class III $ 9.95 ============
See accompanying notes to the financial statements. 5 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Interest $ 3,603,481 Dividends from investment company shares 3,169,670 ----------- Total income 6,773,151 ----------- EXPENSES: Management fee (Note 2) 757,034 Custodian and transfer agent fees 132,029 Audit fees 39,197 Legal fees 20,849 Trustees fees and related expenses (Note 2) 8,927 Registration fees 5,525 Miscellaneous 5,664 Fees reimbursed by Manager (Note 2) (197,493) ----------- 771,732 Indirectly incurred fees reimbursed by Manager (Note 2) (45,346) ----------- 726,386 ----------- Shareholder service fee (Note 2) - Class III 454,221 Shareholder service fee reimbursed (Note 2) - Class III (16,528) ----------- 437,693 ----------- Net expenses 1,164,079 ----------- Net investment income 5,609,072 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (19,597,184) Realized gains distributions from investment company shares 901,301 Closed futures contracts 2,141,781 Closed swap contracts 9,672,155 Written options 96,554 Foreign currency, forward contracts and foreign currency related transactions 9,251,677 ----------- Net realized gain 2,466,284 ----------- Change in net unrealized appreciation (depreciation) on: Investments 10,081,873 Open futures contracts 199,021 Open swap contracts (29,064) Foreign currency, forward contracts and foreign currency related transactions 669,140 ----------- Net unrealized gain 10,920,970 ----------- Net realized and unrealized gain 13,387,254 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $18,996,326 ===========
6 See accompanying notes to the financial statements. GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 5,609,072 $ 15,863,393 Net realized gain 2,466,284 5,916,925 Change in net unrealized appreciation (depreciation) 10,920,970 (9,292,020) ------------ ------------ Net increase in net assets from operations 18,996,326 12,488,298 ------------ ------------ Distributions to shareholders from: Net investment income Class III (12,462,812) (17,797,440) ------------ ------------ Total distributions from net investment income (12,462,812) (17,797,440) ------------ ------------ Net realized gains Class III (16,722,852) (130,656) ------------ ------------ Total distributions from net realized gains (16,722,852) (130,656) ------------ ------------ (29,185,664) (17,928,096) ------------ ------------ Net share transactions (Note 5): Class III (43,819,811) 189,067,102 ------------ ------------ Increase (decrease) in net assets resulting from net share transactions (43,819,811) 189,067,102 ------------ ------------ Total increase (decrease) in net assets (54,009,149) 183,627,304 NET ASSETS: Beginning of period 340,039,163 156,411,859 ------------ ------------ End of period (including distributions in excess of net investment income of $3,041,202 and $2,267,971, respectively) $286,030,014 $340,039,163 ============ ============
See accompanying notes to the financial statements. 7 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, -------------------------------------------------------------------------------- 2003 2002 2001(D) 2000 1999 ------------ ------------ ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 10.39 $ 10.17 $ 9.64 $ 10.23 $ 10.60 -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.19(a)+ 0.77(a)+ 0.62(a)+ 0.62+ 0.64+ Net realized and unrealized gain (loss) 0.45 0.07 0.73 (0.40) (0.58) -------- -------- -------- -------- -------- Total from investment operations 0.64 0.84 1.35 0.22 0.06 -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.47) (0.62) (0.82) (0.70) (0.12) From net realized gains (0.61) --(f) -- (0.11) (0.31) -------- -------- -------- -------- -------- Total distributions (1.08) (0.62) (0.82) (0.81) (0.43) -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 9.95 $ 10.39 $ 10.17 $ 9.64 $ 10.23 ======== ======== ======== ======== ======== TOTAL RETURN(b) 6.45% 8.53% 14.52% 2.26% 0.44% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $286,030 $340,039 $156,412 $120,276 $143,703 Net operating expenses to average daily net assets 0.38%(e) 0.38%(e) 0.39%(e) 0.40% 0.40% Interest expense to average daily net assets -- -- -- 0.01%(c) -- Total net expenses to average daily net assets 0.38% 0.38% 0.39% 0.41% -- Net investment income to average daily net assets 1.85%(a) 7.39%(a) 6.34%(a) 6.19% 5.97% Portfolio turnover rate 108% 113% 181% 40% 113% Fees and expenses reimbursed by the Manager to average daily net assets: 0.09% 0.09% 0.12% 0.10% 0.25%
(a) Net investment income is affected by the timing of the declaration of dividends by other Funds of the Trust in which the Fund invests. (b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (c) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income. (d) Effective March 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium and discount on debt securities. The effect of this change for the year ended February 28, 2001 was to decrease net investment income per share by $0.04, increase net realized gains and losses per share by $0.04, and decrease the ratio of net investment income to average net assets from 6.70% to 6.34%. Per share and ratio/supplemental data for periods prior to March 1, 2000 have not been restated to reflect this change. (e) Net expenses exclude expenses incurred indirectly through investment in underlying funds. See Note 2. (f) The distribution from net realized gains was less than $0.01 per share. + Calculated using average shares outstanding throughout the period. 8 See accompanying notes to the financial statements. GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Core Plus Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks a high total return relative to its performance benchmark through direct and indirect investment in U.S. investment grade securities. The Fund achieves exposure to international bond and currency markets by investing, directly or through other Funds of the Trust, in a combination of foreign bond and currency derivatives, effectively adding to or subtracting from the U.S. bond return the performance of the Fund's international bond and currency investments. The Fund's benchmark is the Lehman Brothers U.S. Aggregate Bond Index. At February 28, 2003, 54.9% of the Fund was invested in the GMO Short-Duration Collateral Fund and 13.6% of the Fund was invested in the GMO Alpha LIBOR Fund, separate funds of GMO Trust managed by GMO. Shares of the GMO Alpha LIBOR Fund and the GMO Short-Duration Collateral Fund are not publicly available for direct purchase. At February 28, 2003, 3.9% of the net assets of the Fund was invested in the GMO Emerging Country Debt Fund, a separate fund of GMO Trust managed by GMO. The financial statements of the GMO Alpha LIBOR Fund, the GMO Short-Duration Collateral Fund and the GMO Emerging Country Debt Fund should be read in conjunction with the Fund's financial statements. The Fund invested a substantial portion of its assets in GMO Alpha LIBOR Fund ("Alpha LIBOR Fund") to obtain the Fund's core portfolio exposure. In November 2002, certain bonds held by Alpha LIBOR Fund ("NPF bonds") defaulted amid allegations of fraud and significant violations of the bonds' indentures. Currently, no market exists for the NPF bonds, and they are being valued at fair value by the trustees of GMO Trust or persons acting at their direction. The devaluation of the NPF bonds had a negative impact on the Fund's net asset value per share. In late November 2002, Alpha LIBOR Fund undertook a reorganization transaction with a new series of GMO Trust, GMO Short-Duration Collateral Fund ("SDCF") and approximately 78% of the Fund's interest in Alpha LIBOR Fund was transferred to SDCF in exchange for SDCF shares. The reorganization was treated as a sale of the Alpha LIBOR Fund shares for financial reporting purposes and a distribution by Alpha LIBOR Fund for tax purposes. Accordingly, for financial reporting purposes, the Fund recognized a loss on the sale of the Alpha LIBOR shares of approximately $17,424,200. In addition, the Fund recognized for tax, but not for financial reporting 9 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- purposes, ordinary income of $6,635,832 and long-term capital gains of $1,183,564 from Alpha LIBOR Fund. $25,243,596 was added to the tax cost basis of the Fund's holdings of Alpha LIBOR Fund. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Shares of other Funds of the Trust are valued at their net asset value as reported on each business day. Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. Some fixed income securities are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and at its discretion may override a price supplied by a source (by taking a price supplied by another source). Securities may be valued by independent pricing services which use prices provided by market makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. 10 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- Certain securities held by the Fund, or underlying funds in which it invests, were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in foreign currency values that are unfavorable to the Fund. The value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through forward currency contracts as of February 28, 2003. 11 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- FUTURES CONTRACTS The Fund may purchase and sell futures contracts to manage its exposure to the financial markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 28, 2003. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 28, 2003, there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the 12 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- amounts paid or offset against the proceeds on the underlying future, security or currency transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. See the Schedule of Investments for all open purchased option contracts as of February 28, 2003. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager. LOAN AGREEMENTS The Fund may invest in direct debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans from third parties. A loan is often administered by a bank or other financial institution (the "lender") that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the loan agreement and only upon receipt by the lender of payments from the borrower. The Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, the Fund may be subject to the credit risk of both the borrower and the lender that is selling the loan agreement. When the Fund purchases assignments from lenders it acquires direct rights against the borrower on the loan. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the financial markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate, total return, forward swap spread lock and credit default swap agreements to manage its exposure to interest rates and credit risk. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Total return swap agreements involve 13 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- commitments to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. Forward swap spread lock swap agreements involve commitments to pay or receive a settlement amount calculated as the difference between the swap spread and a fixed spread, multiplied by the notional amount times the duration of the swap rate. The swap spread is the difference between the benchmark swap rate (market rate) and the specific treasury rate. In a credit default swap, one party makes a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party on its obligation. The Fund may use credit default swaps to provide a measure of protection against defaults of sovereign or corporate issuers (i.e., to reduce risk where the Fund owns or has exposure to the issuer) or to take an active long or short position with respect to the likelihood of a particular issuer's default. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements are included as part of interest income. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market, and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in interest rates. See Note 6 for a summary of open swap agreements as of February 28, 2003. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. 14 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. REVERSE REPURCHASE AGREEMENTS The Fund may enter into reverse repurchase agreements with certain banks and broker/dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. Government securities or other liquid high grade debt obligations in the name of the counterparty equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities the Fund has sold may decline below the price at which it is obligated to repurchase them under the agreement. For the year ended February 28, 2003, the Fund had not entered into any reverse repurchase agreements. DELAYED DELIVERY COMMITMENTS The Fund may purchase or sell securities on a when-issued or forward commitment basis. Payment and delivery may take place a month or more after the date of the transaction. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. Collateral consisting of liquid securities or cash and cash equivalents is maintained in an amount at least equal to these commitments with the custodian. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 2003, the Fund had no securities on loan. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country's tax treaty with the United States. 15 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003, the tax basis of distributions paid was as follows: ordinary income -- $17,928,096 and $28,462,809, respectively and long-term capital gains -- $0 and $722,855, respectively. As of February 28, 2003, the components of distributable earnings on a tax basis consisted of $6,190,213 and $1,184,470 of undistributed ordinary income and undistributed long-term gains, respectively. The temporary differences between book and tax bais distributable earnings are primarily due to foreign currency transactions, losses on wash sales transactions and differing treatments for amortization of premiums and discounts on debt securities. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to foreign currency transactions and the GMO Alpha LIBOR Fund transaction (See Note 1). The financial highlights exclude these adjustments.
Distributions In Excess of Net Accumulated Net Investment Income Realized Gain Paid-in Capital ----------------- ---------------- --------------- $6,080,509 $17,860,497 $(23,941,006)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premium and discount. Dividend income is recorded on the ex-dividend date. Non cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Interest income on U.S. Treasury inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in principal or face amount of these securities is recorded as interest income. 16 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .25% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. The Fund may invest in Class III shares of GMO Emerging Country Debt Fund ("ECDF"). Like the management fee (as described below), the Fund's shareholder service fee will be waived (but not below zero) to the extent of the indirect shareholder service fees paid in connection with the Fund's investment in ECDF. The Fund does not incur any indirect shareholder service fees as a result of the Fund's investment in Alpha LIBOR Fund and SCDF. For the year ended February 28, 2003, shareholder service fees incurred indirectly by the Fund were 0.005% of the Fund's average daily net assets. GMO has entered into a binding agreement effective until at least June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent Trustees of the Trust (including legal fees), 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 ("fund expenses")) and the amount of fees and operating expenses (excluding shareholder service fees (ECDF only) and fund expenses, as defined above) incurred indirectly by the Fund through its investment in the underlying funds (including GMO Alpha LIBOR Fund, GMO Short-Duration Collateral Fund, and ECDF) exceed the management fee. 17 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- For the year ended February 28, 2003, indirect operating expenses (excluding shareholder service fees (GMO ECDF only) and investment-related expenses) and indirect investment-related expenses (including, but not limited to, interest expense, foreign audit expense, and investment-related legal expense) incurred by the Fund through its investment in underlying funds were 0.019% and 0.024% of the Fund's average daily net assets, respectively. As of February 28, 2003, a significant portion of the Fund's shares were held by accounts for which the Manager has investment discretion. The Fund's portion of the fee paid by the Trust to the independent Trustees during the year ended February 28, 2003 was $6,796. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES For the year ended February 28, 2003, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases Sales ------------ ------------ U.S. Government securities $299,830,469 $311,347,461 Investments (non-U.S. Government securities) 55,821,116 106,157,927
For the year ended February 28, 2003, the cost of purchases and proceeds from sale of investments excluded $154,957,650 and $149,757,650, respectively, from the initial transfer of GMO Alpha LIBOR Fund's investments in GMO Short-Duration Collateral Fund. At February 28, 2003, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $339,043,245 $5,045,136 $(29,906,091) $(24,050,955)
4. PRINCIPAL SHAREHOLDERS At February 28, 2003, 85.2% of the outstanding shares of the Fund were held by three shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. 18 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 ------------------------- ------------------------ Shares Amount Shares Amount Class III: ---------- ------------- ---------- ------------ Shares sold 2,799,171 $ 29,003,553 19,956,747 $216,580,773 Shares issued to shareholders in reinvestment of distributions 2,938,072 28,757,501 1,654,864 16,728,562 Shares repurchased (9,732,495) (101,580,865) (4,254,015) (44,242,233) ---------- ------------- ---------- ------------ Net increase (decrease) (3,995,252) $ (43,819,811) 17,357,596 $189,067,102 ========== ============= ========== ============
6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 28, 2003 is as follows: FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Units Appreciation Date Deliver/Receive of Currency Value (Depreciation) ---------- ---------------- -------------- ----------- -------------- Buys 3/25/03 AUD 57,700,000 $34,948,554 $ 926,514 4/01/03 CAD 47,000,000 31,508,508 778,919 3/04/03 CHF 90,700,000 66,887,906 1,161,203 4/29/03 CHF 55,600,000 41,050,592 47,642 4/15/03 GBP 1,900,000 2,984,569 (72,531) 3/18/03 JPY 2,790,000,000 23,611,156 (73,024) ----------- $ 2,768,723 ===========
19 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- FORWARD CURRENCY CONTRACTS -- CONTINUED
Net Unrealized Settlement Units Appreciation Date Deliver/Receive of Currency Value (Depreciation) ---------- ---------------- -------------- ----------- -------------- Sales 3/25/03 AUD 38,100,000 $23,076,948 $ (717,734) 4/01/03 CAD 33,300,000 22,324,113 (477,313) 3/04/03 CHF 90,700,000 66,887,906 (607,571) 4/22/03 EUR 7,800,000 8,392,491 19,029 4/15/03 GBP 7,400,000 11,624,111 216,548 3/18/03 JPY 4,180,000,000 35,374,419 (44,580) ----------- $(1,611,621) ===========
FORWARD CROSS CURRENCY CONTRACTS Settlement Deliver/Units of Receive/In Net Unrealized Date Currency Exchange For Appreciation ---------- ----------------- ---------------- -------------- 3/11/03 CHF 50,471,150 EUR 34,700,000 164,202 4/08/03 EUR 49,700,000 SEK 457,180,360 104,856 ----------- $ 269,058 ===========
FUTURES CONTRACTS
Net Unrealized Number of Contract Appreciation Contracts Type Expiration Date Value (Depreciation) --------- ------------------------------------- --------------- ------------ -------------- Buys 117 Canadian Government Bond 10 Yr. June 2003 $ 8,382,723 $ 11,704 29 Euro BOBL March 2003 3,546,328 89,161 25 Euro BOBL June 2003 3,032,121 (432) 16 Euro Bund March 2003 2,011,951 46,683 79 Euro Bund June 2003 9,859,079 (143) 205 U.S. Long Bond June 2003 23,466,094 346,595 259 U.S. Treasury Note 10 Yr. June 2003 29,882,125 150,636 ----------- $ 644,204 ===========
20 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- FUTURES CONTRACTS -- CONTINUED
Net Unrealized Number of Contract Appreciation Contracts Type Expiration Date Value (Depreciation) --------- ------------------------------------- --------------- ------------ -------------- Sales 38 Australian Government Bond 10 Yr. March 2003 $ 2,472,846 $ (64,614) 79 Australian Government Bond 3 Yr. March 2003 4,999,707 (61,456) 6 Japanese Government Bond 10 Yr. March 2003 7,267,498 (76,262) 18 Japanese Government Bond 10 Yr. June 2003 21,708,099 (25,530) 113 Swiss Government Bond March 2003 10,964,167 (371,869) 2 U.K. Gilt June 2003 382,749 522 143 U.S. Treasury Note 5 Yr. June 2003 16,259,547 (54,447) ----------- $ (653,656) ===========
At February 28, 2003, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. WRITTEN OPTION TRANSACTIONS
Puts Calls ---------------------------- -------------------------------- Principal Amount Principal Amount of Contracts of Contracts (000's omitted) Premiums (000's omitted) Premiums ---------------- ---------- ---------------- -------------- Outstanding, beginning of period -- $ -- -- $ -- Options written -- -- 153,700 6,804,329 Options closed -- -- -- -- Options exercised -- -- (143,100) (6,707,775) Options expired -- -- (10,600) (96,554) Options sold -- -- -- -- --------- ---------- ------------ ----------- Outstanding, end of period -- $ -- -- $ -- ========= ========== ============ ===========
21 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) --------------- ---------- -------------------------------------------------- -------------- CREDIT DEFAULT SWAPS 126,425,696 EUR 3/31/03 Agreement with Morgan Guaranty Trust Company dated $ 58,698 10/31/01 to pay .07% per year times the notional amount. The Fund receives payment only upon a default event in Belgium, the notional amount times the difference between the par value and the then-market value of Kingdom of Belgium, 5.75% due 3/28/08. 76,846,993 EUR 3/31/03 Agreement with Morgan Guaranty Trust Company dated (19,069) 5/4/01 to pay .07% per year times the notional amount. The Fund receives payment only upon a default event in Belgium, the notional amount times the difference between the par value and the then-market value of Kingdom of Belgium, 5.75% due 3/28/08. 5,000,000 USD 4/2/07 Agreement with Lehman Brothers Special Financing (17,412) Inc. dated 3/27/02 to receive .52% per year times the notional amount. The Fund makes payment of the notional amount times the difference between the par value and the then-market value upon a default event of General Electric Capital Corporation, 5.875% due 2/15/12.
22 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) --------------- ---------- -------------------------------------------------- -------------- 3,000,000 USD 4/17/07 Agreement with UBS Warburg dated 4/12/02 to $ (18,576) receive .8% per year times the notional amount. The Fund makes payment of the notional amount times the difference between the par value and the then-market value upon a default event of Equity Office Properties Trust, 6.75% due 2/15/12. 3,000,000 USD 4/17/07 Agreement with UBS Warburg dated 4/12/02 to (6,548) receive .47% per year times the notional amount. The Fund makes payment of the notional amount times the difference between the par value and the then-market value upon a default event of Goldman Sachs Group, Inc., 6.6% due 1/15/12. 3,000,000 USD 4/17/07 Agreement with Bear Stearns dated 4/12/02 to 65,989 receive 1.28% per year times the notional amount. The Fund makes payment of the notional amount times the difference between the par value and the then-market value upon a default event of National Rural Utilities Cooperative Finance Corp., 7.25% due 3/1/12. 10,000,000 USD 12/20/07 Agreement with Citibank N.A. dated 12/13/02 to 92,755 receive 2.41% per year times the notional amount. The Fund makes payment of the notional amount times the difference between the par value and the then-market value upon a default event and the then-market value of AOL Time Warner Inc., 6.75% due 4/15/11.
23 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) --------------- ---------- -------------------------------------------------- -------------- INTEREST RATE SWAPS 10,000,000 SEK 9/25/07 Agreement with Citibank N.A. dated 9/24/02 to $ 31,207 receive the notional amount multiplied by 4.79% and to pay the notional amount multiplied by the 3 month Floating Rate Swedish STIBOR adjusted by a specific spread. 7,378,267 USD 2/15/10 Agreement with JPMorgan Chase Bank dated 9/3/02 to (366,094) pay $10,100,000 at expiration date and to receive at expiration date $7,325,000 plus interest based upon the 3 month Floating Rate LIBOR (compounded quarterly) adjusted by a specific spread. 6,607,704 USD 2/15/12 Agreement with JPMorgan Chase Bank dated 9/3/02 to (328,121) pay $10,100,000 at expiration date and to receive at expiration date $6,560,000 plus interest based upon the 3 month Floating Rate LIBOR (compounded quarterly) adjusted by a specific spread. 6,419,831 USD 8/15/12 Agreement with JPMorgan Chase Bank dated 9/4/02 to (318,828) pay $10,100,000 at expiration date and to receive at expiration date $6,374,000 plus interest based upon the 3 month Floating Rate LIBOR (compounded quarterly) adjusted by a specific spread. 19,500,000 SEK 9/25/12 Agreement with Citibank NA dated 9/24/02 to 64,291 receive the notional amount multiplied by 5.08% and to pay the notional amount multiplied by the 3 month Floating Rate Swedish STIBOR adjusted by a specific spread.
24 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) --------------- ---------- -------------------------------------------------- -------------- 3,148,338 USD 4/15/24 Agreement with JPMorgan Chase Bank dated 9/17/02 $(124,820) to pay $10,000,000 at expiration date and to receive at expiration date $3,130,000 plus interest based upon the 3 month Floating Rate LIBOR (compounded quarterly) adjusted by a specific spread. 4,534,087 USD 8/31/25 Agreement with JPMorgan Chase Bank dated 9/5/02 to (215,579) pay $15,680,000 at expiration date and to receive at expiration date $4,516,000 plus interest based upon the 3 month Floating Rate LIBOR (compounded quarterly) adjusted by a specific spread. TOTAL RETURN SWAPS 30,000,000 USD 5/30/03 Agreement with Lehman Brothers Special Financing 551,761 Inc. dated 11/26/02 to receive (pay) the notional amount multiplied by the change in market value (including accrued interest) of the Lehman Brothers US Credit Index and to pay initial market value multiplied by the 1 month LIBOR adjusted by a specified spread. 28,000,000 USD 8/1/03 Agreement with UBS AG dated 6/28/02 to receive 149,579 (pay) the notional amount multiplied by the return on the Lehman MBS Fixed Rate Index and to pay the notional amount multiplied by the 1 month LIBOR adjusted by a specific spread.
25 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) --------------- ---------- -------------------------------------------------- -------------- 28,000,000 USD 9/1/03 Agreement with Lehman Brothers Special Financing $ 148,949 Inc. dated 7/10/02 to receive (pay) the notional amount multiplied by the change in market value (including accrued interest) of the Lehman Brothers MBS Fixed Rate Index and to pay initial market value multiplied by the 1 month LIBOR adjusted by a specified spread. 31,000,000 USD 11/30/03 Agreement with JPMorgan Chase Bank dated 11/22/02 469,491 to receive (pay) the notional amount multiplied by the change in market value (including accrued interest) of the Lehman Brothers U.S. Government Bond Index and to pay initial market value multiplied by 1 month LIBOR adjusted by a specified spread. 32,000,000 USD 12/1/03 Agreement with UBS AG dated 11/22/02 to receive 170,047 (pay) the notional amount multiplied by the change in market value (including accrued interest) of the Lehman MBS Fixed Rate Index and to pay initial market value multiplied by the 1 month LIBOR adjusted by a specified spread. --------- $ 387,720 =========
See Notes to the Schedule of Investments for definitions of currency abbreviations. 26 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO CORE PLUS BOND FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Core Plus Bond Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 27 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- For the fiscal year ended February 28, 2003, all of the Fund's distributions are from investment company taxable income, except that the Fund has designated 2.48% of the distributions as net capital gain dividends. 28 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 29 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the from February Boston, MA 02110 Trust 2002 - October Age: 64 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 30 PRINCIPAL OFFICERS:
Term of Office(4) Principal Occupation(s) Name, Address, Position(s) and Length of During Past and Age Held with Fund Time Served Five Years ------------------------- ------------------------------ ------------------------------ ------------------------------ Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief 40 Rowes Wharf Vice President from August Operating Officer (2000 - Boston, MA 02110 1998 - October 2002. present) and Member, Grantham, Age: 47 Mayo, Van Otterloo & Co. LLC. Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC. 40 Rowes Wharf February 1998. Boston, MA 02110 Age: 45 Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator, c/o GMO Trust Trust Grantham, Mayo, Van 40 Rowes Wharf Otterloo & Co. LLC. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer 40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003) Boston, MA 02110 and Member, Grantham, Mayo, Age: 37 Van Otterloo & Co. LLC. Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel, c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van 40 Rowes Wharf 2001. Otterloo & Co. LLC (June Boston, MA 02110 1999 - present); Associate/ Age: 58 Junior Partner, Hale and Dorr LLP (1991 - 1999). Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering c/o GMO Trust Laundering Compliance Officer Reporting Officer (February 40 Rowes Wharf 2003 - present) and Compliance Boston, MA 02110 Officer, Grantham, Mayo, Van Age: 32 Otterloo & Co. LLC.
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 31 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGEMENT Day-to-day management of the Fund's portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of GMO Currency Hedged International Bond Fund returned +4.8% for the fiscal year ended February 28, 2003, compared to +8.4% for the J.P. Morgan Non-U.S. Government Bond Index (Hedged), the Fund's benchmark. The Fund's exposure to various issues is achieved directly and indirectly through its investment in GMO Emerging Country Debt Fund, GMO Alpha LIBOR Fund (ALF) and GMO Short-Duration Collateral Fund. Bond market, emerging debt, and currency selection added value during the fiscal year, while issue selection underperformed. Issue selection dramatically hurt performance in late 2002. Value was lost due to credit-related spread widening in the assets underlying the Fund's investment in ALF and the default of certain healthcare receivable asset-backed bonds held by ALF which were allegedly involved in a massive fraud. National Century Financial Enterprises, the sponsor of $3.35 billion of health care asset-backed receivables allegedly violated the terms of the bonds' indentures by, among other things, spending cash collateral, accepting collateral other than permitted receivables, moving receivables between trusts to meet compliance tests, and reimbursing healthcare providers for more than the value of receivables purchased. National Century, its affiliated operations, the trusts, and many healthcare providers have declared bankruptcy. This event had a negative effect on the net asset value of ALF, and an indirect effect on GMO Currency Hedged International Bond Fund of -6.1% (through February 28, 2003). OUTLOOK The Fund is currently structured to benefit from outperformance in the Euro-member country, Swedish, U.S., and emerging bond markets. We expect the Australian, Danish, Japanese, Swiss, and British bond markets to underperform. Strong relative performance is expected from Canadian dollars, Euros, Swiss francs, Swedish krona, and British gilt markets. Japanese yen and U.S. dollars are expected to underperform. At the end of the period, 2.3% of the Fund was invested in emerging country debt. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO CURRENCY HEDGED INTERNATIONAL BOND FUND CLASS III SHARES AND THE J.P. MORGAN NON-U.S. GOVERNMENT BOND INDEX (HEDGED) AS OF FEBRUARY 28, 2003 GMO Currency Hedged J.P. Morgan Non-U.S. Gov't. International Bond Fund Bond Index (Hedged) 9/30/94 $10,000 $10,000 12/31/94 $9,976 $10,162 3/31/95 $10,281 $10,626 6/30/95 $11,154 $11,128 9/30/95 $11,951 $11,548 12/31/95 $12,748 $12,046 3/31/96 $13,044 $12,150 6/30/96 $13,955 $12,482 9/30/96 $14,842 $13,015 12/31/96 $15,790 $13,516 3/31/97 $16,043 $13,696 6/30/97 $16,724 $14,152 9/30/97 $17,808 $14,653 12/31/97 $18,278 $15,047 3/31/98 $18,923 $15,518 6/30/98 $19,080 $15,873 9/30/98 $19,313 $16,723 12/31/98 $19,315 $16,874 3/31/99 $19,517 $17,170 6/30/99 $19,425 $17,046 9/30/99 $19,357 $17,093 12/31/99 $19,828 $17,283 3/31/2000 $20,429 $17,659 6/30/2000 $20,740 $17,974 9/30/2000 $21,224 $18,242 12/31/2000 $22,311 $18,918 3/31/2001 $23,041 $19,452 6/30/2001 $22,971 $19,523 9/30/2001 $23,437 $19,949 12/31/2001 $23,728 $20,058 3/31/2002 $23,701 $20,000 6/30/2002 $24,667 $20,448 9/30/2002 $25,347 $21,132 12/31/2002 $24,441 $21,465 2/28/2003 $25,064 $21,784
AVERAGE ANNUAL TOTAL RETURN Since 1 Year 5 Year Inception 9/30/94 Class III 4.81% 6.18% 11.54%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE/ SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 6.3% UNITED STATES -- 6.3% U.S. GOVERNMENT -- 6.3% USD 1,103,140 U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09(a) 1,269,990 ---------- TOTAL DEBT OBLIGATIONS (COST $1,095,898) 1,269,990 ---------- MUTUAL FUNDS -- 90.6% 47,769 GMO Emerging Country Debt Fund, Class III 454,761 90,853 GMO Alpha LIBOR Fund 2,155,037 628,054 GMO Short-Duration Collateral Fund 15,707,624 ---------- TOTAL MUTUAL FUNDS (COST $18,452,571) 18,317,422 ---------- PRINCIPAL AMOUNT ---------- CALL OPTIONS PURCHASED -- 0.3% CROSS CURRENCY OPTIONS -- 0.3% GBP 800,000 GBP Call/JPY Put, Expires 01/23/04, Strike 184.00 33,320 GBP 700,000 GBP Call/JPY Put, Expires 04/14/03, Strike 181.00 29,466 USD 400,000 JPY Call/USD Put, Expires 07/03/03, Strike 117.30 9,630 ---------- 72,416 ---------- TOTAL CALL OPTIONS PURCHASED (COST $100,380) 72,416 ----------
See accompanying notes to the financial statements. 1 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PRINCIPAL AMOUNT DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- PUT OPTIONS PURCHASED -- 0.0% CROSS CURRENCY OPTIONS -- 0.0% GBP 900,000 GBP Put/USD Call, Expires 06/05/03, Strike 1.428 283 ---------- TOTAL PUT OPTIONS PURCHASED (COST $36,779) 283 ---------- TOTAL INVESTMENTS -- 97.2% (Cost $19,685,628) 19,660,111 Other Assets and Liabilities (net) -- 2.8% 558,892 ---------- TOTAL NET ASSETS -- 100.0% $20,219,003 ==========
NOTES TO SCHEDULE OF INVESTMENTS: CURRENCY ABBREVIATIONS:
AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc EUR - Euro GBP - British Pound JPY - Japanese Yen SEK - Swedish Krona USD - United States Dollar
(a) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 6). 2 See accompanying notes to the financial statements. GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $19,685,628) (Note 1) $19,660,111 Cash 409,366 Interest receivable 8,789 Receivable for open forward foreign currency contracts (Notes 1 and 6) 228,327 Receivable for variation margin on open futures contracts (Notes 1 and 6) 53,532 Net receivable for open swap contracts (Notes 1 and 6) 15,994 Receivable for expenses reimbursed by Manager (Note 2) 5,259 Miscellaneous receivable 4,028 ----------- Total assets 20,385,406 ----------- LIABILITIES: Payable to affiliate for (Note 2): Management fee 3,731 Shareholder service fee 2,239 Payable for open forward foreign currency contracts (Notes 1 and 6) 120,121 Accrued expenses 40,312 ----------- Total liabilities 166,403 ----------- NET ASSETS $20,219,003 =========== NET ASSETS CONSIST OF: Paid-in capital $22,701,341 Accumulated undistributed net investment income 1,074,093 Accumulated net realized loss (3,670,484) Net unrealized appreciation 114,053 ----------- $20,219,003 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $20,219,003 =========== SHARES OUTSTANDING: Class III 2,284,806 =========== NET ASSET VALUE PER SHARE: Class III $ 8.85 ===========
See accompanying notes to the financial statements. 3 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from investment company shares $ 120,241 Interest 85,808 ---------- Total income 206,049 ---------- EXPENSES: Management fee (Note 2) 36,221 Audit fees 45,516 Custodian and transfer agent fees 21,762 Registration fees 3,867 Trustees fees and related expenses (Note 2) 1,735 Legal fees 544 Fees reimbursed by Manager (Note 2) (71,048) ---------- 38,597 Indirectly incurred fees waived or borne by Manager (Note 2) (1,959) ---------- 36,638 ---------- Shareholder service fee (Note 2) - Class III 21,733 Shareholder service fee waived (Note 2) - Class III (712) ---------- 21,021 ---------- Net expenses 57,659 ---------- Net investment income 148,390 ---------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (1,021,075) Realized gains distributions from investment company shares 40,445 Closed futures contracts 384,553 Closed swap contracts 289,026 Written options 3,644 Foreign currency, forward contracts and foreign currency related transactions 402,470 ---------- Net realized gain 99,063 ---------- Change in net unrealized appreciation (depreciation) on: Investments 298,502 Open futures contracts 122,845 Open swap contracts 40,355 Foreign currency, forward contracts and foreign currency related transactions 67,041 ---------- Net unrealized gain 528,743 ---------- Net realized and unrealized gain 627,806 ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 776,196 ==========
4 See accompanying notes to the financial statements. GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 148,390 $ 914,257 Net realized gain 99,063 1,488,746 Change in net unrealized appreciation (depreciation) 528,743 (1,686,749) ----------- ----------- Net increase in net assets from operations 776,196 716,254 ----------- ----------- Distributions to shareholders from: Net investment income Class III (1,285,568) (1,723,251) ----------- ----------- Total distributions from net investment income (1,285,568) (1,723,251) ----------- ----------- Net share transactions: (Note 5) Class III 2,795,937 837,205 ----------- ----------- Increase in net assets resulting from net share transactions 2,795,937 837,205 ----------- ----------- Total increase (decrease) in net assets 2,286,565 (169,792) NET ASSETS: Beginning of period 17,932,438 18,102,230 ----------- ----------- End of period (including accumulated undistributed net investment income of $1,074,093 and $1,244,414, respectively) $20,219,003 $17,932,438 =========== ===========
See accompanying notes to the financial statements. 5 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ---------------------------------------------- 2003 2002 2001(C) 2000 1999 ------- ------- -------- -------- -------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.04 $ 9.72 $ 9.70 $ 10.47 $ 10.66 ------- ------- ------- -------- -------- Income from investment operations: Net investment income(a) 0.09+ 0.50+ 0.59+ 0.65+ 0.74 Net realized and unrealized gain (loss) 0.32 (0.13) 0.71 (0.17) (0.39) ------- ------- ------- -------- -------- Total from investment operations 0.41 0.37 1.30 0.48 0.35 ------- ------- ------- -------- -------- Less distributions to shareholders: From net investment income (0.60) (1.05) (1.18) (1.11) (0.16) From net realized gains -- -- (0.10) (0.14) (0.38) ------- ------- ------- -------- -------- Total distributions (0.60) (1.05) (1.28) (1.25) (0.54) ------- ------- ------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 8.85 $ 9.04 $ 9.72 $ 9.70 $ 10.47 ======= ======= ======= ======== ======== TOTAL RETURN(b) 4.81% 4.21% 14.06% 4.95% 3.20% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $20,219 $17,932 $18,102 $283,340 $323,711 Net expenses to average daily net assets 0.40%(d) 0.38%(d) 0.40%(d) 0.40% 0.40% Net investment income to average daily net assets(a) 1.02% 5.45% 5.96% 6.51% 6.30% Portfolio turnover rate 66% 44% 120% 65% 116% Fees and expenses reimbursed by the Manager to average daily net assets: 0.51% 0.54% 0.07% 0.08% 0.33%
(a) Net investment income for the years ended February 28, 2003, 2002 and 2001 and February 29, 2000 is affected by the timing of the declaration of dividends by other Funds of the Trust in which the Fund invests. (b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (c) Effective March 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium and discount on debt securities. The effect of this change for the year ended February 28, 2001 was to decrease net investment income per share by $0.01, increase net realized and unrealized gains and losses per share by $0.01 and decrease the ratio of net investment income to average net assets from 6.05% to 5.96%. Per share and ratio/supplemental data for periods prior to March 1, 2000 have not been restated to reflect this change. (d) Net expenses exclude expenses incurred indirectly through investment in underlying Funds. (See Note 2) + Computed using average shares outstanding throughout the period. 6 See accompanying notes to the financial statements. GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Currency Hedged International Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through direct and indirect investment in foreign bond and currency markets. The Fund's benchmark is the J.P. Morgan Non-U.S. Government Bond Index (Hedged). At February 28, 2003, 10.7% of the Fund was invested in GMO Alpha LIBOR Fund and 77.7% of the Fund was invested in GMO Short-Duration Collateral Fund, separate funds of GMO Trust managed by GMO. Shares of GMO Alpha LIBOR Fund and GMO Short-Duration Collateral Fund are not publicly available for direct purchase. At February 28, 2003, 2.2% of the net assets of the Fund was invested in GMO Emerging Country Debt Fund, a separate fund of GMO Trust managed by GMO. The financial statements of GMO Alpha LIBOR Fund, GMO Short-Duration Collateral Fund and GMO Emerging Country Debt Fund should be read in conjunction with the Fund's financial statements. The Fund invested a substantial portion of its assets in GMO Alpha LIBOR Fund ("Alpha LIBOR Fund") to obtain the Fund's core portfolio exposure. In November 2002, certain bonds held by Alpha LIBOR Fund ("NPF bonds") defaulted amid allegations of fraud and significant violations of the bonds' indentures. Currently, no market exists for the NPF bonds, and they are being valued at fair value by the trustees of GMO Trust or persons acting at their direction. The devaluation of the NPF bonds had a negative impact on the Fund's net asset value per share. In late November 2002, Alpha LIBOR Fund undertook a reorganization transaction with a new series of GMO Trust, GMO Short-Duration Collateral Fund ("SDCF") and approximately 78% of the Fund's interest in Alpha LIBOR Fund was transferred to SDCF in exchange for SDCF shares. The reorganization was treated as a sale of the Alpha LIBOR Fund shares for financial reporting purposes and a distribution by Alpha LIBOR Fund for tax purposes. Accordingly, for financial reporting purposes, the Fund recognized a loss on the sale of the Alpha LIBOR shares of approximately $781,738. In addition, the Fund recognized for tax, but not for financial reporting purposes, ordinary income of $314,232 and long-term capital gains of $56,046 from Alpha LIBOR Fund. $1,152,016 was added to the tax cost basis of the Fund's holdings of Alpha LIBOR Fund. 7 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Shares of other Funds of the Trust are valued at their net asset value as reported on each business day. Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. Some fixed income securities are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and at its discretion may override a price supplied by a source (by taking a price supplied by another source). Securities may be valued by independent pricing services which use prices provided by market makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. Certain securities held by the underlying funds in which the Fund invests, were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. 8 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in foreign currency values that are unfavorable to the Fund. The value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through forward currency contracts as of February 28, 2003. FUTURES CONTRACTS The Fund may purchase and sell futures contracts to manage its exposure to the financial markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. In 9 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 28, 2003. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 28, 2003, there were no open written option contracts. (See Note 6) The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future, security or currency transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. See Schedule of Investments for all open purchased option contracts as of February 28, 2003. 10 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager. LOAN AGREEMENTS The Fund may invest in direct debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans from third parties. A loan is often administered by a bank or other financial institution (the "lender") that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the loan agreement and only upon receipt by the lender of payments from the borrower. The Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, the Fund may be subject to the credit risk of both the borrower and the lender that is selling the loan agreement. When the Fund purchases assignments from lenders it acquires direct rights against the borrower on the loan. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the financial markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate, total return, forward swap spread lock and credit default swap agreements to manage its exposure to interest rates and credit risk. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Total return swap agreements involve commitments to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. Forward swap spread lock swap agreements involve commitments to pay or receive a settlement amount calculated as the difference between the swap 11 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- spread and a fixed spread, multiplied by the notional amount times the duration of the swap rate. The swap spread is the difference between the benchmark swap rate (market rate) and the specific treasury rate. In a credit default swap, one party makes a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party on its obligation. The Fund may use credit default swaps to provide a measure of protection against defaults of sovereign or corporate issuers (i.e., to reduce risk where the Fund owns or has exposure to the issuer) or to take an active long or short position with respect to the likelihood of a particular issuer's default. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements are included as part of interest income. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market, and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in interest rates. See Note 6 for a summary of open swap agreements as of February 28, 2003. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. 12 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- REVERSE REPURCHASE AGREEMENTS The Fund may enter into reverse repurchase agreements with certain banks and broker/dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. Government securities or other liquid high grade debt obligations in the name of the counterparty equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities the Fund has sold may decline below the price at which it is obligated to repurchase them under the agreement. For the year ended February 28, 2003, the Fund had not entered into any reverse repurchase agreements. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of collateral, the risk of delay in recovery or loss of rights in the collateral should the borrower fail financially. The Fund receives compensation for lending its securities. At February 28, 2003, the Fund had no securities on loan. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country's tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003, the tax basis for distributions paid from ordinary income were $1,723,251 and $1,285,568, respectively. 13 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- As of February 28, 2003, the components of distributable earnings on a tax basis consisted of $1,182,299 of undistributed ordinary income. The temporary differences between book and tax basis distributable earnings are primarily due to foreign currency transactions. At February 28, 2003, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code, of $6,885,002 expiring in 2009. However, restrictions on annual utilization of this carryforward under the Code resulting from significant shareholder activity are expected to limit maximum utilization to offset future capital gains prior to expiration to approximately $3,649,323. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to foreign currency transactions, limitations of capital loss carryovers and the GMO Alpha LIBOR Fund transaction (See Note 1). The financial highlights exclude these adjustments.
Accumulated Undistributed Net Accumulated Net Investment Income Realized Loss Paid-in Capital ----------------- --------------- --------------- $966,857 $3,413,749 $(4,380,606)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Interest income is recorded on the accrual basis, and is adjusted for the amortization of premium and discounts. Dividend income is recorded on the ex-dividend date. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Interest income on inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities is recorded as interest income. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. 14 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .25% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. The Fund may invest in Class III shares of GMO Emerging Country Debt Fund ("ECDF"). Like the management fee (as described below), the Fund's shareholder service fee will be waived (but not below zero) to the extent of the indirect shareholder service fees paid in connection with the Fund's investment in ECDF. The Fund does not incur any indirect shareholder service fees as a result of the Fund's investment in Alpha LIBOR Fund or SDCF. For the year ended February 28, 2003, shareholder service fees incurred indirectly by the Fund were 0.005% of the Fund's average daily net assets. GMO has entered into a binding agreement effective until at least June 30, 2003, to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, and the following expenses: fees and expenses of the independent Trustees of the Trust (including legal fees), 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 (collectively, "fund expenses")) and the amount of fees and operating expenses (excluding shareholder service fees and fund expenses, as defined above) incurred indirectly by the Fund through its investment in the underlying funds exceed the management fee. For the year ended February 28, 2003, indirect operating expenses (excluding shareholder service fees and investment-related expenses) and indirect investment-related expenses (including, but not limited to interest expense, foreign audit expense, and investment-related legal expense) incurred by 15 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- the Fund through its investment in underlying funds (including GMO Alpha LIBOR Fund, GMO Short-Duration Collateral Fund and ECDF) were 0.018% and 0.027% of the Fund's average daily net assets, respectively. As of February 28, 2003, substantially all of the Fund's shares were held by accounts for which the Manager has investment discretion. The Fund's portion of the fee paid by the Trust to the independent Trustees during year ended February 28, 2003 was $1,657. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2003, aggregated $11,867,090 and $9,373,965, respectively. For the year ended February 28 , 2003, the cost of purchases and proceeds from sales of investments excluded $7,491,600 and $7,091,600, respectively, from the initial transfer of GMO Alpha LIBOR Fund's investments in GMO Short-Duration Collateral Fund. (See Note 1) At February 28, 2003, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $20,851,733 $204,189 $(1,395,811) $(1,191,622)
4. PRINCIPAL SHAREHOLDERS At February 28, 2003, 92.4% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's shares outstanding. One of the shareholders is another fund of GMO Trust. Investment activities of these shareholders may have a material effect on the Fund. 16 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 ------------------------ --------------------- Shares Amount Shares Amount Class III: ---------- ------------ -------- ----------- Shares sold 1,433,219 $ 12,587,730 562,588 $ 4,992,607 Shares issued to shareholders in reinvestment of distributions 143,796 1,219,389 194,941 1,694,032 Shares repurchased (1,275,960) (11,011,182) (636,716) (5,849,434) ---------- ------------ -------- ----------- Net increase 301,055 $ 2,795,937 120,813 $ 837,205 ========== ============ ======== ===========
6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 28, 2003 is as follows: FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) ---------- ---------------- ----------------- ------------ -------------- Buys 3/25/03 AUD 3,200,000 $1,938,221 $ 48,537 4/01/03 CAD 2,600,000 1,743,024 40,956 3/04/03 CHF 7,300,000 5,383,481 99,386 4/29/03 CHF 4,400,000 3,248,608 3,770 4/15/03 GBP 300,000 471,248 (11,452) 3/18/03 JPY 130,000,000 1,100,161 (3,479) -------- $177,718 ========
17 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- FORWARD CURRENCY CONTRACTS -- CONTINUED
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) ---------- ---------------- ----------------- ------------ -------------- Sales 3/25/03 AUD 1,800,000 $1,090,249 $(33,647) 4/01/03 CAD 1,300,000 871,512 (20,154) 3/04/03 CHF 7,300,000 5,383,481 (36,804) 4/22/03 EUR 900,000 968,364 2,196 4/15/03 GBP 400,000 628,330 13,059 3/18/03 JPY 270,000,000 2,284,951 (14,585) -------- $(89,935) ========
FORWARD CROSS CURRENCY CONTRACTS
Settlement Deliver/Units of Receive/In Net Unrealized Date Currency Exchange For Appreciation ---------- ---------------- --------------- -------------- 3/11/03 CHF 4,072,600 EUR 2,800,000 $13,250 4/08/03 EUR 3,400,000 SEK 31,275,920 7,173 ------- $20,423 =======
See Notes for the Schedule of Investments for definitions of currency abbreviations. FUTURES CONTRACTS
Net Unrealized Number of Contract Appreciation Contracts Type Expiration Date Value (Depreciation) --------- ------------------------------------- --------------- ----------- -------------- Buys 14 Canadian Government Bond 10 Yr. June 2003 $1,003,061 $ 1,459 14 Euro BOBL March 2003 1,712,021 23,040 12 Euro BOBL June 2003 1,455,418 (192) 7 Euro Bund March 2003 880,228 10,863 37 Euro Bund June 2003 4,617,543 (178) 2 Japanese Government Bond 10 Yr. June 2003 2,412,011 2,589 2 U.S. Long Bond June 2003 228,937 3,410 5 UK Gilt Long Bond June 2003 956,873 (1,245) -------- $ 39,746 ========
18 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- FUTURES CONTRACTS -- CONTINUED
Net Unrealized Number of Contract Appreciation Contracts Type Expiration Date Value (Depreciation) --------- -------------------------------------- --------------- ----------- -------------- Sales 1 Australian Government Bond 10 Yr. March 2003 $ 65,075 $ (1,988) 3 Australian Government Bond 3 Yr. March 2003 189,862 (2,344) 5 Swiss Government Bond March 2003 485,140 (15,615) 9 U.S. Treasury Note 5 Yr. June 2003 1,023,328 (3,427) -------- $(23,374) ========
At February 28, 2003, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. WRITTEN OPTION TRANSACTIONS
Puts Calls -------------------------- ----------------------------- Principal Amount Principal Amount of Contracts of Contracts (000's omitted) Premiums (000's omitted) Premiums ---------------- -------- ---------------- ----------- Outstanding, beginning of period -- $ -- -- $ -- Options written -- -- 7,500,000 337,427 Options closed -- -- (7,100,000) (333,783) Options exercised -- -- (400,000) (3,644) ----------- ------- ------------- --------- Outstanding, end of period -- $ -- -- $ -- =========== ======= ============= =========
19 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS
Notional Expiration Net Unrealized Amount Date Description Appreciation -------------- ---------- -------------------------------------------------- -------------- INTEREST RATE SWAPS 800,000 SEK 9/25/07 Agreement with Citibank N.A. dated 9/24/02 to $ 2,287 receive the notional amount multiplied by 4.79% and to pay the notional amount multiplied by the 3 month Floating Rate Swedish STIBOR adjusted by a specific spread. 1,000,000 SEK 9/25/12 Agreement with Citibank N.A. dated 9/24/02 to 2,967 receive the notional amount multiplied by 5.08% and to pay the notional amount multiplied by the 3 month Floating Rate Swedish STIBOR adjusted by a specific spread. TOTAL RETURN SWAPS 5,000,000 USD 7/24/03 Agreement with Morgan Guaranty Trust Company dated 10,740 7/18/01 to receive (pay) the notional amount multiplied by the return on the JP Morgan Hedged Non-U.S. Traded Total Return Government Bond Index and to pay the notional amount multiplied by the 1 month LIBOR adjusted by a specified spread. ------- $15,994 =======
See Notes to the Schedule of Investments for definitions of currency abbreviations. 20 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO CURRENCY HEDGED INTERNATIONAL BOND FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Currency Hedged International Bond Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 21 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 22 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the from February Boston, MA 02110 Trust 2002 - October Age: 64 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 23 PRINCIPAL OFFICERS:
Term of Office(4) and Principal Occupation(s) Name, Address, Position(s) Length of During Past and Age Held with Fund Time Served Five Years ------------------------------------ -------------- -------------- -------------------------------------------------- Scott Eston President and President and Chief Financial Officer (1997 - present), Chief c/o GMO Trust Chief Chief Operating Officer (2000 - present) and Member, 40 Rowes Wharf Executive Executive Grantham, Mayo, Van Otterloo & Co. LLC. Boston, MA 02110 Officer of the Officer since Age: 47 Trust October 2002; Vice President from August 1998 - October 2002. Susan Randall Harbert Chief Chief Member, Grantham, Mayo, Van Otterloo & Co. LLC. c/o GMO Trust Financial Financial 40 Rowes Wharf Officer and Officer Since Boston, MA 02110 Treasurer of February 2000; Age: 45 the Trust Treasurer since February 1998. Brent Arvidson Assistant Since Senior Fund Administrator, Grantham, Mayo, Van c/o GMO Trust Treasurer of September Otterloo & Co. LLC. 40 Rowes Wharf the Trust 1998. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President Vice President General Counsel, Anti-Money Laundering Reporting c/o GMO Trust and Clerk of since February Officer (July 2002 - February 2003) and Member, 40 Rowes Wharf the Trust 1997; Clerk Grantham, Mayo, Van Otterloo & Co. LLC. Boston, MA 02110 since March Age: 37 2001; May 1999 - August 1999. Elaine M. Hartnett, Esq. Vice President Vice President Associate General Counsel, Grantham, Mayo, Van c/o GMO Trust and Secretary since August Otterloo & Co. LLC (June 1999 - present); 40 Rowes Wharf of the Trust 1999; Associate/ Junior Partner, Hale and Dorr LLP Boston, MA 02110 Secretary (1991 - 1999). Age: 58 since March 2001. Julie Perniola Vice President Since February Anti-Money Laundering Reporting Officer (February c/o GMO Trust and Anti- 2003. 2003 - present) and Compliance Officer, Grantham, 40 Rowes Wharf Money Mayo, Van Otterloo & Co. LLC. Boston, MA 02110 Laundering Age: 32 Compliance Officer
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 24 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGEMENT Day-to-day management of the Fund's portfolio is the responsibility of the International Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE Class III shares of GMO Currency Hedged International Equity Fund returned - -19.5% for the fiscal year ended February 28, 2003. This is +11.9% ahead of the MSCI EAFE Hedged Index (Hedged), which returned -31.4% over the same period. International stocks, like the U.S. market, suffered their third straight year of negative returns in 2002. World equity markets were hit by the continued global economic slowdown, which came on top of valuation levels that remained high by historical standards. With the addition of corporate governance scandals and a perilous geopolitical situation, this combined to produce the worst bear market since 1974. Currency hedging hurt returns over the fiscal year, as the long period of post 1995 dollar strength came to a close. The unhedged EAFE index returned -17.5% (outperforming the S&P 500) on the back of strengthening foreign currencies. Foreign investors have been slowing their inflows as confidence declines in the U.S. economy. In addition, the continued large U.S. trade deficit and lower U.S. interest rates undermine support for the U.S. dollar. But in local currency, or hedged terms, European markets fell even further than the U.S. Germany led the way down, with that country's DAX index falling a Nasdaq-like -44% in calendar year 2002. Europe continued to suffer from the unraveling of the "TMT" bubble in the technology, media, and telecommunications sectors. Faith has all but vanished that third generation mobile phone technology will deliver pots of gold to these sectors. The insurance sector suffered from a brutal combination of rising liabilities for natural (and unnatural) disasters with deteriorating asset values as equity holdings declined in value. There were questions about the viability of the Eurozone as a single currency region and the appropriateness of its stability pact, which limits government deficits. Adhering to this pact means, for example, that Germany has neither fiscal policy nor monetary policy (now ceded to the ECB) available to stimulate its economy. In Japan, frustration continued to mount over the lack of reform. GDP growth is stagnant and some economic indicators forecast a return to recession in 2003. The solvency of the financial sector remains a concern, and several big banks have been forced to raise additional capital at the expense of current shareholders. Prime Minister Koizumi appeared to practice business as usual with the appointment of an establishment candidate to head the central bank. And the strength of the yen against the dollar poses problems for exporters. Despite the fact that the Nikkei 225 index hit a 20 year low, Japan was the best performing major market. The MSCI Japan index fell "only" by 10%, as the bad news there was at least somewhat anticipated in the prices. Within this difficult environment, GMO's disciplined investment approach produced strong relative performance. This portfolio holds shares in the GMO International Intrinsic Value Fund (currently 60%) and GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- the GMO International Growth Fund (currently 40%). Those portfolios returned - -4.1% and -11.4%, respectively, to outperform both EAFE and their respective style benchmarks. The lower return to the GMO Currency Hedged International Equity Fund is due to the adverse effect of hedging the currency exposure back to the U.S. dollar. Within the underlying portfolios, the focus on higher quality, reasonably valued stocks helped ease the pain. GMO's stock selection process, which involves the application of quantitative techniques to forecast returns based upon an evaluation of stock valuation, dividend yield, price momentum, and other factors, performed well in the fiscal year. Sector allocation was a modest benefit to the portfolio, predominantly from an overweight position in electric utilities and an underweight in technology. Generally, the most defensive sectors performed strongest in these times of uncertainty, and utility stocks led the way. Telecommunications stocks and consumer staples also outperformed the benchmark (though all sectors fell in absolute terms). Energy stocks outperformed only slightly despite a run up in oil prices to nearly $40/barrel. The outperformance of the telecommunications sector came after two dismal years, as share prices have fallen enough that the basic revenue from the traditional business is providing some valuation support even as hopes of future growth dissipate. Technology stocks performed the worst of the major sectors. Country allocation was also a positive, as the portfolio benefited from overweights in some of the smaller markets that performed relatively well. Austria was the most notable of these, as overweighting that market, which managed positive absolute return, added close to a percentage point of relative return. Allocations to Canada and the Pacific region outside Japan were also positive as those regions enjoyed relatively strong economic growth. Currency allocation was also positive as the portfolio benefited not just in absolute terms from not holding the U.S. dollar, but also in relative terms from overweighting the euro and other continental currencies at the expense of the pound and yen. OUTLOOK The silver lining to the pain of a tough bear market is that the bad news is now out in the open. With lower stock prices, dividend yields are now meaningful and there is a lower hurdle on earnings growth required to deliver capital gains. Also, many CEOs have been replaced by a more prudent generation focused on reducing debt and other more conservative means of enhancing shareholder value. Lower valuations position international equities both to enjoy positive returns and to outperform the U.S. market. Within the portfolio, GMO is maintaining its strategic moderate value bias (60% versus 40%), down from a more aggressive allocation towards value. The recent outperformance of value stocks relative to growth has collapsed the wide valuation disparity between the two styles that existed at the peak of the bubble. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND CLASS III SHARES AND THE MSCI EAFE (HEDGED) INDEX AS OF FEBRUARY 28, 2003
GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND MSCI EAFE (HEDGED) INDEX MSCI EAFE INDEX 6/30/95 $10,000 $10,000 $10,000 9/30/95 $10,730 $11,175 $10,417 12/31/95 $11,302 $11,992 $10,839 3/31/96 $11,838 $12,716 $11,152 6/30/96 $12,303 $13,194 $11,328 9/30/96 $12,400 $13,289 $11,314 12/31/96 $13,030 $13,648 $11,494 3/31/97 $13,480 $14,309 $11,314 6/30/97 $14,616 $16,075 $12,782 9/30/97 $15,440 $16,539 $12,692 12/31/97 $14,710 $15,758 $11,699 3/31/98 $17,267 $18,411 $13,419 6/30/98 $17,173 $18,740 $13,562 9/30/98 $13,860 $15,346 $11,634 12/31/98 $15,782 $17,916 $14,038 3/31/99 $16,223 $19,287 $14,233 6/30/99 $18,192 $20,500 $14,595 9/30/99 $18,149 $20,365 $15,235 12/31/99 $19,082 $24,450 $17,823 3/31/2000 $18,718 $25,242 $17,804 6/30/2000 $19,936 $24,892 $17,099 9/30/2000 $20,108 $24,303 $15,720 12/31/2000 $20,969 $23,380 $15,298 3/31/2001 $20,531 $21,706 $13,201 6/30/2001 $21,787 $22,007 $13,063 9/30/2001 $18,675 $17,850 $11,234 12/31/2001 $19,864 $19,668 $12,018 3/31/2002 $20,993 $20,032 $12,079 6/30/2002 $19,841 $17,638 $11,823 9/30/2002 $16,739 $14,043 $9,490 12/31/2002 $17,032 $14,273 $10,102 2/28/2003 $16,212 $13,164 $9,458
AVERAGE ANNUAL TOTAL RETURN SINCE INCEPTION 1 YEAR 5 YEAR 6/30/95 Class III -19.53% 0.21% 6.51%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- MUTUAL FUNDS -- 100.1% UNITED STATES -- 100.1% 683,693 GMO International Growth Fund, Class III 11,506,555 1,082,980 GMO International Intrinsic Value Fund, Class IV 17,457,641 ------------- 28,964,196 ------------- TOTAL MUTUAL FUNDS (COST $31,607,932) 28,964,196 ------------- COMMON STOCKS -- 0.0% HONG KONG -- 0.0% 796 China Digicontent Co Ltd*(a) 1 ------------- UNITED KINGDOM -- 0.0% 19,018 British Energy Plc (Deferred Shares)*(a) -- ------------- TOTAL COMMON STOCKS (COST $19) 1 ------------- SHORT-TERM INVESTMENTS -- 5.9% CASH EQUIVALENTS -- 5.9% $ 1,700,000 Societe Generale GC Time Deposit, 1.34%, due 3/03/03 1,700,000 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $1,700,000) 1,700,000 ------------- TOTAL INVESTMENTS -- 106.0% (Cost $33,307,951) 30,664,197 Other Assets and Liabilities (net) -- (6.0%) (1,741,432) ------------- TOTAL NET ASSETS -- 100.0% $ 28,922,765 ============= NOTES TO SCHEDULE OF INVESTMENTS:
* Non-income producing security. (a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). See accompanying notes to the financial statements. 1 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $33,307,951) (Note 1) $30,664,197 Cash 71,108 Foreign currency, at value (cost $12,462) (Note 1) 13,413 Receivable for Fund shares sold 190,000 Interest receivable 64 Foreign taxes receivable 13,102 Receivable for open forward foreign currency contracts (Notes 1 and 6) 22,066,884 Receivable for expenses reimbursed by Manager (Note 2) 28,702 ----------- Total assets 53,047,470 ----------- LIABILITIES: Payable for Fund shares repurchased 971,483 Payable to affiliate for (Note 2): Management fee 11,752 Shareholder service fee 3,265 Payable for open forward foreign currency contracts (Notes 1 and 6) 23,088,653 Accrued expenses 49,552 ----------- Total liabilities 24,124,705 ----------- NET ASSETS $28,922,765 =========== NET ASSETS CONSIST OF: Paid-in capital $37,506,744 Accumulated undistributed net investment income 272,397 Accumulated net realized loss (5,197,885) Net unrealized depreciation (3,658,491) ----------- $28,922,765 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $28,922,765 =========== SHARES OUTSTANDING: Class III 5,218,365 =========== NET ASSET VALUE PER SHARE: Class III $ 5.54 ===========
2 See accompanying notes to the financial statements. GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $1,212) $ 71,543 Interest 19,257 Dividends from investment company shares 638,779 ----------- Total income 729,579 ----------- EXPENSES: Management fee (Note 2) 116,529 Custodian fees 67,338 Audit fees 46,498 Transfer agent fees 25,567 Registration fees 3,956 Trustees fees and related expenses (Note 2) 1,292 Legal fees 826 Miscellaneous 2,567 Fees reimbursed by Manager (Note 2) (146,632) ----------- 117,941 Indirectly incurred fees waived or borne by Manager (Note 2) (115,200) ----------- 2,741 ----------- Shareholder service fee (Note 2) - Class III 32,369 Shareholder service fee waived (Note 2) - Class III (22,623) ----------- 9,746 ----------- Net expenses 12,487 ----------- Net investment income 717,092 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized loss on: Investments (1,087,546) Foreign currency, forward contracts and foreign currency related transactions (2,871,526) ----------- Net realized loss (3,959,072) ----------- Change in net unrealized appreciation (depreciation) on: Investments 990,215 Foreign currency, forward contracts and foreign currency related transactions (701,059) ----------- Net unrealized gain 289,156 ----------- Net realized and unrealized loss (3,669,916) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(2,952,824) ===========
See accompanying notes to the financial statements. 3 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 717,092 $ 3,187,114 Net realized loss (3,959,072) (3,898,941) Change in net unrealized appreciation (depreciation) 289,156 (154,340) ----------- ------------ Net decrease in net assets from operations (2,952,824) (866,167) ----------- ------------ Distributions to shareholders from: Net investment income Class III (1,412,055) (6,827,386) Class IV -- (325,033) ----------- ------------ Total distributions from net investment income (1,412,055) (7,152,419) ----------- ------------ Net realized gains Class III -- (187,380) Class IV -- (247,025) ----------- ------------ Total distributions from net realized gains -- (434,405) ----------- ------------ (1,412,055) (7,586,824) ----------- ------------ Net share transactions (Note 5): Class III (4,293,820) (2,273,739) Class IV -- (61,034,872) ----------- ------------ Decrease in net assets resulting from net share transactions (4,293,820) (63,308,611) ----------- ------------ Total decrease in net assets (8,658,699) (71,761,602) NET ASSETS: Beginning of period 37,581,464 109,343,066 ----------- ------------ End of period (including accumulated undistributed net investment income of $272,397 and $1,571,902, respectively) $28,922,765 $ 37,581,464 =========== ============
4 See accompanying notes to the financial statements. GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ----------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 7.14 $ 9.25 $ 10.04 $ 9.28 $ 11.92 ------- ------- ------- ------- ------- Income from investment operations: Net investment income(e) 0.22(d) 0.46(d) 0.23 0.23 0.23 Net realized and unrealized gain (loss) (1.55) (1.00) 1.34 1.26 (0.36)(b) ------- ------- ------- ------- ------- Total from investment operations (1.33) (0.54) 1.57 1.49 (0.13) ------- ------- ------- ------- ------- Less distributions to shareholders: From net investment income (0.27) (1.53) (0.21) (0.42) (0.29) From net realized gains -- (0.04) (2.15) (0.31) (2.22) ------- ------- ------- ------- ------- Total distributions (0.27) (1.57) (2.36) (0.73) (2.51) ------- ------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 5.54 $ 7.14 $ 9.25 $ 10.04 $ 9.28 ======= ======= ======= ======= ======= TOTAL RETURN(a) (19.53)% (5.38)% 16.69% 15.86% (1.84)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $28,923 $37,581 $49,332 $75,054 $97,450 Net expenses to average daily net assets 0.06%(c) 0.31%(c) 0.69% 0.69% 0.69% Net investment income to average daily net assets 3.32%(d) 5.33%(d) 2.23% 2.25% 2.07% Portfolio turnover rate 90% 120% 39% 68% 68% Fees and expenses reimbursed by the Manager to average daily net assets: 1.32% 0.79% 0.38% 0.33% 0.42%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain (loss) on investmensts for the year ended February 28, 1999 due to timing purchases and redemptions of Fund shares in relation to fluctuating market values of the investments of the Fund. (c) On July 3, 2001, the Fund began to invest a substantial portion of its assets in other funds of GMO Trust and revised its reimbursement. Net expenses exclude expenses incurred indirectly through investment in underlying funds. See Note 2. (d) Recognition of net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the fund invests. (e) Computed using average shares outstanding throughout the period. See accompanying notes to the financial statements. 5 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Currency Hedged International Equity Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through direct and indirect investment in equity securities of non-U.S. issuers and through management of the Fund's foreign currency positions. On July 3, 2001, the Fund began to invest a substantial portion of its assets in other Funds of the Trust ("underlying funds"). The Fund's benchmark is the MSCI EAFE Index (Hedged). At February 28, 2003, 60.3% of the Fund was invested in GMO International Intrinsic Value Fund and 39.8% of the Fund was invested in GMO International Growth Fund, separate funds of GMO Trust managed by GMO. GMO International Intrinsic Value Fund and GMO International Growth Fund invest primarily in equity securities of developed countries in Asia and Europe. The financial statements of GMO International Intrinsic Value Fund and GMO International Growth Fund should be read in conjunction with the Fund's financial statements. Until July 19, 2001, the Fund had two classes of shares outstanding: Class III and Class IV. Effective July 19, 2001, Class IV shares ceased operations. The principal economic difference between the classes of shares was the level of shareholder service fees borne by the classes. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Shares of underlying funds and other mutual funds are valued at their net asset value as reported on each business day. Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent 6 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Securities for which quotations are not readily available, or whose values the Manager has determined to be unreliable, are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in foreign 7 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- currency values that are unfavorable to the Fund. The value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through currency contracts as of February 28, 2003. FUTURES CONTRACTS The Fund may purchase and sell futures contracts to manage its exposure to the financial markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of February 28, 2003, there were no outstanding futures contracts. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 28, 2003, there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's 8 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future, security or currency transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. At February 28, 2003, there were no open purchased option contracts. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the financial markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the 9 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. At February 28, 2003, there were no open swap agreements. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 2003, the Fund did not have any securities on loan. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryover for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country's tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003, the tax basis of distributions paid were as follows: ordinary income -- $7,586,824 and $1,412,055, respectively. At February 28, 2003, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code of $3,271,105 and $1,682,281 expiring in 2010 and 2011, respectively. The Fund has elected to defer to March 1, 2003 post-October capital losses of $724,869. 10 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to foreign currency transactions and the net operating loss. The financial highlights exclude these adjustments.
Accumulated Undistributed Net Accumulated Net Investment Income Realized Loss Paid-in Capital ----------------- ----------------- --------------- $(604,542) $2,871,525 $(2,266,983)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .54% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder 11 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. As described in Note 1, the Fund invests in certain underlying funds of the Trust. Like the management fee (as described below), the Fund's shareholder service fee will be waived (but not below zero) to the extent of the indirect shareholder service fees paid in connection with the Fund's investment in shares of the underlying funds. For the year ended February 28, 2003, shareholder service fees incurred indirectly by the Class III shares of the Fund were .105% of Class III's average daily net assets. GMO has entered into a binding agreement effective until at least June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees and the following expenses: fees and expenses of the independent Trustees of the Trust (including legal fees), 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 (collectively, "fund expenses")) and the amount of fees and expenses (excluding shareholder service fees and fund expenses, as defined above) incurred indirectly by the Fund through its investment in the underlying funds exceed the management fee. Because GMO will not reimburse expenses incurred indirectly by the Fund to the extent they exceed .54%, and because the amount of fees and expenses incurred indirectly by the Fund will vary, the operating expenses (excluding shareholder service fees and fund expenses, as defined above) incurred indirectly by the Fund through its investment in the underlying funds may exceed .54% of the Fund's average daily net assets. For the year ended February 28, 2003, indirect operating expenses (excluding shareholder service fees and investment- related expense) and indirect investment-related expenses (including, but not limited to, interest expense, foreign audit expense, and investment-related legal expense) incurred by the Fund were .534% and less than .001% of Class III's average daily net assets, respectively. As of February 28, 2003, a significant portion of the Fund's shares were held by accounts for which the Manager has investment discretion. The Fund's portion of the fee paid by the Trust to the independent Trustees during the year ended February 28, 2003, was $1,172. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2003, aggregated $20,438,779 and $28,301,603, respectively. 12 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- At February 28, 2003, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in the value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $33,529,638 $ -- $(2,865,441) $(2,865,441)
4. PRINCIPAL SHAREHOLDERS At February 28, 2003, 71.6% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the outstanding shares of the Fund. One of the shareholders is another fund of GMO Trust. Investment activities of these shareholders may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 ------------------------ ------------------------ Shares Amount Shares Amount Class III: ---------- ------------ ---------- ------------ Shares sold 2,882,019 $ 16,484,193 159,897 $ 1,303,095 Shares issued to shareholders in reinvestment of distributions 189,880 1,365,235 961,330 6,731,351 Shares repurchased (3,118,860) (22,143,248) (1,190,266) (10,308,185) ---------- ------------ ---------- ------------ Net decrease (46,961) $ (4,293,820) (69,039) $ (2,273,739) ========== ============ ========== ============
Year Ended Year Ended February 28, 2003 February 28, 2002 ------------------------ ------------------------ Shares Amount Shares Amount Class IV: ---------- ------------ ---------- ------------ Shares sold -- $ -- -- $ -- Shares issued to shareholders in reinvestment of distributions -- -- 26,251 247,025 Shares repurchased -- -- (6,526,919) (61,281,897) ---------- ------------ ---------- ------------ Net decrease -- $ -- (6,500,668) $(61,034,872) ========== ============ ========== ============
13 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 28, 2003 is as follows: FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) ---------- ---------------- ----------------- ------------- -------------- Buys 4/28/03 AUD 11,543,278 $ 6,967,667 $ 677,404 4/28/03 CAD 12,032,126 8,054,239 411,449 3/28/03 CHF 16,702,071 12,323,209 1,053,918 3/28/03 DKK 44,667,035 6,473,934 616,699 3/28/03 EUR 101,733,910 109,547,694 10,355,411 3/28/03 GBP 27,823,537 43,754,635 894,342 4/28/03 HKD 175,102,510 22,447,984 35,847 4/28/03 JPY 5,251,228,904 44,510,364 1,977,090 3/28/03 NOK 193,797,164 26,969,252 1,611,094 4/28/03 NZD 16,025,052 8,858,635 1,265,324 3/28/03 SEK 294,522,783 34,555,212 3,132,593 4/28/03 SGD 2,900,480 1,669,173 35,713 ------------ $ 22,066,884 ============ Sales 4/28/03 AUD 13,077,129 $ 7,893,518 $ (731,389) 4/28/03 CAD 12,549,009 8,400,238 (450,089) 3/28/03 CHF 19,772,771 14,588,849 (1,173,912) 3/28/03 DKK 49,045,118 7,108,483 (649,855) 3/28/03 EUR 109,997,214 118,445,670 (10,774,593) 3/28/03 GBP 32,202,899 50,641,516 (884,570) 4/28/03 HKD 177,351,266 22,736,273 (35,476) 4/28/03 JPY 5,892,148,255 49,942,912 (2,371,586) 3/28/03 NOK 196,357,686 27,325,580 (1,729,794) 4/28/03 NZD 16,295,117 9,007,927 (1,239,856) 3/28/03 SEK 297,066,194 34,853,620 (3,011,507) 4/28/03 SGD 2,867,814 1,650,374 (36,026) ------------ $(23,088,653) ============
14 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- CURRENCY ABBREVIATIONS: AUD - Australian Dollar CAD -Canadian Dollar CHF - Swiss Franc DKK - Danish Krona EUR - Euro GBP - British Pound HKD - Hong Kong Dollar JPY - Japanese Yen NOK - Norwegian Krone NZD - New Zealand Dollar SEK - Swedish Krona SGD - Singapore Dollar
15 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Currency Hedged International Equity Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 16 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 17 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the from February Boston, MA 02110 Trust 2002 - October Age: 64 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 18 PRINCIPAL OFFICERS:
Term of Office(4) Principal Occupation(s) Name, Address, Position(s) and Length of During Past and Age Held with Fund Time Served Five Years ------------------------- ------------------------------ ------------------------------ ------------------------------ Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief 40 Rowes Wharf Vice President from August Operating Officer (2000 - Boston, MA 02110 1998 - October 2002. present) and Member, Grantham, Age: 47 Mayo, Van Otterloo & Co. LLC. Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC. 40 Rowes Wharf February 1998. Boston, MA 02110 Age: 45 Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator, c/o GMO Trust Trust Grantham, Mayo, Van 40 Rowes Wharf Otterloo & Co. LLC. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer 40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003) Boston, MA 02110 and Member, Grantham, Mayo, Age: 37 Van Otterloo & Co. LLC. Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel, c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van 40 Rowes Wharf 2001. Otterloo & Co. LLC (June Boston, MA 02110 1999 - present); Associate/ Age: 58 Junior Partner, Hale and Dorr LLP (1991 - 1999). Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering c/o GMO Trust Laundering Compliance Officer Reporting Officer (February 40 Rowes Wharf 2003 - present) and Compliance Boston, MA 02110 Officer, Grantham, Mayo, Van Age: 32 Otterloo & Co. LLC.
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 19 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGEMENT Day-to-day management of the Fund's portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Domestic Bond Fund returned +11.4% for the fiscal year ended February 28, 2003, as compared with the +11.3% return of the Lehman Brothers U.S. Government Bond Index. The Fund outperformed the benchmark, though issue selection hurt performance in the latter part of 2002. Value was lost due to credit related spread widening in the assets underlying the Fund's investment in the GMO Alpha LIBOR Fund, and the default of certain healthcare receivable asset-backed bonds held by GMO Alpha LIBOR Fund, which cost the Fund 23 basis points. In November of 2002, the Federal Reserve cut short-term interest rates from 1.75% to 1.25% in response to growing signs that U.S. economic growth had slowed. The yield curve steepened significantly over the period, as 3-month rates fell by more than 50 basis points and 10-year interest rates fell by more than 100 basis points. While 10-year swap spreads narrowed from 67 to 42 basis points, credit quality deteriorated on many of the high quality, but less liquid sectors of the U.S. bond market as economic activity slowed. As of February 28, 2002, approximately 54% of the Fund was invested in U.S. government agency issues and U.S. Treasury securities. Approximately 29% of the Fund was invested in highly-rated asset-backed securities. These included issues backed by auto, truck, credit card, and healthcare receivables. The remainder of the Fund was split between corporates (7%), collateralized bond obligations (9%), and cash (1%). The Fund's exposure to these assets is achieved both directly and indirectly through its investment in the GMO Alpha LIBOR Fund and GMO Short-Duration Collateral Fund. OUTLOOK The Fund will continue to focus on high credit quality, but less liquid sectors of the U.S. bond market that offer attractive returns relative to the index. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO DOMESTIC BOND FUND CLASS III SHARES AND THE LEHMAN BROTHERS U.S. GOVERNMENT BOND INDEX AS OF FEBRUARY 28, 2003 GMO DOMESTIC LEHMAN BROTHERS BOND FUND U.S. GOV'T. BOND INDEX 8/18/94 $10,000 $10,000 9/30/94 $9,890 $9,927 12/31/94 $9,939 $9,962 3/31/95 $10,377 $10,431 6/30/95 $11,036 $11,078 9/30/95 $11,272 $11,275 12/31/95 $11,785 $11,790 3/31/96 $11,506 $11,523 6/30/96 $11,560 $11,578 9/30/96 $11,785 $11,773 12/31/96 $12,143 $12,116 3/31/97 $12,035 $12,018 6/30/97 $12,472 $12,435 9/30/97 $12,876 $12,852 12/31/97 $13,352 $13,278 3/31/98 $13,510 $13,478 6/30/98 $13,899 $13,834 9/30/98 $14,662 $14,599 12/31/98 $14,427 $14,586 3/31/99 $14,192 $14,378 6/30/99 $14,191 $14,255 9/30/99 $14,185 $14,350 12/31/99 $14,168 $14,260 3/31/2000 $14,701 $14,738 6/30/2000 $14,913 $14,969 9/30/2000 $15,386 $15,381 12/31/2000 $16,189 $16,149 3/31/2001 $16,638 $16,555 6/30/2001 $16,669 $16,516 9/30/2001 $17,562 $17,420 12/31/2001 $17,393 $17,317 3/31/2002 $17,320 $17,207 6/30/2002 $18,123 $17,971 9/30/2002 $19,321 $19,169 12/31/2002 $19,453 $19,307 2/28/2003 $19,727 $19,570
AVERAGE ANNUAL TOTAL RETURN SINCE INCEPTION 1 YEAR 5 YEAR 8/18/94 Class III 11.43% 7.91% 8.28%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period. Past performance is not indicative of future performance. Information is unaudited. GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE ($)/ SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 41.5% CORPORATE DEBT -- 2.7% 2,500,000 Bank Austria AG, 144A, 7.25%, due 02/15/17 3,043,500 ------------- FOREIGN GOVERNMENT OBLIGATIONS -- 6.3% 24,000,000 Bulgaria Discount Strips, 0.00%, due 07/28/24(a) 7,114,337 ------------- U.S. GOVERNMENT -- 2.4% 1,075,300 U.S. Treasury Inflation Indexed Note, 4.25%, due 01/15/10 1,271,038 1,213,454 U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09(b) 1,396,989 ------------- 2,668,027 ------------- U.S. GOVERNMENT AGENCY -- 30.1% 10,000,000 Agency for International Development Floater (Support of India), Variable Rate, 3 mo. LIBOR + .10%, 1.48%, due 02/01/27 9,880,000 6,000,000 Agency for International Development Floater (Support of Jamaica), Variable Rate, 6 mo. LIBOR + .30%, 1.64%, due 12/01/14 6,007,500 5,188,152 Agency for International Development Floater (Support of Jamaica), Variable Rate, 6 mo. U.S. Treasury Bill + .75%, 1.95%, due 03/30/19 5,158,943 6,602,500 Agency for International Development Floater (Support of Sri Lanka), Variable Rate, 6 mo. LIBOR + .20%, 1.54%, due 06/15/12 6,585,994 6,600,003 Agency for International Development Floater (Support of Zimbabwe), Variable Rate, 3 mo. U.S. Treasury Bill x 115%, 2.60%, due 01/01/12 6,517,502 ------------- 34,149,939 ------------- TOTAL DEBT OBLIGATIONS (COST $44,578,050) 46,975,803 ------------- MUTUAL FUNDS -- 51.0% 24,511 GMO Alpha LIBOR Fund 581,397 2,286,601 GMO Short-Duration Collateral Fund 57,187,888 ------------- TOTAL MUTUAL FUNDS (COST $57,788,818) 57,769,285 -------------
See accompanying notes to the financial statements. 1 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- PREFERRED STOCKS -- 5.6% BANKING AND FINANCIAL SERVICES -- 5.6% 10,000 Home Ownership Funding 2 Preferred 144A, 13.338% 6,276,150 ------------- TOTAL PREFERRED STOCKS (COST $6,824,587) 6,276,150 ------------- TOTAL INVESTMENTS -- 98.1% (Cost $109,191,455) 111,021,238 Other Assets and Liabilities (net) -- 1.9% 2,201,673 ------------- TOTAL NET ASSETS -- 100.0% $ 113,222,911 ============= NOTES TO THE SCHEDULE OF INVESTMENTS:
144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. Variable rates - The rates shown on variable rate notes are the current interest rates at February 28, 2003, which are subject to change based on the terms of the security. (a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). (b) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 6). 2 See accompanying notes to the financial statements. GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $109,191,455) (Note 1) $111,021,238 Cash 879,358 Receivable for investments sold 22,509,951 Receivable for Fund shares sold 125,000 Interest receivable 350,451 Receivable for variation margin on open futures contracts (Notes 1 and 6) 89,561 Net receivable for open swap contracts (Notes 1 and 6) 35,397 Receivable for expenses reimbursed by Manager (Note 2) 2,800 ------------ Total assets 135,013,756 ------------ LIABILITIES: Payable for investments purchased 20,000,000 Payable for Fund shares repurchased 1,741,867 Payable to affiliate for (Note 2): Management fee 8,518 Shareholder service fee 12,778 Accrued expenses 27,682 ------------ Total liabilities 21,790,845 ------------ NET ASSETS $113,222,911 ============ NET ASSETS CONSIST OF: Paid-in capital $107,597,330 Accumulated undistributed net investment income 325,715 Accumulated net realized gain 3,093,452 Net unrealized appreciation 2,206,414 ------------ $113,222,911 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $113,222,911 ============ SHARES OUTSTANDING: Class III 11,233,425 ============ NET ASSET VALUE PER SHARE: Class III $ 10.08 ============
See accompanying notes to the financial statements. 3 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Interest $ 2,699,728 Dividends 599,899 ----------- Total income 3,299,627 ----------- EXPENSES: Management fee (Note 2) 116,826 Audit fees 25,957 Custodian and transfer agent fees 21,793 Legal fees 8,330 Registration fees 3,870 Trustees fees and related expenses (Note 2) 3,518 Miscellaneous 2,565 Fees reimbursed by Manager (Note 2) (60,331) ----------- 122,528 Shareholder service fee (Note 2) - Class III 175,240 ----------- Net expenses 297,768 ----------- Net investment income 3,001,859 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (492,656) Realized gains distributions from investment company shares 53,332 Closed futures contracts 2,206,273 Closed swap contracts 6,365,796 ----------- Net realized gain 8,132,745 ----------- Change in net unrealized appreciation (depreciation) on: Investments 2,229,955 Open futures contracts 131,334 Open swap contracts (1,297,073) ----------- Net unrealized gain 1,064,216 ----------- Net realized and unrealized gain 9,196,961 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $12,198,820 ===========
4 See accompanying notes to the financial statements. GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 3,001,859 $ 7,133,724 Net realized gain 8,132,745 5,373,329 Change in net unrealized appreciation (depreciation) 1,064,216 (1,886,101) ------------ ------------ Net increase in net assets from operations 12,198,820 10,620,952 ------------ ------------ Distributions to shareholders from: Net investment income Class III (3,105,892) (8,152,095) ------------ ------------ Total distributions from net investment income (3,105,892) (8,152,095) ------------ ------------ Net realized gains Class III (4,216,075) (6,876,138) ------------ ------------ Total distributions from net realized gains (4,216,075) (6,876,138) ------------ ------------ (7,321,967) (15,028,233) ------------ ------------ Net share transactions (Note 5): Class III (46,654,360) (11,126,261) ------------ ------------ Decrease in net assets resulting from net share transactions (46,654,360) (11,126,261) ------------ ------------ Total decrease in net assets (41,777,507) (15,533,542) NET ASSETS: Beginning of period 155,000,418 170,533,960 ------------ ------------ End of period (including accumulated undistributed net investment income of $325,715 and $409,323, respectively) $113,222,911 $155,000,418 ============ ============
See accompanying notes to the financial statements. 5 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------------------------------ 2003 2002 2001(C) 2000 1999 -------- -------- -------- -------- -------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.68 $ 9.98 $ 9.23 $ 9.65 $ 10.26 -------- -------- -------- -------- -------- Income from investment operations: Net investment income(d) 0.25+ 0.43+ 0.61+ 0.60 0.68 Net realized and unrealized gain (loss) 0.83 0.20 0.72 (0.42) (0.15) -------- -------- -------- -------- -------- Total from investment operations 1.08 0.63 1.33 0.18 0.53 -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.27) (0.50) (0.58) (0.58) (0.68) From net realized gains (0.41) (0.43) -- (0.02) (0.46) -------- -------- -------- -------- -------- Total distributions (0.68) (0.93) (0.58) (0.60) (1.14) -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 10.08 $ 9.68 $ 9.98 $ 9.23 $ 9.65 ======== ======== ======== ======== ======== TOTAL RETURN(a) 11.43% 6.62% 14.91% 2.03% 5.03% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $113,223 $155,000 $170,534 $164,457 $175,071 Net operating expenses to average daily net assets 0.25% 0.25% 0.25% 0.25% 0.25% Interest expense to average daily net assets -- -- 0.07% 0.19% 0.02% Total net expenses to average daily net assets(e) 0.25% 0.25% 0.32%(b) 0.44%(b) 0.27%(b) Net investment income to average daily net assets(d) 2.57% 4.35% 6.41% 5.85% 6.21% Portfolio turnover rate 71% 19% 65% 20% 17% Fees and expenses reimbursed by the Manager to average daily net assets: 0.05% 0.05% 0.05% 0.05% 0.19%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income. (c) Effective March 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium and discount on debt securities. The effect of this change for the year ended February 28, 2001 was to increase net investment income per share by $0.001, decrease net realized and unrealized gains and losses per share by $0.001 and increase the ratio of net investment income to average net assets from 6.40% to 6.41%. Per share data and ratios/suppplemental data for periods prior to March 1, 2000 have not been restated to reflect this change. (d) Net investment income is affected by timing of the declaration of dividends by other GMO Funds in which the Fund invests. (e) Net expenses exclude expenses incurred indirectly through investment in other GMO Funds in which the Fund invests. + Computed using average shares outstanding throughout the period. 6 See accompanying notes to the financial statements. GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Domestic Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in U.S. investment grade securities. The Fund's benchmark is the Lehman Brothers U.S. Government Bond Index. At February 28, 2003, 0.5% of the Fund was invested in the GMO Alpha LIBOR Fund and 50.5% of the Fund was invested in the GMO Short-Duration Collateral Fund, separate funds of GMO Trust managed by GMO. Shares of the GMO Alpha LIBOR Fund and the GMO Short-Duration Collateral Fund are not publicly available for direct purchase. The financial statements of the GMO Alpha LIBOR Fund and the GMO Short-Duration Collateral Fund should be read in conjunction with the Fund's financial statements. The Fund invested a substantial portion of its assets in GMO Alpha LIBOR Fund ("Alpha LIBOR Fund") to obtain the Fund's core portfolio exposure. In November 2002, certain bonds held by Alpha LIBOR Fund ("NPF bonds") defaulted amid allegations of fraud and significant violations of the bonds' indentures. Currently, no market exists for the NPF bonds, and they are being valued at fair value by the trustees of GMO Trust or persons acting at their direction. The devaluation of the NPF bonds had a negative impact on the Fund's net asset value per share. In late November 2002, Alpha LIBOR Fund undertook a reorganization transaction with a new series of GMO Trust, GMO Short-Duration Collateral Fund ("SDCF") and approximately 78% of the Fund's interest in Alpha LIBOR Fund was transferred to SDCF in exchange for SDCF shares. The reorganization was treated as a sale of the Alpha LIBOR Fund shares for financial reporting purposes and a distribution by Alpha LIBOR Fund for tax purposes. Accordingly, for financial reporting purposes, the Fund recognized a loss on the sale of the Alpha LIBOR shares of approximately $173,371. In addition, the Fund recognized for tax, but not for financial reporting purposes, ordinary income of $93,879 and long-term capital gains of $16,744 from Alpha LIBOR Fund. $283,994 was added to the tax cost basis of the Fund's holdings of Alpha LIBOR Fund. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The 7 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of other GMO Funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. Some fixed income securities are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and at its discretion may override a price supplied by a source (by taking a price supplied by another source). Securities may be valued by independent pricing services which use prices provided by market makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. Certain securities held by the Fund, or underlying funds in which it invests, were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. At February 28, 2003, the total value of these securities represented 26% of net assets, all of which are U.S. Government backed securities. FUTURES CONTRACTS The Fund may purchase and sell futures contracts to manage its exposure to the financial markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures 8 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 28, 2003. OPTIONS The Fund may write call and put options on futures or securities it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future or security transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future or security may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future or security underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 28, 2003, there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future or security transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. At February 28, 2003, there were no open purchased option contracts. 9 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager. LOAN AGREEMENTS The Fund may invest in direct debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans from third parties. A loan is often administered by a bank or other financial institution (the "lender") that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the loan agreement and only upon receipt by the lender of payments from the borrower. The Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, the Fund may be subject to the credit risk of both the borrower and the lender that is selling the loan agreement. When the Fund purchases assignments from lenders it acquires direct rights against the borrower on the loan. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the financial markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate, total return and forward swap spread lock swap agreements to manage its exposure to interest rates. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Total return swap agreements involve commitments to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. Forward swap spread lock swap agreements involve commitments to pay or receive a settlement amount calculated as the difference between the swap spread and a fixed spread, 10 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- multiplied by the notional amount times the duration of the swap rate. The swap spread is the difference between the benchmark swap rate (market rate) and the specific treasury rate. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements are included as part of interest income. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in interest rates. See Note 6 for a summary of open swap agreements as of February 28, 2003. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. REVERSE REPURCHASE AGREEMENTS The Fund may enter into reverse repurchase agreements with certain banks and broker/dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. Government securities or other liquid high grade debt obligations in the name of the counterparty equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements 11 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- involve the risk that the market value of the securities the Fund has sold may decline below the price at which it is obligated to repurchase them under the agreement. During the year ended February 28, 2003, the Fund did not enter into any reverse repurchase agreements. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 2003, there were no securities on loan. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country's tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States of America. During the years ended February 28, 2002 and February 28, 2003, the tax basis of distributions paid from ordinary income were $12,483,179 and $7,321,967, respectively. During the year ended February 28, 2002, the tax basis of distributions paid from long-term capital gains were $2,545,054. As of February 28, 2003, the components of distributable earnings on a tax basis consisted of $1,156,560 and $2,435,138 of undistributed ordinary income and undistributed long-term capital gains, respectively. The temporary difference between book and tax basis distributable earnings are primarily due to futures transactions. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This 12 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to amortization of premium and discount on debt securities and the GMO Alpha LIBOR Fund transaction (See Note 1). The financial highlights exclude these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain Paid-in Capital ----------------- ----------------- --------------- $20,425 $263,570 $(283,995)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and discounts. Dividend income is recorded on the ex-dividend date. Non cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Interest income on U.S. Treasury inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities adjusted for inflation is recorded as interest income. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .10% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until at least June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent Trustees of the Trust (including legal fees), brokerage 13 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 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) exceed the management fee. The Fund incurs fees and expenses indirectly as a shareholder in GMO Alpha LIBOR Fund and GMO Short-Duration Collateral Fund. For the year ended February 28, 2003, indirect operating expenses (excluding investment-related expenses) were 0.001% of the Fund's average daily net assets, and indirect investment-related expenses (including, but not limited to, interest expense, foreign audit expense, and investment-related legal expense) were 0.005% of the Fund's average daily net assets. As of February 28, 2003, a significant portion of the Fund's shares were held by accounts for which the Manager has investment discretion. The Fund's portion of the fee paid by the Trust to the independent Trustees during the year ended February 28, 2003 was $2,669. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES For the year ended February 28, 2003, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases Sales ----------- ----------- U.S. Government securities $ 1,207,678 $45,436,516 Investments (non-U.S. Government securities) 81,378,377 79,639,625
For the year ended February 28, 2003, the cost of purchases and proceeds from sales of investments exclude the initial transfer of GMO Alpha LIBOR Fund's investments in GMO Short-Duration Collateral Fund of $2,118,653. (See Note 1) At February 28, 2003, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Appreciation -------------- ---------------- ---------------- -------------- $109,496,391 $2,440,702 $(915,855) $1,524,847
14 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 4. PRINCIPAL SHAREHOLDERS At February 28, 2003, 49.5% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. One of the shareholders is another fund of GMO Trust. Investment activities of these shareholders may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 ------------------------ ------------------------ Shares Amount Shares Amount Class III: ---------- ------------ ---------- ------------ Shares sold 3,707,607 $ 36,658,798 1,276,400 $ 12,796,444 Shares issued to shareholders in reinvestment of distributions 715,346 7,060,380 1,401,556 13,523,066 Shares repurchased (9,196,332) (90,373,538) (3,761,625) (37,445,771) ---------- ------------ ---------- ------------ Net decrease (4,773,379) $(46,654,360) (1,083,669) $(11,126,261) ========== ============ ========== ============
6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 28, 2003 is as follows: FUTURES CONTRACTS
Number of Contract Net Unrealized Contracts Type Expiration Date Value Appreciation --------- ---------------------------- --------------- ------------ -------------- Buys 67 U.S. Long Bond June 2003 $7,669,407 $113,154 43 U.S. Treasury Note 10 Yr. June 2003 4,961,125 27,909 -------- $141,063 ========
At February 28, 2003, the Fund had sufficient cash and/or securities to cover any commitments of margin requirements of the relevant broker or exchange. 15 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS
Net Unrealized Notional Expiration Appreciation / Amount Date Description (Depreciation) --------------- ---------- -------------------------------------------------- -------------- INTEREST RATE SWAPS 9,400,000 USD 12/23/04 Agreement with UBS AG dated 12/19/02 to receive $ 63,590 the notional amount multiplied by 2.088% and to pay the notional amount multiplied by the 3 month Floating Rate LIBOR adjusted by a specific spread. 23,000,000 USD 12/23/07 Agreement with UBS AG dated 12/19/02 to pay the (569,811) notional amount multiplied by 3.38% and to receive the notional amount multiplied by the 3 month Floating Rate LIBOR adjusted by a specific spread. 13,100,000 USD 12/23/12 Agreement with UBS AG dated 12/19/02 to receive 372,223 the notional amount multiplied by 4.425% and to pay the notional amount multiplied by the 3 month Floating Rate LIBOR adjusted by a specific spread. 7,033,560 USD 7/28/24 Agreement with JPMorgan Chase Bank dated 8/28/02 (692,299) to pay $24,000,000 at expiration date and to receive at expiration date $6,980,000 plus interest based upon the 3 month Floating Rate LIBOR (compounded quarterly) adjusted by a specified spread.
16 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Expiration Appreciation / Amount Date Description (Depreciation) --------------- ---------- -------------------------------------------------- -------------- TOTAL RETURN SWAPS 50,000,000 USD 7/1/03 Agreement with Lehman Brothers Special Financing $ 758,967 Inc. dated 6/29/01 to receive (pay) the notional amount multiplied by the return on the Lehman Brothers US Government Index and to pay the notional amount multiplied by the 1 month LIBOR adjusted by a specified spread. 10,000,000 USD 9/2/03 Agreement with Deutsche Bank AG dated 2/27/03 to -- receive (pay) the notional amount multiplied by the return on the Lehman Brothers CMBS Index and to pay the notional amount multiplied by the 1 month LIBOR adjusted by a specified spread. 20,000,000 USD 8/31/04 Agreement with JPMorgan Chase Bank dated 8/28/02 302,898 to receive (pay) the notional amount multiplied by the return on the Lehman Brothers US Government Index and to pay the notional amount multiplied by the 1 month LIBOR adjusted by a specified spread. --------- $ 235,568 =========
17 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO DOMESTIC BOND FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Domestic Bond Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 18 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 19 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the from February Boston, MA 02110 Trust 2002 - October Age: 64 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 20 PRINCIPAL OFFICERS:
Term of Office(4) Principal Occupation(s) Name, Address, Position(s) and Length of During Past and Age Held with Fund Time Served Five Years ------------------------------------ -------------- -------------- -------------------------------------------------- Scott Eston President and President and Chief Financial Officer (1997 - present), Chief c/o GMO Trust Chief Chief Operating Officer (2000 - present) and Member, 40 Rowes Wharf Executive Executive Grantham, Mayo, Van Otterloo & Co. LLC. Boston, MA 02110 Officer of the Officer since Age: 47 Trust October 2002; Vice President from August 1998 - October 2002. Susan Randall Harbert Chief Chief Member, Grantham, Mayo, Van Otterloo & Co. LLC. c/o GMO Trust Financial Financial 40 Rowes Wharf Officer and Officer Since Boston, MA 02110 Treasurer of February 2000; Age: 45 the Trust Treasurer since February 1998. Brent Arvidson Assistant Since Senior Fund Administrator, Grantham, Mayo, Van c/o GMO Trust Treasurer of September Otterloo & Co. LLC. 40 Rowes Wharf the Trust 1998. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President Vice President General Counsel, Anti-Money Laundering Reporting c/o GMO Trust and Clerk of since February Officer (July 2002 - February 2003) and Member, 40 Rowes Wharf the Trust 1997; Clerk Grantham, Mayo, Van Otterloo & Co. LLC. Boston, MA 02110 since March Age: 37 2001; May 1999 - August 1999. Elaine M. Hartnett, Esq. Vice President Vice President Associate General Counsel, Grantham, Mayo, Van c/o GMO Trust and Secretary since August Otterloo & Co. LLC (June 1999 - present); 40 Rowes Wharf of the Trust 1999; Associate/ Junior Partner, Hale and Dorr LLP Boston, MA 02110 Secretary (1991 - 1999). Age: 58 since March 2001.
21 PRINCIPAL OFFICERS: (CONTINUED)
Term of Office(4) Principal Occupation(s) Name, Address, Position(s) and Length of During Past and Age Held with Fund Time Served Five Years ------------------------------------ -------------- -------------- -------------------------------------------------- Julie Perniola Vice President Since February Anti-Money Laundering Reporting Officer (February c/o GMO Trust and Anti- 2003. 2003 - present) and Compliance Officer, Grantham, 40 Rowes Wharf Money Mayo, Van Otterloo & Co. LLC. Boston, MA 02110 Laundering Age: 32 Compliance Officer
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 22 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGEMENT Day-to-day management of the Fund's portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the Emerging Country Debt Fund returned +15.9% for the fiscal year ended February 28, 2003, as compared with +12.3% for the J.P. Morgan Emerging Markets Bond Index Global (EMBIG). The Fund outperformed the benchmark during the fiscal year by 3.6%. EMBIG spreads over U.S Treasuries widened from 615 basis points to 659 basis points during the 12-month period. The EMBIG return of +12.3% for the fiscal year was driven by carry (the yield on the index averaged over 10%) and a 1.2% drop in U.S. interest rates. The biggest gainers of the fiscal year were Russia (+31.6%), Lebanon (+25.6%), and South Africa (+22.6%). Russia benefited from strong oil and other commodity prices and prudent macro-economic policies, including ongoing fiscal surpluses, which have significantly eased its debt service burden. Lebanon rebounded from a relatively low level after a French-led group of donor countries pledged support in return for promising to tackle its huge fiscal and current account deficits. South Africa took advantage of gold and other commodity prices, as well as relative isolation from problems in Latin America and the Middle East. Countries outside Latin America (48% of the index) outperformed Latins, +19.5% to +6.5%. The worst performing countries for the year were Uruguay (-35.5%), Ivory Coast (-23.7%), and Argentina (-12.2%). The Uruguayan economy suffered from the problems in neighboring Argentina and Brazil, with which most of its trade is conducted. It is now trying to convince private investors to participate in a debt exchange to improve its amortization profile. Ivory Coast was making good progress toward reforming its economy in cooperation with the IMF, and restructuring its defaulted bonds with its private creditors when Muslim rebels from the north took up arms against the southern Christian government, a conflict that still has not been completely resolved. Argentina continues to suffer from a lack of political leadership, although its economy seems to have bottomed out. A new president is to be elected in April, and will be responsible for dealing with holders of defaulted Argentine bonds. These three countries were the only ones in the index to generate losses over the period, and Uruguay and Ivory Coast are each less than 0.1% of the EMBIG. Market selection added value, primarily from the Russia and Bulgaria overweights and the underweight in Brazil. However, overweighting Ivory Coast and underweighting Lebanon cost some alpha, though. Security selection added 290 basis points of positive alpha in total, mostly from positions in Russia, where 2030 Eurobonds outperformed and the first phase of the foreign trade debt exchange was completed, and Bulgaria, where we overweighted the Brady bonds. GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- OUTLOOK Entering March 2003, the Fund has meaningful overweightings in the debt of Algeria and Russia. The Fund has meaningful underweights in the debt of Mexico, Malaysia, and Turkey. The Fund continues to emphasize less liquid debt and obtain default protection when cheaply priced. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO EMERGING COUNTRY DEBT FUND CLASS III SHARES AND THE J.P. MORGAN EMERGING MARKETS BOND INDEX GLOBAL AS OF FEBRUARY 28, 2003 GMO EMERGING COUNTRY J.P. MORGAN EMERGING DEBT FUND MARKETS BOND INDEX GLOBAL 4/19/94 $9,950 $10,000 6/30/94 $9,741 $10,196 9/30/94 $10,587 $11,490 12/31/94 $9,535 $10,501 3/31/95 $8,770 $9,388 6/30/95 $11,064 $11,396 9/30/95 $12,128 $12,130 12/31/95 $13,835 $13,272 3/31/96 $14,753 $13,881 6/30/96 $17,312 $15,204 9/30/96 $20,528 $16,783 12/31/96 $22,925 $17,947 3/31/97 $23,816 $18,168 6/30/97 $27,307 $19,759 9/30/97 $31,392 $21,044 12/31/97 $30,034 $20,091 3/31/98 $31,799 $21,192 6/30/98 $28,321 $20,078 9/30/98 $18,434 $15,941 12/31/98 $20,863 $17,772 3/31/99 $21,758 $18,701 6/30/99 $23,072 $19,549 9/30/99 $23,371 $19,840 12/31/99 $27,600 $22,069 3/31/2000 $31,572 $23,519 6/30/2000 $31,606 $23,603 9/30/2000 $34,152 $24,781 12/31/2000 $34,258 $25,248 3/31/2001 $35,379 $25,821 6/30/2001 $37,340 $26,717 9/30/2001 $35,993 $25,602 12/31/2001 $39,121 $25,590 3/31/2002 $42,731 $27,071 6/30/2002 $41,131 $25,824 9/30/2002 $41,330 $25,726 12/31/2002 $46,688 $28,947 2/28/2003 $49,156 $30,365 COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO EMERGING COUNTRY DEBT FUND CLASS III SHARES AND THE J.P. MORGAN EMERGING MARKETS BOND INDEX GLOBAL AS OF FEBRUARY 28, 2003 J.P. MORGAN EMERGING MARKETS BOND INDEX GLOBAL +* 4/19/94 $10,000 6/30/94 $9,906 9/30/94 $10,982 12/31/94 $10,062 3/31/95 $8,948 6/30/95 $10,991 9/30/95 $11,741 12/31/95 $12,800 3/31/96 $13,309 6/30/96 $14,781 9/30/96 $16,652 12/31/96 $17,831 3/31/97 $17,971 6/30/97 $19,663 9/30/97 $21,020 12/31/97 $20,153 3/31/98 $21,202 6/30/98 $19,936 9/30/98 $15,703 12/31/98 $17,261 3/31/99 $18,134 6/30/99 $19,086 9/30/99 $19,314 12/31/99 $21,744 3/31/2000 $23,173 6/30/2000 $23,255 9/30/2000 $24,416 12/31/2000 $24,877 3/31/2001 $25,441 6/30/2001 $26,324 9/30/2001 $25,226 12/31/2001 $25,214 3/31/2002 $26,673 6/30/2002 $25,444 9/30/2002 $25,347 12/31/2002 $28,521 2/28/2003 $29,918
AVERAGE ANNUAL TOTAL RETURN SINCE 1 YEAR 5 YEAR INCEPTION 4/19/94 Class III 0.1508 0.0979 19.67% 1/9/98 Class IV 15.38% 9.91% 10.85%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Each perfomance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 50 bp on the purchase and 25 bp on the redemption. Transaction fees are retained by the Fund to cover trading costs. Performance for Class IV shares may vary due to different shareholder serving fees. Past performance is not indicative of future performance. Information is unaudited. *J.P. Morgan EMBI Global + represents the J.P. EMBI prior to 8/95, J.P. Morgan EMBI+ through 12/31/99 and the J.P. Morgan EMBI Global thereafter. The manager changed the benchmark due to the belief that the EMBIG is more diversified and representative of the universe of emerging country debt. GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 75.8% ARGENTINA -- 3.6% USD 32,201 Argentina Corrientes Coupon Payment Certificate, 0.00%, due 12/28/49(a)(b) -- USD 500,000 Argentina Government International Bond, 11.75%, due 04/07/09(a) 120,000 USD 15,000,000 Argentina Government International Bond, 7.13%, due 04/06/04(a) 2,700,000 DEM 20,000,000 Argentina Government International Bond, 5.87%, due 03/31/23(a) 4,794,312 ARS 113,873 Lecop Letras de Cancelacion Coupon Payment Certificates, 0.00%, due 04/01/09(a)(b) 27,769 ARS 20,260,256 Prestamos Garantizados, Step Up, 2.25%, due 04/01/10(a) 804,332 ARS 6,400,000 Provincia Corrientes Series 1, PIK, Variable Rate, 1 mo. Peso Deposit Rate, 3.21%, due 04/01/09(a) 239,360 ARS 2,500,000 Provincia Corrientes Series 2, PIK, Variable Rate, 1 mo. Peso Deposit Rate, 3.21%, due 04/01/09(a) 93,500 USD 32,000,000 Republic of Argentina Discount Bond Series L-GL, Variable Rate, 6 mo. LIBOR + .81%, 2.94%, due 03/31/23(a) 15,040,000 DEM 3,830,000 Republic of Argentina Discount Bond, Variable Rate, 6 mo. DEM LIBOR + .81%, 3.82%, due 03/31/23(a) 886,452 USD 15,637,900 Republic of Argentina Global Bond, 12.25%, due 06/19/18(a) 3,033,753 USD 26,545,000 Republic of Argentina Global Bond, 12.13%, due 02/25/19(a) 6,238,075 USD 8,000,000 Republic of Argentina Global Bond, 9.75%, due 09/19/27(a) 1,600,000 DEM 5,000,000 Republic of Argentina Global Bond, 9.00%, due 11/19/08(a)(b) 502,852 USD 4,040,000 Republic of Argentina Global Bond, 8.88%, due 03/01/29(a) 603,495 EUR 3,500,000 Republic of Argentina Global Bond, 8.00%, due 02/26/08(a) 829,906 USD 198,230 Republic of Argentina Global Bond, 7.00%, due 12/19/08(a) 44,106 USD 162,000 Republic of Argentina Global Bond, 6.00%, due 03/31/23(a) 70,470 ARS 27,436,201 Republic of Argentina INDER Certificates, 6.00%, due 04/15/06(a)(b) 682,705 USD 2,000,000 Republic of Argentina Pro 4, 2.00%, due 12/28/10(a) 193,000 USD 64,401 Republic of Argentina Pro 4 Coupon Certificates, 0.00%, due 12/28/49(a)(b) -- EUR 2,500,000 Republic of Argentina Series EMTN, Variable Rate, 3 mo. EURIBOR +5.10%, 8.57%, due 12/22/04(a)(b) 464,801 USD 63,210,000 Republic of Argentina, 12% Capitalization Bond, PIK, due 06/19/31(a) 12,009,900 ------------- 50,978,788 -------------
See accompanying notes to the financial statements. 1 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- BOSNIA & HERZEGOVINA -- 0.5% DEM 25,244,000 Bosnia & Herzegovina Series A, Step Up, 3.00%, due 12/11/17 7,512,059 ------------- BRAZIL -- 17.0% USD 307,853 Brazil Capitalization Bond Series L, PIK, 8.00%, due 04/15/14 229,735 USD 125,000,000 Brazil DCB (Bearer), Variable Rate, 6 mo. LIBOR + .88%, 2.63%, due 04/15/12 77,500,000 USD 74,500,000 Brazil DCB (Registered) Series RG, Variable Rate, 6 mo. LIBOR + .88%, 2.63%, due 04/15/12 46,190,000 USD 54,525,000 Brazil Discount ZL Bond, Variable Rate, 6 mo. LIBOR + .81%, 2.56%, due 04/15/24 35,304,937 USD 52,320,000 Brazil FLIRB (Registered), Variable Rate, Step Up, 2.56%, due 04/15/09 36,624,000 USD 16,387,154 Brazil MYDFA Trust Certificates Reg S, Variable Rate, 6 mo. LIBOR + .81%, 2.69%, due 09/15/07 12,065,042 USD 39,587,312 Brazil New Money Bond Series L, Variable Rate, 6 mo. LIBOR + .88%, 2.63%, due 04/15/09 28,997,706 USD 8,971,532 Brazil New Money Bond Series L, Variable Rate, 6 mo. LIBOR + .88%, 2.63%, due 04/15/09 6,571,647 USD 916,700 Brazilian Government International Bond, 6.00%, due 09/15/13 568,354 USD 725,028 Brazilian Government International Bond, Odd Lot, 6.00%, due 09/15/13 435,016 ------------- 244,486,437 ------------- BULGARIA -- 2.8% USD 5,000,000 Bulgaria Discount Bond Series A, Variable Rate, 6 mo. LIBOR + .81%, 2.19%, due 07/28/24 4,862,500 USD 42,000,000 Bulgaria Discount Bond, Interest Strips, Series 62, 0.00%, due 01/28/10 10,164,420 USD 42,000,000 Bulgaria Discount Bond, Interest Strips, Series 63, 0.00%, due 01/28/17 7,525,560 USD 15,822,000 Republic of Bulgaria Reg S, 8.25%, due 01/15/15 18,037,080 ------------- 40,589,560 ------------- COLOMBIA -- 1.2% USD 2,000,000 Republic of Colombia, 11.85%, due 03/09/28 1,560,000 GBP 6,825,000 Republic of Colombia, 9.75%, due 02/11/08 9,567,551 USD 8,000,000 Republic of Colombia, 8.70%, due 02/15/16 6,560,000 ------------- 17,687,551 -------------
See accompanying notes to the financial statements. 2 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- COSTA RICA -- 0.0% USD 750,000 Central Bank of Costa Rica Principal Bond Series A, 6.25%, due 05/21/10 770,625 ------------- DOMINICAN REPUBLIC -- 2.6% USD 39,807,000 Dominican Republic Discount Bond, Variable Rate, 6 mo. LIBOR + .81%, 2.31%, due 08/30/24 31,049,460 USD 6,000,000 Dominican Republic International Bond 144A, 9.04%, due 01/23/13 5,745,000 ------------- 36,794,460 ------------- ECUADOR -- 0.8% USD 2,900,628 Republic of Ecuador PDI (Global Bearer Capitalization Bond), PIK, Variable Rate, 6 mo. LIBOR + .81%, 2.19%, due 02/27/15(b) 1,071,621 USD 20,587,000 Republic of Ecuador Reg S, Variable Rate, Step Up, 6.00%, due 08/15/30 9,984,695 ------------- 11,056,316 ------------- EGYPT -- 0.2% USD 2,000,000 Arab Republic of Egypt, 8.75%, due 07/11/11(c) 2,260,000 ------------- EL SALVADOR -- 0.4% USD 6,000,000 Republic Of El Salvador 144A, 8.50%, due 07/25/11 6,540,000 ------------- IVORY COAST -- 1.4% FRF 37,500,000 Ivory Coast Discount Bond, Variable Rate, Step Up, 3.50%, due 03/31/28(a) 1,848,482 USD 79,600,000 Ivory Coast FLIRB Series YR20, Variable Rate, Step Up, 2.00%, due 03/29/18(a) 11,343,000 FRF 34,905,000 Ivory Coast FLIRB, Variable Rate, Step Up, 2.00%, due 03/29/18(a) 839,924 FRF 256,889,500 Ivory Coast PDI, Variable Rate, Step Up, 1.90%, due 03/29/18(a) 6,647,980 ------------- 20,679,386 ------------- JAMAICA -- 0.1% USD 2,000,000 Jamaica Government International Bond, 10.63%, due 06/20/17 1,800,000 -------------
See accompanying notes to the financial statements. 3 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- JORDAN -- 1.0% USD 2,131,578 Hashemite Kingdom of Jordan IAB, Variable Rate, 6 mo. LIBOR + .81%, 2.25%, due 12/23/05 2,078,289 USD 14,750,000 Hashemite Kingdom of Jordan Par Bond, Variable Rate, Step Up, 6.00%, due 12/23/23 12,390,000 ------------- 14,468,289 ------------- KAZAKHSTAN -- 0.3% USD 4,000,000 Kaztransoil Reg S, 8.50%, due 07/06/06 4,140,000 ------------- MACEDONIA -- 1.0% USD 19,044,838 Macedonia Capitalization Bond, PIK, Variable Rate, 6 mo. LIBOR + .81%, 2.21%, due 07/13/12 14,093,180 ------------- MALAYSIA -- 0.6% USD 8,000,000 Malaysia Global Bond, 7.50%, due 07/15/11 9,342,173 ------------- MEXICO -- 1.9% USD 18,500,000 Mexico Global Bond Series MTN, 8.30%, due 08/15/31 19,628,500 ITL 7,000,000,000 Mexico Government International Bond, 11.00%, due 05/08/17 4,997,211 DEM 5,000,000 Mexico Par Bond, 5.01%, due 12/31/19 2,562,477 USD 159,000 Mexico Par Bond, Series B Odd Lot, 6.25%, due 12/31/19(b) 150,454 ------------- 27,338,642 ------------- NIGERIA -- 1.4% USD 27,000,000 Central Bank of Nigeria Par Bond Series WW, Step Up, 6.25%, due 11/15/20 20,520,000 ------------- PANAMA -- 2.2% USD 15,000,000 Republic of Panama, 9.63%, due 02/08/11 16,275,000 USD 5,000,000 Republic of Panama, 9.38%, due 07/23/12 5,262,500 USD 4,000,000 Republic of Panama, 9.38%, due 01/16/23 4,080,000 USD 8,000,000 Republic of Panama Par Bond, Variable Rate, Step Up, 4.75%, due 07/17/26 6,080,000 ------------- 31,697,500 ------------- PERU -- 1.8% USD 7,236,000 Peru Discount Bond, Variable Rate, 6 mo. LIBOR + .81%, 2.56%, due 03/07/27 5,933,520
4 See accompanying notes to the financial statements. GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- PERU -- CONTINUED USD 12,925,000 Peru FLIRB, Variable Rate, Step Up, 4.00%, due 03/07/17 9,774,532 USD 19,000,000 Peru Par Bond, Variable Rate, Step Up, 3.00%, due 03/07/27 9,690,000 ------------- 25,398,052 ------------- PHILIPPINES -- 4.0% USD 4,310,000 Central Bank of the Philippines Par Bond Series B, Variable Rate, Step Up, 6.50%, due 12/01/17 4,051,400 USD 48,567,000 Central Bank of the Philippines Series A, 8.60%, due 06/15/27 40,310,610 EUR 12,000,000 Philippine Government International Bond 144A, 9.13%, due 02/22/10 12,836,598 ------------- 57,198,608 ------------- POLAND -- 0.5% USD 6,000,000 Poland Government International Bond, 6.25%, due 07/03/12 6,765,000 ------------- QATAR -- 0.7% USD 7,500,000 Qatar Government International Bond, 9.75%, due 06/15/30 9,562,500 ------------- RUSSIA -- 11.6% USD 10,000,000 OAO Gazprom 144A, 9.63%, due 03/01/13 10,262,500 RUB 82,710,346 Russia Federal Loan Bond Series 26003, 10.00%, due 03/15/05(b) 2,368,952 USD 179,694,799 Russia Federation Reg S, Variable Rate, Step Up, 5.00%, due 03/31/30 153,639,053 ------------- 166,270,505 ------------- SINGAPORE -- 4.4% SGD 100,000,000 Singapore Government International Bond, 3.50%, due 07/01/12(c) 63,580,957 ------------- SOUTH KOREA -- 0.5% USD 6,000,000 Export Import Bank of Korea, 7.10%, due 03/15/07 6,776,458 ------------- TRINIDAD & TOBAGO -- 0.2% USD 3,000,000 Republic of Trinidad & Tobago, 144A , 9.88%, due 10/01/09 3,600,000 ------------- TUNISIA -- 0.1% JPY 200,000,000 Banque Centrale De Tunisie Series 6RG, 4.35%, due 08/15/17 1,700,148 -------------
See accompanying notes to the financial statements. 5 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- TURKEY -- 0.3% USD 4,000,000 Republic of Turkey Global Bond, 12.00%, due 12/15/08 4,322,292 ------------- UKRAINE -- 0.1% USD 1,680,000 Ukraine Government International Bond Series Reg$, 11.00%, due 03/15/07 1,824,900 ------------- UNITED STATES -- 5.6% ASSET-BACKED SECURITIES -- 4.4% USD 30,518,803 BEA CBO Series 98-1A Class A2A, 144A, 6.72%, due 06/15/10 21,057,974 USD 4,228,400 California Infrastructure PG&E Series 97-1 Class A7, 6.42%, due 09/25/08 4,599,376 USD 14,173,071 Chyps CBO Series 97-1A Class A2A, 144A, 6.72%, due 01/15/10 9,212,496 USD 4,800,000 Meridian Funding Co LLC, MBIA, 144A, Variable Rate, 1 mo. LIBOR + .38%, 1.71%, due 06/22/11 4,758,000 USD 2,000,000 Rhyno CBO Delaware Corp Series 97-1 Class A-2, 144A, Step Up, 6.33%, due 09/15/09 2,060,880 USD 27,525,872 SHYPPCO Finance Company Series 1I Class A-2B, 6.64%, due 06/15/10 21,470,180 ------------- 63,158,906 ------------- CORPORATE DEBT -- 0.9% USD 12,000,000 Pemex Master Trust, 8.63%, due 02/01/22 12,438,000 ------------- U.S. GOVERNMENT -- 0.3% USD 4,479,320 U.S. Treasury Inflation Indexed Note, 3.63%, due 01/15/08(d) 5,060,232 ------------- TOTAL UNITED STATES 80,657,138 ------------- URUGUAY -- 0.2% USD 5,250,000 Banco Central Del Uruguay Series B, 6.75%, due 03/21/21 3,570,000 ------------- VENEZUELA -- 5.2% DEM 610,000 Banco Central Venezuela New Money Bond Series B, Variable Rate, DEM 6 mo. LIBOR + .88%, 3.81%, due 12/18/05 188,666 USD 1,031,431 Republic of Venezuela DCB DL Odd Lot, Variable Rate, 6 mo. LIBOR + .88%, 2.31%, due 12/18/07(b) 661,405
6 See accompanying notes to the financial statements. GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- VENEZUELA -- CONTINUED USD 8,608,696 Republic of Venezuela DCB IL, Variable Rate, 6 mo. LIBOR + .88%, 2.31%, due 2/18/08 5,606,413 USD 19,107,000 Republic of Venezuela Discount Bond Series W-A, Variable Rate, 6 mo. LIBOR + .81%, 2.69%, due 03/31/20 13,279,365 USD 5,225,000 Republic of Venezuela Discount Bond Series W-B, Variable Rate, 6 mo. LIBOR + .81%, 2.31%, due 03/31/20 3,631,375 DEM 34,500,000 Republic Of Venezuela Discount Bond, Variable Rate, DEM 6mo. LIBOR + .81%, 4.00%, due 03/31/20 12,215,164 USD 109,286 Republic of Venezuela FLIRB Series A Odd Lot, Variable Rate, 6 mo. LIBOR + .88%, 2.69%, due 03/31/07(b) 72,402 USD 2,142,800 Republic of Venezuela FLIRB Series A, Variable Rate, 6 mo. LIBOR + .88%, 2.69%, due 03/31/07 1,526,745 USD 313,714 Republic of Venezuela FLIRB Series B Odd Lot, Variable Rate, 6 mo. LIBOR + .88%, 2.69%, due 03/31/07(b) 207,835 CHF 17,142,783 Republic of Venezuela FLIRB Series Sfr, Variable Rate, CHF 6 mo. LIBOR + .88%, 1.69%, due 03/31/07 7,853,948 USD 4,383,725 Republic of Venezuela New Money Bond Series A Odd Lot, Variable Rate, 6 mo. LIBOR + 1%, 2.44%, due 12/18/05(b) 2,898,737 USD 3,070,588 Republic of Venezuela New Money Bond Series A, Variable Rate, 6 mo. LIBOR + 1%, 2.44%, due 12/18/05 2,183,955 USD 919,061 Republic of Venezuela New Money Bond Series B Odd Lot, Variable Rate, 6 mo. LIBOR + .88%, 3.81%, due 12/18/05(b) 607,730 USD 352,941 Republic of Venezuela New Money Bond Series B, Variable Rate, 6 mo. LIBOR + .88%, 2.31%, due 12/18/05 251,030 DEM 24,500,000 Republic of Venezuela Par Bond , 6.66%, due 03/31/20 9,619,623 FRF 54,175,000 Republic of Venezuela Par Bond Series WOIL, 7.71%, due 03/31/20 6,965,400 DEM 20,490,000 Republic of Venezuela, Step Down, 7.38%, due 10/29/08 6,661,945 ------------- 74,431,738 ------------- VIETNAM -- 1.5% USD 19,750,000 Vietnam Par Bond, Variable Rate, Step Up, 3.50%, due 03/12/28 12,689,375 USD 4,000,000 Vietnam Discount Bond, Variable Rate, 6 mo. LIBOR + .81%, 2.63%, due 03/13/28 3,160,000 USD 6,000,000 Vietnam PDI, Variable Rate, Step Up, 4.00%, due 03/14/16 5,160,000 ------------- 21,009,375 -------------
See accompanying notes to the financial statements. 7 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- YUGOSLAVIA -- 0.1% USD 4,000,000 Second Emerging Markets Series EMTN, 0.00%, due 07/15/06 1,110,001 ------------- TOTAL DEBT OBLIGATIONS (COST $1,114,931,988) 1,090,532,638 ------------- LOAN ASSIGNMENTS -- 8.1% ALGERIA -- 2.9% JPY 304,880,052 Algeria Tranche 1 Loan Agreement, JPY LIBOR + .8125%, (0.9375%), due 09/04/06 2,424,083 JPY 4,547,020,950 Algeria Tranche 3 Loan Agreement, JPY LIBOR + .8125%, (0.9375%), due 03/04/10 34,230,058 JPY 703,125,000 Algeria Tranche 3 Loan Agreement, JPY Long Term Prime +.8125% (2.3875%), due 03/04/10 5,293,138 ------------- 41,947,279 ------------- CAMEROON -- 0.1% NLG 23,084,718 Cameroon Loan Agreement, (No Tranche specified, dated January 31, 1981)* 1,354,845 FRF 18,396,841 Republic of Cameroon Tranche B, (dated January 30, 1979)* 362,733 ------------- 1,717,578 ------------- CONGO REPUBLIC (BRAZZAVILLE) -- 0.3% FRF 102,097,963 Republic of Congo Loan Agreement* 2,013,080 USD 8,496,466 Republic of Congo Loan Agreement* 977,094 EUR 14,565,609 Republic of Congo Loan Agreement* 1,883,858 ------------- 4,874,032 ------------- INDONESIA -- 1.8% JPY 260,280,000 Republic of Indonesia Loan Agreement, dated January 1, 1994 (1.00417%), due 03/28/13 1,453,033 USD 5,302,000 Republic of Indonesia Loan Agreement, dated January 1, 1994 (3.3125%), due 03/28/13 3,181,200 USD 3,900,000 Republic of Indonesia Loan Agreement, dated June 14, 1995 LIBOR + .625% (2.75%), due 12/14/19 1,794,000 USD 3,900,000 Republic of Indonesia Loan Agreement, dated June 14, 1995 LIBOR + .625%, (2.6875%), due 12/14/19 1,794,000 USD 5,200,000 Republic of Indonesia Loan Agreement, dated June 14, 1995 LIBOR + .625%, (2.8125%), due 12/14/19 2,392,000
8 See accompanying notes to the financial statements. GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- INDONESIA -- CONTINUED USD 3,800,000 Republic of Indonesia Loan Agreement, dated March 25, 1997 LIBOR + .625%, (2.0625%), due 01/25/06 2,014,000 USD 2,850,000 Republic of Indonesia Loan Agreement, dated March 25, 1997 LIBOR + .625%, (2.0625%), due 01/25/06 1,510,500 USD 2,850,000 Republic of Indonesia Loan Agreement, dated March 25, 1997 LIBOR + .625%, (2.0625%), due 01/25/06 1,510,500 USD 6,090,000 Republic of Indonesia Loan Agreement, dated May 21, 1996 LIBOR + .625%, (2.75%), due 03/21/05 3,105,900 USD 8,120,000 Republic of Indonesia Loan Agreement, dated May 21, 1996 LIBOR + .625%, (2.8125%), due 03/21/05 4,141,200 USD 6,090,000 Republic of Indonesia Loan Agreement, dated May 21, 1996 LIBOR + .625%, (3.0625%), due 03/21/05 3,105,900 ------------- 26,002,233 ------------- JAMAICA -- 0.0% USD 135,225 Jamaica Refinancing Agreement Tranche B, LIBOR + .8125%, (2.1875%), due 11/15/04 121,703 ------------- MOROCCO -- 0.6% USD 9,000,000 Morocco Restructuring and Consolidating Agreement Tranche A, 6 mo. LIBOR + .8125% (2.1875), due 01/01/09 8,325,000 ------------- RUSSIA -- 2.3% DEM 15,000,000 International Bank for Economic Cooperation Loan Agreement* 7,821,756 EUR 5,000,000 International Bank for Economic Cooperation Loan Agreement* 5,099,341 USD 5,000,000 International Investment Bank Loan Agreement* 4,362,500 USD 19,002,375 Russia Foreign Trade Obligations*(b) 15,049,881 ------------- 32,333,478 ------------- YUGOSLAVIA -- 0.1% USD 1,400,368 Yugoslavia New Financing Agreement Tranche A* 658,173 USD 1,499,572 Yugoslavia New Financing Agreement Tranche C* 704,799 ------------- 1,362,972 ------------- TOTAL LOAN ASSIGNMENTS (COST $88,432,789) 116,684,275 -------------
See accompanying notes to the financial statements. 9 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- LOAN PARTICIPATIONS -- 7.1% ALGERIA -- 0.7% JPY 187,500,000 Algeria Tranche 3 Loan Agreement, JPY Long Term Prime +.8125% (2.3875%), (Participation with Salomon), due 03/04/10 1,411,504 JPY 1,261,184,212 Algeria Tranche S1, JPY Long Term Prime + .8125%, (3.0125%), (Participation with Merrill Lynch), due 03/04/10 9,067,512 ------------- 10,479,016 ------------- CAMEROON -- 0.0% NLG 4,968,184 Cameroon Loan Agreement, (No Tranche specified, dated January 31, 1981), (Participation with Salomon)* 291,583 ------------- INDONESIA -- 0.3% USD 1,431,316 Republic of Indonesia Loan Agreement, 6 mo. LIBOR +.70%, (2.3875%), (Participation with Deutsche Bank), due 12/14/19 1,245,244 USD 480,000 Republic of Indonesia Loan Agreement, dated June 14, 1995 LIBOR + .625% (2.75%), (Participation with Salomon), due 12/14/19 220,800 USD 480,000 Republic of Indonesia Loan Agreement, dated June 14, 1995 LIBOR + .625%, (2.6875%), (Participation with Salomon), due 12/14/19 220,800 USD 640,000 Republic of Indonesia Loan Agreement, dated June 14, 1995 LIBOR + .625%, (2.8125%), (Participation with Salomon), due 12/14/19 294,400 USD 558,000 Republic of Indonesia Loan Agreement, dated March 25, 1997 LIBOR + .625%, (2.0625%), (Participation with Salomon), due 01/25/06 295,740 USD 558,000 Republic of Indonesia Loan Agreement, dated March 25, 1997 LIBOR + .625%, (2.0625%), (Participation with Salomon), due 01/25/06 295,740 USD 744,000 Republic of Indonesia Loan Agreement, dated March 25, 1997 LIBOR + .625%, (2.0625%), (Participation with Salomon), due 01/25/06 394,320 USD 570,000 Republic of Indonesia Loan Agreement, dated May 21, 1996 LIBOR + .625%, (2.75%), (Participation with Salomon), due 03/21/05 290,700 USD 760,000 Republic of Indonesia Loan Agreement, dated May 21, 1996 LIBOR + .625%, (2.8125%), (Participation with Salomon), due 03/21/05 387,600
10 See accompanying notes to the financial statements. GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- INDONESIA -- CONTINUED USD 570,000 Republic of Indonesia Loan Agreement, dated May 21, 1996 LIBOR + .625%, (3.0625%), (Participation with Salomon), due 03/21/05 290,700 ------------- 3,936,044 ------------- JAMAICA -- 0.1% USD 218,750 Jamaica Refinancing Agreement Tranche B, LIBOR + .8125%, (2.1875%), (Participation with JP Morgan Chase), due 11/15/04 196,875 USD 1,093,750 Jamaica Refinancing Agreement Tranche B, LIBOR + .8125%, (2.1875%), (Participation with Salomon), due 11/15/04 984,375 ------------- 1,181,250 ------------- RUSSIA -- 5.7% DEM 3,500,000 International Bank for Economic Cooperation Loan Agreement, (Participation with Salomon)* 1,825,076 USD 2,000,000 International Bank for Economic Cooperation Loan Agreement, (Participation with UBS)* 1,892,500 JPY 900,000,000 International Investment Bank Loan Agreement, (Participation with Bank of America)* 6,765,701 DEM 7,500,000 International Investment Bank Loan Agreement, (Participation with Mizuho)* 3,688,727 EUR 11,537,362 Russia Paris Club Debt, Variable Rate, (6.45%), (Participation with Deutsche Bank), due 08/20/20 8,729,348 EUR 16,801,518 Russia Paris Club Debt, Variable Rate, (6.45%), (Participation with Deutsche Bank), due 08/20/20 13,009,273 EUR 11,861,993 Russia Paris Club Debt, Variable Rate, (6.45%), (Participation with Deutsche Bank), due 08/20/20 8,974,969 EUR 48,589,983 Russia Paris Club Debt, Variable Rate, (6.70%), (Participation with Deutsche Bank), due 08/20/20 37,748,500 ------------- 82,634,094 ------------- SERBIA -- 0.2% USD 3,000,000 Serbia New Financing Agreement (Participation with JP Morgan Chase)* 1,530,000
See accompanying notes to the financial statements. 11 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE ($)/ SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- SERBIA -- CONTINUED USD 3,000,000 Serbia Trade & Deposit Facility Agreement (Participation with JP Morgan Chase)* 780,000 ------------- 2,310,000 ------------- YUGOSLAVIA -- 0.1% USD 2,100,416 Yugoslavia New Financing Agreement Tranche B, (Participation with JP Morgan Chase)* 987,195 USD 352,445 Yugoslavia New Financing Agreement Tranche C, (Participation with JP Morgan Chase)* 165,649 ------------- 1,152,844 ------------- TOTAL LOAN PARTICIPATIONS (COST $73,668,829) 101,984,831 ------------- PROMISSORY NOTES -- 0.1% NIGERIA -- 0.1% USD 3,000,000 Central Bank of Nigeria Promissory Notes Series RC, 5.09%, due 1/5/10* 990,000 ------------- TOTAL PROMISSORY NOTES (COST $1,466,442) 990,000 ------------- MUTUAL FUNDS -- 2.7% 353,939 GMO Alpha LIBOR Fund 8,395,431 1,222,269 GMO Short-Duration Collateral Fund 30,568,955 ------------- TOTAL MUTUAL FUNDS (COST $39,675,604) 38,964,386 ------------- PRINCIPAL AMOUNT -------------- CALL OPTIONS PURCHASED -- 0.5% OPTIONS ON BONDS -- 0.5% USD 30,000,000 Mexico Global Bond, 11.50%, due 5/15/26, Expires 03/10/03, Strike 134.80 834,207 USD 10,000,000 Mexico Global Bond, 11.50%, due 5/15/26, Expires 3/10/03, Strike 134.80 282,784 USD 20,000,000 Mexico Global Bond, 11.50%, due 5/15/26, Expires 3/12/03, Strike 134.40 611,094
12 See accompanying notes to the financial statements. GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PRINCIPAL AMOUNT DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- OPTIONS ON BONDS -- CONTINUED USD 10,000,000 Qatar Government International Bond, 9.758%, due 6/15/30, Expires 05/12/03, Strike 122 52,351 USD 60,000,000 Russia Federation Bond, 5%, due 3/31/30, Expires 3/05/03, Strike 82.25 1,993,566 USD 30,000,000 Russia Federation Bond, 5%, due 3/31/30, Expires 3/10/03, Strike 81.8750 1,101,180 USD 20,000,000 Russia Federation Bond, 5%, due 3/31/30, Expires 3/10/03, Strike 82.3750 637,934 USD 20,000,000 Russia Federation Bond, 5%, due 3/31/30, Expires 3/17/03, Strike 83.6250 405,446 USD 20,000,000 Russia Federation Bond, 5%, due 3/31/30, Expires 3/21/03, Strike 84.5625 289,922 USD 25,000,000 Russia Federation Bond, 5%, due 3/31/30, Expires 3/26/03, Strike 85.750 218,857 USD 25,000,000 Russia Federation Bond, 5%, due 3/31/30, Expires 3/27/03, Strike 85.875 173,743 ------------- 6,601,084 ------------- TOTAL CALL OPTIONS PURCHASED (COST $2,964,500) 6,601,084 ------------- PUT OPTIONS PURCHASED -- 0.5% OPTIONS ON INTEREST RATE SWAPS -- 0.5% USD 50,000,000 KRW Swaption, Expires 06/01/05, Strike 7.5% 3,096,638 USD 75,000,000 KRW Swaption, Expires 06/07/05, Strike 7.42% 4,479,646 ------------- 7,576,284 ------------- TOTAL PUT OPTIONS PURCHASED (COST $4,025,000) 7,576,284 ------------- SHARES -------------- RIGHTS AND WARRANTS -- 0.1% MEXICO -- 0.1% 33,077,000 Mexico Par Bond Series B Warrants, Expires 6/30/04** 330,770 33,077,000 Mexico Par Bond Series C Warrants, Expires 6/30/05** 66,154 33,077,000 Mexico Par Bond Series D Warrants, Expires 6/30/06** 19,846 29,000 United Mexican States Recovery Warrants Odd Lot, Expires 6/30/03** 186
See accompanying notes to the financial statements. 13 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- MEXICO -- CONTINUED 54,324,000 United Mexican States Warrants, Expires 12/31/09** 108,648 192,813,000 United Mexican States Warrants, Expires 6/30/03** 1,234,003 ------------- 1,759,607 ------------- NIGERIA -- 0.0% 25,000 Central Bank of Nigeria Payment Adjusted Warrants, Expires 11/15/20** -- ------------- URUGUAY -- 0.0% 4,000,000 Banco Central Del Uruguay Warrants, Expires 1/2/21**(b) -- ------------- VENEZUELA -- 0.0% 195,865 Republic of Venezuela Bond Warrants, Expires 4/18/20** -- 277,160 Republic of Venezuela Recovery Warrants, Expires 4/15/20** -- ------------- -- ------------- TOTAL RIGHTS AND WARRANTS (COST $20,880) 1,759,607 ------------- SHORT-TERM INVESTMENTS -- 4.8% CASH EQUIVALENTS -- 4.8% USD 69,497,181 Merrimac Cash Fund 69,497,181 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $69,497,181) 69,497,181 ------------- TOTAL INVESTMENTS -- 99.7% (Cost $1,394,683,213) 1,434,590,286 Other Assets and Liabilities (net) -- 0.3% 3,663,735 ------------- TOTAL NET ASSETS -- 100.0% $1,438,254,021 =============
See accompanying notes to the financial statements. 14 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003 NOTES TO SCHEDULE OF INVESTMENTS: 144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. DCB - Debt Conversion Bond EMTN - Euromarket Medium Term Note FLIRB - Front Loaded Interest Reduction Bond IAB - Interest Arrears Bond MBIA - Insured as to the payment of principal and interest by MBIA Insurance Corp MYDFA - Multi-Year Deposit Facility Agreement PDI - Past Due Interest PIK - Payment In Kind Variable and step up rates - The rates shown on variable and step up rate notes are the current interest rates at February 28, 2003, which are subject to change based on the terms of the security, including varying reset dates. CURRENCY ABBREVIATIONS:
ARS - Argentine Peso CHF - Swiss Franc DEM - German Mark EUR - Euro FRF - French Franc GBP - British Pound HKD - Hong Kong Dollar ITL - Italian Lira JPY - Japanese Yen KRW - South Korean Won NLG - Netherlands Guilder RUB - Russian Ruble SGD - Singapore Dollar USD - United States Dollar
(a) Security is in default. (b) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). (c) All or a portion of this security has been segregated to cover collateral requirements on reverse repurchase agreements (Note 6). (d) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 6). * Non-performing. Borrower not currently paying interest. ** Non-income producing security. See accompanying notes to the financial statements. 15 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $1,394,683,213) (Note 1) $1,434,590,286 Cash 7,258,774 Foreign currency, at value (cost $12,971,784) (Note 1) 12,953,807 Receivable for investments sold 9,708,807 Receivable for Fund shares sold 44,313,436 Interest receivable 19,885,379 Receivable for open forward foreign currency contracts (Notes 1 and 6) 680,177 Net receivable for open swap contracts (Notes 1 and 6) 17,308,163 -------------- Total assets 1,546,698,829 -------------- LIABILITIES: Payable for investments purchased 42,783,764 Payable for Fund shares repurchased 265,551 Payable to affiliate for (Note 2): Management fee 364,036 Shareholder service fee 133,065 Payable for open forward foreign currency contracts (Notes 1 and 6) 299,449 Payable for variation margin on open futures contracts (Notes 1 and 6) 358 Payable for reverse repurchase agreements (Notes 1 and 6) 64,319,904 Accrued expenses 278,681 -------------- Total liabilities 108,444,808 -------------- NET ASSETS $1,438,254,021 ============== NET ASSETS CONSIST OF: Paid-in capital $1,371,717,462 Distributions in excess of net investment income (18,023,246) Accumulated net realized gain 31,895,613 Net unrealized appreciation 52,664,192 -------------- $1,438,254,021 ============== NET ASSETS ATTRIBUTABLE TO: Class III shares $ 822,080,069 ============== Class IV shares $ 616,173,952 ============== SHARES OUTSTANDING: Class III 86,402,970 ============== Class IV 64,746,490 ============== NET ASSET VALUE PER SHARE: Class III $ 9.51 ============== Class IV $ 9.52 ==============
16 See accompanying notes to the financial statements. GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Interest $125,565,864 Dividends from investment company shares 302,044 ------------ Total income 125,867,908 ------------ EXPENSES: Management fee (Note 2) 4,047,684 Interest expense (Notes 1 and 6) 902,128 Custodian fees 628,875 Audit fees 95,450 Legal fees 47,655 Transfer agent fees 35,040 Trustees fees and related expenses (Note 2) 27,357 Registration fees 10,618 Miscellaneous 14,880 Fees reimbursed by Manager (Note 2) (60,430) ------------ 5,749,257 Shareholder service fee (Note 2) - Class III 966,667 Shareholder service fee (Note 2) - Class IV 512,037 ------------ Net expenses 7,227,961 ------------ Net investment income 118,639,947 ------------ REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 74,288,796 Realized gains distributions from investment company shares 124,651 Closed futures contracts (307,892) Closed swap contracts 1,990,648 Written options 911,250 Foreign currency, forward contracts and foreign currency related transactions (21,365,668) ------------ Net realized gain 55,641,785 ------------ Change in net unrealized appreciation (depreciation) on: Investments 15,833,476 Open futures contracts 42,972 Open swap contracts 5,319,552 Written options (768,963) Foreign currency, forward contracts and foreign currency related transactions (3,910,299) ------------ Net unrealized gain 16,516,738 ------------ Net realized and unrealized gain 72,158,523 ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $190,798,470 ============
See accompanying notes to the financial statements. 17 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 118,639,947 $ 110,823,631 Net realized gain 55,641,785 49,361,236 Change in net unrealized appreciation (depreciation) 16,516,738 7,066,008 -------------- -------------- Net increase in net assets from operations 190,798,470 167,250,875 -------------- -------------- Distributions to shareholders from: Net investment income Class III (69,910,377) (58,047,624) Class IV (55,714,018) (65,295,506) -------------- -------------- Total distributions from net investment income (125,624,395) (123,343,130) -------------- -------------- Net realized gains Class III (12,966,279) -- Class IV (10,131,853) -- -------------- -------------- Total distributions from net realized gains (23,098,132) -- -------------- -------------- (148,722,527) (123,343,130) -------------- -------------- Net share transactions (Note 5): Class III 229,203,802 115,721,050 Class IV 106,900,799 (109,470,121) -------------- -------------- Increase in net assets resulting from net share transactions 336,104,601 6,250,929 -------------- -------------- Total increase in net assets 378,180,544 50,158,674 NET ASSETS: Beginning of period 1,060,073,477 1,009,914,803 -------------- -------------- End of period (including distributions in excess of net investment income of $18,023,246 and $11,215,278, respectively) $1,438,254,021 $1,060,073,477 ============== ==============
18 See accompanying notes to the financial statements. GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ---------------------------------------------------------------- 2003 2002 2001(B) 2000 1999 -------- -------- -------- -------- -------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.30 $ 8.96 $ 8.74 $ 6.89 $ 11.64 -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.94+ 1.01+ 1.13+ 0.84+ 0.92+ Net realized and unrealized gain (loss) 0.45 0.52 0.41 2.20 (4.41) -------- -------- -------- -------- -------- Total from investment operations 1.39 1.53 1.54 3.04 (3.49) -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.99) (1.19) (1.32) (1.07) (0.23) From net realized gains (0.19) -- -- (0.12) (1.03) -------- -------- -------- -------- -------- Total distributions (1.18) (1.19) (1.32) (1.19) (1.26) -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 9.51 $ 9.30 $ 8.96 $ 8.74 $ 6.89 ======== ======== ======== ======== ======== TOTAL RETURN(a) 15.94% 18.53% 18.78% 46.81% (32.94)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $822,080 $570,459 $430,003 $378,593 $450,336 Net operating expenses to average daily net assets 0.57%(f) 0.57%(f) 0.56% 0.56% 0.56% Interest expense to average daily net assets 0.08%(d) 0.14%(d) -- -- -- Total net expenses to average daily net assets 0.65% 0.71% 0.56% 0.56% 0.56% Net investment income to average daily net assets 10.21% 11.17% 12.57% 10.82% 10.99% Portfolio turnover rate 121% 130% 139% 123% 272% Fees and expenses reimbursed by the Manager to average daily net assets: 0.01%(g) 0.02% 0.03% 0.03% 0.18% Purchase and redemption fees consisted of the following per share amounts:(c) $ 0.01 --(e) $ 0.01 N/A N/A
+ Computed using average shares outstanding throughout the period. (a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. Calculation excludes purchase premiums and redemption fees. (b) Effective March 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium and discount on debt securities. The effect of this change for the year ended February 28, 2001 was to decrease net investment income per share by $0.04, increase net realized and unrealized gains and losses per share by $0.04 and decrease the ratio of net investment income to average net assets from 13.06% to 12.57%. Per share data and ratios/supplemental data for periods prior to March 1, 2000 have not been restated to reflect this change. (c) Effective March 1, 2000, the Fund adopted the provisions of the revised AICPA Audit and Accounting Guide for Investment Companies which requires the disclosure of the per share effect of purchase and redemption fees. Periods prior to March 1, 2000 have not been restated to reflect this change. Amounts calculated using average shares outstanding throughout the period. (d) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income. (e) Purchase and redemption fees were less than $0.01 per share. (f) Net expenses exclude expenses incurred indirectly through investment in underlying funds. See Note 2. (g) Effective June 30, 2002, the Fund ceased reimbursing any Fund fees or expenses. See Note 2. See accompanying notes to the financial statements. 19 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, --------------------------------------------------------------------- 2003 2002 2001(B) 2000 1999** --------- --------- --------- --------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.29 $ 8.95 $ 8.74 $ 6.90 $ 11.63 -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.95+ 1.01+ 1.14+ 0.84+ 0.91+ Net realized and unrealized gain (loss) 0.46 0.52 0.40 2.20 (4.37) -------- -------- -------- -------- -------- Total from investment operations 1.41 1.53 1.54 3.04 (3.46) -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.99) (1.19) (1.33) (1.08) (0.24) From net realized gains (0.19) -- -- (0.12) (1.03) -------- -------- -------- -------- -------- Total distributions (1.18) (1.19) (1.33) (1.20) (1.27) -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 9.52 $ 9.29 $ 8.95 $ 8.74 $ 6.90 ======== ======== ======== ======== ======== TOTAL RETURN(a) 16.25% 18.60% 18.71% 47.00% (32.82)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $616,174 $489,615 $579,912 $545,869 $323,285 Net operating expenses to average daily net assets 0.52%(f) 0.52%(f) 0.51% 0.51% 0.51% Interest expense to average daily net assets 0.08%(d) 0.14%(d) -- -- -- Total net expenses to average daily net assets 0.60% 0.66% 0.51% 0.51% 0.51% Net investment income to average daily net assets 10.32% 11.22% 12.62% 10.87% 10.87% Portfolio turnover rate 121% 130% 139% 123% 272% Fees and expenses reimbursed by the Manager to average daily net assets: 0.01%(g) 0.02% 0.03% 0.03% 0.18% Purchase and redemption fees consisted of the following per share amounts:(c) $ 0.01 --(e) $ 0.01 N/A N/A
+ Computed using average shares outstanding throughout the period. (a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. Calculation excludes purchase premiums and redemption fees. (b) Effective March 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium and discount on debt securities. The effect of this change for the year ended February 28, 2001 was to decrease net investment income per share by $0.04, increase net realized and unrealized gains and losses per share by $0.04 and decrease the ratio of net investment income to average net assets from 13.11% to 12.62%. Per share data and ratios/supplemental data for periods prior to March 1, 2000 have not been restated to reflect this change. (c) Effective March 1, 2000, the Fund adopted the provisions of the revised AICPA Audit and Accounting Guide for Investment Companies which requires the disclosure of the per share effect of purchase and redemption fees. Periods prior to March 1, 2000 have not been restated to reflect this change. Amounts calculated using average shares outstanding throughout the period. (d) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income. (e) Purchase and redemption fees were less than $0.01 per share. (f) Net expenses exclude expenses incurred indirectly through invesment in underlying funds. See Note 2. (g) Effective June 30, 2002, the Fund ceased reimbursing any Fund fees or expenses. See Note 2. 20 See accompanying notes to the financial statements. GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Emerging Country Debt Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks to earn high total return through direct and indirect investment in sovereign debt of developing countries in Asia, Latin America, the Middle East, Africa and Europe. The Fund's benchmark is the J.P. Morgan Emerging Markets Bond Index Global. Throughout the year ended February 28, 2003, the Fund had two classes of shares outstanding: Class III and Class IV. The principal economic difference between the classes of shares is the level of shareholder service fees borne by the classes. Eligibility for and automatic conversion among the various classes of shares is generally based on the total amount of assets invested in a particular fund or with GMO, as more fully outlined in the Trust's prospectus. At February 28, 2003, 2.1% of the Fund was invested in GMO Short-Duration Collateral Fund and 0.6% of the Fund was invested in GMO Alpha LIBOR Fund, each a separate fund of GMO Trust managed by GMO. Shares of GMO Alpha LIBOR Fund and GMO Short-Duration Collateral Fund are not publicly available for direct purchase. The financial statements of GMO Alpha LIBOR Fund and GMO Short-Duration Collateral Fund should be read in conjunction with the Fund's financial statements. The Fund invested a substantial portion of its assets in GMO Alpha LIBOR Fund ("Alpha LIBOR Fund") to obtain the Fund's core portfolio exposure. In November 2002, certain bonds held by Alpha LIBOR Fund ("NPF bonds") defaulted amid allegations of fraud and significant violations of the bonds' indentures. Currently, no market exists for the NPF bonds, and they are being valued at fair value by the trustees of GMO Trust or persons acting at their direction. The devaluation of the NPF bonds had a negative impact on the Fund's net asset value per share. In late November 2002, Alpha LIBOR Fund undertook a reorganization transaction with a new series of GMO Trust, GMO Short-Duration Collateral Fund ("SDCF") and approximately 78% of the Fund's interest in Alpha LIBOR Fund was transferred to SDCF in exchange for SDCF shares. The reorganization was treated as a sale of the Alpha LIBOR Fund shares for financial reporting purposes and a distribution by Alpha LIBOR Fund for tax purposes. Accordingly, for financial reporting purposes, the Fund recognized a loss on the sale of the Alpha LIBOR shares of 21 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- approximately $2,638,586. In addition, the Fund recognized for tax, but not for financial reporting purposes, ordinary income of $1,355,616 and long-term capital gains of $241,787 from Alpha LIBOR Fund. $4,235,989 was added to the tax cost basis of the Fund's holdings of Alpha LIBOR Fund. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of other GMO Funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. Some fixed income securities are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and at its discretion may override a price supplied by a source (by taking a price supplied by another source). Securities may be valued by independent pricing services which use prices provided by market-makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. At February 28, 2003, the total value of these securities represented 15% of net assets. 22 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- Certain securities held by the Fund, or underlying Funds in which it invests, were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in foreign currency values that are unfavorable to the Fund. The value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through forward currency contracts as of February 28, 2003. 23 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- FUTURES CONTRACTS The Fund may purchase and sell futures contracts to manage its exposure to the financial markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 28, 2003. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 28, 2003, there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the 24 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- amounts paid or offset against the proceeds on the underlying future, security or currency transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. See the Schedule of Investments for all open purchased option contracts as of February 28, 2003. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager. LOAN AGREEMENTS The Fund may invest in direct debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans from third parties. A loan is often administered by a bank or other financial institution (the lender) that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the loan agreement and only upon receipt by the lender of payments from the borrower. The Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, the Fund may be subject to the credit risk of both the borrower and the lender that is selling the loan agreement. When the Fund purchases assignments from lenders it acquires direct rights against the borrower on the loan. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the financial markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate, total return, forward swap spread lock and credit default swap agreements to manage its exposure to interest rates and credit risk. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Total return swap agreements involve 25 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- commitments to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. Forward swap spread lock swap agreements involve commitments to pay or receive a settlement amount calculated as the difference between the swap spread and a fixed spread, multiplied by the notional amount times the duration of the swap rate. The swap spread is the difference between the benchmark swap rate (market rate) and the specific treasury rate. In a credit default swap, one party makes a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party on its obligation. The Fund may use credit default swaps to provide a measure of protection against defaults of sovereign or corporate issuers (i.e., to reduce risk where the Fund owns or has exposure to the issuer) or to take an active long or short position with respect to the likelihood of a particular issuer's default. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements are included as part of interest income. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market, and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in interest rates. See Note 6 for a summary of open swap agreements as of February 28, 2003. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. 26 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. REVERSE REPURCHASE AGREEMENTS The Fund may enter into reverse repurchase agreements with certain banks and broker/dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. Government securities or other liquid high grade debt obligations in the name of the counterparty equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities the Fund has sold may decline below the price at which it is obligated to repurchase them under the agreement. At February 28, 2003, the Fund had entered into reverse repurchase agreements having a market value of $64,319,904, collateralized by securities with a market value of $65,840,957. See Note 6 for a summary of open reverse repurchase agreements as of February 28, 2003. DELAYED DELIVERY COMMITMENTS The Fund may purchase or sell securities on a when-issued or forward commitment basis. Payment and delivery may take place a month or more after the date of the transaction. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. Collateral consisting of liquid securities or cash and cash equivalents is maintained with the custodian in an amount at least equal to these commitments. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 2003, the Fund had no securities on loan. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax 27 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country's tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. During the years ended February 28, 2002, and February 28, 2003, the tax basis of distributions paid was as follows: ordinary income -- $123,343,130 and $139,039,496, respectively and long-term capital gains -- $0 and $9,683,031, respectively. As of February 28, 2003, the components of distributable earnings on a tax basis consisted of $61,300,823 and $683,936 of undistributed ordinary income and undistributed long-term capital gains, respectively. The temporary differences between book and tax basis distributable earnings are primarily due to differing treatments for amortization of premiums and discounts on debt securities and losses on wash sales transactions. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to foreign currency transactions, swap transactions, differing treatments for amortization of premiums and discounts on debt securities and the GMO Alpha LIBOR Fund transaction (See Note 1). The financial highlights exclude these adjustments.
Distributions In Excess of Accumulated Net Investment Income Realized Gain Paid-in Capital ----------------- --------------- --------------- $176,480 $3,905,179 $(4,081,659)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Interest income is recorded on the accrual basis, and is adjusted for the amortization of premium and discounts. Income is not recognized, nor are premium and discount amortized on securities for which collection is not expected. Dividend 28 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- income, net of applicable withholding taxes, is recorded on the ex-dividend date or non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Interest income on inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of these securities is recorded as interest income. ALLOCATION OF OPERATING ACTIVITY The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro-rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class' operations. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is .50% of the amount invested. In the case of cash redemptions, the fee is .25% of the amount redeemed. If the Manager determines that any portion of a cash purchase fee is offset by a corresponding cash redemption occurring on the same day, the purchase premium or redemption fee charged by the Fund will be reduced by 100% with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived if the Manager determines the Fund is substantially underweighted/overweighted in cash so that a purchase or redemption will not require a securities transaction. All purchase premuims and redemption fees are paid to and recorded by the Fund as paid-in-capital. For the years ending February 28, 2002 and 2003, the Fund received $142,331 and $1,199,731 in purchase premiums and $365,848 and $85,527 in redemption fees, respectively. There is no premium for reinvested distributions. INVESTMENT RISK Investments in emerging country debt present certain risks that are not inherent in many other securities. Many emerging countries present elements of political and/or economic instability, which may result in the Fund's inability to collect on a timely basis, or in full, principal and interest payments. Further, countries may impose various types of foreign currency regulations or controls which may impede the Fund's ability to repatriate amounts it receives. The Fund may acquire interests in securities or bank loans which are in default at the time of acquisition in anticipation of improving conditions in the related countries. These factors may result in significant volatility in the values of its holdings. The markets for emerging country debt are relatively illiquid. Accordingly, the Fund may not be able to realize in an actual sale amounts approximating those used to value its holdings. 29 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- GMO Emerging Country Debt Fund owns loans and bonds representing significant exposure to the risk of default in many countries, but has the most sizable of such positions relating to Russia and Brazil. The Fund's financial position would be substantially adversely affected in the case of a default by either of these countries on obligations held by the Fund, or on obligations issued by those countries generally. The Fund has purchased default protection in the form of credit default swap agreements with respect to both countries, which may offset some of the losses that the Fund might experience in the case of a default on bonds issued by such countries. However, it is important to note that (i) such protection would not cover losses due to defaults on loan assignments or participations, (ii) such protection will generally not be sufficient to cover all of the Fund's losses in the case of default, and (iii) due to the privately negotiated nature of such instruments, under some circumstances, the protection offered by such instruments may not be realized, even if the Fund incurs substantial losses due to weakening of the credit or virtual default by the countries. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .35% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .15% for Class III shares and .10% for Class IV shares. Effective June 30, 2002, the Manager no longer reimburses any Fund fees or expenses. Prior to June 30, 2002, GMO had an agreement to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, custody fees, fees and expenses of the independent Trustees of the Trust (including legal fees), 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) exceeded the management fee. The Fund incurs fees and expenses indirectly as a shareholder in GMO Alpha LIBOR Fund and GMO Short-Duration Collateral Fund. For the year ended February 28, 2003, indirect operating expenses (excluding investment-related expenses) were less than 0.001% of the Fund's average daily net assets, and indirect investment-related expenses (including, but not limited to, interest expense, foreign audit expense, and investment-related legal expense) were 0.001% of the Fund's average daily net assets. As of February 28, 2003, greater than 10% of the Fund's shares were held by accounts for which the Manager has investment discretion. 30 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- The Fund's portion of the fee paid by the Trust to the independent Trustees during the year ended February 28, 2003, was $19,637. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2003, aggregated $1,547,907,264 and $1,436,259,888, respectively. For the year ended February 28, 2003, the cost of purchases and proceeds from sales of investments exclude the initial transfer of GMO Alpha LIBOR Fund's investments in GMO Short-Duration Collateral Fund of $30,593,581. (See Note 1) At February 28, 2003, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Appreciation -------------- ---------------- ---------------- -------------- $1,410,413,188 $155,285,779 $(131,108,681) $24,177,098
4. PRINCIPAL SHAREHOLDERS At February 28, 2003, 29.4% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's shares outstanding. Investment activities of these shareholders may have a material effect on the Fund. 31 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 -------------------------- -------------------------- Shares Amount Shares Amount Class III: ----------- ------------- ----------- ------------- Shares sold 29,282,626 $ 269,640,084 18,610,565 $ 166,106,864 Shares issued to shareholders in reinvestment of distributions 7,513,503 67,172,341 5,226,345 44,398,759 Shares repurchased (11,754,805) (107,608,623) (10,466,626) (94,784,573) ----------- ------------- ----------- ------------- Net increase 25,041,324 $ 229,203,802 13,370,284 $ 115,721,050 =========== ============= =========== ============= Year Ended Year Ended February 28, 2003 February 28, 2002 -------------------------- -------------------------- Shares Amount Shares Amount Class IV: ----------- ------------- ----------- ------------- Shares sold 9,603,263 $ 86,925,003 3,577,633 $ 31,523,144 Shares issued to shareholders in reinvestment of distributions 7,164,059 64,094,884 7,423,129 63,116,014 Shares repurchased (4,705,391) (44,119,088) (23,086,937) (204,109,279) ----------- ------------- ----------- ------------- Net increase (decrease) 12,061,931 $ 106,900,799 (12,086,175) $(109,470,121) =========== ============= =========== =============
6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 28, 2003 is as follows: FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) ---------- ---------------- ----------------- ------------ -------------- Buys 3/04/03 CHF 2,800,000 $ 2,064,897 $ 2,327 3/05/03 KRW 9,200,000,000 7,706,801 (17,800) --------- $ (15,473) =========
32 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- FORWARD CURRENCY CONTRACTS -- CONTINUED
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) ---------- ---------------- ----------------- ------------ -------------- Sales 3/04/03 CHF 2,800,000 $ 2,064,897 $ (62,781) 4/29/03 CHF 2,800,000 2,067,296 (2,399) 4/22/03 EUR 101,300,000 108,994,782 247,138 4/15/03 GBP 5,500,000 8,639,542 207,098 5/27/03 HKD 194,972,500 24,992,640 7,360 3/18/03 JPY 6,100,000,000 51,622,956 203,722 3/05/03 KRW 9,200,000,000 7,706,801 (216,469) 6/05/03 KRW 8,700,000,000 7,232,940 12,532 --------- $ 396,201 =========
FUTURES CONTRACTS
Number of Contract Net Unrealized Contracts Type Expiration Date Value Depreciation --------- ----------------------------------- --------------- ----------- -------------- Sales 2 Japanese Government Bond 10 Yr. March 2003 $2,421,823 $(28,381) 4 Japanese Government Bond 10 Yr. June 2003 4,839,636 (5,674) -------- $(34,055) ========
At February 28, 2003, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. 33 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- WRITTEN OPTION TRANSACTIONS
Puts Calls ------------------------------ ---------------------------- Principal Amount Principal Amount of Contracts of Contracts (000's omitted) Premiums (000's omitted) Premiums ---------------- ------------ ---------------- ---------- Outstanding, beginning of period 27,000 $ 911,250 -- $ -- Options expired (27,000) (911,250) -- -- ------------ --------- ---------- ---------- Outstanding, end of period -- $ -- -- $ -- ============ ========= ========== ==========
REVERSE REPURCHASE AGREEMENTS
Face Value Description Market Value -------------- -------------------------------------------------- ------------ SGD 108,009,669 Deutsche Bank., 0.77%, dated 1/2/03, to be $62,180,598 repurchased on 4/2/03 at face value plus accrued interest. USD 2,139,306 J.P Morgan Chase & Co., 0.00%, dated 11/13/02, to 2,139,306 be repurchased on demand at face value plus accrued interest. ------------ $64,319,904 ============ Average balance outstanding $ 74,950,665 Average interest rate 1.33% Maximum balance outstanding $144,519,110 Average shares outstanding 125,622,994 Average balance per share outstanding .58
34 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ------------------- ---------- -------------------------------------------------- -------------- CREDIT DEFAULT SWAPS 10,000,000 USD 4/07/03 Agreement with JPMorgan Chase Bank dated 2/06/03 $ (155,260) to pay 325,000 USD on the effective date. The fund receives payment only upon a default event in Venezuela, the notional amount times the difference between the par value and the then-market value of Republic of Venezuela, 6 month LIBOR + .88%, due 12/18/07. 5,000,000 USD 4/18/03 Agreement with Deutsche Bank AG dated 4/12/01 to (22,363) pay 2.75% per year times the notional amount. The fund receives payment only upon a default event in the Philippines, the notional amount times the difference between the par value and the then-market value of Republic of the Philippines, 8.875% due 04/15/08. 5,000,000 USD 4/21/03 Agreement with UBS AG dated 10/16/01 to pay 7.30% (129,814) per year times the notional amount. The fund receives payment only upon a default event in Brazil, the notional amount times the difference between the par value and the then-market value of the Republic of Brazil, 11.625% due 4/15/04. 8,000,000 USD 4/25/03 Agreement with Goldman Sachs International dated (1,043,186) 10/03/02 to pay 1,120,000 USD on the effective date. The fund receives payment only upon a default event in Brazil, the notional amount times the difference between the par value and the then-market value of the Republic of Brazil, 14.0% due 10/15/09.
35 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ------------------- ---------- -------------------------------------------------- -------------- 10,000,000 USD 6/20/03 Agreement with UBS AG dated 12/19/02 to pay 16.50% $ (599,423) per year times the notional amount. The fund receives payment only upon a default event in Brazil, the notional amount times the difference between the par value and the then-market value of the Republic of Brazil, 8.0% due 4/15/14. 15,000,000 USD 6/20/03 Agreement with Goldman Sachs International dated 665,815 1/14/99 to receive 11.60% per year times the notional amount. The fund makes payment only upon a default event in Colombia, the notional amount times the difference between the par value and the then-market value of Republic of Colombia, 7.625% due 2/15/07. 5,000,000 USD 6/30/03 Agreement with Deutsche Bank AG dated 2/06/03 to 72,267 pay 17.25% per year times the notional amount. The fund receives payment only upon a default event in Venezuela, the notional amount times the difference between the par value and the then-market value of Republic of Venezuela, 9.25% due 9/15/27. 7,500,000 USD 7/23/03 Agreement with Goldman Sachs International dated (77,951) 7/18/01 to pay 4.80% per year times the notional amount. The fund receives payment only upon a default event in Colombia, the notional amount times the difference between the par value and the then-market value of Republic of Colombia, 9.75% due 4/23/09.
36 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ------------------- ---------- -------------------------------------------------- -------------- 5,000,000 USD 10/15/03 Agreement with Deutsche Bank AG dated 1/21/03 to $ (118,476) pay 11.20% per year times the notional amount. The fund receives payment only upon a default event in Brazil, the notional amount times the difference between the par value and the then-market value of Republic of Brazil, 12.25% due 3/06/30. 5,000,000 USD 10/16/03 Agreement with Deutsche Bank AG dated 10/11/00 to (46,800) pay 2.83% per year times the notional amount. The fund receives payment only upon a default event in the Philippines, the notional amount times the difference between the par value and the then-market value of Republic of Philippines, 8.875% due 4/15/08. 15,000,000 USD 12/18/03 Agreement with Deutsche Bank AG dated 2/06/03 to 71,374 receive 5.50% per year times the notional amount. The fund makes payment only upon a default event on the Gazprom Loan Facility, due 12/17/04. The payment the fund makes is equal to the notional amount times the difference between the par value and the then-market value of Gazprom Loan Facility, due 12/17/04. 5,000,000 USD 4/13/04 Agreement with Goldman Sachs International dated (410,962) 4/04/01 to pay 11.50% per year times the notional amount. The fund receives payment only upon a default event in Turkey, the notional amount times the difference between the par value and the then-market value of Republic of Turkey, 11.75% due 6/15/10.
37 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ------------------- ---------- -------------------------------------------------- -------------- 8,000,000 USD 4/15/04 Agreement with Morgan Guaranty Trust Company dated $ 49,634 3/13/02 to pay 5.75% per year times the notional amount. The fund receives payment only upon a default event in Brazil, the notional amount times the difference between the par value and the then-market value of the Federative Republic of Brazil, 8.00% due 4/15/14 5,000,000 USD 4/15/04 Agreement with Bank of America N.A. dated 11/28/01 (109,231) to pay 7.95% per year times the notional amount. The fund receives payment only upon a default event in Brazil, the notional amount times the difference between the par value and the then-market value of the Republic of Brazil, 8.00% due 4/15/14. 5,000,000 USD 6/18/05 Agreement with Deutsche Bank AG dated 6/18/02 to 115,901 pay 2.35% per year times the notional amount. The fund receives payment only upon a default event in the Philippines, the notional amount times the difference between the par value and the then-market value of Republic of the Philippines, 8.875% due 04/15/08. 5,000,000 USD 7/15/05 Agreement with Banque Paribas dated 10/18/02 to 487,531 pay 10.0% per year times the notional amount. The fund receives payment only upon a default event on the Banco Latinoamericano de Exportaciones SA Euro Medium Term Notes, 7.71%, due 9/22/05. The payment the fund receives is equal to the notional amount times the difference between the par value and the then-market value of Banco Latinoamericano de Exportaciones SA Euro Medium Term Notes, 7.71%, due 9/22/05.
38 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ------------------- ---------- -------------------------------------------------- -------------- 7,000,000 USD 8/05/05 Agreement with Deutsche Bank AG dated 7/31/02 to $ 75,610 pay 3.35% per year times the notional amount. The fund receives payment only upon a default event in the Philippines, the notional amount times the difference between the par value and the then-market value of Republic of Philippines, 8.875%, due 4/15/08. 10,000,000 USD 11/06/05 Agreement with JPMorgan Chase Bank dated 11/05/02 (925,017) to pay 9.30% per year times the notional amount. The fund receives payment only upon a default event in Colombia, the notional amount times the difference between the par value and the then-market value of Republic of Colombia, 10.0% due 1/23/12. 15,000,000 USD 4/03/06 Agreement Morgan Guaranty Trust Company dated 48,185 3/29/01 to pay 0.25% per year times the notional amount. The fund receives payment only upon a default event on the Banco Santander Senior Bonds or Loans. The payment the fund receives is equal to the notional amount times the difference between the par value and the then-market value of any series of Banco Santander Senior Bonds or Loans.
39 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ------------------- ---------- -------------------------------------------------- -------------- 15,000,000 USD 4/06/06 Agreement with Morgan Guaranty Trust Company dated $ 44,647 04/03/01 to pay 0.26% per year times the notional amount. The fund receives payment only upon a default event on the Banco Santander Senior Bonds or Loans. The payment the fund receives is equal to the notional amount times the difference between and the par value and the then-market value of any series of Banco Santander Senior Bonds or Loans. 30,000,000 USD 4/10/06 Agreement with Morgan Guaranty Trust Company dated 78,540 4/05/01 to pay 0.275% per year times the notional amount. The fund receives payment only upon a default event on the Banco Santander Senior Bonds or Loans. The payment the fund receives is equal to the notional amount times the difference between the par value and the then-market value of any series of Banco Santander Senior Bonds or Loans. 10,000,000 USD 4/10/06 Agreement with Morgan Guaranty Trust Company dated 30,096 4/04/01 to pay 0.26% per year times the notional amount. The fund receives payment only upon a default event on the Banco Santander Senior Bonds or Loans. The payment the fund receives is equal to the notional amount times the difference between the par value and the then-market value of any series of Banco Santander Bonds or Loans.
40 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ------------------- ---------- -------------------------------------------------- -------------- 25,000,000 USD 4/30/06 Agreement with Morgan Guaranty Trust Company dated $ (44,147) 4/25/01 to pay 0.27% per year times the notional amount. The fund receives payment only upon a default event on the Banco Bilbao Vizcaya Senior Bonds or Loans. The payment the fund receives is equal to the notional amount times the difference between the par value and the then-market value of Banco Bilbao Vizcaya Senior Bonds or Loans. 15,000,000 USD 6/08/06 Agreement with Morgan Guaranty Trust Company dated 300,067 6/05/01 to receive 2.95% per year times the notional amount. The fund makes payment only upon a default event in Mexico, the notional amount times the difference between the par value and the then-market value of United Mexican States, 8.375% due 1/14/11. 20,000,000 USD 8/09/06 Agreement with JPMorgan Chase Bank dated 8/06/02 (73,770) to pay 0.420% per year times the notional amount. The fund receives payment only upon a default event on the Banco Bilbao Vizcaya Argentaria SA, 5.0% due 6/24/08. The payment the fund receives is equal to the notional amount times the difference between the par value and the then-market value of Banco Bilbao Vizcaya Argentaria SA, 5.0% due 6/24/08.
41 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ------------------- ---------- -------------------------------------------------- -------------- 5,000,000 USD 9/27/06 Agreement with Merrill Lynch International dated $ (22,857) 11/01/02 to receive 5.70% per year times the notional amount. The fund makes payment only upon a default event in the Dominican Republic, the notional amount times the difference between the par value and the then-market value of the Government of Dominican Republic, 9.50% due 9/27/06. 10,000,000 USD 2/18/07 Agreement with Morgan Guaranty Trust Company dated (494,636) 2/13/02 to pay 4.6% per year times the notional amount. The fund receives payment only upon a default event in Russia, the notional amount times the difference between the par value and the then-market value of Russia Eurobond, 5.0% due 3/31/30. 10,000,000 USD 2/26/07 Agreement with Salomon Brothers International (160,406) Limited dated 2/21/02 to pay 2.15% per year times the notional amount. The fund receives payment only upon a default event in South Africa, the notional amount times the difference between the par value and the then-market value of the Republic of South Africa, 9.125% due 05/19/09. 10,000,000 USD 6/27/07 Agreement with JPMorgan Chase Bank dated 06/24/02 (33,745) to pay 0.330% per year times the notional amount. The fund receives payment only upon a default event on the Banco Bilbao Vizcaya of Spain. The payment the fund receives is equal to the notional amount times the difference between the par value and the then-market value of Banco Bilbao Vizcaya of Spain.
42 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ------------------- ---------- -------------------------------------------------- -------------- 10,000,000 USD 7/02/07 Agreement with Citibank N.A. dated 6/27/02 to pay $ (38,781) 0.640% per year times the notional amount. The fund receives payment only upon a default event on the Bank of China bonds or loans. The payment the fund receives is equal to the notional amount times the difference between the par value and the then-market value of the Bank of China bonds or loans. 3,000,000 USD 7/02/07 Agreement with Deutsche Bank AG dated 6/27/02 to (11,950) pay 0.640% per year times the notional amount. The fund receives payment only upon a default event in China, the notional amount times the difference between the par value and the then-market value of the Bank of China, 8.25% due 03/15/14. 15,000,000 USD 9/27/07 Agreement with JPMorgan Chase Bank dated 9/26/02 (24,746) to pay 0.330% per year times the notional amount. The fund receives payment only upon a default event on the HSBC Bank Plc, 3 month LIBOR + .05%, due 4/12/06. The payment the fund receives is equal to the notional amount times the difference between the par value and the then-market value of HSBC Bank Plc, 3 month LIBOR + .05%, due 4/12/06.
43 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ------------------- ---------- -------------------------------------------------- -------------- 10,000,000 USD 10/10/07 Agreement with JPMorgan Chase Bank dated 10/09/02 $ (186,360) to pay 0.70% per year times the notional amount. The fund receives payment only upon a default event on the Banco Bilbao Vizcaya Argentaria SA, 5.0% due 6/24/08. The payment the fund receives is equal to the notional amount times the difference between the par value and the then-market value of Banco Bilbao Vizcaya Argentaria SA, 5.0% due 6/24/08. 8,000,000 USD 10/19/07 Agreement with Deutsche Bank AG dated 10/18/02 to 457,103 pay 15.0% per year times the notional amount. The fund receives payment only upon a default event in Venezuela, the notional amount times the difference between the par value and the then-market value of the Republic of Venezuela, 9.25% due 9/15/27. 5,000,000 USD 10/22/07 Agreement with JPMorgan Chase Bank dated 10/21/02 (59,704) to pay 0.540% per year times the notional amount. The fund receives payment only upon a default event on the Banco Bilbao Vizcaya Argentaria SA, 5.0% due 6/24/08. The payment the fund receives is equal to the notional amount times the difference between the par value and the then-market value of Banco Bilbao Vizcaya Argentaria SA, 5.0% due 6/24/08.
44 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ------------------- ---------- -------------------------------------------------- -------------- 5,000,000 USD 10/23/07 Agreement with JPMorgan Chase Bank dated 10/22/02 $ (47,338) to pay 0.480% per year times the notional amount. The fund receives payment only upon a default event on the Banco Bilbao Vizcaya Argentaria SA, 5.0% due 6/24/08. The payment the fund receives is equal to the notional amount times the difference between the par value and the then-market value of Banco Bilbao Vizcaya Argentaria SA, 5.0% due 6/24/08. 5,000,000 USD 10/30/07 Agreement with Deutsche Bank AG dated 10/29/02 to (38,843) pay 0.440% per year times the notional amount. The fund receives payment only upon a default event on the Banco Bilbao Vizcaya Argentaria SA, 5.0% due 6/24/08. The payment the fund receives is equal to the notional amount times the difference between the par value and the then-market value of Banco Bilbao Vizcaya Argentaria SA, 5.0% due 6/24/08. 10,000,000 USD 11/25/07 Agreement with Deutsche Bank AG dated 11/22/02 to (1,232) pay 1.150% per year times the notional amount. The fund receives payment only upon a default event on the Endesa SA of Spain, 4.375% due 6/18/09. The payment the fund receives is equal to the notional amount times the difference between the par value and the then-market value of Endesa SA of Spain, 4.375% due 6/18/09.
45 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ------------------- ---------- -------------------------------------------------- -------------- 15,000,000 USD 11/27/07 Agreement with JPMorgan Chase Bank dated 11/26/02 $ 26,553 to pay 1.10% per year times the notional amount. The fund receives payment only upon a default event on the Endesa SA of Spain, 5.25% due 2/22/06. The payment the fund receives is equal to the notional amount times the difference between the par value and the then-market value of Endesa SA of Spain, 5.25% due 2/22/06. 5,000,000 USD 7/30/12 Agreement with JPMorgan Chase Bank dated 7/25/02 388,401 to receive 3.05% per year times the notional amount. The fund makes payment only upon a default event in Chile, the notional amount times the difference between the par value and the tnen-market value of Republic of Chile, 7.125% due 1/11/12. 10,000,000 USD 8/12/12 Agreement with JPMorgan Chase Bank dated 8/07/02 863,760 to receive 4.42% per year times the notional amount. The fund makes payment only upon a default event in Mexico, the notional amount times the difference between the par value and the then-market value of United Mexican States, 7.5% due 1/14/12. 15,000,000 USD 9/19/12 Agreement with Bank of America N.A. dated 9/18/02 1,218,112 to receive 4.07% per year times the notional amount. The fund makes payment only upon a default event in Mexico, the notional amount times the difference between the par value and the then-market value of United Mexican States, 11.375% due 9/15/16.
46 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ------------------- ---------- -------------------------------------------------- -------------- 10,000,000 USD 10/03/12 Agreement with JPMorgan Chase Bank dated 10/02/02 $ 830,871 to receive 4.12% per year times the notional amount. The fund makes payment only upon a default event in Mexico, the notional amount times the difference between the par value and the then-market value of United Mexican States, 7.5% due 1/14/12. 10,000,000 USD 10/04/12 Agreement with JPMorgan Chase Bank dated 10/03/02 821,881 to receive 2.95% per year times the notional amount. The fund makes payment only upon a default event in Chile, the notional amount times the difference between the par value and the then-market value of Republic of Chile, 7.125% due 1/11/12. 5,000,000 USD 11/05/12 Agreement with Deutsche Bank AG dated 11/04/02 to (895,351) receive 6.50% per year times the notional amount. The fund makes payment only upon a default event in Jamaica, the notional amount times the difference between the par value and the then-market value of the Government of Jamaica, 11.625% due 1/15/22. 10,000,000 USD 1/08/13 Agreement with Deutsche Bank AG dated 1/07/03 to (212,865) receive 7.15% per year times the notional amount. The fund makes payment only upon a default event in Colombia, the notional amount times the difference between the par value and the then-market value of Republic of Colombia, 11.75% due 2/25/20.
47 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ------------------- ---------- -------------------------------------------------- -------------- 10,000,000 USD 1/09/13 Agreement with Deutsche Bank AG dated 1/08/03 to $ 86,756 receive 8.25% per year times the notional amount. The fund makes payment only upon a default event in Turkey, the notional amount times the difference between the par value and the then-market value of Republic of Turkey, 11.875% due 1/15/30. 7,000,000 USD 1/10/13 Agreement with JPMorgan Chase Bank dated 1/09/03 (28,657) to receive 7.50% per year times the notional amount. The fund makes payment only upon a default event in Colombia, the notional amount times the difference between the par value and the then-market value of Republic of Colombia, 10.0% due 1/23/12. 10,000,000 USD 2/07/13 Agreement with JPMorgan Chase Bank dated 2/06/03 312,155 to receive 8.30% per year times the notional amount. The fund makes payment only upon a default event in Colombia, the notional amount times the difference between the par value and the then-market value of Republic of Colombia, 11.75% due 2/25/20. 15,000,000 USD 2/11/13 Agreement with JPMorgan Chase Bank dated 2/10/03 3,513 to receive 3.05% per year times the notional amount. The fund makes payment only upon a default event in Mexico, the notional amount times the difference between the par value and the then-market value of United Mexican States, 11.5% due 5/15/26.
48 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ------------------- ---------- -------------------------------------------------- -------------- 10,000,000 USD 10/05/17 Agreement with JPMorgan Chase Bank dated 10/04/02 $ 943,986 to receive 4.20% per year times the notional amount. The fund makes payment only upon a default event in Mexico, the notional amount times the difference between the par value and the then-market value of United Mexican States, 11.5% due 5/15/26. INTEREST RATE SWAPS 1,000,000,000 HKD 4/03/03 Agreement with Morgan Guaranty Trust Company dated (693,704) 3/30/00 to pay the notional amount multiplied by 7.12% and to receive the notional amount multiplied by the 3 month Floating Rate Hong Kong HIBOR adjusted by a specified spread. 129,500,000 USD 4/03/03 Agreement with Morgan Guaranty Trust Company dated 721,450 3/30/00 to receive the notional amount multiplied by 7.23% and to pay the notional amount multiplied by the 3 month LIBOR adjusted by a specified spread. 1,000,000,000 HKD 8/07/04 Agreement with Morgan Guaranty Trust Company dated (5,359,291) 8/03/01 to pay the notional amount multiplied by 4.75% and to receive the notional amount multiplied by 3 month Floating Rate Hong Kong HIBOR adjusted by a specified spread. 130,600,000 USD 8/07/04 Agreement with Morgan Guaranty Trust Company dated 6,105,324 8/03/01 to receive the notional amount multiplied by 4.835% and to pay the notional amount multiplied by the 3 month LIBOR adjusted by a specified spread.
49 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ------------------- ---------- -------------------------------------------------- -------------- 15,000,000 EUR 2/22/07 Agreement with UBS AG dated 2/18/00 to pay the $(1,665,994) notional amount multiplied by 5.76% and to receive the notional amount multiplied by the 6 month EURIBOR. 7,000,000,000 JPY 1/16/08 Agreement with UBS AG dated 1/14/03 to pay the (210,567) notional amount multiplied by 0.355% and to receive the notional amount multiplied by the 6 month Japanese LIBOR adjusted by a specified spread. 137,500,000,000 KRW 6/01/08 Agreement with Deutsche Bank AG dated 11/12/02 to (867,245) pay the notional amount multiplied by 5.36% and to receive the notional amount multiplied by the 3 month Korean CD rate. 6,000,000,000 JPY 12/17/09 Agreement with Citibank N.A. dated 12/13/02 to pay (387,955) the notional amount multiplied by 0.5475% and to receive the notional amount multiplied by the 6 month Japanese LIBOR adjusted by a specified spread. 26,000,000 USD 3/31/10 Agreement with UBS AG dated 3/29/00 to receive the 6,255,533 notional amount multiplied by 7.406% and to pay the notional amount multiplied by the 3 month LIBOR adjusted by a specified spread. 35,000,000 USD 9/13/10 Agreement with Bear Stearns Bank Plc dated 9/08/00 7,772,010 to receive the notional amount multiplied by 7.01% and to pay the notional amount multiplied by the 3 month LIBOR adjusted by a specified spread.
50 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ------------------- ---------- -------------------------------------------------- -------------- 20,000,000 USD 1/24/11 Agreement with UBS AG dated 1/22/01 to receive the $ 3,265,006 notional amount multiplied by 6.12% and to pay the notional amount multiplied by the 3 month LIBOR adjusted by a specified spread. 30,000,000 USD 1/25/11 Agreement with Bear Stearns Bank Plc dated 1/23/01 5,078,545 to receive the notional amount multiplied by 6.201% and to pay the notional amount multiplied by the 3 month LIBOR adjusted by a specified spread. 20,000,000 SGD 7/01/12 Agreement with Deutsche Bank AG dated 9/20/02 to (1,234,693) pay the notional amount multiplied by 3.50% and to receive the notional amount multiplied by the 3 month SOR adjusted by a specified spread. 30,000,000 SGD 7/01/12 Agreement with Deutsche Bank AG dated 9/19/02 to (1,850,347) pay the notional amount multiplied by 3.50% and to receive the notional amount multiplied by the 3 month SOR adjusted by a specified spread. 50,000,000 SGD 7/01/12 Agreement with Deutsche Bank AG dated 9/19/02 to (3,043,796) pay the notional amount multiplied by 3.50% and to receive the notional amount multiplied by the 3 month SOR adjusted by a specified spread. ----------- $15,863,163 ===========
See Notes to the Schedule of Investments for definitions of currency abbreviations. 51 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO EMERGING COUNTRY DEBT FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Emerging Country Debt Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 52 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 53 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- ------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since Member, Grantham, Mayo, 39 None c/o GMO Trust Board of September Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the 1985. Boston, MA 02110 Trust President Age: 64 from February 2002 - October 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 54 PRINCIPAL OFFICERS:
Term of Office(4) Principal Occupation(s) Name, Address, Position(s) and Length of During Past and Age Held with Fund Time Served Five Years ------------------------- ------------------------------ ------------------------------ ------------------------------ Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief 40 Rowes Wharf Vice President from August Operating Officer (2000 - Boston, MA 02110 1998 - October 2002. present) and Member, Grantham, Age: 47 Mayo, Van Otterloo & Co. LLC. Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC. 40 Rowes Wharf February 1998. Boston, MA 02110 Age: 45 Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator, c/o GMO Trust Trust Grantham, Mayo, Van 40 Rowes Wharf Otterloo & Co. LLC. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer 40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003) Boston, MA 02110 and Member, Grantham, Mayo, Age: 37 Van Otterloo & Co. LLC. Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel, c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van 40 Rowes Wharf 2001. Otterloo & Co. LLC (June Boston, MA 02110 1999 - present); Associate/ Age: 58 Junior Partner, Hale and Dorr LLP (1991 - 1999). Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering c/o GMO Trust Laundering Compliance Officer Reporting Officer (February 40 Rowes Wharf 2003 - present) and Compliance Boston, MA 02110 Officer, Grantham, Mayo, Van Age: 32 Otterloo & Co. LLC.
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 55 GMO EMERGING COUNTRIES FUND (FORMERLY GMO EVOLVING COUNTRIES FUND) (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGEMENT Day-to-day management of the Fund's portfolio is the responsibility of the Emerging Markets Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Emerging Countries Fund returned -10.2% for the fiscal year ended February 28, 2003. The Fund's benchmark, the S&P/IFC Investable Composite, returned -11.6% during the same period. We normally expect to obtain approximately 70% of our value added from country selection and the rest from stock selection. During the fiscal year we were on target with 1.0% added value coming from country selection and 0.5% coming from security selection. Like the previous three years, our largest overweight for 2002 came in the TIP (Thailand, Indonesia, Philippines) region. While Philippines disappointed this year (falling over 30%), Thailand and Indonesia were two of the top performing markets on the back of strengthening economies and political reforms. Both markets were approximately flat over the past 12 months, outperforming the global emerging markets by 12%. Our overweight of this region added 1.25% to performance. The biggest driver outside of Asia was the weakening U.S. dollar (on the back of economic uncertainty and the looming war in Iraq). A weak dollar meant a strong euro, strong gold price, and strong commodity prices in general. South Africa and Russia (up 34% and 35%, respectively) were the biggest beneficiaries of this move because of their high concentration in mining and oil. Our 5.2% underweight of South Africa cost the Fund 2.4%. This was partially balanced by the 4% overweight in Russia, which added 1.6%. Eastern Europe, with Czech Republic, Poland, and Hungary set to enter the Eurozone in 2004, also benefited from the weak dollar. We are overweight the Czech Republic and Poland, and building weight in all three markets. Our combined 3% bet on the region added 1.5% to performance. Mexico found itself on the other side of the dollar trade. Having risen in sympathy with the strong dollar in the late 1990s, the Mexican peso fell rapidly even against the already weak dollar over the past 12 months. We have been underweight this market for 3 years on the back of an overvalued market and currency. Our 7.7% underweight added 1.1% to performance. Value stocks strung together their third straight year of strong returns. The cheapest third of stocks outperformed by 4%, while their expensive counterparts lagged by over 8%. Our bet on these two groups added over 1% to performance. GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- OUTLOOK For the second year, emerging equities significantly outperformed their global counterparts in a difficult environment. The S&P 500 and MSCI EAFE fell 22.7% and 17.5%, respectively, over the year ended February 28, 2003, further supporting the case for emerging markets as a diversifying asset class. Nevertheless, there is even more hope for the future. A couple of secular trends fuel this optimism. First there is a realization among emerging market policymakers that they need to reduce their dependence on export-led growth and boost their domestic economy. This has led to low interest rates, driving up consumption in most of our investable markets. Second, as western economies struggle to recover from the overhang of the bubble, cost control through outsourcing has become a mainstream strategy. Production and services are being moved aggressively to lower-cost destinations, primarily in emerging markets. As always, short-term (absolute) performance of the asset class will likely be driven by global equity moves, global growth, and any developments in the conflict with Iraq. But, trading at 10 times price to earnings, with strong growth prospects, emerging markets have a safety net that the rest of global equities do not. We expect the asset class to continue to outperform global equities. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO EMERGING COUNTRIES FUND CLASS III SHARES AND THE S&P/IFC INVESTABLE COMPOSITE INDEX AS OF FEBRUARY 28, 2003 GMO Emerging Countries Fund S&P/IFC Investable Composite Index 8/29/97 $10,000 $10,000 9/30/97 $10,060 $10,327 12/31/97 $8,130 $8,333 3/31/98 $8,970 $8,918 6/30/98 $6,380 $7,025 9/30/98 $4,975 $5,500 12/31/98 $6,176 $6,497 3/31/99 $6,648 $7,207 6/30/99 $10,690 $8,919 9/30/99 $9,346 $8,640 12/31/99 $12,025 $10,860 3/31/2000 $12,117 $11,006 6/30/2000 $10,567 $9,879 9/30/2000 $9,612 $8,596 12/31/2000 $8,596 $7,411 3/31/2001 $8,314 $7,050 6/30/2001 $9,005 $7,561 9/30/2001 $7,341 $5,869 12/31/2001 $9,115 $7,542 3/31/2002 $11,143 $8,517 6/30/2002 $10,287 $7,845 9/30/2002 $8,493 $6,617 12/31/2002 $9,104 $7,246 2/28/2003 $9,158 $7,037
AVERAGE ANNUAL TOTAL RETURN Since 1 Year 5 Year Inception 8/29/97 Class III -10.15% 1.24% -1.59% 7/9/2002 Class M n/a n/a -13.60%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- COMMON STOCKS -- 88.6% ARGENTINA -- 2.4% 30,500 BBVA Banco Frances SA ADR* 145,790 18,000 Grupo Financiero Galicia SA ADR* 45,720 21,900 IRSA Inversiones y Representaciones SA GDR* 166,221 75,800 Perez Companc SA ADR* 552,582 126,000 Telecom Argentina SA ADR* 506,520 30,893 Tenaris SA ADR* 691,694 ----------- 2,108,527 ----------- BRAZIL -- 3.4% 162,360,000 Banco do Brasil SA 436,721 4,524,000 Cia Saneamento Basico SAO PA 97,464 47,440,000 Companhia Siderurgica Nacional SA 824,119 52,722,000 Electrobras 248,173 15,000 Petroleo Brasileiro SA (Petrobras) 200,939 26,500 Petroleo Brasileiro SA (Petrobras) ADR 354,305 69,923 Souza Cruz (Registered) 390,464 13,070,000 Tele Norte Leste Participacoes SA 62,256 6,700 Unibanco SA GDR 76,045 12,648 Vale Do Rio Doce 368,560 ----------- 3,059,046 ----------- CHINA -- 9.4% 227,000 Bengang Steel Plates Co Ltd Class B 91,975 2,482,000 Brilliance China Automotive Holdings Ltd 579,200 432,000 China Everbright Ltd 130,169 191,950 China International Marine Containers Co Ltd Class B 210,677 528,000 China Mobile Ltd* 1,137,362 9,600 China Mobile Ltd ADR* 105,024 2,388,000 China Petroleum & Chemical Corp Class H 450,098 101,000 China Resources Enterprise Ltd 90,651 468,000 China Unicom* 283,533 34,000 China Unicom ADR* 209,780 463,000 Chongqing Changan Automobile Co Ltd Class B 234,495 336,000 CNOOC Ltd 471,747 7,500 CNOOC Ltd ADR 209,025 392,000 Cosco Pacific Ltd 354,349 155,000 CSG Technology Holding Co Ltd Class B 78,701 1,704,000 Denway Motors Ltd 655,460
See accompanying notes to the financial statements. 1 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- CHINA -- CONTINUED 3,938,000 Guangdong Investments Ltd* 595,817 3,600 Huaneng Power International Inc ADR 130,536 88,000 Huaneng Power International Inc Class H 78,419 1,074,000 Maanshan Iron & Steel Co Ltd Class H 95,019 5,064,000 PetroChina Co Ltd Class H 1,058,368 514,000 Shandong International Power Development Co Ltd Class H 116,652 344,976 Shenzhen SEG Co Ltd Class B* 149,507 1,980,000 Stone Electronic Technology Ltd* 114,244 924,000 TCL International Holdings Ltd 239,912 326,000 Tsingtao Brewing Co Ltd Class H 195,414 254,000 Yanzhou Coal Mining Co Ltd Class H 109,102 367,000 Zhejiang Southeast Electric Power Co Class B 226,806 ----------- 8,402,042 ----------- CZECH REPUBLIC -- 3.2% 57,355 Ceski Telecom AS* 525,441 233,779 CEZ AS 729,764 17,125 Komercni Banka AS 1,228,938 617 Philip Morris CR AS 230,704 120,600 Unipetrol* 164,908 ----------- 2,879,755 ----------- EGYPT -- 0.5% 12,448 Commercial International Bank 78,149 6,900 Eastern Tobacco Co 68,072 23,500 Export Development Bank of Egypt 55,936 39,759 MobiNil-Egyptian Mobile Services Co 263,729 ----------- 465,886 ----------- HUNGARY -- 0.7% 700 Delmagyarorszagi Aramszol 37,465 600 Gedeon Richter Rt 36,758 5,400 Magyar Tavkozlesi Rt (Matav) ADR 87,966 4,600 MOL Magyar Olaj es Gazipari Rt (New Shares) 99,193 31,700 OTP Bank Rt 309,043 13,000 Pannonplast Rt 85,680 ----------- 656,105 -----------
See accompanying notes to the financial statements. 2 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- INDIA -- 4.4% 22,700 Hindalco Industries Ltd GDR 144A 274,670 20,600 ICICI Banking Ltd ADR* 146,466 6,200 ITC Ltd GDR 84,630 52,400 Mahindra & Mahindra Ltd GDR 120,520 53,620 Ranbaxy Laboratories Ltd GDR 772,128 38,700 Reliance Industries Ltd GDR 144A 481,815 71,900 Satyam Computer Services Ltd ADR 756,388 77,600 State Bank of India GDR 1,101,920 7,075 Wipro Ltd ADR 214,938 ----------- 3,953,475 ----------- INDONESIA -- 4.2% 3,946,700 Bank Central Asia Tbk 1,099,576 5,312,000 Gajah Tunggal Tbk* 125,572 1,694,500 HM Sampoerna Tbk 562,703 4,766,000 PT Matahari Putra Prima Tbk 209,235 682,000 Ramayana Lestari Sentosa 168,897 3,930,112 Telekomunikasi IndonesiaTbk PT Class B 1,581,601 ----------- 3,747,584 ----------- MALAYSIA -- 0.3% 22,000 Berjaya Sports Toto 18,642 3,000 British American Tobacco Berhad 28,816 18,000 IJM Corp Berhad Class A 22,358 23,000 Malakoff Berhad 24,453 42,000 Maxis Communications Berhad* 59,684 12,000 Perusahaan Otomobil Nasional 25,263 148,000 Renong Berhad* 18,111 12,000 Resorts World Berhad 29,842 13,000 Telekom Malaysia Berhad 26,513 14,000 Tenaga Nasional Berhad 34,632 ----------- 288,314 ----------- MEXICO -- 0.4% 14,000 Apasco SA de CV 77,084 26,000 Carso Global Telecom Class A* 26,469 16,000 Grupo Financiero Inbursa SA de CV* 11,796 15,000 Grupo Mexico SA Class B* 17,417 20,000 Grupo Modelo SA de CV Class C 41,302
See accompanying notes to the financial statements. 3 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- MEXICO -- CONTINUED 30,000 Grupo Sanborns SA Class B* 30,161 6,300 Organizacion Soriana SA de CV Class B* 10,020 111,000 Savia SA Class A* 42,225 2,900 Telefonos de Mexico Class L ADR 84,303 ----------- 340,777 ----------- PERU -- 0.1% 1,900 Cia de Minas Buenaventura SA ADR 47,880 ----------- PHILIPPINES -- 3.2% 1,746,140 Aboitiz Equity Ventures Inc* 73,016 14,863,900 Ayala Land Inc 1,267,623 166,000 Bank of the Philippine Islands 97,423 246,400 Equitable Banking Corp* 103,938 640,570 First Philippine Holdings* 96,335 16,612 Globe Telecom Inc* 159,950 603,902 La Tondena Distillers Inc 354,422 78,200 Philippine Long Distance Telephone* 419,505 87,600 San Miguel Corp Class B 107,642 2,272,000 SM Prime Holdings 220,845 ----------- 2,900,699 ----------- POLAND -- 5.1% 268,700 Bank Millennium SA* 182,656 18,000 Bank Pekao SA* 405,719 40,300 BRE Bank SA 700,323 1,200 Browary Zywiec SA* 103,960 7,600 Debica SA 111,483 13,300 Grupa Kety SA 193,736 191,300 KGHM Polska Miedz SA* 611,096 67,800 Optimus SA* 116,955 47,659 Orbis SA 214,359 116,500 Polski Koncern Naftowy Orlen 510,593 457,700 Telekomunikacja Polska SA* 1,362,672 8,300 Telekomunikacja Polska SA GDR 144A* 24,568 ----------- 4,538,120 ----------- RUSSIA -- 6.1% 40,000 AO Mosenergo ADR 166,000
4 See accompanying notes to the financial statements. GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- RUSSIA -- CONTINUED 5,600 Golden Telecom Inc* 74,480 21,200 JSC Mining & Smelting Co ADR* 527,350 1,500 Lukoil ADR 144A 89,625 14,125 Lukoil Holding Co ADR 843,969 1,900 Mobile Telesystems ADR* 81,244 15,800 Rostelecom ADR 130,350 600 Sberbank RF 127,020 5,550 Surgutneftegaz ADR 88,800 29,700 Tatneft ADR 498,960 17,270 Yukos Corp ADR 2,836,597 ----------- 5,464,395 ----------- SOUTH AFRICA -- 8.4% 147,000 ABSA Group Ltd 608,771 64,000 AECI Ltd 203,147 18,000 Amalgamated Beverage Industries Ltd 108,244 8,861 Edgars Consolidated Stores Ltd 59,329 62,000 Gencor Ltd 320,951 2,000 Impala Platinum Holdings Ltd 121,561 508,000 Iscor Ltd 1,118,027 87,000 Murray & Roberts Holdings Ltd 131,065 72,000 Naspers Ltd 204,436 109,956 Nedcor Ltd 1,308,821 97,000 Pick'n Pay Stores Ltd 149,738 10,700 Pretoria Portland Cement Co Ltd 118,077 142,000 Remgro Ltd 1,029,993 391,000 Sanlam Ltd 344,211 50,000 Sasol Ltd 588,647 20,000 Tiger Brands Ltd 156,973 128,000 Venfin Ltd* 259,488 1,073,000 Woolworths Holdings Ltd 685,168 ----------- 7,516,647 ----------- SOUTH KOREA -- 12.9% 1,200 Amorepacific Corp 91,484 138,000 Chohung Bank* 424,873 22,800 Dongbu Steel 51,382 85,300 Hanjin Heavy Industry 202,593 3,100 Kangwon Land Inc 333,724
See accompanying notes to the financial statements. 5 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- SOUTH KOREA -- CONTINUED 8,900 KIA Motors Corp 56,294 4,200 Kookmin Credit Card Co Ltd* 62,631 66,700 Korea Electric Power Corp 1,003,029 28,000 Korea Electric Power Corp ADR 231,000 109,900 Korea Exchange Bank* 331,454 8,800 Korea Gas Corp 184,309 12,300 Korean Air Lines 139,111 11,600 KT Corp 424,195 7,000 KT Freetel* 143,677 46,300 KT&G Corp 649,709 14,500 KT&G Corp GDR 144A 101,500 68,500 Kumho Industrial Co Ltd* 123,095 16,600 LG Chemicals Ltd 514,556 27,300 LG Electronics Inc 921,702 21,100 LG Engineering & Construction Ltd 249,244 6,100 LG Household & Health Care Ltd 130,315 53,200 LG Investment & Securities Co Ltd 561,572 30,500 LG Telecom Co Ltd* 102,974 4,990 POSCO 461,940 10,924 Samsung Electronics 2,557,917 1,614 Samsung Electronics GDR 144A (Non Voting) 91,998 1,400 Samsung Fire & Marine Insurance 66,854 53,500 Samsung Techwin Co Ltd* 255,925 4,600 Seoul City Gas Co Ltd 68,982 52,036 SK Corp 549,285 15,708 SK Global* 103,961 43,900 Ssangyong Motor* 209,634 15,500 Taegu Department Store Co 113,752 26,700 The Will-bes & Co Ltd* 70,349 ----------- 11,585,020 ----------- TAIWAN -- 11.7% 100,000 Ambit Microsystems Corp 307,914 733,750 Asustek Computer Inc 1,245,791 489,000 Cheng Loong Corp* 147,052 1,214,000 China Bills Finance Corp* 310,924 3,251,779 China Development Financial Holding Corp* 1,225,851 1,141,000 China Steel Corp 709,226 1,190,000 Chinatrust Financial Holding Co* 955,424 473,000 Compal Electronics Inc 455,986
6 See accompanying notes to the financial statements. GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- TAIWAN -- CONTINUED 360,950 First Financial Holding Co Ltd* 225,399 172,000 Fubon Financial Holding Co Ltd 135,125 566,580 Hsinchu International Bank* 229,078 1,607,700 Inventec Co Ltd 925,295 1,298,000 Mosel Vitelic Inc* 190,498 509,480 Nan Ya Plastic Corp 504,349 2,461,000 Ritek Corp 1,161,450 329,000 Synnex Technology International Corp 460,127 876,000 Taiwan Cement Corp* 308,806 1,479,000 Taiwan Pulp & Paper Corp* 287,288 66,000 Taiwan Styrene Monomer Corp* 56,788 458,000 Walsin Lihwa Corp* 135,094 711,960 Yageo Corp* 194,637 355,000 Yieh Loong Co Ltd* 144,554 103,000 Yulon Motor Co 121,822 ----------- 10,438,478 ----------- THAILAND -- 6.4% 408,000 Advanced Info Service Pcl (Foreign Registered) 371,908 124,300 Electricity Generating Pcl NVDR 114,756 1,322,000 Land & House Pcl (Foreign Registered) 239,465 3,014,000 Land & House Pcl NVDR 524,817 1,957,000 National Finance Pcl NVDR* 599,198 281,240 PTT Exploration & Production Pcl (Foreign Registered)(a) 847,960 100,000 PTT Pcl (Foreign Registered)(a) 102,255 398,000 Quality House Co Ltd (Foreign Registered)*(a) 57,209 227,000 Saha Union Pcl (Foreign Registered)(a) 95,501 799,000 Sahaviriya Steel Industry (Foreign Registered)*(a) 164,338 214,000 Shin Satellite (Foreign Registered)*(a) 53,019 7,000 Siam Cement Pcl (Foreign Registered) 210,401 38,800 Siam Cement Pcl NVDR 1,117,251 261,850 Siam Commercial Bank Pcl (Foreign Registered)* 198,904 273,000 Thai Airways International (Foreign Registered)(a) 188,232 670,200 Thai Farmers Bank NVDR* 450,351 1,198,200 Thai Petrochemical (Foreign Registered)* 90,177 345,200 Thai Union Frozen Products Pcl (Foreign Registered) 148,456 214,000 TPI Polene Co (Foreign Registered)*(a) 85,030 304,000 Vinythai Pcl (Foreign Registered)*(a) 65,724 ----------- 5,724,952 -----------
See accompanying notes to the financial statements. 7 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- TURKEY -- 5.8% 174,619,179 Akbank TAS* 667,195 27,544,000 Aksa Akrilik Kimya Sanayii 267,417 42,800,000 Aksigorta AS 150,128 7,657,000 Anadolu Isuzu Otomotiv Sanay* 50,359 36,991,000 Arcelik AS 335,966 2,315,000 Brisa Bridgestone Sabanci 65,977 41,422,000 Carsi Buyuk Magazacilik AS* 45,405 13,861,000 Enka Insaat ve Sanayi AS* 390,695 63,081,000 Eregli Demir ve Celik Fabrikalari TAS* 691,461 412,462,000 Finansbank* 248,020 50,511,000 Global Menkul Degerler AS* 34,802 198,000,000 Is Gayrimenkul Yatirim Ortakligi AS* 109,139 35,491,000 Milliyet Gazetecilik AS* 53,909 44,700,000 Turk Hava Yollari* 181,992 70,699,000 Turkcell Iletisim Hizmet AS* 476,050 1,017,417,250 Turkiye Garanti Bankasi* 1,433,880 ----------- 5,202,395 ----------- VENEZUELA -- 0.0% 4,100 Compania Anonima Nacional Telefonos de Venezuela (CANTV) ADR 41,533 ----------- TOTAL COMMON STOCKS (COST $79,251,999) 79,361,630 ----------- PREFERRED STOCKS -- 5.5% BRAZIL -- 2.8% 3,556,000 Bco Itau SA (Registered) 156,428 68,970,000 Bombril SA 3.53% 106,286 22,505,600 Brasil Telecom Participacoes SA 2.19% 110,920 927,000 Companhia de Tecidos do Norte de Minas - Coteminas 56,363 15,850 Companhia Vale do Rio Doce Class A 435,220 15,500 Empresa Brasileira de Aeronautica SA ADR 159,805 7,044,500 Gerdau SA 65,589 717,154 Investimentos Itau SA 365,710 20,100 Perdigao SA 55,192 53,334 Petroleo Brasileiro SA (Petrobras) 3.01% 637,946 178,000 Sadia SA 61,345 11,442,000 Siderurgica de Tubarao 3.50% 150,359
8 See accompanying notes to the financial statements. GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- BRAZIL -- CONTINUED 123,221,000 Tele Centro Oeste Celular SA 6.78% 148,459 ----------- 2,509,622 ----------- RUSSIA -- 0.2% 225 Transneft 80,100 610,200 Unified Energy System* 72,614 ----------- 152,714 ----------- SOUTH KOREA -- 2.5% 33,000 Dongbu Steel 11.70% 57,090 13,000 LG Chem Ltd 185,146 17,300 Samsung Electronics (Non Voting) 4.08% 1,942,110 3,000 Samsung SDI Co Ltd 3.63% 95,003 ----------- 2,279,349 ----------- TOTAL PREFERRED STOCKS (COST $5,338,118) 4,941,685 ----------- RIGHTS AND WARRANTS -- 0.3% THAILAND -- 0.3% 132,750 Adkinson Securities Warrants, Expires 6/14/03* -- 132,750 Adkinson Securities Warrants, Expires 6/14/05* -- 2,665,000 Land & House Warrants, Expires 9/02/08 (Foreign Registered)* 307,703 116,526 Telecomasia Corp Pcl Warrants, Expires 4/03/08* -- ----------- 307,703 ----------- TOTAL RIGHTS AND WARRANTS (COST $28,025) 307,703 -----------
See accompanying notes to the financial statements. 9 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE ($) DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 4.5% CASH EQUIVALENTS -- 4.5% $ 4,000,000 Dresdner GC Time Deposit, 1.31%, due 3/03/03 4,000,000 ----------- TOTAL SHORT-TERM INVESTMENTS (COST $4,000,000) 4,000,000 ----------- TOTAL INVESTMENTS -- 98.9% (Cost $88,618,142) 88,611,018 Other Assets and Liabilities (net) -- 1.1% 1,009,837 ----------- TOTAL NET ASSETS -- 100.0% $89,620,855 =========== NOTES TO SCHEDULE OF INVESTMENTS:
144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. ADR - American Depositary Receipt GDR - Global Depository Receipt NVDR - Non-Voting Depository Receipt
* Non-income producing security. (a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). 10 See accompanying notes to the financial statements. GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY (SHOWING PERCENTAGE OF EQUITY INVESTMENTS) FEBRUARY 28, 2003 (UNAUDITED) At February 28, 2003, industry sector diversification of the Fund's equity investments was as follows:
INDUSTRY SECTOR - -------------------------------------------------------------------- Financials 22.5% Materials 14.8 Energy 13.8 Information Technology 13.4 Telecommunication Services 10.9 Consumer Discretionary 9.2 Industrials 5.4 Consumer Staples 4.7 Utilities 4.4 Health Care 0.9 ----- 100.0% =====
See accompanying notes to the financial statements. 11 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $88,618,142) (Note 1) $88,611,018 Cash 32,211 Foreign currency, at value (cost $791,574) (Note 1) 795,830 Receivable for investments sold 3,818,894 Receivable for Fund shares sold 3,611 Dividends and interest receivable 335,688 Foreign taxes receivable 369 Receivable for expenses reimbursed by Manager (Note 2) 44,790 ----------- Total assets 93,642,411 ----------- LIABILITIES: Payable for investments purchased 3,819,801 Payable for Fund shares repurchased 14,812 Payable to affiliate for (Note 2): Management fee 44,860 Shareholder service fee - Class III 10,286 12b-1 fee - Class M 244 Administration fee - Class M 89 Accrued expenses 131,464 ----------- Total liabilities 4,021,556 ----------- NET ASSETS $89,620,855 =========== NET ASSETS CONSIST OF: Paid-in capital $100,055,808 Accumulated undistributed net investment income 579,393 Accumulated net realized loss (11,011,359) Net unrealized depreciation (2,987) ----------- $89,620,855 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $89,042,342 =========== Class M shares $ 578,513 =========== SHARES OUTSTANDING: Class III 10,432,554 =========== Class M 67,974 =========== NET ASSET VALUE PER SHARE: Class III $ 8.54 =========== Class M $ 8.51 ===========
12 See accompanying notes to the financial statements. GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $223,685) $ 1,502,054 Interest 53,516 ----------- Total income 1,555,570 ----------- EXPENSES: Management fee (Note 2) 492,799 Custodian fees 462,212 Audit fees 57,263 Transfer agent fees 38,515 Registration fees 23,617 Legal fees 10,519 Trustees fees and related expenses (Note 2) 2,471 Miscellaneous 1,833 Fees reimbursed by Manager (Note 2) (236,929) ----------- 852,300 Shareholder service fee (Note 2) - Class III 113,348 12b-1 fee (Note 2) - Class M 625 Administration fee (Note 2) - Class M 500 ----------- Net expenses 966,773 ----------- Net investment income 588,797 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 1,755,273 Closed swap contracts (296,448) Foreign currency, forward contracts and foreign currency related transactions (74,779) ----------- Net realized gain 1,384,046 ----------- Change in net unrealized appreciation (depreciation) on: Investments (8,270,306) Open swap contracts (35,488) Foreign currency, forward contracts and foreign currency related transactions 399 ----------- Net unrealized loss (8,305,395) ----------- Net realized and unrealized loss (6,921,349) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(6,332,552) ===========
See accompanying notes to the financial statements. 13 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 588,797 $ 1,029,438 Net realized gain (loss) 1,384,046 (6,820,591) Change in net unrealized appreciation (depreciation) (8,305,395) 10,978,483 ----------- ----------- Net increase (decrease) in net assets from operations (6,332,552) 5,187,330 ----------- ----------- Distributions to shareholders from: Net investment income Class III (1,010,952) (414,875) ----------- ----------- Total distributions from net investment income (1,010,952) (414,875) ----------- ----------- Net share transactions (Note 5): Class III 23,980,200 15,393,038 Class M 579,467 -- ----------- ----------- Increase in net assets resulting from net share transactions 24,559,667 15,393,038 ----------- ----------- Total increase in net assets 17,216,163 20,165,493 NET ASSETS: Beginning of period 72,404,692 52,239,199 ----------- ----------- End of period (including accumulated undistributed net investment income of $579,393 and $813,684, respectively) $89,620,855 $72,404,692 =========== ===========
14 See accompanying notes to the financial statements. GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------------------------- 2003 2002 2001 2000 1999 ------- ------- ------- ------- ------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.65 $ 8.81 $ 11.41 $ 5.74 $ 8.61 ------- ------- ------- ------- ------- Income from investment operations: Net investment income 0.08 0.14 0.08 0.05 0.23 Net realized and unrealized gain (loss) (1.04) 0.77 (2.48) 5.63 (2.94) ------- ------- ------- ------- ------- Total from investment operations (0.96) 0.91 (2.40) 5.68 (2.71) ------- ------- ------- ------- ------- Less distributions to shareholders: From net investment income (0.15) (0.07) -- -- (0.16) From net realized gains -- -- (0.20) (0.01) -- ------- ------- ------- ------- ------- Total distributions (0.15) (0.07) (0.20) (0.01) (0.16) ------- ------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 8.54 $ 9.65 $ 8.81 $ 11.41 $ 5.74 ======= ======= ======= ======= ======= TOTAL RETURN(a) (10.15)% 10.49% (21.27)% 98.96% (31.60)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $89,042 $72,405 $52,239 $65,191 $31,718 Net expenses to average daily net assets 1.27% 1.40% 1.40% 1.28% 1.27% Net investment income to average daily net assets 0.78% 2.12% 0.91% 0.54% 3.65% Portfolio turnover rate 108% 109% 98% 157% 158% Fees and expenses reimbursed by the Manager to average daily net assets: 0.31% 0.17% 0.15% 0.17% 0.34% Purchase and redemption fees consisted of the following per share amounts:(b) $0.00(c) $ 0.04 $ 0.02 -- --
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. Calculations excludes purchase premiums and redemption fees. (b) Effective March 1, 2000 the fund adopted the provisions of the revised AICPA Audit and Accounting Guide for Investment Companies which requires the disclosure of the per share effect of purchase and redemption fees. Periods prior to March 1, 2000 have not been restated to reflect this change. Amounts calculated using average shares outstanding throughout the period. (c) Purchase and redemption fees were less than $0.01 per share. The redemption fee was rescinded effective April 1, 2002. See accompanying notes to the financial statements. 15 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS M SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM JULY 9, 2002 (COMMENCEMENT OF OPERATIONS) THROUGH FEBRUARY 28, 2003 ---------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.85 ------- Income from investment operations: Net investment income 0.01 Net realized and unrealized loss (1.35) ------- Total from investment operations (1.34) ------- NET ASSET VALUE, END OF PERIOD $ 8.51 ======= TOTAL RETURN(a) (13.60)%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 579 Net expenses to average daily net assets 1.57%* Net investment income to average daily net assets 0.20%* Portfolio turnover rate 108% Fees and expenses reimbursed by the Manager to average daily net assets: 0.41%*
* Annualized. ** Not annualized. (a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. 16 See accompanying notes to the financial statements. GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Emerging Countries Fund (the "Fund") (formerly GMO Evolving Countries Fund) is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in equity securities traded in the securities markets of developing countries of Asia, Latin America, the Middle East, Africa and Europe ("Emerging Markets"). The Fund's benchmark is the S&P/IFC Investable Composite Index. Throughout the year ended February 28, 2003, the Fund offered Class III shares. Effective July 9, 2002, the Fund began to offer Class M shares. Class III shares bear a shareholder service fee while Class M shares bear an administrative fee and a 12b-1 fee (See Note 2). The principal economic difference between the classes of shares is the level of fees borne by the classes. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their 17 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in foreign currency values that are unfavorable to the Fund. There were no forward foreign currency contracts outstanding as of February 28, 2003. FUTURES CONTRACTS The Fund may purchase and sell futures contracts to manage its exposure to the financial markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a 18 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of February 28, 2003, there were no outstanding futures contracts. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 28, 2003, there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future, security or currency transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. At February 28, 2003, there were no open purchased option contracts. 19 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the financial markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the 20 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. At February 28, 2003, there were no open swap agreements. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryover for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country's tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003, the tax basis of distributions paid was as follows: ordinary income -- $44,875 and $1,010,952, respectively. As of February 28, 2003, the components of distributable earnings on a tax basis consisted of $1,070,417 of undistributed ordinary income. The temporary differences between book and tax basis distributable earnings are primarily due to passive foreign investment company transactions. At February 28, 2003, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code of $1,253,194, $7,353,298 and $156,212 expiring in 2009, 2010 and 2011, respectively. The Fund has elected to defer to March 1, 2003 post-October capital losses of $1,808,334. 21 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to foreign currency and passive foreign investment company transactions. The financial highlights exclude these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain ------------------------- ------------------------- $187,864 $(187,864)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. ALLOCATION OF OPERATING ACTIVITY The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro-rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service, 12b-1, and administration fees, which are directly attributable to a class of shares, are charged to that class' operations. PURCHASES AND REDEMPTIONS OF FUND SHARES Effective April 1, 2002 the Fund ceased charging a purchase premium or redemption fee in connection with the purchase or sale of Fund shares. Prior to April 1, 2002, the premium on cash purchases of Fund shares was 1.20% of the amount invested. In the case of cash redemptions, the fee was .40% of the amount redeemed. All purchase premiums and redemption fees were paid to and recorded by the Fund as paid-in capital. For the years ended February 28, 2002 and February 28, 2003, the Fund received $230,775 and $0 in purchase premiums and $15,444 and $1,000 in redemption fees, respectively. 22 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT RISK Investments in securities of issuers in emerging countries present certain risks that are not inherent in many other investments. Many emerging countries present elements of political and/or economic instability. The securities markets of emerging countries are generally smaller and less developed than the securities markets of the U.S. and developed foreign markets. Further, countries may impose various types of foreign currency regulations or controls which may impede the Fund's ability to repatriate amounts it receives. The Fund may acquire interests in securities in anticipation of improving conditions in the related countries. These factors may result in significant volatility in the values of its holdings. The markets for emerging countries are relatively illiquid. Accordingly, the Fund may not be able to realize in an actual sale amounts approximating those used to value its holdings. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .65% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. Class M shares of the Fund pays GMO an administrative fee monthly at an annual rate of .20% of average daily Class M net assets for support services provided to Class M shareholders. Fund Distributors, Inc. (the "Distributor") serves as the Fund's distributor. Pursuant to a Rule 12b-1 distribution plan adopted by the Fund, Class M shares of the Fund pay a fee at the annual rate of .25% of average daily Class M net assets for any activities or expenses intended to result in the sale of Class M shares of the Fund. This fee may be spent by the Distributor on personal services rendered to Class M shareholders of the Fund and/or maintenance of Class M shareholder accounts. GMO has entered into a binding agreement effective until at least June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding fees and expenses of the independent Trustees of the Trust (including legal fees), 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), exceed 1.25% and 1.55% of the Fund's average daily net assets, for Class III and Class M, respectively. The Fund incurred fees and expenses indirectly as a shareholder in GMO Alpha LIBOR Fund. For the year ended February 28, 2003, indirect operating expenses (excluding investment-related 23 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- expenses) were less than .001% of the Fund's average daily net assets, and indirect investment-related expenses (including, but not limited to, interest expense, foreign audit expense, and investment-related legal expense) were less than .001% of the Fund's average daily net assets. As of February 28, 2003, greater than 10% of the Fund's shares were held by accounts for which the Manager has investment discretion. The Fund's portion of the fee paid by the Trust to the independent Trustees during the year ended February 28, 2003, was $1,998. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2003, were as follows:
Purchases Sales ------------ ----------- U.S. Government securities $ 147,847 $ 159,663 Investments (non-U.S. Government securities) 100,865,466 78,790,691
At February 28, 2003, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in the value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $89,549,475 $9,068,543 $(10,007,000) $(938,457)
4. PRINCIPAL SHAREHOLDERS At February 28, 2003, 50.7% of the outstanding shares of the Fund were held by three shareholders, each holding in excess of 10% of the outstanding shares of the Fund. Investment activities of these shareholders may have a material effect on the Fund. 24 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 ------------------------- ------------------------- Shares Amount Shares Amount ----------- ------------ ---------- ------------- Class III: Shares sold 7,169,991 $ 63,503,546 2,036,289 $ 18,983,825 Shares issued to shareholders in reinvestment of distributions 99,670 970,789 47,640 393,508 Shares repurchased (4,337,592) (40,494,135) (514,676) (3,984,295) ----------- ------------ ---------- ------------- Net increase 2,932,069 $ 23,980,200 1,569,253 $ 15,393,038 =========== ============ ========== =============
Period from July 9, 2002 (commencement of operations) through February 28, 2003 ------------------------- Shares Amount ----------- ------------ Class M: Shares sold 170,323 $ 1,468,988 Shares issued to shareholders in reinvestment of distributions -- -- Shares repurchased (102,349) (889,521) ----------- ------------ Net increase 67,974 $ 579,467 =========== ============
25 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO EMERGING COUNTRIES FUND (FORMERLY GMO EVOLVING COUNTRIES FUND) In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Emerging Countries Fund (formerly GMO Evolving Countries Fund) (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 26 GMO EMERGING COUNTRIES FUND (FORMERLY GMO EVOLVING COUNTRIES FUND) (A SERIES OF GMO TRUST) TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- During the year ended February 28, 2003, the Fund paid foreign taxes of $223,685 and recognized foreign source income of $1,725,739. 27 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios Term of Principal in Fund Other Office(1) and Occupation(s) Complex Directorships Name, Address, Position(s) Length of During Past Overseen Held by and Age Held with Fund Time Served Five Years by Trustee Trustee ------------------ -------------------- -------------------- -------------------- --------------- ------------- Jay O. Light Trustee of the Trust Since May 1996 Professor of 39 *(2) c/o GMO Trust Business 40 Rowes Wharf Administration and Boston, MA 02110 Senior Associate Age: 61 Dean, Harvard University. Donald W. Trustee of the Trust Since December 2000 Advisory Counsel, 39 None Glazer, Esq. Goodwin Procter LLP; c/o GMO Trust Secretary and 40 Rowes Wharf Consultant, Boston, MA 02110 Provant, Inc. Age: 58 (provider of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
28 INTERESTED TRUSTEES:
Number of Portfolios Term of Principal in Fund Other Office(1) and Occupation(s) Complex Directorships Name, Address, Position(s) Length of During Past Five Overseen Held by and Age Held with Fund Time Served Years by Trustee Trustee ------------------ -------------------- -------------------- -------------------- --------------- ------------- R. Jeremy Chairman of the Since September Member, Grantham, 39 None Grantham(3) Board of Trustees of 1985. President from Mayo, c/o GMO Trust the Trust February 2002 - Van Otterloo & Co. 40 Rowes Wharf October 2002. LLC. Boston, MA 02110 Age: 64
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 29 PRINCIPAL OFFICERS:
Term of Office(4) Principal Occupation(s) Name, Address, Position(s) and Length of During Past and Age Held with Fund Time Served Five Years ---------------------------- -------------- ------------------- -------------------------------------------------- Scott Eston President and President and Chief Chief Financial Officer (1997-present), Chief c/o GMO Trust Chief Executive Officer Operating Officer (2000 - present) and Member, 40 Rowes Wharf Executive since October 2002; Grantham, Mayo, Van Otterloo & Co. LLC. Boston, MA 02110 Officer of the Vice President from Age: 47 Trust August 1998 - October 2002. Susan Randall Harbert Chief Chief Financial Member, Grantham, Mayo, Van Otterloo & Co. LLC. c/o GMO Trust Financial Officer Since 40 Rowes Wharf Officer and February 2000; Boston, MA 02110 Treasurer of Treasurer since Age: 45 the Trust February 1998. Brent Arvidson Assistant Since September Senior Fund Administrator, Grantham, Mayo, Van c/o GMO Trust Treasurer of 1998. Otterloo & Co. LLC. 40 Rowes Wharf the Trust Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President Vice President General Counsel, Anti-Money Laundering Reporting c/o GMO Trust and Clerk of since February Officer (July 2002 - February 2003) and Member, 40 Rowes Wharf the Trust 1997; Clerk since Grantham, Mayo, Van Otterloo & Co. LLC. Boston, MA 02110 March 2001; May Age: 37 1999 - August 1999. Elaine M. Hartnett, Esq. Vice President Vice President Associate General Counsel, Grantham, Mayo, Van c/o GMO Trust and Secretary since August 1999; Otterloo & Co. LLC (June 1999 - present); 40 Rowes Wharf of the Trust Secretary since Associate/Junior Partner, Hale and Dorr LLP Boston, MA 02110 March 2001. (1991 - 1999). Age: 58 Julie Perniola Vice President Since February Anti-Money Laundering Reporting Officer (February c/o GMO Trust and Anti- 2003. 2003 - present) and Compliance Officer, Grantham, 40 Rowes Wharf Money Mayo, Van Otterloo & Co. LLC. Boston, MA 02110 Laundering Age: 32 Compliance Officer
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 30 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGEMENT Day-to-day management of the Fund's portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the Emerging Country Debt Share Fund returned +15.8% for the fiscal year ended February 28, 2003, as compared with +12.3% for the J.P. Morgan Emerging Markets Bond Index Global (EMBIG). The Fund outperformed the benchmark during the fiscal year by 3.5%. EMBIG spreads over U.S Treasuries widened from 615 to 659 basis points during the 12-month period. The EMBIG return of 12.3% for the calendar year was driven by carry (the yield on the index averaged over 10%) and a 1.2 percentage point drop in U.S. interest rates. The biggest gainers of the fiscal year were Russia (+31.6%), Lebanon (+25.6%), and South Africa (+22.6%). Russia benefited from strong oil and other commodity prices and prudent macro-economic policies, including ongoing fiscal surpluses, which have significantly eased its debt service burden. Lebanon rebounded from a relatively low level after a French-led group of donor countries pledged support in return for promising to tackle its huge fiscal and current account deficits. South Africa took advantage of gold and other commodities, as well as relative isolation from problems in Latin America and the Middle East. Countries outside Latin America (48% of the index) outperformed Latins, +19.5% to +6.5%. The worst performing countries for the year were Uruguay (-35.5%), Ivory Coast (-23.7%), and Argentina (-12.2%). The Uruguayan economy suffered from the problems in neighboring Argentina and Brazil, with which most of its trade is conducted. It is now trying to convince private investors to participate in a debt exchange to improve its amortization profile. Ivory Coast was making good progress toward reforming its economy in cooperation with the IMF, and restructuring its defaulted bonds with its private creditors at a time when Muslim rebels from the north took up arms against the southern Christian government, a conflict that still has not been completely resolved. Argentina continues to suffer from a lack of political leadership, although its economy seems to have bottomed out. A new president is to be elected in April, and will be responsible for dealing with holders of defaulted Argentine bonds. These three countries were the only ones in the index to generate losses over the period, and Uruguay and Ivory Coast are each less than 0.1% of the EMBIG. Market selection added value, primarily from the Russia and Bulgaria overweights and the underweight in Brazil. However, overweighting Ivory Coast and underweighting Lebanon cost some alpha. Security selection added 290 basis points of positive alpha in total, mostly from positions in Russia, where 2030 Eurobonds outperformed and the first phase of the FTO exchange was completed, and Bulgaria, where we overweighted the Brady bonds. GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- OUTLOOK Entering March 2003 the Fund, through its investment in GMO Emerging Country Debt Fund, has meaningful overweightings in debt of Algeria and Russia. The Fund meaningfully underweights the debt of Mexico, Malaysia, and Turkey. The Fund emphasizes less liquid debt and obtains default protection when cheaply priced. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO EMERGING COUNTRY DEBT SHARE FUND CLASS III SHARES AND THE J.P. MORGAN EMERGING MARKETS BOND INDEX GLOBAL AS OF FEBRUARY 28, 2003 GMO EMERGING COUNTRY J.P. MORGAN EMERGING DEBT SHARE FUND MARKETS BOND INDEX GLOBAL 7/20/98 $10,000 $10,000 9/30/98 $6,160 $7,683 12/31/98 $6,968 $8,565 3/31/99 $7,269 $9,013 6/30/99 $7,701 $9,422 9/30/99 $7,802 $9,562 12/31/99 $9,207 $10,636 3/31/2000 $10,539 $11,335 6/30/2000 $10,551 $11,376 9/30/2000 $11,396 $11,943 12/31/2000 $11,438 $12,169 3/31/2001 $11,800 $12,445 6/30/2001 $12,459 $12,877 9/30/2001 $12,016 $12,339 12/31/2001 $13,068 $12,334 3/31/2002 $14,247 $13,047 6/30/2002 $13,711 $12,446 9/30/2002 $13,775 $12,399 12/31/2002 $15,553 $13,951 2/28/2003 $16,411 $14,635 COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO EMERGING COUNTRY DEBT SHARE FUND CLASS III SHARES AND THE J.P. MORGAN EMERGING MARKETS BOND INDEX GLOBAL AS OF FEBRUARY 28, 2003 J.P. MORGAN EMERGING MARKETS BOND INDEX GLOBAL +* 7/20/98 $10,000 9/30/98 $7,586 12/31/98 $8,338 3/31/99 $8,760 6/30/99 $9,220 9/30/99 $9,330 12/31/99 $10,504 3/31/2000 $11,194 6/30/2000 $11,234 9/30/2000 $11,795 12/31/2000 $12,017 3/31/2001 $12,290 6/30/2001 $12,717 9/30/2001 $12,186 12/31/2001 $12,180 3/31/2002 $12,885 6/30/2002 $12,291 9/30/2002 $12,245 12/31/2002 $13,778 2/28/2003 $14,453
AVERAGE ANNUAL TOTAL RETURN SINCE INCEPTION 1 YEAR 7/20/98 Class III 15.81% 11.34%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. * J.P. Morgan EMBI Global + represents the J.P. Morgan EMBI prior to 8/95, J.P. Morgan EMBI+ through 12/31/99 and the J.P. Morgan EMBI Global thereafter. The manager changed the benchmark due to the belief that the EMBIG is more diversified and representative of the universe of emerging country debt. GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------ MUTUAL FUND -- 98.9% 6,871,915 GMO Emerging Country Debt Fund, Class III (Cost $59,166,157) 65,420,635 ---------- TOTAL INVESTMENTS -- 98.9% (Cost $59,166,157) 65,420,635 Other Assets and Liabilities (net) -- 1.1% 719,420 ---------- TOTAL NET ASSETS -- 100.0% $66,140,055 ==========
See accompanying notes to the financial statements. 1 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $59,166,157) (Note 1) $65,420,635 Cash 532,219 Receivable for Fund shares sold 187,679 Interest receivable 187 Receivable for expenses reimbursed by Manager (Note 2) 6,748 ----------- Total assets 66,147,468 ----------- LIABILITIES: Accrued expenses 7,413 ----------- Total liabilities 7,413 ----------- NET ASSETS $66,140,055 =========== NET ASSETS CONSIST OF: Paid-in capital $60,495,458 Accumulated undistributed net investment income 3,705 Accumulated net realized loss (613,586) Net unrealized appreciation 6,254,478 ----------- $66,140,055 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $66,140,055 =========== SHARES OUTSTANDING: Class III 6,914,927 =========== NET ASSET VALUE PER SHARE: Class III $ 9.56 ===========
2 See accompanying notes to the financial statements. GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from investment company shares $5,864,038 Interest 3,441 ---------- Total income 5,867,479 ---------- EXPENSES: Registration fees 17,371 Custodian and transfer agent fees 11,306 Audit fees 11,106 Legal fees 8,616 Trustees fees and related expenses (Note 2) 1,311 Miscellaneous 5,518 Fees reimbursed by Manager (Note 2) (53,567) ---------- 1,661 ---------- Net expenses 1,661 ---------- Net investment income 5,865,818 ---------- REALIZED AND UNREALIZED GAIN: Net realized gain on: Investments 1,362,286 Realized gains distributions from investment company shares 1,086,793 ---------- Net realized gain on investments 2,449,079 ---------- Change in net unrealized appreciation (depreciation) on investments 360,455 ---------- Net realized and unrealized gain 2,809,534 ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $8,675,352 ==========
See accompanying notes to the financial statements. 3 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 5,865,818 $ 9,967,725 Net realized gain (loss) 2,449,079 (2,435,702) Change in net unrealized appreciation (depreciation) 360,455 7,536,465 ------------ ------------ Net increase in net assets from operations 8,675,352 15,068,488 ------------ ------------ Distributions to shareholders from: Net investment income Class III (6,495,001) (9,960,484) ------------ ------------ Total distributions from net investment income (6,495,001) (9,960,484) ------------ ------------ Net share transactions (Note 5): Class III (25,991,923) (17,637,823) ------------ ------------ Decrease in net assets resulting from net share transactions (25,991,923) (17,637,823) ------------ ------------ Total decrease in net assets (23,811,572) (12,529,819) NET ASSETS: Beginning of period 89,951,627 102,481,446 ------------ ------------ End of period (including accumulated undistributed net investment income of $3,705 and $7,241, respectively) $ 66,140,055 $ 89,951,627 ============ ============
4 See accompanying notes to the financial statements. GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------------------------------------------------ 2003 2002 2001 2000 1999* ----------- ----------- ---------- --------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.25 $ 8.90 $ 8.70 $ 6.84 $ 10.00 ------- ------- -------- ------- ------- Income from investment operations: Net investment income(a) 0.83++ 1.03++ 1.33++ 1.10 0.03 Net realized and unrealized gain (loss) 0.57 0.51 0.23 1.97 (3.16) ------- ------- -------- ------- ------- Total from investment operations 1.40 1.54 1.56 3.07 (3.13) ------- ------- -------- ------- ------- Less distributions to shareholders: From net investment income (1.09) (1.19) (1.36) (1.20) (0.03) From net realized gains -- -- -- (0.01) -- ------- ------- -------- ------- ------- Total distributions (1.09) (1.19) (1.36) (1.21) (0.03) ------- ------- -------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 9.56 $ 9.25 $ 8.90 $ 8.70 $ 6.84 ======= ======= ======== ======= ======= TOTAL RETURN(b) 15.81% 18.47% 18.71% 46.71% (31.32)%+ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $66,140 $89,952 $102,481 $86,280 $41,216 Net expenses to average daily net assets(c) 0.00%(d) 0.00%(d) 0.00% 0.00% 0.00%** Net investment income to average daily net assets(a) 8.88% 11.43% 14.39% 14.22% 0.64%** Portfolio turnover rate 30% 14% 0% 0% 0% Fees and expenses reimbursed by the Manager to average daily net assets: 0.08% 0.06% 0.03% 0.04% 0.09%**
(a) Recognition of net investment income is affected by the timing of the declaration of dividends by GMO Emerging Country Debt Fund. (b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (c) Net expenses exclude expenses incurred indirectly through investment in underlying fund. (See Note 1.) (d) The ratio of net expenses to average daily net assets was less than 0.01%. * Period from July 20, 1998 (commencement of operations) through February 28, 1999. ** Annualized. + Not Annualized. ++ Computed using average shares outstanding throughout the period. See accompanying notes to the financial statements. 5 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Emerging Country Debt Share Fund (the "Fund"), is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in Class III Shares of GMO Emerging Country Debt Fund ("ECDF"), a portfolio of the Trust. GMO also serves as investment manager to ECDF. ECDF pursues its objectives by investing primarily in sovereign debt of developing countries in Asia, Latin America, the Middle East, Africa and Europe. The Fund's benchmark is the J.P. Morgan Emerging Markets Bond Index Global. The financial statements of ECDF should be read in conjunction with the Fund's financial statements. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Shares of ECDF are valued at their net asset value as reported on each business day. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost, which approximates fair value. Securities for which quotations are not readily available or whose values the manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. Certain securities held by the underlying fund in which the Fund invests were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. 6 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country's tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003, the tax basis of distributions paid from ordinary income were $9,960,484 and $6,495,001, respectively. As of February 28, 2003, the components of distributable earnings on a tax basis consisted of $3,705 and $128,471 of undistributed ordinary income and undistributed long-term capital gains, respectively. The temporary difference between book and tax basis distributable earnings are primarily due to losses on wash sales transactions. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of 7 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus U.S. GAAP. The financial highlights exclude these adjustments.
Accumulated Accumulated Undistributed Net Net Investment Income Realized Loss ----------------- ------------- $625,647 $(625,647)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Income dividends and capital gain distributions from ECDF are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund will also incur certain fees and expenses indirectly as a shareholder in ECDF (See Note 2). PURCHASES AND REDEMPTIONS OF FUNDS SHARES The Fund does not charge any purchase premium or redemption fee in connection with the purchase and sale of Fund shares. As a shareholder in ECDF, the Fund will indirectly bear ECDF's purchase premium and redemption fees which are .50% and .25%, respectively. These fees are paid to and retained by ECDF. INVESTMENT RISK The Fund is subject to the investment risk associated with an investment in ECDF. Investments in emerging country debt present certain risks that are not inherent in many other securities. Many emerging countries present elements of political and/or economic instability, which may result in ECDF's inability to collect on a timely basis, or in full, principal and interest payments. Further, countries may impose various types of foreign currency regulations or controls which may impede ECDF's ability to repatriate amounts it receives. ECDF may acquire interests in securities or bank loans which are in default at the time of acquisition in anticipation of improving conditions in the 8 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- related countries. These factors may result in significant volatility in the values of its holdings. The markets for emerging country debt are relatively illiquid. Accordingly, ECDF may not be able to realize in an actual sale amounts approximating those used to value its holdings. Additionally, the investment risk associated with an investment in ECDF may be more pronounced to the extent that ECDF engages in derivative transactions. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES The manager does not directly charge an advisory fee or shareholder service fee. GMO, in its capacity as Manager of ECDF, earns a management fee at the annual rate of .35% of ECDF's average daily net assets. Additionally, Class III shares of ECDF bear a shareholder service fee at the annual rate of .15% of ECDF's average daily net assets. GMO has entered into a binding agreement, effective until at least June 30, 2003, to reimburse the Fund for its total annual direct operating expenses (excluding fees and expenses of the independent Trustees of the Trust (including legal fees), 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). The Fund incurs fees and expenses indirectly as a shareholder in ECDF. For the year ended February 28, 2003, the shareholder service fees incurred indirectly by the Fund through its investment in ECDF were .15% of the Fund's average daily net assets, indirect operating expenses (excluding shareholder service fees and investment-related expenses) were .414% of the Fund's average daily net assets, and indirect investment-related expenses (including, but not limited to, interest expense, foreign audit expense, and investment-related legal expense) were .079% of the Fund's average daily net assets. The Fund's portion of the fee paid by the Trust to the independent Trustees during the year ended February 28, 2003 was $862. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2003, aggregated $20,064,831 and $45,800,869, respectively. 9 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- At February 28, 2003, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Appreciation -------------- ---------------- ---------------- -------------- $59,908,214 $5,564,416 $(51,995) $5,512,421
4. PRINCIPAL SHAREHOLDERS At February 28, 2003, 100% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 ------------------------ ------------------------ Shares Amount Shares Amount Class III: ---------- ------------ ---------- ------------ Shares sold 1,532,346 $ 14,338,722 441,370 $ 3,958,889 Shares issued to shareholders in reinvestment of distributions 717,691 6,495,001 1,170,445 9,960,484 Shares repurchased (5,057,362) (46,825,646) (3,399,153) (31,557,196) ---------- ------------ ---------- ------------ Net decrease (2,807,325) $(25,991,923) (1,787,338) $(17,637,823) ========== ============ ========== ============
10 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO EMERGING COUNTRY DEBT SHARE FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Emerging Country Debt Share Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 11 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 12 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the from February Boston, MA 02110 Trust 2002 - October Age: 64 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 13 PRINCIPAL OFFICERS:
Term of Office(4) Principal Occupation(s) Name, Address, Position(s) and Length of During Past and Age Held with Fund Time Served Five Years ------------------------- ------------------------------ ------------------------------ ------------------------------ Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief 40 Rowes Wharf Vice President from August Operating Officer (2000 - Boston, MA 02110 1998 - October 2002. present) and Member, Grantham, Age: 47 Mayo, Van Otterloo & Co. LLC. Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC. 40 Rowes Wharf February 1998. Boston, MA 02110 Age: 45 Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator, c/o GMO Trust Trust Grantham, Mayo, Van 40 Rowes Wharf Otterloo & Co. LLC. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer 40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003) Boston, MA 02110 and Member, Grantham, Mayo, Age: 37 Van Otterloo & Co. LLC. Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel, c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van 40 Rowes Wharf 2001. Otterloo & Co. LLC (June Boston, MA 02110 1999 - present); Associate/ Age: 58 Junior Partner, Hale and Dorr LLP (1991 - 1999). Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering c/o GMO Trust Laundering Compliance Officer Reporting Officer (February 40 Rowes Wharf 2003 - present) and Compliance Boston, MA 02110 Officer, Grantham, Mayo, Van Age: 32 Otterloo & Co. LLC.
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 14 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGEMENT Day-to-day management of the Fund's portfolio is the responsibility of the Emerging Markets Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Emerging Markets Fund returned -9.1% for the fiscal year ended February 28, 2003. The Fund's benchmark, the S&P/IFC Investable Composite, returned -11.6% during the same period. We normally expect to obtain approximately 70% of our value added from country selection and the rest from stock selection. During the fiscal year we were on target with 1.5% added value coming from country selection and 1.0% coming from security selection. Like the previous three years, our largest overweight for 2002 came in the TIP (Thailand, Indonesia, Philippines) region. While Philippines disappointed this year (falling over 30%), Thailand and Indonesia were two of the top performing markets on the back of strengthening economies and political reforms. Both markets were approximately flat over the past 12 months, outperforming the global emerging markets by 12%. Our overweight of this region added 0.8% to performance. The biggest driver outside of Asia was the weakening U.S. dollar (on the back of economic uncertainty and the looming war in Iraq). A weak dollar meant a strong euro, strong gold price, and strong commodity prices in general. South Africa and Russia (up 34% and 35%, respectively) were the biggest beneficiaries of this move because of their high concentration in mining and oil. Our 3.6% underweight of South Africa cost the Fund 1.5%. This was partially balanced by the 2.5% overweight in Russia, which added 0.8%. Eastern Europe, with Czech Republic, Poland, and Hungary set to enter the Eurozone in 2004, also benefited from the weak dollar. We are overweight the Czech Republic and Poland, and building weight in all three markets. Our combined 3% bet on the region added 0.8% to performance. Mexico found itself on the other side of the dollar trade. Having risen in sympathy with the strong dollar in the late-1990s, the Mexican peso fell rapidly, even against the already weak dollar over the past 12 months. We have been underweight in this market for 3 years on the back of an overvalued market and currency. Our 6.4% underweight added 0.9% to performance. Value stocks strung together their third straight year of strong returns. The cheapest third of stocks outperformed by 4%, while their expensive counterparts lagged by over 8%. Our bet on these two groups added 1% to performance. GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- OUTLOOK For the second year, emerging equities significantly outperformed their global counterparts in a difficult environment. The S&P 500 and MSCI EAFE fell 22.7% and 17.5%, respectively, over the year ended February 28, 2003, further supporting the case for emerging markets as a diversifying asset class. Nevertheless, there is even more hope for the future. A couple of secular trends fuel this optimism. First there is a realization among emerging market policymakers that they need to reduce their dependence on export-led growth and boost their domestic economy. This has led to low interest rates, driving up consumption in most of our investable markets. Second, as western economies struggle to recover from the overhang of the bubble, cost control through outsourcing has become a mainstream strategy. Production and services are being moved aggressively to lower-cost destinations, primarily in emerging markets. As always, short-term (absolute) performance of the asset class will likely be driven by global equity moves, global growth, and any developments in the conflict with Iraq. But, trading at 10 times price to earnings, with strong growth prospects, emerging markets have a safety net that the rest of global equities do not. We would expect the asset class to continue to outperform global equities. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO EMERGING MARKETS FUND CLASS III SHARES AND THE S&P/IFC INVESTABLE COMPOSITE INDEX AS OF FEBRUARY 28, 2003 GMO EMERGING MARKETS FUND S&P/IFC INVESTABLE COMPOSITE INDEX 12/9/93 $9,920 $10,000 12/31/93 $10,926 $11,127 3/31/94 $11,035 $9,812 6/30/94 $10,926 $9,500 9/30/94 $13,232 $11,776 12/31/94 $11,612 $9,792 3/31/95 $9,679 $8,352 6/30/95 $10,808 $9,082 9/30/95 $10,895 $9,051 12/31/95 $10,152 $8,967 3/31/96 $11,101 $9,642 6/30/96 $11,885 $10,060 9/30/96 $11,324 $9,834 12/31/96 $11,334 $9,809 3/31/97 $12,566 $10,744 6/30/97 $14,154 $11,392 9/30/97 $14,509 $10,364 12/31/97 $11,322 $8,363 3/31/98 $11,821 $8,950 6/30/98 $8,483 $7,051 9/30/98 $6,746 $5,520 12/31/98 $8,052 $6,521 3/31/99 $8,922 $7,233 6/30/99 $11,991 $8,952 9/30/99 $10,885 $8,671 12/31/99 $14,311 $10,899 3/31/2000 $14,561 $11,046 6/30/2000 $12,689 $9,915 9/30/2000 $11,679 $8,627 12/31/2000 $10,333 $7,438 3/31/2001 $10,520 $7,075 6/30/2001 $11,321 $7,588 9/30/2001 $9,393 $5,890 12/31/2001 $11,343 $7,569 3/31/2002 $13,643 $8,548 6/30/2002 $12,646 $7,874 9/30/2002 $10,526 $6,640 12/31/2002 $11,434 $7,272 2/28/2003 $11,330 $7,063
AVERAGE ANNUAL TOTAL RETURN SINCE INCEPTION 1 YEAR 5 YEAR 12/9/93 Class III -10.59% -0.21% 1.36% 1/9/98 Class IV -10.54% -0.17% 1.86%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 80 bp on the purchase and 80 bp on the redemption. Transaction fees are retained by the Fund to cover trading costs. Performance for Class IV shares may vary due to different shareholder servicing fees. Past performance is not indicative of future performance. Information is unaudited. GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- COMMON STOCKS -- 80.2% ARGENTINA -- 0.6% 180,400 BBVA Banco Frances SA ADR* 862,312 291,000 Grupo Financiero Galicia SA ADR* 739,140 63,500 IRSA Inversiones y Representaciones SA GDR* 481,965 715,700 Perez Companc SA ADR* 5,217,453 613,450 Telecom Argentina SA ADR* 2,466,069 122,779 Tenaris SA ADR* 2,749,022 -------------- 12,515,961 -------------- BRAZIL -- 2.5% 2,408,716,800 Banco do Brasil SA 6,479,037 718,408,500 Companhia Siderurgica Nacional SA 12,480,058 1,288,732,000 Electrobras 6,066,320 356,500 Petroleo Brasileiro SA (Petrobras) 4,775,642 178,000 Petroleo Brasileiro SA (Petrobras) ADR 2,379,860 1,441,200 Souza Cruz (Registered) 8,047,945 452,301,000 Tele Norte Leste Participacoes SA 2,154,418 451,750 Vale Do Rio Doce 13,163,911 -------------- 55,547,191 -------------- CHILE -- 0.4% 16,400 AFP Provida SA ADR 367,032 79,300 Banco Santander Chile SA ADR 1,420,263 33,500 Compania de Telecommunicaciones de Chile ADR 316,910 84,800 Cristalerias de Chile SA ADR 1,547,600 94,000 Embotelladora Andina SA ADR 606,300 720,481 Enersis SA ADR* 2,881,924 126,400 Masisa SA ADR 783,680 13,500 Sociedad Quimica y Minera de Chile ADR 301,050 -------------- 8,224,759 -------------- CHINA -- 9.9% 36,340,000 Brilliance China Automotive Holdings Ltd 8,480,312 45,683,000 China Eastern Airlines Corp Ltd Class H 5,974,620 32,240,000 China Everbright Ltd 9,714,454 4,188,000 China Insurance International Holdings Co Ltd 2,282,186 12,217,000 China Mobile Ltd* 26,316,575 284,800 China Mobile Ltd ADR* 3,115,712
See accompanying notes to the financial statements. 1 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- CHINA -- CONTINUED 98,229,000 China Petroleum & Chemical Corp Class H 18,514,525 6,706,000 China Resources Enterprise Ltd 6,018,900 25,954,000 China Unicom* 15,723,949 398,800 China Unicom ADR* 2,460,596 9,522,940 Chongqing Changan Automobile Co Ltd Class B 4,823,071 10,882,000 CNOOC Ltd 15,278,417 52,000 CNOOC Ltd ADR 1,449,240 14,756,000 Cosco Pacific Ltd 13,338,693 53,668,800 Denway Motors Ltd 20,644,228 13,546,000 Guangdong Investments Ltd* 2,049,503 8,426,000 Huaneng Power International Inc Class H 7,508,648 10,528,000 Legend Holdings Ltd 3,610,981 2,607,000 People's Food Holdings Ltd 1,341,612 124,363,000 PetroChina Co Ltd Class H 25,991,677 18,716,000 Shandong International Power Development Co Ltd Class H 4,247,582 4,403,000 Shanghai Industrial Holdings Ltd Class H 6,831,083 8,686,000 Sinopec Shanghai Petrochemical Co Ltd Class H* 1,458,971 10,662,000 TCL International Holdings Ltd 2,768,339 7,700,000 Top Form International Ltd* 957,675 5,121,847 TPV Technology Ltd 1,477,626 2,050,000 Victory City International Holdings 502,045 10,146,918 Zhejiang Southeast Electric Power Co Class B 6,270,795 -------------- 219,152,015 -------------- CZECH REPUBLIC -- 2.5% 378,376 Ceske Radiokomunikace* 2,439,305 937,965 Ceski Telecom AS* 8,592,891 4,402,378 CEZ AS 13,742,447 339,000 Komercni Banka AS 24,327,584 48,000 Komercni Banka AS GDR 1,152,000 14,330 Philip Morris CR AS 5,358,173 -------------- 55,612,400 -------------- EGYPT -- 0.4% 188,744 Commercial International Bank 1,184,940 147,216 Eastern Tobacco Co 1,452,355 590,136 Egyptian International Pharmaceuticals Industries Co 910,344 721,257 MobiNil-Egyptian Mobile Services Co 4,784,230 -------------- 8,331,869 --------------
See accompanying notes to the financial statements. 2 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- HUNGARY -- 0.5% 22,150 Gedeon Richter Rt 1,356,972 103,400 Magyar Tavkozlesi Rt (Matav) ADR 1,684,386 74,600 MOL Magyar Olaj es Gazipari Rt (New Shares) 1,608,648 621,300 OTP Bank Rt 6,057,039 73,100 Pannonplast Rt 481,783 -------------- 11,188,828 -------------- INDIA -- 0.7% 575,300 Bharat Heavy Electricals Ltd 2,533,420 1,060 BSES Ltd 5,093 900 Cipla Ltd 14,463 3,000 Cipla Ltd (New Shares)(a) 1 850 Escorts Ltd 745 133,200 e-Serve International Ltd 1,372,381 203,900 Galaxy Entertainment Corp* 77,428 1,318 Great Eastern Shipping Co 1,016 2,990 HCL Infosytems Ltd 5,457 400 ITC Ltd 5,455 87 Mahindra GESCO Developers Ltd 24 21,500 Mastek Ltd 262,971 21,275 NIIT Ltd 60,368 102,750 Polaris Software Lab 318,392 71,360 Ranbaxy Laboratories Ltd GDR 1,027,584 8,029 Reliance Industries 49,557 179,500 Reliance Industries Ltd GDR 144A 2,234,775 355,600 State Bank of India GDR 5,049,520 339,900 Tata Engineering & Locomotive GDR* 1,148,862 524,200 U TV Software Comm Ltd*+(a) 274,940 206,046 Venky's (India) Ltd 208,575 200 Wockhardt Life Sciences Ltd* 104 2,100 Wockhardt Ltd 20,046 -------------- 14,671,177 -------------- INDONESIA -- 4.4% 25,161,692 Astra International Tbk* 6,656,158 69,382,000 Bank Central Asia Tbk 19,330,270 14,803,400 Bimantara Citra Tbk PT 3,999,343 30,109,200 Citra Marga Nusaphala Persad* 1,152,376 5,915,500 Gudang Garam 5,027,526
See accompanying notes to the financial statements. 3 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- INDONESIA -- CONTINUED 33,535,500 HM Sampoerna Tbk 11,136,345 28,275,800 Indah Kiat Pulp & Paper* 557,018 32,617,500 Indofood Sukses Makmur Tbk 2,111,224 896,000 Indonesian Satellite Corp Tbk PT 791,760 29,868,000 Indorama Synthetics* 1,361,686 3,154,000 International Nickel* 2,272,258 41,841,000 Mayora Indah Tbk 1,695,588 186,900 PT Indosat (Persero) Tbk Class B ADR 1,626,030 38,503,000 PT Matahari Putra Prima Tbk 1,690,344 2,798,000 Semen Gresik 2,299,251 301,969 Telekomunikasi Indonesia Class B ADR 2,415,752 83,810,280 Telekomunikasi IndonesiaTbk PT Class B 33,727,895 -------------- 97,850,824 -------------- ISRAEL -- 0.0% 11,736 Clal Industries Ltd* 33,347 -------------- LEBANON -- 0.0% 24,118 Banque Libanaise* 132,649 -------------- MALAYSIA -- 1.4% 301,000 Affin Holdings Berhad 64,953 11,064,000 Arab-Malaysian Corp Berhad* 2,664,095 710,000 Edaran Otomobil Berhad 1,457,368 4,310,000 Highlands and Lowlands Berhad 3,334,579 1,978,400 Hong Leong Credit Berhad 2,051,288 2,963,000 IJM Corp Berhad Class A 3,680,358 1,298,800 IOI Corp Berhad 2,033,647 1,546,873 Malakoff Berhad 1,644,570 1,159,000 Malaysian International Shipping (Foreign Registered) 2,196,000 632,000 Malaysian Oxygen Berhad 1,729,684 482,667 OYL Industries BHD 2,921,406 1,262,000 Perusahaan Otomobil Nasional 2,656,842 1,039,000 Resorts World Berhad 2,583,829 3,491,700 Saship Holdings*(a)(b) 9,189 137,463 Silverstone Corp BHD* 6,692 1,206,000 Sime UEP Properties Berhad 1,269,474 14,130,000 Tan Chong International Ltd 1,757,395 -------------- 32,061,369 --------------
See accompanying notes to the financial statements. 4 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- MEXICO -- 0.8% 1,963,000 Alfa SA Class A 2,855,402 106,110 America Movil SA de CV ADR 1,464,318 68,147 Cemex SA de CV ADR (Participating Certificates) 1,223,239 16,524 Cemex SA de CV CPO 59,417 1,084,300 Corporacion GEO SA de CV Series B* 2,061,405 3,840,000 Grupo Cementos de Chihuahua SA de CV* 2,608,518 8,232,755 Grupo Financiero Serfin SA de CV Class B*(a)(b) 7,457 3,720,000 Grupo Herdez SA de CV* 1,179,268 519,500 Grupo Modelo SA de CV Class C 1,072,808 209,400 Telefonos de Mexico Class L ADR 6,087,258 -------------- 18,619,090 -------------- PERU -- 0.0% 39,200 Cia de Minas Buenaventura SA ADR 987,840 146,238 Union de Cervecerias Peruanas Backus & Johnson SA 57,998 -------------- 1,045,838 -------------- PHILIPPINES -- 2.2% 36,062,184 Ayala Corp 2,810,899 167,333,000 Ayala Land Inc 14,270,490 3,108,400 Bank of the Philippine Islands 1,824,279 71,648,450 Filinvest Land Inc* 1,143,222 12,255,528 First Philippine Holdings* 1,843,106 201,212 Globe Telecom Inc* 1,937,392 8,511,305 Ionics Circuits Inc 78,050 674,000 Ionics EMS Inc 52,319 2,894,410 Metropolitan Bank & Trust Co 1,459,812 1,366,110 Philippine Long Distance Telephone* 7,328,513 50,000 Philippine Long Distance Telephone GDR 144A 1,200,000 7,324,551 San Miguel Corp Class B 9,000,365 48,611,000 SM Prime Holdings 4,725,141 -------------- 47,673,588 -------------- POLAND -- 1.2% 303,400 Bank Pekao SA* 6,838,625 400,200 BRE Bank SA 6,954,575 2,085,800 KGHM Polska Miedz SA* 6,662,961
See accompanying notes to the financial statements. 5 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- POLAND -- CONTINUED 1,490,200 Polski Koncern Naftowy Orlen 6,531,205 -------------- 26,987,366 -------------- RUSSIA -- 5.0% 632,610 Bashneft* 1,783,960 2,649,789 Chelyabinsk Pipe Works 271,603 7,500 Cherepovets MK Severstal* 431,250 17,100 Dalmoreproduct 3,420 90,000 Divot Holdings NV*+(a)(b) 900 272,800 Electrosila* 777,480 29,221 Elsib 58,442 479,997 JSC Mining & Smelting Co ADR* 11,939,925 37,000 Lukoil ADR 144A 2,210,750 159,300 Lukoil Holding Co ADR 9,518,175 38,700 Mobile Telesystems ADR* 1,654,812 785,700 North-West Telecom 272,638 350,000 Onaco Oil Co* 546,000 40,000 Orenburgneft* 448,400 548,200 Rostelecom ADR 4,522,650 135,000 Russia Petroleum* 810,000 35,500 Sberbank RF 7,515,350 10,000 Seversky Tube Works ADR* 62,000 6,375 Severstal-Auto* 6,375 6,375 Severstal-Resursources* 638 8,896,214 Sibirtelecom 226,853 353,100 Sibneft ADR* 7,591,650 116,810 Sun Interbrew Ltd Class A GDR* 379,633 718,000 Sun Interbrew Ltd Class B GDR* 2,692,500 119,450 Tatneft ADR 2,006,760 37,000 Trade House GUM ADR* 114,700 2,400 Udmurtneft* 240,000 214,000 United Heavy Machinery ADR 144A* 1,198,400 1,345,180 United Heavy Machinery Uralmash-Izhora Group ADR* 7,533,008 155,000 Yukos Corp ADR 25,458,750 1,878,500 Yukos Oil 20,522,613 -------------- 110,799,635 -------------- SOUTH AFRICA -- 8.8% 4,705,940 ABSA Group Ltd 19,488,709
6 See accompanying notes to the financial statements. GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- SOUTH AFRICA -- CONTINUED 3,003,800 AECI Ltd 9,534,572 3,648,000 African Bank Investments Ltd 2,903,890 154,690 AngloGold Ltd 4,961,719 2,169,493 Anglovaal Industries Inc 3,550,769 5,501,000 Foschini Ltd 7,912,066 1,504,000 Gencor Ltd 7,785,644 6,900 Goldfields Ltd 86,409 4,000 Harmony Gold Mining Co Ltd 54,804 150,000 Impala Platinum Holdings Ltd 9,117,060 7,184,375 Iscor Ltd 15,811,665 782,279 Kumba Resources Ltd 2,909,867 246,008 Liberty International Plc 2,226,703 3,560,000 MTN Group Ltd* 5,627,953 1,018,000 Nampak Ltd 1,571,475 1,218,000 Naspers Ltd 3,458,382 1,832,716 Nedcor Ltd 21,815,072 2,793,200 Premier Group Ltd*(a) 3,463 3,098,770 Remgro Ltd 22,476,850 47 Sage Group Ltd 10 18,013,057 Sanlam Ltd 15,857,547 2,090,110 Sasol Ltd 24,606,756 833,000 Standard Bank Investment Corp 2,969,430 452,000 Tiger Brands Ltd 3,547,582 761,200 Tongaat-Hulett Group 3,492,133 2,152,000 Venfin Ltd* 4,362,649 -------------- 196,133,179 -------------- SOUTH KOREA -- 14.5% 38,180 Amorepacific Corp 2,910,719 175,400 Cheil Industries Inc 2,093,956 1,955,400 Chohung Bank* 6,020,270 199,620 Daelim Industrial Co Ltd 2,809,547 1,367,500 Daesang Corp 2,211,096 12,330 Gwangju Shinsegae Co Ltd 413,186 78,450 Hanil Cement Manufacturing 2,132,704 1,257,500 Hankook Tire Co Ltd 2,744,345 221,840 Hanssem Co Ltd 2,053,644 1,536,348 Hanwha Corp* 2,419,750 437,840 Hyosung Corp 3,924,842 67,400 Hyundai Motor Co 1,417,283
See accompanying notes to the financial statements. 7 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- SOUTH KOREA -- CONTINUED 64,900 Kangwon Land Inc 6,986,680 791,600 KIA Motors Corp 5,006,979 98,400 Kookmin Credit Card Co Ltd* 1,467,365 1,740,170 Korea Electric Power Corp 26,168,518 2,062,800 Korea Exchange Bank* 6,221,321 192,300 Korean Air Lines 2,174,884 399,500 KT Corp 14,609,119 346,600 KT Freetel* 7,114,062 539,700 KT&G Corp 7,573,388 576,000 KT&G Corp GDR 144A 4,032,000 481,700 LG Chemicals Ltd 14,931,429 309,410 LG Electronics Inc 10,446,298 335,800 LG Engineering & Construction Ltd 3,966,640 72,950 LG Household & Health Care Ltd 1,558,434 355,500 LG International Corp 1,474,239 2,553,600 LG Investment & Securities Co Ltd 26,955,439 252,800 Poongsan Corp 2,054,338 141,276 POSCO 13,078,371 674,600 Samsung Corp 3,492,672 383,000 Samsung Electronics 89,681,649 63,860 Samsung Fire & Marine Insurance 3,049,487 54,400 Samsung SDI Co Ltd 3,099,066 100,841 Shin Young Securities Co 1,161,617 21,400 Shinsegae Co Ltd 2,760,943 1,314,870 SK Corp 13,879,581 513,945 SK Global* 3,401,471 1,500 SK Telecom 207,347 214,000 SK Telecom ADR 3,293,460 1,390,400 Ssangyong Motor* 6,639,534 621,962 Taihan Electric Wire 2,475,030 27,800 Tongyang Confectionery Co 1,164,495 -------------- 321,277,198 -------------- SRI LANKA -- 0.0% 333,600 Lanka Walltile Ltd 112,761 1,591,169 Millenium Information Technology*+(a) 787,470 -------------- 900,231 --------------
See accompanying notes to the financial statements. 8 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- TAIWAN -- 11.7% 12,342,290 Ambassador Hotel* 3,569,497 1,412,000 Ambit Microsystems Corp 4,347,741 15,040,050 Asustek Computer Inc 25,535,624 5,848,055 Chang Hwa Bank 2,625,314 54,273,020 China Development Financial Holding Corp* 20,459,757 13,780,400 China Housing Food & Synthetic* 1,594,164 8,058,000 China Manmade Fibers* 3,455,085 14,347,000 China Steel Corp 8,917,847 26,310,000 Chinatrust Financial Holding Co* 21,123,712 9,971,000 Compal Electronics Inc 9,612,331 2,623,000 Delta Electronics Inc 2,747,545 3,990,110 Evergreen Marine Corp 2,709,830 5,044,710 First Financial Holding Co Ltd* 3,150,222 5,587,000 Formosa Chemicals & Fibre Co 5,562,883 3,617,000 Formosa Plastics Corp 4,548,573 3,159,785 Formosa Taffeta Co 1,318,471 4,720,000 Fubon Financial Holding Co Ltd 3,708,086 1,725,250 GigaByte Technology Co Ltd 2,333,432 2,240,288 Hon Hai Precision Industry Co Ltd 7,220,497 17,540,880 Hsinchu International Bank* 7,092,068 19,393,200 Inventec Co Ltd 11,161,554 13,493,606 Mega Financial Holdings Co Ltd* 6,562,358 11,734,050 Nan Ya Plastic Corp 11,615,865 11,994,886 Orient Semiconductor Electronics Ltd* 1,846,695 38,836,000 Ritek Corp 18,328,357 5,716,000 Synnex Technology International Corp 7,994,176 32,247,010 Taiwan Cement Corp* 11,367,651 12,381,909 Taiwan Semiconductor* 14,965,185 13,786,914 Teco Electric & Machinery* 4,185,667 6,980,472 United Microelectronics* 3,957,275 632,167 United Microelectronics ADR* 2,041,899 15,549,000 Waterland Financial Holdings* 3,132,173 2,078,000 Wintek Corp* 1,734,158 27,803,040 Yageo Corp* 7,600,831 8,708,810 Yang Ming Marine Transport* 4,586,222 6,371,000 Yulon Motor Co 7,535,197 -------------- 260,247,942 -------------- THAILAND -- 6.5% 10,329,295 Advanced Info Service Pcl (Foreign Registered) 9,415,508
See accompanying notes to the financial statements. 9 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- THAILAND -- CONTINUED 2,705 Advanced Info Service Pcl NVDR 2,418 433,000 Bangkok Bank Pcl (Foreign Registered)* 642,643 629,000 Bangkok Bank Pcl NVDR* 786,526 16,339,700 Bangkok Expressway Pcl (Foreign Registered)(a) 5,728,538 19,778,000 Bank of Ayudhya Pcl (Foreign Registered)* 3,698,119 2,034,100 Banpu Pcl (Foreign Registered)(a) 1,806,610 853,400 BIG C Supercenter Pcl (Foreign Registered)*(a) 289,221 4,292,800 BIG C Supercenter Pcl NVDR* 1,454,846 2,352,800 Central Pattana Pcl (Foreign Registered)*(a) 1,264,798 1,847,600 Central Pattana Pcl NVDR* 993,217 21,105,640 Charoen Pokphand Foods Pcl (Foreign Registered)(a) 2,071,840 836,460 Electricity Generating Pcl (Foreign Registered) 782,012 2,109,300 Electricity Generating Pcl NVDR 1,947,350 5,724,000 GMM Grammy Pcl (Foreign Registered) 2,648,947 13,450 Italian-Thai Development Pcl (Foreign Registered)*(a) 5,250 53,112,100 Land & House Pcl NVDR 9,248,221 32,154,200 National Finance Pcl NVDR* 9,845,040 3,927,000 National Petrochemical (Foreign Registered)(a) 4,635,117 3,608,158 PTT Exploration & Production Pcl (Foreign Registered)(a) 10,878,868 12,639,200 PTT Pcl (Foreign Registered)(a) 12,924,273 8,879,000 Quality House Co Ltd (Foreign Registered)*(a) 1,276,285 590,000 Regional Container Lines (Foreign Registered) 723,969 1,707,000 Saha Pathana International Holdings Pcl (Foreign Registered)(a) 3,191,773 3,004,100 Saha Union Pcl (Foreign Registered)(a) 1,263,849 16,566,000 Sansiri Pcl (Foreign Registered)*(a) 2,381,229 956,900 Siam Cement Pcl NVDR 27,554,068 6,844,300 Siam Commercial Bank Pcl (Foreign Registered)* 5,199,013 3,108,050 Star Block Co Ltd (Foreign Registered)*(a) 726 11,335,000 Thai Farmers Bank NVDR* 7,616,717 5,703,650 Thai German Ceramics Industry (Foreign Registered)(a) 5,265,728 5,630,800 Thai Union Frozen Products Pcl (Foreign Registered) 2,421,566 7,136,300 Tisco Finance Pcl (Foreign Registered)*(a) 3,135,735 1,355,000 Univenture Pcl (Foreign Registered)(a) 823,419 2,145,000 Univenture Pcl NVDR* 1,303,494 -------------- 143,226,933 -------------- TURKEY -- 5.8% 322,496,000 Adana Cimento Class A 1,474,614 8,135,552,138 Akbank TAS* 31,084,791 590,573,500 Akcansa Cimento AS 1,720,117
10 See accompanying notes to the financial statements. GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- TURKEY -- CONTINUED 174,518,000 Aksa Akrilik Kimya Sanayii 1,694,350 524,656,000 Aksigorta AS 1,840,322 361,385,000 Anadolu Isuzu Otomotiv Sanay* 2,376,788 527,411,000 Arcelik AS 4,790,141 262,055,000 Aselsan Askeri Elektroni* 2,626,295 24,163,000 Brisa Bridgestone Sabanci 688,642 930,300,000 Carsi Buyuk Magazacilik AS* 1,019,746 393,489,000 Doktas Dokumculuk Ticaret* 776,380 57,359,000 Eczacibasi Yapi* 1,329,335 88,185,000 Enka Insaat ve Sanayi AS* 2,485,640 1,072,251,000 Eregli Demir ve Celik Fabrikalari TAS* 11,753,456 5,236,795,000 Finansbank* 3,148,965 695,675,000 Ford Otomotive Sanayii AS* 7,516,689 78,619,000 Galatasaray Sportif Sinai ve Ticari Yatirimlar AS* 1,772,806 1,466,524,000 Global Menkul Degerler AS* 1,010,446 499,216,260 Hurriyet Gazeteci* 1,375,854 109,828,000 Mardin Cimento Sanayii 509,068 42,150,000 Medya Holding*(a) -- 480,492,000 Milliyet Gazetecilik AS* 729,842 58,823,000 Netas Telekomunik 1,031,659 84,124,000 Sasa Dupont Sabanci Polyester Sanayi AS* 869,431 2,015,000,000 Tansas Perakende Magazacilik Ticaret AS* 1,293,689 1,646,692,750 Trakya Cam Sanayii 3,506,893 1,574,714,000 Turkcell Iletisim Hizmet AS* 10,603,304 15,856,147,087 Turkiye Garanti Bankasi* 22,346,590 123,975,000 Uzel Makina Sanayii AS* 165,015 1,793,130,000 Vestel Elektronik Sanayi* 4,099,546 3,181,579,000 Yapi ve Kredi Bankasi* 3,537,302 -------------- 129,177,716 -------------- VENEZUELA -- 0.4% 795,312 Compania Anonima Nacional Telefonos de Venezuela (CANTV) ADR 8,056,511 30,055 Mantex SA Class A ADR* 56,353 350,434 Mercantil Servicios Financieros ADR 1,140,347 -------------- 9,253,211 -------------- TOTAL COMMON STOCKS (COST $1,864,710,513) 1,780,664,316 --------------
See accompanying notes to the financial statements. 11 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- PREFERRED STOCKS -- 6.2% BRAZIL -- 4.3% 9,877,000 Ambev Ciade Rebid 1.67% 1,389,256 111,258,000 Bco Itau SA (Registered) 4,894,230 23,904,000 Belgo Mineira (Registered) 2,799,628 836,749,000 Brasil Telecom Participacoes SA 2.19% 4,123,960 467,700 Companhia Vale do Rio Doce Class A 12,842,421 1,004,010,860 Electrobras Class B (Registered) 9.83% 5,007,395 318,900 Empresa Brasileira de Aeronautica SA ADR 3,287,859 427,413,000 Gerdau SA 3,979,528 22,322,178 Investimentos Itau SA 11,383,122 1,588,900 Petroleo Brasileiro SA (Petrobras) 3.01% 19,005,363 521,700 Petroleo Brasileiro SA ADR 6.93% 6,260,400 461,135,000 Siderurgica de Tubarao 3.50% 6,059,745 5,777,141,000 Tele Centro Oeste Celular SA 6.78% 6,960,411 407,300 Tele Centro Oeste Celular SA ADR 2.38% 1,405,185 74,732 Tele Norte Leste Participacoes ADR 4.11% 504,441 113,647,414 Tele Norte Leste Participacoes SA 3.44% 754,677 757,312,648 Tractebel Energia SA Class B 0.96% 420,140 9,347,654 Unipar Class B 2.52% 2,671,507 34,362,000 Votorantim Celulose e Papel SA 2.53% 1,303,522 -------------- 95,052,790 -------------- RUSSIA -- 0.3% 100,800 Red October 144A* 92,736 16,125 Transneft 5,740,500 -------------- 5,833,236 -------------- SOUTH KOREA -- 1.6% 242,100 LG Electronics Inc 3,772,513 289,663 Samsung Electronics (Non Voting) 4.08% 32,517,775 -------------- 36,290,288 -------------- TOTAL PREFERRED STOCKS (COST $145,361,179) 137,176,314 -------------- RIGHTS AND WARRANTS -- 3.8% INDIA -- 3.6% 275,900 Bajaj Auto Warrants, Expires 6/30/03 (Merrill Lynch)*(f) 2,987,362 394,734 Bharat Heavy Electricals Ltd Warrants, Expires 9/9/05 (Merrill Lynch)*(f) 1,725,224
12 See accompanying notes to the financial statements. GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- INDIA -- CONTINUED 1,608,000 Bharat Heavy Electricals Warrants, Expires 8/3/04 (Goldman Sachs)*(f) 7,027,925 402,000 Digital Global Soft Warrants, Expires 8/3/04 (Goldman Sachs)*(f) 5,440,909 445,317 Digital Global Soft Warrants, Expires 6/30/03 (Merrill Lynch)*(f) 6,027,187 5,638 EServe Warrants, Expires 10/10/05 (Merrill Lynch)(f) 57,654 935,935 Hero Honda Warrants, Expires 6/5/03 (Merrill Lynch)*(f) 4,355,654 225,000 Hero Honda Warrants, Expires 8/3/04 (Goldman Sachs)*(f) 1,047,105 822,652 Hindustan Petroleum Warrants, Expires 6/30/03 (Merrill Lynch)*(f) 5,371,835 435,000 ICICI Bank Ltd Warrants, Expires 5/8/03 (Merrill Lynch)*(f) 1,349,588 1,052,500 ICICI Bank Ltd Warrants, Expires 7/16/04 (Merrill Lynch)*(f) 3,265,381 58,518 Infosys Technology Warrants, Expires 8/3/04 (Goldman Sachs)*(f) 5,209,454 132,876 Infosys Technology Warrants, Expires 9/5/05 (Merrill Lynch)*(f) 11,829,033 443,209 Ranbaxy Laboratories Ltd Warrants, Expires 8/3/04 (Goldman Sachs)*(f) 5,666,427 365,363 Ranbaxy Laboratories Ltd Warrants, Expires 9/2/05 (Merrill Lynch)*(f) 7,473,829 949,910 Reliance Industries Warrants, Expires 7/3/03 (Merrill Lynch)*(f) 5,819,149 470,450 Satyam Computer Warrants, Expires 11/4/05 (Merrill Lynch)*(f) 2,211,915 11,280 State Bank of India Warrants, Expires 12/23/05 (Merrill Lynch)*(f) 67,127 509,000 Tata Engineering & Locomotive Warrants, Expires 7/3/03 (Merrill Lynch)*(f) 1,728,615 718,280 United Phosphorous Warrants, Expires 10/10/05 (Merrill Lynch)*(f) 2,086,388 -------------- 80,747,761 -------------- MALAYSIA -- 0.0% 200,750 Affin Holdings Berhad Warrants, Expires 7/08/05* 7,396 265,600 IJM Corp Berhad Warrants, Expires 8/24/04* 125,811 -------------- 133,207 -------------- THAILAND -- 0.2% 4,226,464 Charoen Pokphand Foods Pcl Warrants, Expires 4/29/05 (Foreign Registered)* 233,130 834,000 Kiatnakin Finance Ltd Warrants, Expires 03/30/09* 294,342 30,569,000 Land & House Warrants, Expires 9/02/08 (Foreign Registered)* 3,529,528 2,689,393 Telecomasia Corp Pcl Warrants, Expires 4/03/08* -- -------------- 4,057,000 -------------- TOTAL RIGHTS AND WARRANTS (COST $84,588,221) 84,937,968 -------------- PRIVATE EQUITY SECURITIES -- 2.4% POLAND -- 2.4% 21,635,077 CHP Investors*+(a) 28,926,098
See accompanying notes to the financial statements. 13 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- POLAND -- CONTINUED 17,000,000 MHP Investors*+(a) 17,000,000 9,204,400 Polimex Investment Partners*+(a) 6,138,414 -------------- 52,064,512 -------------- TOTAL PRIVATE EQUITY SECURITIES (COST $50,467,010) 52,064,512 -------------- DEBT OBLIGATIONS -- 1.6% UNITED STATES -- 1.6% $ 1,650,586 U.S. Treasury Inflation Indexed Note, 4.25%, due 01/15/10(c) 1,951,303 $ 29,288,367 U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09(c) 33,704,508 -------------- 35,655,811 -------------- TOTAL DEBT OBLIGATIONS (COST $32,777,909) 35,655,811 -------------- CONVERTIBLE SECURITIES -- 0.8% INDONESIA -- 0.0% $ 26,000,000 APP Finance (VI), Zero Coupon, due 11/18/12 601,250 -------------- MALAYSIA -- 0.1% $ 3,279,400 Berjaya Sports Toto BHD, 8.00%, due 06/25/12 2,580,370 -------------- RUSSIA -- 0.7% $ 124,330 Divot Holdings NV*+(a)(b) 1,244 $ 46,624 Divot Holdings, Convertible Securities*+(a)(b) 466 $ 11,300,000 Lukinter Finance CB, 3.50%, due 11/29/07 12,797,250 $ 1,800,000 Lukoil Finance, 3.50%, due 11/29/07 2,038,500 -------------- 14,837,460 -------------- TOTAL CONVERTIBLE SECURITIES (COST $21,807,031) 18,019,080 --------------
See accompanying notes to the financial statements. 14 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- MUTUAL FUNDS -- 0.7% UNITED STATES -- 0.7% 133,320 GMO Alpha LIBOR Fund(c) 3,162,354 461,898 GMO Short-Duration Collateral Fund(c) 11,552,065 -------------- 14,714,419 -------------- TOTAL MUTUAL FUNDS (COST $14,960,357) 14,714,419 -------------- INVESTMENT FUNDS -- 0.6% INDIA -- 0.0% 170 SPG Infinity Technology Fund I*+(a) 242,420 1,227,400 TDA India Technology Fund II LP*+(a) 764,989 10,500 UTI Masterplus 1991 Units* 3,540 -------------- 1,010,949 -------------- KAZAKHSTAN -- 0.0% 450,000 Kazakhstan Investment Fund*+(a) 50,209 -------------- POLAND -- 0.0% 1,749,150 The Emerging Europe Fund II, LP*+(a) 1,084,473 -------------- ROMANIA -- 0.1% 3,600 Romanian Investment Fund*+(a) 1,309,622 -------------- RUSSIA -- 0.5% 9,500,000 NCH Eagle Fund LP*+(a) 10,048,831 -------------- UKRAINE -- 0.0% 16,667 Societe Generale Thalmann Ukraine Fund*+(a) 820,869 -------------- TOTAL INVESTMENT FUNDS (COST $22,138,299) 14,324,953 -------------- EQUITY LINKED SECURITIES -- 0.2% RUSSIA -- 0.2% 5,685,000 Renaissance Gazprom Note*+(a)(d) 3,701,503 -------------- TOTAL EQUITY LINKED SECURITIES (COST $4,782,059) 3,701,503 --------------
See accompanying notes to the financial statements. 15 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE ($) DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 4.5% CASH EQUIVALENTS -- 4.5% $ 73,800,000 Royal Bank of Canada GC Time Deposit, 1.33%, due 3/03/03 73,800,000 26,302,159 The Boston Global Investment Trust(e) 26,302,159 -------------- 100,102,159 -------------- TOTAL SHORT-TERM INVESTMENTS (COST $100,102,159) 100,102,159 -------------- TOTAL INVESTMENTS -- 101.0% (Cost $2,341,694,737) 2,241,361,035 Other Assets and Liabilities (net) -- (1.0%) (21,753,531) -------------- TOTAL NET ASSETS -- 100.0% $2,219,607,504 ============== NOTES TO SCHEDULE OF INVESTMENTS:
144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. ADR - American Depositary Receipt GDR - Global Depository Receipt NVDR - Non-Voting Depository Receipt
* Non-income producing security. (a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). + Direct placement securities are restricted as to resale. They have been valued at fair value by the Trustees after consideration of restricitions as to resale, financial condition and prospects of the issuer, general market conditions, and pertinent information in accordance with the Fund's Prospectus and the Investment Company Act of 1940, as amended. The Fund has limited rights to registration under the Securities Act of 1933 with respect to those restricted securities. 16 See accompanying notes to the financial statements. GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003 Additional information on each restricted security is as follows:
MARKET VALUE AS A MARKET PERCENTAGE VALUE AS OF ACQUISITION ACQUISITION OF FUND'S FEBRUARY 28, ISSUER, DESCRIPTION DATE COST NET ASSETS 2003 - ---------------------------------------------------------------------------------------------------------- CHP Investors 12/13/99 - 3/05/01 $22,825,006 1.30% $ 28,926,098 Divot Holdings NV, Convertible Securities 9/21/01 124,330 0.00 1,244 Divot Holdings NV, Common Stocks 6/26/00 1,502,100 0.00 900 Divot Holdings, Convertible Securities 3/27/02 46,624 0.00 466 Kazakhstan Investment Fund 10/16/97 3,285,000 0.00 50,209 MHP Investors 11/27/01 17,935,000 0.77 17,000,000 Millenium Information Technology 10/21/99 2,252,570 0.04 787,470 NCH Eagle Fund LP 1/21/97 9,500,000 0.45 10,048,831 Polimex Investment Partners 7/07/99 - 9/21/01 9,707,005 0.28 6,145,778 Renaissance Gazprom Note 5/24/01 - 1/17/02 4,782,059 0.17 3,701,503 Romanian Investment Fund 5/12/97 3,600,000 0.06 1,309,622 Societe Generale Thalmann Ukraine Fund 7/15/97 1,666,700 0.04 820,869 SPG Infinity Technology Fund I 12/23/99 1,105,000 0.01 242,420 TDA India Technology Fund II LP 2/23/00 - 10/02/01 1,227,400 0.03 764,989 The Emerging Europe Fund II, LP 12/05/97 - 3/17/00 1,749,150 0.05 1,084,473 U TV Software Comm Ltd 2/29/00 3,004,959 0.01 274,940
(b) Bankrupt issuer. (c) All or a portion of this security is held as collateral for open swap contracts (Note 6). (d) A derivative security whose price is linked to the return on the specified Russian security. (e) Represents investment of security lending collateral (Note 1). (f) Structured warrants with risks similar to equity swaps (Note 2). See accompanying notes to the financial statements. 17 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY (SHOWING PERCENTAGE OF EQUITY INVESTMENTS) FEBRUARY 28, 2003 (UNAUDITED) At February 28, 2003, industry sector diversification of the Fund's equity investments was as follows:
INDUSTRY SECTOR - -------------------------------------------------------------------- Financials 21.1% Materials 15.0 Information Technology 13.5 Energy 11.7 Telecommunication Services 10.1 Consumer Discretionary 8.7 Industrials 6.9 Consumer Staples 4.5 Utilities 3.8 Health Care 0.8 Miscellaneous 3.9 ----- 100.0% =====
18 See accompanying notes to the financial statements. GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value, including securities on loan of $24,914,517 (cost $2,341,694,737) (Note 1) $2,241,361,035 Foreign currency, at value (cost $16,103,568) (Note 1) 16,257,838 Receivable for investments sold 5,504,491 Receivable for Fund shares sold 9,731,662 Dividends and interest receivable 7,674,566 Foreign taxes receivable 993,877 Receivable for expenses reimbursed by Manager (Note 2) 72,128 -------------- Total assets 2,281,595,597 -------------- LIABILITIES: Payable for investments purchased 25,588,543 Payable upon return of securities loaned (Note 1) 26,302,159 Due to custodian 5,401,391 Payable to affiliate for (Note 2): Management fee 1,373,885 Shareholder service fee 219,712 Net payable for open swap contracts (Notes 1 and 6) 952,585 Accrued expenses 2,149,818 -------------- Total liabilities 61,988,093 -------------- NET ASSETS $2,219,607,504 ============== NET ASSETS CONSIST OF: Paid-in capital $2,724,784,791 Distributions in excess of net investment income (2,327,854) Accumulated net realized loss (401,769,041) Net unrealized depreciation (101,080,392) -------------- $2,219,607,504 ============== NET ASSETS ATTRIBUTABLE TO: Class III shares $1,215,653,319 ============== Class IV shares $1,003,954,185 ============== SHARES OUTSTANDING: Class III 137,798,619 ============== Class IV 113,980,837 ============== NET ASSET VALUE PER SHARE: Class III $ 8.82 ============== Class IV $ 8.81 ==============
See accompanying notes to the financial statements. 19 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $4,935,218) $ 38,775,395 Interest (including securities lending income of $141,316) 4,123,972 Dividends from investment company shares 160,768 ------------- Total income 43,060,135 ------------- EXPENSES: Management fee (Note 2) 15,328,439 Custodian fees 3,610,379 Legal fees 206,151 Audit fees 135,759 Transfer agent fees 49,445 Trustees fees and related expenses (Note 2) 39,802 Registration fees 36,787 Miscellaneous 25,067 Fees reimbursed by Manager (Note 2) (286,002) ------------- 19,145,827 Shareholder service fee (Note 2) - Class III 1,535,695 Shareholder service fee (Note 2) - Class IV 912,029 ------------- Net expenses 21,593,551 ------------- Net investment income 21,466,584 ------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (net of foreign capital gains tax of $1,881,053) (44,393,138) Realized gains distributions from investment company shares 71,338 Closed swap contracts (4,514,455) Foreign currency, forward contracts and foreign currency related transactions (1,889,315) ------------- Net realized loss (50,725,570) ------------- Change in net unrealized appreciation (depreciation) on: Investments (167,262,651) Open swap contracts (2,526,222) Foreign currency, forward contracts and foreign currency related transactions 153,789 ------------- Net unrealized loss (169,635,084) ------------- Net realized and unrealized loss (220,360,654) ------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(198,894,070) =============
20 See accompanying notes to the financial statements. GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 21,466,584 $ 25,084,464 Net realized loss (50,725,570) (109,659,468) Change in net unrealized appreciation (depreciation) (169,635,084) 237,597,552 -------------- -------------- Net increase (decrease) in net assets from operations (198,894,070) 153,022,548 -------------- -------------- Distributions to shareholders from: Net investment income Class III (14,313,177) (12,628,140) Class IV (12,715,508) (10,389,852) -------------- -------------- Total distributions from net investment income (27,028,685) (23,017,992) -------------- -------------- Net share transactions (Note 4): Class III 498,075,637 195,960,013 Class IV 385,039,223 208,626,765 -------------- -------------- Increase in net assets resulting from net share transactions 883,114,860 404,586,778 -------------- -------------- Total increase in net assets 657,192,105 534,591,334 NET ASSETS: Beginning of period 1,562,415,399 1,027,824,065 -------------- -------------- End of period (including distributions in excess of net investment income of $2,327,854 and accumulated undistributed net investment income of $5,824,554, respectively) $2,219,607,504 $1,562,415,399 ============== ==============
See accompanying notes to the financial statements. 21 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, -------------------------------------------------------------- 2003 2002 2001 2000 1999 ------------ ---------- ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.84 $ 9.04 $ 11.16 $ 6.31 $ 9.56 ---------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.11+ 0.18+ 0.17+ 0.13+ 0.25 Net realized and unrealized gain (loss) (1.00) 0.80 (2.27) 4.77 (3.19) ---------- -------- -------- -------- -------- Total from investment operations (0.89) 0.98 (2.10) 4.90 (2.94) ---------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.13) (0.18) (0.02) (0.05) (0.19) From net realized gains -- -- -- -- (0.12) ---------- -------- -------- -------- -------- Total distributions (0.13) (0.18) (0.02) (0.05) (0.31) ---------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 8.82 $ 9.84 $ 9.04 $ 11.16 $ 6.31 ========== ======== ======== ======== ======== TOTAL RETURN(a) (9.14)% 11.15% (18.79)% 77.43% (30.96)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $1,215,653 $826,960 $560,205 $727,197 $524,741 Net expenses to average daily net assets 1.16% 1.19%(b) 1.23% 1.18% 1.16% Net investment income to average daily net assets 1.12% 2.32% 1.69% 1.41% 2.75% Portfolio turnover rate 59% 74% 90% 73% 76% Fees and expenses reimbursed by the Manager to average daily net assets: 0.02% 0.02% 0.02% 0.03% 0.21% Purchase and redemption fees consisted of the following per share amounts:(c) $ 0.05 $ 0.05 $ 0.03 -- --
+ Computed using average shares outstanding throughout the period. (a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. Calculation excludes purchase premiums and redemption fees. (b) Includes stamp duties and transfer taxes not reimbursed by the Manager, which approximate .035% of average daily net assets. (c) Effective March 1, 2000, the Fund adopted the provisions of the revised AICPA Audit and Accounting Guide for Investment Companies which requires the disclosure of the per share effect of purchase and redemption fees. Periods prior to March 1, 2000 have not been restated to reflect this change. Amounts calculated using average shares outstanding throughout the period. 22 See accompanying notes to the financial statements. GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, -------------------------------------------------------------- 2003 2002 2001 2000 1999 ------------ ---------- ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.83 $ 9.03 $ 11.16 $ 6.31 $ 9.56 ---------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.11+ 0.17+ 0.17+ 0.13+ 0.28 Net realized and unrealized gain (loss) (0.99) 0.82 (2.28) 4.77 (3.21) ---------- -------- -------- -------- -------- Total from investment operations (0.88) 0.99 (2.11) 4.90 (2.93) ---------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.14) (0.19) (0.02) (0.05) (0.20) From net realized gains -- -- -- -- (0.12) ---------- -------- -------- -------- -------- Total distributions (0.14) (0.19) (0.02) (0.05) (0.32) ---------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 8.81 $ 9.83 $ 9.03 $ 11.16 $ 6.31 ========== ======== ======== ======== ======== TOTAL RETURN(a) (9.09)% 11.22% (18.82)% 77.76% (31.01)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $1,003,954 $735,455 $467,619 $480,208 $261,187 Net expenses to average daily net assets 1.12% 1.14%(b) 1.18% 1.13% 1.12% Net investment income to average daily net assets 1.16% 2.27% 1.73% 1.45% 2.87% Portfolio turnover rate 59% 74% 90% 73% 76% Fees and expenses reimbursed by the Manager to average daily net assets: 0.02% 0.02% 0.02% 0.03% 0.21% Purchase and redemption fees consisted of the following per share amounts:(c) $ 0.02 $ 0.03 $ 0.03 -- --
+ Computed using average shares outstanding throughout the period. (a) The total return would have been lower had certain expenses not been reimbursed during the periods shown. Calculation excludes purchase premiums and redemption fees. (b) Includes stamp duties and transfer taxes not waived or borne by the Manager, which approximate .04% of average daily net assets. (c) Effective March 1, 2000, the Fund adopted the provisions of the revised AICPA Audit and Accounting Guide for Investment Companies which requires the disclosure of the per share effect of purchase and redemption fees. Periods prior to March 1, 2000 have not been restated to reflect this change. Amounts calculated using average shares outstanding throughout the period. See accompanying notes to the financial statements. 23 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Emerging Markets Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in equity securities traded in the securities markets of developing countries in Asia, Latin America, the Middle East, Africa, and Europe ("Emerging Markets"). The Fund's benchmark is the S&P/IFC Investable Composite Index. Throughout the year ended February 28, 2003, the Fund had two classes of shares outstanding: Class III and Class IV. The principal economic difference between the classes of shares is the level of shareholder service fees borne by the classes. Eligibility for and automatic conversion among the various classes of shares is generally based on the total amount of assets invested in a particular fund or with GMO, as more fully outlined in the Trust's prospectus. At February 28, 2003, 0.5% of the Fund was invested in the GMO Short-Duration Collateral Fund and 0.1% of the Fund was invested in the GMO Alpha LIBOR Fund, separate funds of GMO Trust managed by GMO. Shares of the GMO Short-Duration Collateral Fund and GMO Alpha LIBOR Fund are not publicly available for direct purchase. The financial statements of the GMO Short-Duration Collateral Fund and GMO Alpha LIBOR Fund should be read in conjunction with the Fund's financial statements. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding 24 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. Certain securities held by the Fund were valued on the basis of a price provided by a principal market maker. These prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. Indian regulators have alleged that the Fund violated certain conditions under which it was granted permission to operate in India and have restricted a portion of the Fund's locally held assets pending resolution of the dispute. The amount of these restricted assets is small relative to the size of the Fund, representing approximately 0.06% of the Fund's total assets as of February 28, 2003. The valuation of this possible claim and all matters relating to the Fund's response to these allegations are subject to the supervision and control of the Trust's Board of Trustees, and all costs in respect of this matter are being borne by the fund. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's 25 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in foreign currency values that are unfavorable to the Fund. There were no forward foreign currency contracts outstanding as of February 28, 2003. FUTURES CONTRACTS The Fund may purchase and sell futures contracts to manage its exposure to the financial markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of February 28, 2003, there were no outstanding futures contracts. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from 26 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 28, 2003, there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future, security or currency transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. At February 28, 2003, there were no open purchased option contracts. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the financial markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based 27 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. The Fund also may enter into structured warrants, which are derivatives like swaps and have risks similar to swaps. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. See Note 5 for a summary of all open swap agreements as of February 28, 2003. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of collateral, the risk of delay in recovery or loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 2003, the Fund loaned securities having a market value of $24,914,517 collateralized by cash in the amount of $26,302,159 which was invested in a short-term instrument. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryover for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country's tax treaty with the United States. 28 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003, the tax basis of distributions paid was as follows: ordinary income -- $23,017,992 and $27,028,685, respectively. As of February 28, 2003 the components of distributable earnings on a tax basis consisted of $16,578,660 of undistributed ordinary income. The temporary differences between book and tax basis distributable earnings are primarily due to passive foreign investment company transactions and losses on wash sale transactions. As of February 28, 2003, greater than 10% of the Fund's shares were held by accounts for which the Manager has investment discretion. At February 28, 2003, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code of $184,350,946, $114,351,984 and $64,302,847 expiring in 2007, 2010 and 2011, respectively. The Fund has elected to defer to March 1, 2003 post-October capital losses of $19,381,010. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to foreign currency transactions and passive foreign investment company transactions. The financial highlights exclude these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain Paid-in Capital ----------------- ----------------- --------------- $(2,590,307) $4,060,069 $(1,469,762)
29 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Interest income on U.S. Treasury inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities adjusted for inflation is recorded as interest income. ALLOCATION OF OPERATING ACTIVITY The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro-rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class' operations. PURCHASES AND REDEMPTIONS OF FUND SHARES Effective April 1, 2002, the level of purchase premium and redemption fees charged to the Fund are each .80%. Prior to April 1, 2002, the premium on cash purchases of Fund shares was 1.20% of the amount invested and the fee for cash redemptions was .40% of the amount redeemed. If the Manager determines that any portion of a cash purchase or redemption fee is offset by a corresponding cash redemption or purchase occurring on the same day, the purchase premium or redemption fee charged by the Fund will be reduced by 100% with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived if the Manager determines the Fund is either substantially overweighted or underweighted in cash so that a redemption or purchase will not require a securities transaction. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. These fees are allocated relative to each class' net assets on the share transaction date. For the years ended February 28, 2002 and February 28, 2003, the Fund received $4,883,014 and $7,148,446 in purchase premiums and $73,894 and $79,299 in redemption fees, respectively. There is no premium for reinvested distributions. 30 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT RISK Investments in securities of emerging countries present certain risks that are not inherent in many other investments. Many emerging countries present elements of political and/or economic instability. The securities markets of emerging countries are generally smaller and less developed than the securities markets of the U.S. and developed foreign markets. Further, countries may impose various types of foreign currency regulations or controls which may impede the Fund's ability to repatriate amounts it receives. The Fund may acquire interests in securities in anticipation of improving conditions in the related countries. These factors may result in significant volatility in the values of its holdings. The markets for emerging countries are relatively illiquid. Accordingly, the Fund may not be able to realize in an actual sale amounts approximating those used to value its holdings. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .81% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .15% for Class III shares and .105% for Class IV shares. GMO has entered into a binding agreement effective until at least June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, custody fees and the following fund expenses: fees and expenses of the independent Trustees of the Trust (including legal fees), 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) exceed the management fee. The Fund incurs fees and expenses indirectly as a shareholder in GMO Alpha LIBOR Fund and GMO Short-Duration Collateral Fund. For the year ended February 28, 2003, indirect operating expenses (excluding investment-related expenses) were less than .001% of the Fund's average daily net assets, and indirect investment-related expenses (including, but not limited to, interest expense, foreign audit expense, and investment-related legal expense) were less than .001% of the Fund's average daily net assets. As of February 28, 2003, greater than 10% of the Fund's shares were held by accounts for which the Manager has investment discretion. 31 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- The Fund's portion of the fee paid by the Trust to the independent Trustees during the year ended February 28, 2003, was $28,141. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2003, were as follows:
Purchases Sales -------------- -------------- U.S. Government securities $ 67,098,009 $ 41,169,858 Investments (non-U.S. Government securities) 1,827,979,228 1,022,924,247
At February 28, 2003, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in the value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $2,341,280,537 $219,610,042 $(320,051,430) $(100,441,388)
4. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 -------------------------- ------------------------- Shares Amount Shares Amount Class III: ----------- ------------- ----------- ------------ Shares sold 78,465,027 $ 750,254,514 32,338,323 $282,585,254 Shares issued to shareholders in reinvestment of distributions 1,032,167 9,789,196 1,004,357 8,683,208 Shares repurchased (25,770,379) (261,968,073) (11,259,655) (95,308,449) ----------- ------------- ----------- ------------ Net increase 53,726,815 $ 498,075,637 22,083,025 $195,960,013 =========== ============= =========== ============
32 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - --------------------------------------------------------------------------------
Year Ended Year Ended February 28, 2003 February 28, 2002 -------------------------- ------------------------- Shares Amount Shares Amount Class IV: ----------- ------------- ----------- ------------ Shares sold 39,386,555 $ 388,617,328 22,755,584 $206,010,111 Shares issued to shareholders in reinvestment of distributions 698,767 6,650,570 303,239 2,616,654 Shares repurchased (948,372) (10,228,675) -- -- ----------- ------------- ----------- ------------ Net increase 39,136,950 $ 385,039,223 23,058,823 $208,626,765 =========== ============= =========== ============
5. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 28, 2003 is as follows: TOTAL RETURN SWAP AGREEMENTS
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ---------- ---------- -------------------------------------------------- -------------- $ 377,598 3/13/03 Agreement with Morgan Stanley & Co. International $ (23,225) Limited dated 3/10/02 to receive the notional amount multiplied by the change in the market value of Macronix International common stock (including dividends) and to pay the notional amount multiplied by the 1 month LIBOR adjusted by a specific spread. 10,512,316 9/11/03 Agreement with Merrill Lynch International dated (1,144,174) 9/9/02 to receive the notional amount multiplied by the return of the MSCI Taiwan Index and to pay the notional amount multiplied by the 3 month LIBOR adjusted by a specific spread. 4,143,424 9/25/03 Agreement with Morgan Stanley & Co. International 294,411 Limited dated 9/20/02 to receive the notional amount multiplied by the return on the MSCI Thailand Index and to pay the notional amount multiplied by the 3 month LIBOR adjusted by a specified spread.
33 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- TOTAL RETURN SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) ---------- ---------- -------------------------------------------------- -------------- $2,354,216 10/9/03 Agreement with Morgan Stanley & Co. International $ (63,259) Limited dated 10/9/02 to receive the notional amount multiplied by the return on the MSCI India Index and to pay the notional amount multiplied by the 3 month LIBOR adjusted by a specified spread. 5,796,187 10/18/03 Agreement with Morgan Stanley & Co. International (107,888) Limited dated 10/8/02 to receive the notional amount multiplied by the return of the MSCI India Index and to pay the notional amount multiplied by the 3 month LIBOR adjusted by a specified spread. 4,969,707 10/15/03 Agreement with Morgan Stanley & Co. International (128,039) Limited dated 10/15/02 to receive the notional amount multiplied by the return of the MSCI Thailand Index and to pay the notional amount multiplied by the 3 month LIBOR adjusted by a specified spread. 1,300,000 1/14/04 Agreement with Morgan Stanley & Co. International (34,931) Limited dated 1/09/03 to receive the notional amount multiplied by the return of the MSCI India Index and to pay the notional amount multiplied by the 3 month LIBOR adjusted by a specified spread. 10,000,000 2/3/04 Agreement with Merrill Lynch International dated 254,520 1/30/03 to receive the notional amount multiplied by the return of the MSCI India Index and to pay the notional amount multiplied by the 3 month LIBOR adjusted by a specific spread. ----------- $ (952,585) ===========
34 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO EMERGING MARKETS FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Emerging Markets Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 35 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- During the year ended February 28, 2003, the Fund paid foreign taxes of $6,819,874 and recognized foreign source income of $39,941,301. 36 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Five Overseen Directorships and Age Held with Fund Time Served Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 37 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the from February Boston, MA 02110 Trust 2002 - October Age: 64 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 38 PRINCIPAL OFFICERS:
Principal Occupation(s) Name, Address, Position(s) Term of Office(4) and Length During Past and Age Held with Fund of Time Served Five Years ------------------------- ------------------------- ---------------------------- ------------------------- Scott Eston President and Chief President and Chief Chief Financial Officer c/o GMO Trust Executive Officer of the Executive Officer since (1997 - present), Chief 40 Rowes Wharf Trust October 2002; Vice President Operating Officer Boston, MA 02110 from August 1998 - October (2000 - present) and Age: 47 2002. Member, Grantham, Mayo, Van Otterloo & Co. LLC. Susan Randall Harbert Chief Financial Officer Chief Financial Officer Member, Grantham, Mayo, c/o GMO Trust and Treasurer of the Since February 2000; Van Otterloo & Co. LLC. 40 Rowes Wharf Trust Treasurer since February Boston, MA 02110 1998. Age: 45 Brent Arvidson Assistant Treasurer of Since September 1998. Senior Fund c/o GMO Trust the Trust Administrator, Grantham, 40 Rowes Wharf Mayo, Van Otterloo & Co. Boston, MA 02110 LLC. Age: 33 William R. Royer, Esq. Vice President and Clerk Vice President since General Counsel, Anti- c/o GMO Trust of the Trust February 1997; Clerk since Money Laundering 40 Rowes Wharf March 2001; May 1999 - Reporting Officer (July Boston, MA 02110 August 1999. 2002 - February 2003) and Age: 37 Member, Grantham, Mayo, Van Otterloo & Co. LLC. Elaine M. Hartnett, Esq. Vice President and Vice President since August Associate General c/o GMO Trust Secretary of the Trust 1999; Secretary since March Counsel, Grantham, Mayo, 40 Rowes Wharf 2001. Van Otterloo & Co. LLC Boston, MA 02110 (June 1999 - present); Age: 58 Associate/ Junior Partner, Hale and Dorr LLP (1991 - 1999). Julie Perniola Vice President and Anti- Since February 2003. Anti-Money Laundering c/o GMO Trust Money Laundering Reporting Officer 40 Rowes Wharf Compliance Officer (February 2003 - present) Boston, MA 02110 and Compliance Officer, Age: 32 Grantham, Mayo, Van Otterloo & Co. LLC.
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 39 GMO FOREIGN FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO FOREIGN FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGEMENT Day-to-day management of the Fund's portfolio is the responsibility of the International Active Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE For the fiscal year ended February 28, 2003, the Class III shares of the GMO Foreign Fund outperformed the Morgan Stanley Capital International Europe, Australasia and Far East (MSCI EAFE) Index by +8.6% after fees, declining 8.9% while the benchmark tumbled 17.5%. Stock selection was the source of the outperformance. GMO country selection subtracted 0.6% from returns during the fiscal year. Germany had the worst return of the benchmark markets, plummeting 35.6%. Real GDP is estimated to have grown only 0.2% for 2002, while domestic demand was down 1.3%, the biggest decline since German unification. The only factor that stopped aggregate economic output from shrinking was exports, but those are threatened by the recent euro strength. The Finnish market fell 30.6%, which can be attributed to weakness in Finnish telecom-related stocks. Nokia shares, for example, lost over a third of their value during the last 12 months. The MSCI Netherlands index lost 28.7%. The heavyweight financial sector, particularly insurance companies, fell due to two factors: 1) immensely higher payouts and reserve provisioning due to catastrophic loss (both 9/11 and storm damage); and 2) very weak global equity markets. Both effects led to the heavy selling of equity positions further exacerbating the cycle. The coup de grace for the Netherlands was the emergence of scandals in this normally stolid market. An accounting scandal in the retail sector drove large cap stocks down, while insider trading and market manipulation allegations (still pending trial) pushed down the smaller cap segment. The Fund had an overweight position in Germany, a neutral position in Finland, and an underweight position in the Netherlands. Among benchmark countries, only two indices had positive absolute returns this fiscal year: New Zealand and Austria. New Zealand was the best performing market, with a return of 26.3%. Returns for New Zealand during the fiscal year were aided by the strong New Zealand dollar, which appreciated versus the U.S. dollar by an impressive 32.7%. The MSCI Austria index gained 16.8%. The ability to improve margins and generate free cash -- all at globally cheap valuations -- lured both financial investors and industrial acquisition teams to this market. Even after such strong performance the Austrian market continues to offer value, if not liquidity. While Australia did not have a positive return for the fiscal year, down 1.8%, it was the best performing large MSCI EAFE market. Despite a severe drought, GDP in Australia grew by an impressive 3.8%, making it one the best performing economies globally. The economy was aided by strong gains in household credit demand and housing prices. However, there is now concern that a consumer credit bubble is looming, and a rental yield of 3.0% versus a three-month treasury rate of 4.8% hints that residential property may be overpriced. The strong Australian dollar also contributed substantially to returns for the fiscal year, rising by 17.5% versus the U.S. dollar. The Fund had overweight positions in New Zealand and Austria, but has gone from an over- to an underweight in Australia during the year. GMO FOREIGN FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- GMO stock picking added 9.2% to returns during the fiscal year. Stock selection was particularly strong in Germany, Japan, the United Kingdom, Australia, and Finland. In Germany the largest contributors to returns were Adidas-Salomon, Continental, and Deutsche Telekom, all of which were undervalued companies with strong managements that were willing to restructure. Adidas-Salomon is on its second year of restructuring and is poised to achieve margins equivalent to the U.S. company Nike, its closest competitor. Continental AG restructured its tire operations in Europe by shifting production to lower cost Eastern European countries. Deutsche Telekom used strict cost controls and asset sales to generate substantial free cash to pay off some of its debt. The holdings that contributed to outperformance in Japan had two things in common -- low valuations and delivery of good earnings performance. They included electronics-related firms (Konica, Canon, Yamaha, Arisawa), auto-related names (Nissan, Aisin Seiki, Honda), and consumer goods companies (Kao, Bandai). Inexpensive defensive stocks drove outperformance in the United Kingdom. While expensive defensive stocks such as pharmaceuticals declined, defensive value worked quite well. Gallaher and Imperial Tobacco, both large holdings in the U.K. portfolio, each rose 45% in a market that declined by 18.7%. The largest single contributor to our performance in Australia was MIM Holding. MIM is benefiting from takeover discussions with Xstrata, the Swiss mining company. Australian holdings in consumer non-discretionary companies also added to returns. Our largest holdings in this sector are Lion Nathan, a brewer, and Foodland, a food retailer, and both offered strong earnings growth in a time of economic uncertainty. Metso, Uponor, M-Real, and some timely buying of Nokia late in the fiscal year generated a positive return in Finland, despite the Finnish market being down 30.6%. Uponor was the best performer of the four, up nearly 20%. OUTLOOK Lower market valuations are an alluring prospect for international value investors in the teeth of geopolitical uncertainty. There is even the prospect of a weaker U.S. dollar. After years of a headwind this tailwind should benefit our investors. We expect that our stock selection will be the principal driver of our returns. Country valuation differences are relatively narrow entering 2003. Thus, it will be our fundamental stock analysis which allows us to discern the greatest opportunities to make money. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO FOREIGN FUND CLASS III SHARES AND THE MSCI EAFE INDEX AS OF FEBRUARY 28, 2003 GMO FOREIGN FUND MSCI EAFE INDEX 2/28/93 $10,000 $10,000 3/31/93 $10,694 $10,872 6/30/93 $11,366 $11,965 9/30/93 $12,490 $12,759 12/31/93 $13,471 $12,869 3/31/94 $13,991 $13,319 6/30/94 $14,244 $13,999 9/30/94 $14,590 $14,013 12/31/94 $14,348 $13,870 3/31/95 $14,238 $14,128 6/30/95 $15,153 $14,231 9/30/95 $16,024 $14,824 12/31/95 $16,335 $15,424 3/31/96 $16,804 $15,870 6/30/96 $17,424 $16,121 9/30/96 $17,459 $16,101 12/31/96 $18,674 $16,357 3/31/97 $18,849 $16,101 6/30/97 $21,113 $18,190 9/30/97 $21,958 $18,062 12/31/97 $19,955 $16,648 3/31/98 $22,553 $19,097 6/30/98 $22,338 $19,300 9/30/98 $19,452 $16,556 12/31/98 $22,739 $19,977 3/31/99 $22,813 $20,255 6/30/99 $24,862 $20,770 9/30/99 $26,175 $21,681 12/31/99 $29,325 $25,364 3/31/2000 $28,368 $25,337 6/30/2000 $28,285 $24,333 9/30/2000 $26,769 $22,370 12/31/2000 $27,410 $21,770 3/31/2001 $24,990 $18,786 6/30/2001 $25,828 $18,590 9/30/2001 $22,580 $15,987 12/31/2001 $24,643 $17,102 3/31/2002 $25,647 $17,189 6/30/2002 $26,357 $16,825 9/30/2002 $22,074 $13,505 12/31/2002 $23,229 $14,376 2/28/2003 $22,206 $13,460
AVERAGE ANNUAL TOTAL RETURN SINCE INCEPTION 1 YEAR 5 YEAR 10 YEAR 9/30/96 Class II -9.00% 0.41% n/a 3.76% Class III -8.89% 0.47% 8.30% n/a Class IV 1/9/98 -8.92% 0.53% n/a 2.60% Class M 1/25/2002 -9.09% n/a n/a -7.67%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. The Fund commenced operations on June 28, 1996 subsequent to a transaction involving, in essence, the reorganization of the GMO International Equities Pool of the Common Fund for Non-Profit Organizations (the GMO Pool) as the Foreign Fund. All information relating to the time periods prior to June 28, 1996 relates to the GMO Pool. performance for Classes II, IV and M may vary due to different shareholder servicing fees. Past performance is not indicative of future performance. Information is unaudited. GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------- COMMON STOCKS -- 89.0% AUSTRALIA -- 3.9% 1,603,628 Amcor Ltd 8,018,852 411,040 Capral Aluminum Ltd 695,937 760,518 Foodland Associated 8,293,521 154,000 Foster's Group Ltd 403,725 3,490,121 Insurance Australia Group Ltd 6,481,019 2,684,380 John Fairfax Holdings Ltd 4,805,597 824,550 Lihir Gold Ltd* 695,526 76,000 Lihir Gold Ltd ADR*+ 1,292,000 1,829,663 Lion Nathan Ltd 5,807,031 1,291,600 Mayne Group Ltd 2,476,832 1,267,364 Menzies Gold NL* 22,304 13,633,466 MIM Holdings Ltd 11,748,326 6,918,127 Oil Search Ltd* 2,854,820 10,946,321 Pasminco Ltd*(a) -- 847,427 Publishing & Broadcasting Ltd 3,959,810 516,800 Sons of Gwalia Ltd 439,068 1,283,107 Westpac Banking Corp 10,940,081 ------------- 68,934,449 ------------- AUSTRIA -- 0.5% 30,555 Erste Bank Der Oesterreichischen Sparkassen AG 2,045,088 12,040 Flughafen Wien AG 436,018 10,497 Oesterreichische Brau Beteiligungs AG 858,142 14,540 OMV AG 1,571,039 233,840 Telekom Austria AG* 2,464,880 13,864 VA Technologie AG (Bearer) 216,668 35,040 Wienerberger AG 597,082 ------------- 8,188,917 ------------- BELGIUM -- 1.5% 48,604 Almanij NV 1,564,752 25,192 CFE (CIE Francois D'enter) 4,881,918 302,170 Dexia 2,758,500 24,663 Electrabel SA 6,193,555 138,065 Fortis B 1,889,842 100,135 Fortis Strip* 1,079 31,755 Groupe Bruxelles Lambert SA 1,180,781 108,793 KBC Bancassurance Holding 3,287,889
See accompanying notes to the financial statements. 1 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------- BELGIUM -- CONTINUED 40,152 Solvay Et Cie 2,380,170 71,049 UCB SA 1,624,190 ------------- 25,762,676 ------------- BRAZIL -- 0.3% 450,300 Cia de Concessoes Rodoviarias* 883,189 109,800 Ultrapar Participacoes SA ADR 731,268 202,600 Votorantim Celulose e Papel SA ADR 3,851,426 ------------- 5,465,883 ------------- CANADA -- 1.9% 147,200 BCE Inc 2,743,821 622,000 Hudson's Bay Co 3,507,048 110,840 Inco Ltd* 2,362,176 220,100 KAP Resources Ltd*(a) 1,477 300,750 Norske Skog Canada Ltd* 958,895 3,512,030 Nortel Networks Corp* 7,543,627 67,500 Rothmans Inc 1,131,796 443,740 Teck Cominco Ltd Class B 3,574,225 977,610 Tembec Inc* 6,542,336 475,860 Timberwest Forest Corp 3,928,768 129,296 Trizec Canada Inc 985,038 ------------- 33,279,207 ------------- CHINA -- 0.8% 3,931,440 China Mobile Ltd* 8,468,694 3,323,230 Shanghai Industrial Holdings Ltd Class H 5,155,862 ------------- 13,624,556 ------------- DENMARK -- 0.3% 188,420 Carlsberg A/S Class B 6,109,766 ------------- FINLAND -- 2.7% 674,000 Huhtamaki Oyj Class I 6,116,601 1,236,927 Metso Oyj 12,798,335 554,000 M-real Oyj 4,209,563 1,688,100 Nokia Oyj 22,560,984
2 See accompanying notes to the financial statements. GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------- FINLAND -- CONTINUED 124,000 Uponor Oyj 2,536,624 ------------- 48,222,107 ------------- FRANCE -- 4.0% 30,360 Accor SA 932,577 40,525 Alcatel SA 292,205 77,940 Assurances Generales de France 2,145,455 24,482 Aventis SA Class A 1,111,672 58,740 Axa 717,935 74,205 BIC SA 2,367,353 155,982 BNP Paribas 6,455,708 18,510 Casino Guichard Perrachon SA 1,057,354 26,020 Christian Dior SA 890,408 72,460 Cie de Saint-Gobain 2,189,070 38,118 Danone 4,510,977 709,300 Eurotunnel SA Units (Bearer)* 290,504 12,075 Guyenne et Gascogne SA 937,039 15,498 Imerys SA 1,650,330 11,690 Lafarge SA 680,372 52,966 Lagardere S.C.A. 1,949,513 85,104 Michelin SA Class B 2,760,925 21,383 Pernod Ricard 1,655,898 133,092 Peugeot SA 5,881,309 48,455 Schneider Electric SA 2,107,793 31,563 Sophia (EX-SFI) 1,029,063 787,520 Suez SA 10,312,787 18,010 Technip-Coflexip SA 1,164,671 72,014 Thales SA 1,650,131 102,963 Total Fina Elf SA 13,605,354 6,082 Wendel Investissement 159,291 76,131 Wendel Investissement 1,787,956 22,431 Worms et Cie SA 373,521 ------------- 70,667,171 ------------- GERMANY -- 8.2% 44,133 Aareal Bank AG* 487,582 254,020 Adidas-Salomon AG 20,259,924 130,643 Allianz AG (Registered) 9,363,667 121,340 Bilfinger & Berger 2,419,435
See accompanying notes to the financial statements. 3 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------- GERMANY -- CONTINUED 105,483 Celanese AG* 2,080,519 343,210 Commerzbank AG 2,163,984 1,053,320 Continental AG* 16,518,154 711,380 DaimlerChrysler AG (Registered) 21,698,328 44,130 DePfa Bank Plc 1,605,262 222,715 Deutsche Bank AG 9,073,596 984,270 Deutsche Lufthansa AG* 8,253,383 270,520 Deutsche Post AG 2,740,725 1,496,130 Deutsche Telekom 17,189,558 188,350 Fraport AG Frankfurt Airport Services Worldwide 3,684,516 99,499 Gehe AG 3,731,953 231,240 K&S AG 4,311,687 36,310 Koelnische Rueckversicherungs-Gesellschaft AG (New Shares)* 1,721,936 117,410 Koelnische Rueckversicherungs-Gesellschaft AG (Registered)* 5,555,303 90,590 MG Technologies AG 514,552 92,700 Muenchener Rueckversicherungs AG 8,292,701 89,770 Repower Systems AG* 2,031,836 ------------- 143,698,601 ------------- GREECE -- 0.1% 117,800 Greek Organization of Football Prognostics SA 1,104,594 ------------- HONG KONG -- 3.7% 1,229,290 Beijing Enterprises Class H 1,205,789 2,158,449 Great Eagle Holdings Ltd 1,252,322 9,035,430 Hang Lung Group Co Ltd 7,646,246 6,747,420 Hang Lung Properties Ltd 6,142,591 522,225 Hanison Construction Holdings Ltd 16,740 4,465,050 HKR International Ltd* 687,010 7,444,001 Hong Kong Land Holdings 9,156,121 3,941,865 Hysan Development Co Ltd 3,032,554 109,859 Jardine Matheson Holdings Ltd 626,196 2,298,073 Jardine Strategic Holdings Ltd 5,791,144 1,263,016 Liu Chong Hing Bank Ltd 1,157,898 8,931,323 New World Development Co Ltd 4,065,366 1,484,399 NWS Holdings Ltd 352,110 1,907,000 PCCW Ltd* 1,247,028 4,792,890 SCMP Group Ltd 1,736,087 832,240 Swire Pacific Ltd Class A 3,542,764
4 See accompanying notes to the financial statements. GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------- HONG KONG -- CONTINUED 5,281,290 Swire Pacific Ltd Class B 3,588,983 3,317,790 Wharf Holdings Ltd 6,806,508 8,501,810 Wheelock and Co Ltd 6,540,609 ------------- 64,594,066 ------------- INDIA -- 1.1% 475,000 Gail India Ltd GDR 144A 4,512,500 212,300 Hindalco Industries Ltd GDR 144A 2,568,830 244,600 ICICI Banking Ltd ADR* 1,739,106 224,500 ITC Ltd GDR 3,064,425 295,000 Reliance Industries Ltd GDR 144A 3,672,750 197,000 State Bank of India GDR 2,797,400 136,127 Videsh Sanchar Nigam Ltd ADR 505,031 ------------- 18,860,042 ------------- INDONESIA -- 0.3% 11,710,615 Astra International Tbk* 3,097,872 2,336,500 Indonesian Satellite Corp Tbk PT 2,064,673 35,700 PT Indosat (Persero) Tbk Class B ADR 310,590 2,982,000 PT Matahari Putra Prima Tbk 130,915 300,000 Timah Tbk PT (Foreign Registered) 23,639 ------------- 5,627,689 ------------- IRELAND -- 1.1% 814,737 Allied Irish Banks Plc 10,335,514 877,570 Bank of Ireland 9,666,535 ------------- 20,002,049 ------------- ITALY -- 3.6% 285,231 Assicurazioni Generali SPA 7,209,045 639,466 Banca Intesa SPA 1,481,815 521,959 Banca Intesa SPA - RNC 871,979 186,039 Banca Nazionale Del Lavoro SPA* 223,171 299,038 Banca Toscana 1,398,796 130,354 Buzzi Unicem SPA 793,800 814,760 CIR-Compagnie Industriali Riunite SPA 756,964 178,447 Danieli and Co SPA (Savings Shares) 253,491 1,284,635 Enel SPA 7,545,959
See accompanying notes to the financial statements. 5 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------- ITALY -- CONTINUED 1,288,021 ENI-Ente Nazionale Idrocarburi SPA 19,115,914 38,834 Ericsson SPA 709,866 117,110 Fiat SPA 908,792 96,946 Grouppo Editoriale L'Espresso 337,498 98,553 IFIL Finanziaria di Partecipazioni SPA (Savings Shares) 220,407 231,170 Italcementi SPA 1,253,250 58,000 Pagnossin SPA 82,079 178,971 RAS SPA 2,200,931 71,852 San Paolo IMI SPA 503,374 521,000 Snam Rete Gas SPA 1,847,446 431,006 Telecom Italia Mobile SPA (Savings Shares) 1,811,699 622,892 Telecom Italia SPA 4,330,227 1,023,482 Telecom Italia SPA (Savings Shares) 5,019,145 1,045,032 UniCredito Italiano SPA 4,189,968 ------------- 63,065,616 ------------- JAPAN -- 17.6% 423,000 Aeon Co Ltd 8,515,458 410,100 Aisin Seiki Co Ltd 5,616,003 318,000 Ajinomoto Co Inc 3,370,302 639,000 Alps Electric Co Ltd 7,804,745 185,803 Arisawa Manufacturing 3,724,704 206,400 Bandai Co 7,070,586 609,000 Bank of Fukuoka Ltd 2,467,422 76 C&S Co Ltd 887 638,000 Canon Inc 23,043,011 699,300 Chubu Electric Power Co Inc 12,835,534 242,100 Credit Saison Co 4,320,837 674,000 Daikin Industries Ltd 10,774,878 878,000 Daimaru Inc 2,970,607 553,000 Denso Corp 8,274,536 1,339 East Japan Railway Co 6,172,595 137,000 Fuji Photo Film Co Ltd 4,345,528 695,600 Honda Motor Co Ltd 25,417,568 979,000 Itochu Corp 2,335,191 86,000 Japan Airport Terminal Co Ltd 491,013 338,800 JFE Holdings Inc* 4,920,445 661,000 Kao Corp 13,949,630 176,600 Kirin Beverage Corp 2,980,055 886,000 Konica Corp 7,111,981
6 See accompanying notes to the financial statements. GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------- JAPAN -- CONTINUED 72,300 Kose Corp 2,085,371 83,300 Kyocera Corp 4,375,496 1,308,000 Mitsubishi Corp 8,751,347 2,893,000 Mitsubishi Electric Corp* 7,732,612 796,000 Mitsubishi Rayon Co Ltd 1,865,020 703,000 Mitsui Fudosan Co Ltd 4,608,374 1,013,000 Nippon Oil Co Ltd 4,309,909 1,653,100 Nissan Motor Co 12,402,620 150,800 Nissin Food Products 3,023,015 715,000 NTN Corp 2,939,226 7,064 NTT Docomo Inc* 13,324,356 84,900 ORIX Corp 4,682,157 590,000 Ricoh Company Ltd 8,913,005 134,200 Rinnai Corp 2,786,729 55,000 Seino Transportation Co Ltd 344,259 211,000 Sekisui House Ltd 1,488,467 127,600 Shimachu Co 2,320,491 456,000 Shiseido Co Ltd 5,288,019 316,000 Showa Corp 2,737,018 889,000 Sumitomo Chemical Co Ltd 3,007,824 834,000 Sumitomo Trust & Banking 2,913,445 329,000 Takeda Chemical Industries Ltd 12,133,136 391,000 Tanabe Seiyaku Co Ltd 3,191,499 303,600 Tokyo Broadcasting System Inc 3,774,938 1,563,000 Tokyo Gas Co 4,732,958 175,640 Tostem Inax Holding Corp 2,167,551 347,000 Ushio Inc 3,563,189 1,073 West Japan Railway Co 3,476,075 243,000 Yamaha Corp 2,735,741 184,000 Yamanouchi Pharmaceutical Co Ltd 5,011,461 137,000 Yamato Kogyo Co 637,344 ------------- 309,836,168 ------------- MALAYSIA -- 0.1% 1,059,000 Maxis Communications Berhad* 1,504,895 ------------- MEXICO -- 0.3% 222,200 Coca-Cola Femsa SA ADR 4,019,598
See accompanying notes to the financial statements. 7 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------- MEXICO -- CONTINUED 2,682,100 Grupo Financiero BBVA Bancomer SA* 2,021,155 ------------- 6,040,753 ------------- NETHERLANDS -- 2.5% 122,472 Aegon NV 1,313,403 110,902 Akzo Nobel NV 2,401,361 110,750 Fortis NV 1,518,340 16,099 Fugro NV 563,924 47,886 Hagemeyer NV 233,800 133,874 Hal Trust (Participating Units) 2,597,209 260,444 ING Groep NV 3,522,867 156,013 Koninklijke Ahold NV 588,528 69,720 Koninklijke BAM NBM NV 882,945 242,432 Koninklijke Philips Electronics NV 4,044,819 92,391 Koninklijke Philips Electronics NV ADR 1,542,930 297,144 Koninklijke Vendex KBB NV 2,139,349 100,987 Koninklijke Volker Wessels 1,632,657 50,831 Koninklijke Wessanen NV 264,067 168,820 Laurus NV* 191,052 189,442 Reed Elsevier NV 1,945,841 185,770 Royal Dutch Petroleum 7,358,192 78,252 TPG NV 1,096,420 61,023 Unilever NV 3,459,533 21,060 Univar NV* 113,492 131,321 VNU NV 2,888,786 50,421 Vopak NV* 570,609 119,010 Wegener NV 487,422 35,387 Wereldhave NV 2,023,333 ------------- 43,380,879 ------------- NEW ZEALAND -- 1.3% 1,972,386 Air New Zealand Class B* 570,872 6,099,177 Carter Holt Harvey Ltd 5,873,007 6,198,833 Telecom Corp of New Zealand 14,525,639 8,100,237 Trans Tasman Properties Ltd* 1,172,234 ------------- 22,141,752 ------------- NORWAY -- 2.0% 350,000 Ekornes ASA 4,249,796
8 See accompanying notes to the financial statements. GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------- NORWAY -- CONTINUED 267,410 Norske Skogindustrier AS Class A 3,414,912 380,020 Prosafe ASA* 5,462,915 532,030 Smedvig ASA Class A 2,294,433 252,000 Smedvig ASA Class B 914,439 2,523,220 Statoil ASA 19,368,616 ------------- 35,705,111 ------------- SINGAPORE -- 0.7% 2,471,840 Allgreen Properties Ltd 1,200,992 977,780 DBS Group Holdings Ltd 5,397,285 3,567,000 MobileOne Ltd* 2,522,732 968,450 Singapore Land Ltd 1,793,065 6,039,820 SMRT Corp Ltd 1,857,979 ------------- 12,772,053 ------------- SOUTH AFRICA -- 0.4% 273,500 Allied Technologies Ltd 714,855 502,410 Liberty Group Ltd 3,363,894 1,528,961 Old Mutual Plc 1,969,710 182,787 Sun International Ltd* 50,994 260,114 Western Areas Ltd* 1,048,184 ------------- 7,147,637 ------------- SOUTH KOREA -- 1.3% 19,865 Hansol Paper Manufacturing Ltd 90,367 209,060 Korea Electric Power Corp 3,143,825 913,300 KT Corp ADR 16,896,050 226,000 Samsung Corp 1,170,092 8,040 Samsung Electronics 1,882,612 5,300 Samsung Fire & Marine Insurance 253,089 ------------- 23,436,035 ------------- SPAIN -- 5.5% 88,370 ACS Actividades Cons y Serv 3,049,751 278,360 Altadis SA 6,597,361 730,000 Amadeus Global Travel Distribution 3,359,610 1,071,652 Banco Bilbao Vizcaya SA 9,136,260 98,470 Banco Popular Espanol 4,011,751
See accompanying notes to the financial statements. 9 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------- SPAIN -- CONTINUED 1,254,442 Banco Santander Central Hispano 8,044,624 854,918 Endesa SA 10,227,880 288,400 Gas Natural SDG SA 5,657,243 814,733 Iberdrola SA 12,486,855 266,000 NH Hoteles SA* 2,264,889 116,650 Red Electrica de Espana 1,424,468 746,480 Repsol YPF SA 10,459,230 1,783,337 Telefonica SA* 17,298,726 114,877 Transportes Azkar SA 543,545 202,390 Union Fenosa SA 2,558,735 ------------- 97,120,928 ------------- SWEDEN -- 1.6% 449,490 Autoliv Inc SDR 9,297,243 950,300 Billerud AB 11,168,175 722,000 SAAB AB Class B 7,551,769 ------------- 28,017,187 ------------- SWITZERLAND -- 2.8% 184,880 ABB Ltd* 383,122 1,330 Bank Sarasin & Cie AG 1,118,142 2,316 Belimo Holding AG 580,708 18,440 Bobst Group AG (Registered)* 462,360 2,822 Bqe Cant Vaudoise* 159,726 5,996 Centerpulse AG* 1,154,097 123,068 Credit Suisse Group* 2,291,642 1,905 Fischer (George) AG (Registered)* 155,940 5,177 Forbo Holdings AG (Registered) 1,450,782 9,298 Geberit AG* 2,489,066 22,620 Hero AG 2,335,398 19,955 Holcim Ltd 3,233,858 640 Jelmoli (Bearer) 384,661 3,906 Jelmoli (Registered) 463,765 7,655 Kraftwerk Laufenberg (Bearer) 1,817,780 13,520 Lonza Group AG 769,723 24,370 Nestle SA 4,906,350 130,900 Novartis AG 4,807,389 504 Schweizerische National-Versicherungs-Gesellschaft 158,708 5,020 SGS Societe Generale Surveillance Holdings SA (Registered) 1,702,950
10 See accompanying notes to the financial statements. GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------- SWITZERLAND -- CONTINUED 1,674 Sulzer AG (Registered)* 195,362 18,740 Swatch Group AG 1,554,757 62,586 Swiss Reinsurance Co 3,369,305 27,390 Swisscom AG 8,140,243 3,480 Unique Zurich Airport* 56,460 15,121 Valora Holding AG 2,503,440 21,021 Zurich Financial Services AG 1,782,754 ------------- 48,428,488 ------------- TAIWAN -- 0.4% 25,000 Asustek Computer Inc 42,446 282,380 Compal Electronics GDR 144A* 1,389,310 646,070 Standard Foods Ltd 150,595 1,935,160 Taiwan Cement Corp* 682,179 5,567,000 United Microelectronics* 3,155,968 295,900 United Microelectronics ADR* 955,757 ------------- 6,376,255 ------------- THAILAND -- 0.5% 1,248,600 PTT Exploration & Production Pcl (Foreign Registered)(a) 3,764,623 115,400 Siam Cement Pcl (Foreign Registered) 3,468,608 81,350 Siam Cement Pcl NVDR 2,342,485 ------------- 9,575,716 ------------- UNITED KINGDOM -- 18.0% 946,814 Abbey National Plc 5,816,174 2,365,000 Aggregate Industries Plc 2,626,204 674,591 Allied Domecq Plc 3,182,332 249,339 Amersham Plc 1,690,719 228,200 AstraZeneca Plc 7,361,287 887,906 Aviva Plc 5,534,725 129,891 AWG Plc* 1,076,150 537,428 BAA Plc 3,665,357 2,429,510 BAE Systems Plc 4,209,393 2,205,845 Barclays Plc 12,751,145 116,043 Berkley Group 1,148,768 1,121,746 BG Group Plc 4,324,395 250,747 BHP Billiton Plc 1,303,340 366,790 Boots Group Plc 3,131,302
See accompanying notes to the financial statements. 11 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------- UNITED KINGDOM -- CONTINUED 2,047,188 BP Plc 12,898,103 364,833 BPB Plc 1,511,325 501,600 British Energy Plc (Deferred Shares)*(a) -- 707,876 British Sky Broadcasting Plc* 7,007,621 3,352,701 BT Group Plc 8,634,172 408,920 Bunzl Co 2,479,746 323,200 Cadbury Schweppes Plc 1,634,122 2,486,964 Centrica Plc 5,523,276 556,622 Chubb Plc 526,041 490,755 Cookson Group Plc* 133,340 959,883 Diageo Plc 9,525,044 233,822 Dixons Group Plc (New Shares) 338,830 418,898 FKI Plc 418,977 200,000 Galen Holdings Plc 1,071,068 663,885 Gallaher Group Plc 6,514,619 901,693 GlaxoSmithKline Plc 15,850,064 469,989 GUS Plc 3,756,919 395,358 Hanson Plc 1,854,174 1,143,771 HBOS Plc 11,926,285 532,860 Hilton Group Plc 1,250,569 1,043,483 HSBC Holdings Plc 11,242,156 1,247,193 Imperial Chemical Industries Plc 2,985,970 498,518 Imperial Tobacco Group Plc 7,777,562 634,940 International Power Plc* 907,585 2,480,378 Invensys Plc 625,095 995,000 John Wood Group Plc 2,468,379 131,570 Johnson Matthey 1,702,443 605,273 Kidde Plc 545,802 1,254,017 Kingfisher Plc 4,518,275 2,614,644 Legal & General Group Plc 3,078,449 1,360,120 Lloyds TSB Group Plc 7,583,831 59,438 Lonmin Plc 772,840 318,669 Marks & Spencer Group Plc 1,533,413 810,000 Matalan Plc 2,755,795 1,512,501 mmO2 Plc* 1,131,612 1,185,044 National Grid Transco Plc 7,615,576 177,717 P&O Princess Cruises Plc 1,116,889 352,000 Pearson Plc 2,661,289 460,717 Peninsular & Oriental Steam Navigation Co 1,141,124 725,596 Prudential Plc 3,862,956
12 See accompanying notes to the financial statements. GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------- UNITED KINGDOM -- CONTINUED 328,240 Rank Group Plc 1,207,220 218,690 Reed Elsevier Plc 1,596,566 1,649,020 Rentokil Initial Plc 4,746,696 214,669 Reuters Group Plc 402,369 367,200 Rexam Plc 1,866,711 125,441 RMC Group 727,102 586,302 Royal Bank of Scotland Group 13,418,227 955,000 SABMiller Plc 5,881,502 221,370 Sainsbury (J) 808,937 441,421 Scottish & Newcastle Plc 2,336,148 368,960 Scottish & Southern Energy Plc 3,661,238 649,000 Scottish Power Plc 3,726,064 492,863 Severn Trent Plc 5,465,212 2,423,750 Shell Transport & Trading (Registered) 14,039,403 254,310 Six Continents Plc 2,479,489 412,160 Smith (David S.) Holdings Plc 973,790 183,400 SSL International Plc 596,523 140,434 Standard Chartered Plc 1,541,747 226,228 TI Automotive Ltd*(a) -- 869,546 Tomkins Plc 2,574,889 268,447 Trinity Mirror Plc 1,682,867 592,632 Unilever Plc 5,283,353 350,384 United Utilities 3,256,150 365,980 Viridian Group Plc 2,937,039 8,968,273 Vodafone Group Plc 16,068,242 200,354 Whitbread Plc 1,644,159 233,676 Wolseley 1,843,996 ------------- 317,468,266 ------------- TOTAL COMMON STOCKS (COST $1,768,098,077) 1,566,159,512 ------------- PREFERRED STOCKS -- 1.7% AUSTRALIA -- 0.0% 100,022 News Corporation Ltd 0.93% 518,364 ------------- BRAZIL -- 0.1% 88,610,000 Gerdau SA 825,024 -------------
See accompanying notes to the financial statements. 13 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES/ PAR VALUE DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------- FRANCE -- 0.0% 16,658 Casino Guichard Perrachon SA 3.74% 769,508 ------------- GERMANY -- 1.4% 306,560 Bayerische Motoren Werke AG 2.41% 5,815,223 192,904 Rheinmetall AG (Non Voting) 3.92% 2,079,119 55,000 Rheinmetall AG 2.51% 776,555 53,890 Villeroy & Boch AG (Non Voting) 5.78% 464,661 522,349 Volkswagen AG 5.30% 15,313,267 ------------- 24,448,825 ------------- ITALY -- 0.1% 107,933 Fiat SPA 4.95% 511,853 70,578 Fondiaria - SAI 8.00% 396,319 42,571 IFI Istituto Finanziario Industries 4.82% 367,064 ------------- 1,275,236 ------------- THAILAND -- 0.1% 1,954,080 Siam Commercial Bank Ltd* 1,472,925 ------------- TOTAL PREFERRED STOCKS (COST $33,020,570) 29,309,882 ------------- CONVERTIBLE SECURITIES -- 1.2% JAPAN -- 1.2% JPY 456,000,000 Internet Initiative Japan Inc, 144A, 1.75%, due 03/31/05 3,394,206 JPY 2,181,000,000 SMFG Finance, 144A, 2.25%, due 7/11/05 16,879,805 ------------- 20,274,011 ------------- TOTAL CONVERTIBLE SECURITIES (COST $22,478,419) 20,274,011 ------------- DEBT OBLIGATIONS -- 0.0% UNITED KINGDOM -- 0.0% GBP 35,888 BAE Systems Plc, 7.45%, due 11/30/03 11,305 GBP 102,000 BG Transco Holdings Plc Index Linked, 4.186%, due 12/14/22 181,674 GBP 102,000 BG Transco Holdings Plc, 4.98%, Variable Rate, due 12/14/09 159,168
14 See accompanying notes to the financial statements. GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES/ PAR VALUE DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------- UNITED KINGDOM -- CONTINUED GBP 102,000 BG Transco Holdings Plc, 7.00%, due 12/16/24 178,392 ------------- 530,539 ------------- TOTAL DEBT OBLIGATIONS (COST $395,369) 530,539 ------------- INVESTMENT FUNDS -- 0.0% SOUTH KOREA -- 0.0% 38,500 Alliance Korean Investment Fund A* 298,375 ------------- TOTAL INVESTMENT FUNDS (COST $327,839) 298,375 ------------- RIGHTS AND WARRANTS -- 0.0% FRANCE -- 0.0% 85,957 Wendel Investissement Warrants, Expires 3/27/03* 927 ------------- TOTAL RIGHTS AND WARRANTS (COST $185,439) 927 ------------- SHORT-TERM INVESTMENTS -- 7.4% CASH EQUIVALENTS -- 7.4% USD 71,500,000 Societe Generale GC Time Deposit, 1.34%, due 3/03/03 71,500,000 58,300,757 The Boston Global Investment Trust(b) 58,300,757 ------------- 129,800,757 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $129,800,757) 129,800,757 ------------- TOTAL INVESTMENTS -- 99.3% (Cost $1,954,306,470) 1,746,374,003 Other Assets and Liabilities (net) -- 0.7% 12,916,373 ------------- TOTAL NET ASSETS -- 100.0% $1,759,290,376 =============
See accompanying notes to the financial statements. 15 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003 NOTES TO SCHEDULE OF INVESTMENTS:
144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. ADR - American Depositary Receipt GDR - Global Depository Receipt NVDR - Non-Voting Depository Receipt SDR - Swedish Depository Receipt * Non-income producing security. + Direct placement securities are restricted as to resale. They have been valued at fair value by the Trustees after consideration of restricitions as to resale, financial condition and prospects of the issuer, general market conditions, and pertinent information in accordance with the Fund's Prospectus and the Investment Company Act of 1940, as amended. The Fund has limited rights to registration under the Securities Act of 1933 with respect to those restricted securities. 16 See accompanying notes to the financial statements. GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003 Additional information on each restricted security is as follows:
MARKET VALUE AS A MARKET PERCENTAGE VALUE AS OF ACQUISITION ACQUISITION OF FUND'S FEBRUARY 28, ISSUER, DESCRIPTION DATE COST NET ASSETS 2003 - ---------------------------------------------------------------------------------------------------------- Lihir Gold Ltd ADR 10/07/99 $1,454,640 0.07% $ 1,292,000
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). (b) Represents investment of security lending collateral (Note 1).
CURRENCY ABBREVIATIONS: GBP - British Pound JPY - Japanese Yen USD - United States Dollar
See accompanying notes to the financial statements. 17 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY (SHOWING PERCENTAGE OF EQUITY INVESTMENTS) FEBRUARY 28, 2003 (UNAUDITED) At February 28, 2003, industry sector diversification of the Fund's equity investments was as follows:
INDUSTRY SECTOR - -------------------------------------------------------------------- Financials 21.1% Consumer Discretionary 17.6 Industrials 10.5 Telecommunication Services 9.1 Materials 9.0 Consumer Staples 8.4 Energy 8.0 Utilities 7.5 Information Technology 4.9 Health Care 3.9 ----- 100.0% =====
18 See accompanying notes to the financial statements. GMO FOREIGN FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value, including securities on loan of $55,069,097 (cost $1,954,306,470) (Note 1) $1,746,374,003 Cash 1,873 Foreign currency, at value (cost $78,057,595) (Note 1) 78,174,865 Receivable for investments sold 10,650,452 Receivable for Fund shares sold 5,269,247 Dividends and interest receivable 3,011,096 Foreign taxes receivable 767,969 Receivable for expenses reimbursed by Manager (Note 2) 173,880 -------------- Total assets 1,844,423,385 -------------- LIABILITIES: Payable for investments purchased 25,242,381 Payable upon return of securities loaned (Note 1) 58,300,757 Payable for Fund shares repurchased 348,339 Payable to affiliate for (Note 2): Management fee 798,604 Shareholder service fee 204,796 12b-1 Distribution fee - Class M 1,844 Administration fee - Class M 696 Accrued expenses 235,592 -------------- Total liabilities 85,133,009 -------------- NET ASSETS $1,759,290,376 ============== NET ASSETS CONSIST OF: Paid-in capital $2,028,461,787 Accumulated undistributed net investment income 19,995,289 Accumulated net realized loss (81,442,939) Net unrealized depreciation (207,723,761) -------------- $1,759,290,376 ==============
See accompanying notes to the financial statements. 19 GMO FOREIGN FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- (CONTINUED) -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- NET ASSETS ATTRIBUTABLE TO: Class II shares $ 305,422,632 ============== Class III shares $1,241,561,519 ============== Class IV shares $ 207,857,600 ============== Class M shares $ 4,448,625 ============== SHARES OUTSTANDING: Class II 34,395,494 ============== Class III 139,450,438 ============== Class IV 23,343,659 ============== Class M 502,095 ============== NET ASSET VALUE PER SHARE: Class II $ 8.88 ============== Class III $ 8.90 ============== Class IV $ 8.90 ============== Class M $ 8.86 ==============
20 See accompanying notes to the financial statements. GMO FOREIGN FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $4,008,907) $ 34,031,218 Interest (including securities lending income of $979,882) 4,057,057 ------------- Total income 38,088,275 ------------- EXPENSES: Management fee (Note 2) 9,153,120 Custodian fees 1,089,383 Legal fees 76,100 Transfer agent fees 68,750 Audit fees 64,540 Registration fees 42,219 Trustees fees and related expenses (Note 2) 32,572 Miscellaneous 21,908 Fees reimbursed by Manager (Note 2) (1,353,328) ------------- 9,195,264 Shareholder service fee (Note 2) - Class II 392,825 Shareholder service fee (Note 2) - Class III 1,721,218 Shareholder service fee (Note 2) - Class IV 178,420 ------------- 12b-1 Distribution fee (Note 2) - Class M 3,101 ------------- Administration fee (Note 2) - Class M 2,481 ------------- Net expenses 11,493,309 ------------- Net investment income 26,594,966 ------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (43,163,300) Foreign currency, forward contracts and foreign currency related transactions 13,496,848 ------------- Net realized loss (29,666,452) ------------- Change in net unrealized appreciation (depreciation) on: Investments (152,111,649) Foreign currency, forward contracts and foreign currency related transactions 905,883 ------------- Net unrealized loss (151,205,766) ------------- Net realized and unrealized loss (180,872,218) ------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(154,277,252) =============
See accompanying notes to the financial statements. 21 GMO FOREIGN FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 26,594,966 $ 22,627,904 Net realized loss (29,666,452) (31,941,438) Change in net unrealized appreciation (depreciation) (151,205,766) (99,343,365) -------------- -------------- Net decrease in net assets from operations (154,277,252) (108,656,899) -------------- -------------- Distributions to shareholders from: Net investment income Class II (3,740,934) (913,145) Class III (21,554,280) (11,258,163) Class IV (4,218,845) (1,559,674) Class M (48,153) -- -------------- -------------- Total distributions from net investment income (29,562,212) (13,730,982) -------------- -------------- Net realized gains Class II -- (667,887) Class III -- (10,672,198) Class IV -- (1,492,707) -------------- -------------- Total distributions from net realized gains -- (12,832,792) -------------- -------------- (29,562,212) (26,563,774) -------------- -------------- Net share transactions: (Note 5) Class II 230,185,805 43,713,899 Class III 320,862,731 143,493,669 Class IV 103,451,466 6,306,235 Class M 4,689,233 858 -------------- -------------- Increase in net assets resulting from net share transactions 659,189,235 193,514,661 -------------- -------------- Total increase in net assets 475,349,771 58,293,988 NET ASSETS: Beginning of period 1,283,940,605 1,225,646,617 -------------- -------------- End of period (including accumulated undistributed net investment income of $19,995,289 and $9,509,502, respectively) $1,759,290,376 $1,283,940,605 ============== ==============
22 See accompanying notes to the financial statements. GMO FOREIGN FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS II SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, --------------------------------------------- 2003 2002 2001 2000 1999 -------- -------- ------- ------- ------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.94 $ 11.21 $ 13.14 $ 11.79 $ 12.09 -------- -------- ------- ------- ------- Income from investment operations: Net investment income(b) 0.15 0.16 0.20 0.17 0.20 Net realized and unrealized gain (loss) (1.03) (1.20) (0.41) 2.89 (0.14) -------- -------- ------- ------- ------- Total from investment operations (0.88) (1.04) (0.21) 3.06 0.06 -------- -------- ------- ------- ------- Less distributions to shareholders: From net investment income (0.18) (0.11) (0.29) (0.21) (0.25) From net realized gains -- (0.12) (1.43) (1.50) (0.11) -------- -------- ------- ------- ------- Total distributions (0.18) (0.23) (1.72) (1.71) (0.36) -------- -------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 8.88 $ 9.94 $ 11.21 $ 13.14 $ 11.79 ======== ======== ======= ======= ======= TOTAL RETURN(a) (9.00)% (9.37)% (1.84)% 25.63% 0.36% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $305,423 $100,127 $61,681 $60,278 $33,780 Net expenses to average daily net assets 0.82% 0.82% 0.82% 0.82% 0.82% Net investment income to average daily net assets 1.54% 1.56% 1.63% 1.28% 1.64% Portfolio turnover rate 22% 22% 38% 35% 27% Fees and expenses reimbursed by the Manager to average daily net assets: 0.09% 0.09% 0.09% 0.10% 0.25%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) Computed using average shares outstanding throughout the period. See accompanying notes to the financial statements. 23 GMO FOREIGN FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, -------------------------------------------------------- 2003 2002 2001 2000 1999 ---------- ---------- ---------- ---------- -------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.95 $ 11.22 $ 13.16 $ 11.81 $ 12.10 ---------- ---------- ---------- ---------- -------- Income from investment operations: Net investment income(b) 0.17 0.19 0.21 0.20 0.20 Net realized and unrealized gain (loss) (1.04) (1.23) (0.43) 2.86 (0.12) ---------- ---------- ---------- ---------- -------- Total from investment operations (0.87) (1.04) (0.22) 3.06 0.08 ---------- ---------- ---------- ---------- -------- Less distributions to shareholders: From net investment income (0.18) (0.11) (0.29) (0.21) (0.26) From net realized gains -- (0.12) (1.43) (1.50) (0.11) ---------- ---------- ---------- ---------- -------- Total distributions (0.18) (0.23) (1.72) (1.71) (0.37) ---------- ---------- ---------- ---------- -------- NET ASSET VALUE, END OF PERIOD $ 8.90 $ 9.95 $ 11.22 $ 13.16 $ 11.81 ========== ========== ========== ========== ======== TOTAL RETURN(a) (8.89)% (9.33)% (1.85)% 25.65% 0.48% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $1,241,562 $1,049,456 $1,019,541 $1,022,498 $927,108 Net expenses to average daily net assets 0.75% 0.75% 0.75% 0.75% 0.75% Net investment income to average daily net assets 1.77% 1.88% 1.71% 1.48% 1.60% Portfolio turnover rate 22% 22% 38% 35% 27% Fees and expenses reimbursed by the Manager to average daily net assets: 0.09% 0.09% 0.09% 0.10% 0.25%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) Computed using average shares outstanding throughout the period. 24 See accompanying notes to the financial statements. GMO FOREIGN FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------------------------------ 2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.96 $ 11.22 $ 13.16 $ 11.81 $ 12.11 -------- -------- -------- -------- -------- Income from investment operations: Net investment income(b) 0.18 0.20 0.22 0.21 0.22 Net realized and unrealized gain (loss) (1.05) (1.22) (0.43) 2.86 (0.15) -------- -------- -------- -------- -------- Total from investment operations (0.87) (1.02) (0.21) 3.07 0.07 -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.19) (0.12) (0.30) (0.22) (0.26) From net realized gains -- (0.12) (1.43) (1.50) (0.11) -------- -------- -------- -------- -------- Total distributions (0.19) (0.24) (1.73) (1.72) (0.37) -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 8.90 $ 9.96 $ 11.22 $ 13.16 $ 11.81 ======== ======== ======== ======== ======== TOTAL RETURN(a) (8.92)% (9.19)% (1.79)% 25.74% 0.53% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $207,858 $134,357 $144,425 $141,175 $130,760 Net expenses to average daily net assets 0.69% 0.69% 0.69% 0.69% 0.69% Net investment income to average daily net assets 1.79% 1.97% 1.77% 1.55% 1.81% Portfolio turnover rate 22% 22% 38% 35% 27% Fees and expenses reimbursed by the Manager to average daily net assets: 0.09% 0.09% 0.09% 0.10% 0.25%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) Computed using average shares outstanding throughout the period. See accompanying notes to the financial statements. 25 GMO FOREIGN FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS M SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ----------------- 2003 2002+ ------ --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.93 $ 9.85 ------ --------- Income from investment operations: Net investment income(b) 0.05 0.00(c) Net realized and unrealized gain (loss) (0.93) 0.08 ------ --------- Total from investment operations (0.88) 0.08 ------ --------- Less distributions to shareholders: From net investment income (0.19) -- ------ --------- Total distributions (0.19) -- ------ --------- NET ASSET VALUE, END OF PERIOD $ 8.86 $ 9.93 ====== ========= TOTAL RETURN(a) (9.09)% 0.81%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $4,449 $ 1 Net expenses to average daily net assets 1.06% 1.05%* Net investment income to average daily net assets 0.55% 0.35%* Portfolio turnover rate 22% 22% Fees and expenses reimbursed by the Manager to average daily net assets: 0.10% 0.09%*
+ Period from January 25, 2002 (commencement of operations) to February 28, 2002. * Annualized. ** Not Annualized. (a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) Computed using average shares outstanding throughout the period. (c) Net investment income earned was less than $.01 per share. 26 See accompanying notes to the financial statements. GMO FOREIGN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Foreign Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in equity securities of non-U.S. issuers. The Fund's benchmark is the Morgan Stanley Capital International EAFE Index. Throughout the year ended February 28, 2003, the Fund had four classes of shares outstanding: Class II, Class III, Class IV, and Class M. Class M shares bear an administrative fee and a 12b-1 fee while classes II, III, and IV bear a shareholder service fee (See Note 2). The principal economic difference among the classes of shares is the level of fees borne by the classes. Eligibility for and automatic conversion among the various classes of shares is generally based on the total amount of assets invested in a particular fund or with GMO, as more fully outlined in the Trust's prospectus. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their 27 GMO FOREIGN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. Certain securities held by the Fund were valued on the basis of a price provided by a principal market maker. These prices may differ from the value that would have been used had a broader market for the securities existed and the differences could be material to the financial statements. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in foreign currency values that are unfavorable to the Fund. There were no forward foreign currency contracts outstanding as of February 28, 2003. 28 GMO FOREIGN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- FUTURES CONTRACTS The Fund may purchase and sell futures contracts to manage its exposure to the financial markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of February 28, 2003, there were no outstanding futures contracts. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 28, 2003, there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the 29 GMO FOREIGN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- amounts paid or offset against the proceeds on the underlying future, security or currency transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. At February 28, 2003, there were no open purchased option contracts. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the financial markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. At February 28, 2003, there were no open swap agreements. 30 GMO FOREIGN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 2003, the Fund loaned securities having a market value of $55,069,097 collateralized by cash in the amount of $58,300,757 which was invested in a short-term instrument. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryover for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country's tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003, the tax basis of distributions paid was as follows: ordinary income -- $13,793,543 and $29,562,212, respectively; and long-term capital gains -- $12,770,231 and $0, respectively. At February 28, 2003, the components of distributable earnings on a tax basis consisted of $21,765,321 of undistributed ordinary income. The temporary differences between book and tax basis distributable earnings are primarily due to passive foreign investment company transactions and losses on wash sale transactions. 31 GMO FOREIGN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- At February 28, 2003, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code of $23,898,414 and $17,460,238 expiring in 2010 and 2011, respectively. The Fund has elected to defer to March 1, 2003 post-October capital losses of $38,136,022. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to foreign currency transactions. The financial highlights exclude these adjustments.
Accumulated Undistributed Net Accumulated Net Investment Income Realized Loss Paid-in Capital ----------------- ----------------- --------------- $13,453,033 $(14,254,467) $801,434
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. ALLOCATION OF OPERATING ACTIVITY The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro-rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service, 12b-1, and administration fees, which are directly attributable to a class of shares, are charged to that class' operations. INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic 32 GMO FOREIGN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .60% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .22% for Class II shares, .15% for Class III shares, and .09% for Class IV shares. The Class M shares of the Fund pays GMO an administrative fee monthly at the annual rate of .20% of average daily Class M net assets for support services provided to Class M shareholders. Fund Distributors, Inc. (the "Distributor") serves as the Fund's distributor. Pursuant to a Rule 12b-1 distribution plan adopted by the Fund, Class M shares of the Fund pay a fee, at the annual rate of 0.25% of average daily Class M net assets for any activities or expenses primarily intended to result in the sale of Class M shares of the Fund. This fee may be spent by the Distributor on personal services rendered to Class M shareholders of the Fund and/or maintenance of Class M shareholder accounts. GMO has entered into a binding agreement effective until at least June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees (Class II, Class III and Class IV only), administrative fee (Class M only), 12b-1 fee (Class M only), fees and expenses of the independent Trustees of the Trust (including legal fees), 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) exceed the management fee. The Fund's portion of the fee paid by the Trust to the independent Trustees during the year ended February 28, 2003, was $22,271. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2003 aggregated $898,547,625 and $315,955,222, respectively. 33 GMO FOREIGN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- At February 28, 2003 the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $1,957,939,335 $85,743,229 $(297,308,561) $(211,565,332)
4. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 -------------------------- -------------------------- Shares Amount Shares Amount Class II: ----------- ------------- ----------- ------------- Shares sold 26,662,327 $ 252,786,694 6,901,919 $ 66,851,376 Shares issued to shareholders in reinvestment of distributions 330,624 3,216,043 147,774 1,500,948 Shares repurchased (2,675,281) (25,816,932) (2,475,524) (24,638,425) ----------- ------------- ----------- ------------- Net increase 24,317,670 $ 230,185,805 4,574,169 $ 43,713,899 =========== ============= =========== ============= Year Ended Year Ended February 28, 2003 February 28, 2002 -------------------------- -------------------------- Shares Amount Shares Amount Class III: ----------- ------------- ----------- ------------- Shares sold 50,940,076 $ 493,560,075 26,800,942 $ 274,364,642 Shares issued to shareholders in reinvestment of distributions 1,230,614 12,079,797 1,685,173 17,307,866 Shares repurchased (18,151,641) (184,777,141) (13,914,112) (148,178,839) ----------- ------------- ----------- ------------- Net increase 34,019,049 $ 320,862,731 14,572,003 $ 143,493,669 =========== ============= =========== =============
34 GMO FOREIGN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - --------------------------------------------------------------------------------
Year Ended Year Ended February 28, 2003 February 28, 2002 -------------------------- -------------------------- Shares Amount Shares Amount Class IV: ----------- ------------- ----------- ------------- Shares sold 9,587,705 $ 100,892,832 423,565 $ 4,206,000 Shares issued to shareholders in reinvestment of distributions 272,027 2,678,839 203,713 2,100,235 Shares repurchased (11,514) (120,205) -- -- ----------- ------------- ----------- ------------- Net increase 9,848,218 $ 103,451,466 627,278 $ 6,306,235 =========== ============= =========== ============= Period from January 25, 2002 (commencement of Year Ended operations) February 28, 2003 through February 28, 2002 -------------------------- -------------------------- Shares Amount Shares Amount Class M: ----------- ------------- ----------- ------------- Shares sold 561,276 $ 5,236,694 87 $ 858 Shares issued to shareholders in reinvestment of distributions 5,216 48,153 -- -- Shares repurchased (64,484) (595,614) -- -- ----------- ------------- ----------- ------------- Net increase 502,008 $ 4,689,233 87 $ 858 =========== ============= =========== =============
35 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO FOREIGN FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Foreign Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 36 GMO FOREIGN FUND (A SERIES OF GMO TRUST) TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- During the year ended February 28, 2003, the Fund paid foreign taxes of $4,008,907 and recognized foreign source income of $38,040,125. 37 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 38 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the from February Boston, MA 02110 Trust 2002 - October Age: 64 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 39 PRINCIPAL OFFICERS:
Term of Office(4) and Principal Occupation(s) Name, Address, Position(s) Length of During Past and Age Held with Fund Time Served Five Years ------------------------------------ -------------- -------------- -------------------------------------------------- Scott Eston President and President and Chief Financial Officer (1997 - present), Chief c/o GMO Trust Chief Chief Operating Officer (2000 - present) and Member, 40 Rowes Wharf Executive Executive Grantham, Mayo, Van Otterloo & Co. LLC. Boston, MA 02110 Officer of the Officer since Age: 47 Trust October 2002; Vice President from August 1998 - October 2002. Susan Randall Harbert Chief Chief Member, Grantham, Mayo, Van Otterloo & Co. LLC. c/o GMO Trust Financial Financial 40 Rowes Wharf Officer and Officer Since Boston, MA 02110 Treasurer of February 2000; Age: 45 the Trust Treasurer since February 1998. Brent Arvidson Assistant Since Senior Fund Administrator, Grantham, Mayo, Van c/o GMO Trust Treasurer of September Otterloo & Co. LLC. 40 Rowes Wharf the Trust 1998. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President Vice President General Counsel, Anti-Money Laundering Reporting c/o GMO Trust and Clerk of since February Officer (July 2002 - February 2003) and Member, 40 Rowes Wharf the Trust 1997; Clerk Grantham, Mayo, Van Otterloo & Co. LLC. Boston, MA 02110 since March Age: 37 2001; May 1999 - August 1999. Elaine M. Hartnett, Esq. Vice President Vice President Associate General Counsel, Grantham, Mayo, Van c/o GMO Trust and Secretary since August Otterloo & Co. LLC (June 1999 - present); 40 Rowes Wharf of the Trust 1999; Associate/ Junior Partner, Hale and Dorr LLP Boston, MA 02110 Secretary (1991 - 1999). Age: 58 since March 2001. Julie Perniola Vice President Since February Anti-Money Laundering Reporting Officer (February c/o GMO Trust and Anti- 2003. 2003 - present) and Compliance Officer, Grantham, 40 Rowes Wharf Money Mayo, Van Otterloo & Co. LLC. Boston, MA 02110 Laundering Age: 32 Compliance Officer
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 40 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGEMENT Day-to-day management of the Fund's portfolio is the responsibility of the International Active Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE For the fiscal year ended February 28, 2003, Class III shares of GMO Foreign Small Companies Fund fell 3.6%, outperforming its Salomon Smith Barney ("SSB") Extended Market Index ("EMI") World ex-US Index benchmark by 6.8% after fees. The Fund's benchmark lost 10.4%. Stock selection was the source of the outperformance. GMO country selection subtracted 1.1% from returns during the fiscal year. The worst performing market in the SSB EMI World ex-US Index was Norway, with a decline of 30.2%. The sharp rise in the value of the Norwegian krone, combined with very high interest rates, proved deadly for Norway's smaller companies, many of which are exporters with a significant part of costs denominated in krone. The SSB EMI Netherlands Index lost 28.4%. The pressure on the financial sector, particularly insurance stocks, caused them to unwind their equity portfolios at any price. The illiquid smaller cap stocks were very vulnerable. Further, the stock exchange regulator leveled allegations of insider trading and market manipulation at the team that managed the Orange Fund, the leader in Dutch small cap investment. Turmoil and uncertainty led to selling pressure across the board. The South Korean market fell 26.0%. Geopolitical tension had this market on edge for most of the last year, and the nuclear stand-off in North Korea has added considerably to the equity risk premium in South Korea. Germany was the worst performing major market for the 12 months ending in February, declining 24.0%. Real GDP is estimated to have grown only 0.2% for 2002, with domestic demand down 1.3% for the biggest decline since German unification. The only factor that stopped aggregate economic output from shrinking was exports, but those are threatened by the recent euro strength. The Fund was overweight Norway, South Korea, and Germany, but underweight the Netherlands. Austria was the best performing market, with a return of 20.8%. The ability to improve margins and generate free cash -- all at globally cheap valuations -- lured both financial investors and industrial acquisition teams to this market. Even after such strong performance the Austrian market continues to offer value, if not liquidity. New Zealand gained 18.4%. Returns for New Zealand during the fiscal year were aided by the strong New Zealand dollar, which appreciated versus the U.S. dollar by an impressive 32.7%. The Fund was overweight in both of these countries. Spain was up 13.2%, helped by a 24.6% move in the currency. The small cap companies were primarily exposed to the growing Spanish economy, so their earnings were less affected by the poorly performing economies of Brazil and Argentina and the global economic malaise. The best performing major market was Australia, up 10.6%. Despite a severe drought, GDP in Australia grew by an impressive 3.8%, making it one the best performing economies globally. The economy was aided by strong gains in household credit demand and housing prices. However, there is now concern that a consumer credit bubble is looming, and a rental yield of 3.0% versus a 3-month treasury rate of 4.8% is a sign that GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- residential property may be overpriced. The strong Australian dollar also contributed substantially to returns for the fiscal year, rising by 17.5% versus the U.S. dollar. The Fund started the fiscal year with overweight positions in Spain and Australia, but ended the year underweight these countries. GMO stock selection added 7.9% to returns during the fiscal year. Stock selection was particularly strong in Japan, the United Kingdom, Korea, France, and Germany. The holdings that contributed to outperformance in Japan had two things in common -- low valuations and delivery of good earnings or dividends. They included a consumer electronics firm (Funai), a retailer (Cawachi), an apartment builder (Daito Trust), a cosmetics company (Kose), and a real estate investment trust (ORIX JREIT). In the United Kingdom, our largest holding, Anglo Irish Banks, drove our outperformance. Anglo Irish far exceeded analysts' forecasts and soared 58.9% while the Irish market increased 4.1%. Korea has an abundance of extremely cyclical companies with low valuations. Our portfolio is concentrated in industry leaders that offer consistent free cash generation. Companies such as Korea Electric Terminal, Samsung SDI, and Hanmi Pharmaceutical contributed to the positive return in Korea. In France we sought strong free cash flow and high yields. This strategy delivered an absolute return in a very negative environment. The largest contributor to our positive performance in Germany was Stada Arzneimittel AG. Stada is a generics drug producer benefiting from the large pipeline of patent expirations across Europe. OUTLOOK Foreign small capitalization stocks are set to deliver strong returns in 2003 even though they already had powerful outperformance in 2002. We expect that stock selection will again be the principle driver of our returns. Country valuation differences are narrow entering 2003. Smaller cap companies offer fundamental investors a unique opportunity to pounce on the undiscovered and misunderstood value opportunities across the markets. The possibility of a weak dollar just adds more allure. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO FOREIGN SMALL COMPANIES FUND CLASS III SHARES AND THE SSB EMI WORLD EX-U.S. INDEX AS OF FEBRUARY 28, 2003 GMO FOREIGN SMALL COMPANIES FUND 1/4/95 $10,000 3/31/95 $9,936 6/30/95 $10,244 9/30/95 $10,744 12/31/95 $10,836 3/31/96 $11,430 6/30/96 $12,285 9/30/96 $12,228 12/31/96 $13,230 3/31/97 $13,179 6/30/97 $14,235 9/30/97 $14,173 12/31/97 $12,727 3/31/98 $14,110 6/30/98 $13,988 9/30/98 $11,554 12/31/98 $13,301 3/31/99 $13,706 6/30/99 $15,598 9/30/99 $17,111 12/31/99 $18,824 3/31/2000 $19,045 6/30/2000 $18,686 9/30/2000 $17,378 12/31/2000 $17,367 3/31/2001 $17,217 6/30/2001 $18,344 9/30/2001 $16,613 12/31/2001 $18,002 3/31/2002 $19,621 6/30/2002 $20,662 9/30/2002 $17,693 12/31/2002 $18,475 2/28/2003 $17,811 COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO FOREIGN SMALL COMPANIES FUND CLASS III SHARES AND THE SSB EMI WORLD EX-U.S. INDEX AS OF FEBRUARY 28, 2003 SALOMON SMITH BARNEY EMI WORLD EX-U.S. INDEX 1/4/95 $10,000 3/31/95 $10,062 6/30/95 $10,057 9/30/95 $10,455 12/31/95 $10,655 3/31/96 $11,267 6/30/96 $11,765 9/30/96 $11,499 12/31/96 $11,427 3/31/97 $11,217 6/30/97 $12,023 9/30/97 $11,539 12/31/97 $10,352 3/31/98 $12,132 6/30/98 $12,088 9/30/98 $10,259 12/31/98 $11,609 3/31/99 $11,774 6/30/99 $12,498 9/30/99 $13,134 12/31/99 $14,366 3/31/2000 $14,658 6/30/2000 $14,403 9/30/2000 $13,644 12/31/2000 $12,885 3/31/2001 $11,512 6/30/2001 $11,862 9/30/2001 $10,034 12/31/2001 $10,862 3/31/2002 $11,515 6/30/2002 $11,746 9/30/2002 $9,676 12/31/2002 $10,070 2/28/2003 $9,684
AVERAGE ANNUAL TOTAL RETURN SINCE INCEPTION 1 YEAR 5 YEAR 1/4/95 CLASS III -3.64% 5.42% 7.33% 6/14/2002 Class IV n/a n/a -12.76%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The Fund commenced operations on June 30, 2000 subsequent to a transaction involving, in essence, the reorganization of the GMO Small Cap Active Pool of the Common Fund for Non-Profit Organizations (the GMO Pool) as the GMO Foreign Small Companies Fund. All information relating to the time periods prior to June 30, 2000 relates to the GMO Pool. The total returns of the GMO Pool have been restated to reflect the current expenses of Class III shares of the GMO Foreign Small Companies Fund. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ COMMON STOCKS -- 89.2% AUSTRALIA -- 3.7% 421,949 Amcor Ltd 2,109,932 126,572 APN News & Media Ltd 227,358 1,393,304 Brazin Ltd 1,082,274 480,797 Consolidated Rutile Ltd 259,677 2,902,128 David Jones Ltd 1,954,884 32,000 Foodland Associated 348,963 888,145 Insurance Australia Group Ltd 1,649,251 654,372 John Fairfax Holdings Ltd 1,171,462 201,000 Lihir Gold Ltd* 169,548 6,000 Lihir Gold Ltd ADR*+ 102,000 744,781 Lion Nathan Ltd 2,363,805 1,000,000 Mayne Group Ltd 1,917,646 378,868 McGuigan Simeon Wines Ltd 1,007,032 1,353,112 MIM Holdings Ltd 1,166,013 371,000 Oil Search Ltd* 153,096 608,500 Pacifica Group Ltd 1,414,297 825,000 Pasminco Ltd*(a) -- 501,000 Sons of Gwalia Ltd 425,645 ------------ 17,522,883 ------------ AUSTRIA -- 1.0% 14,550 Erste Bank Der Oesterreichischen Sparkassen AG 973,852 26,248 Oesterreichische Brau Beteiligungs AG 2,145,804 15,480 OMV AG 1,672,605 ------------ 4,792,261 ------------ BELGIUM -- 1.4% 34,000 Almanij NV 1,094,592 37,918 Bekaert SA 1,338,428 167 CFE (CIE Francois D'enter) 32,363 68,300 KBC Bancassurance Holding 2,064,129 44,320 Omega Pharma SA 683,084 21,490 Solvay Et Cie 1,273,906 5,006 Unibra SA 375,524 ------------ 6,862,026 ------------ BRAZIL -- 0.2% 479,600 Cia de Concessoes Rodoviarias* 940,656 ------------
See accompanying notes to the financial statements. 1 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ CANADA -- 3.6% 485,000 Hudson's Bay Co 2,734,595 73,800 Inco Ltd* 1,572,795 90,600 KAP Resources Ltd*(a) 608 133,877 Norske Skog Canada Ltd* 426,846 14,000 Rothmans Inc 234,743 1,000,000 SFK Pulp Fund 7,175,460 260,300 Teck Cominco Ltd Class B 2,096,657 237,600 Tembec Inc* 1,590,060 153,400 Timberwest Forest Corp 1,266,492 ------------ 17,098,256 ------------ CROATIA -- 0.4% 160,000 Pliva D.D. 2,008,000 ------------ DENMARK -- 0.8% 50,000 Carlsberg A/S Class B 1,621,316 36,000 Kobenhavns Lufthavne AS 2,298,134 ------------ 3,919,450 ------------ FINLAND -- 5.2% 216,900 Aspocomp Group Oyj* 1,496,159 603,815 Huhtamaki Oyj Class I 5,479,667 252,000 Jaakko Poyry Group 3,938,281 324,800 Metso Oyj 3,360,667 255,000 M-real Oyj 1,937,615 1,123,562 Rapala VMC Oyj 5,316,181 160,000 Uponor Oyj 3,273,063 ------------ 24,801,633 ------------ FRANCE -- 6.2% 39,100 Assurances Generales de France 1,076,306 23,271 Bacou Dalloz* 1,617,756 6,800 Bail-Investissement 1,006,277 22,800 BIC SA 727,386 161,900 Boursorama* 436,240 20,216 Buffalo Grill 165,595 391,900 Canal Plus 1,757,142 3,700 Casino Guichard Perrachon SA 211,357 7,320 Christian Dior SA 250,492 10,356 Clarins 483,413
2 See accompanying notes to the financial statements. GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ FRANCE -- CONTINUED 6,450 Damartex SA* 75,080 44,100 Essilor International SA 1,711,115 39,101 Eurazeo 2,052,367 369,100 Eurotunnel SA Units (Bearer)* 151,170 6,300 Gaumont SA* 291,976 90,469 GrandVision SA 1,745,384 4,444 Groupe Partouche 259,604 9,000 Guyenne et Gascogne SA 698,414 11,400 Imerys SA 1,213,948 5,900 Klepierre 787,883 22,100 Lagardere S.C.A. 813,432 55,200 LISI 1,029,256 60,000 Michelin SA Class B 1,946,507 9,407 Natexis Banques Populaires 724,929 1,351 SAGA* 55,332 4,600 Schneider Electric SA 200,100 18,500 Seb SA 1,563,241 7,250 SOMFY International SA 789,219 41,203 Sophia (EX-SFI) 1,343,360 25,000 Thales SA 572,851 34,000 Valeo SA 965,235 51,872 Virbac SA 1,355,760 30,001 Worms et Cie SA 499,577 49,341 Zodiac SA 925,327 ------------ 29,503,031 ------------ GERMANY -- 5.1% 8,028 Aareal Bank AG* 88,689 32,992 Adidas-Salomon AG 2,631,350 98,200 Bilfinger & Berger 1,958,039 88,600 Commerzbank AG 558,635 190,200 Continental AG* 2,982,715 8,028 DePfa Bank Plc 292,025 280,500 Deutsche Lufthansa AG* 2,352,072 100,007 Fraport AG Frankfurt Airport Services Worldwide 1,956,344 78,200 Gildemeister AG 297,522 77,747 Hannover Rueckversicherungs AG* 1,747,141 85,673 K&S AG 1,597,454 119,840 Repower Systems AG* 2,712,435 73,600 Stada Arzneimittel AG 3,530,011
See accompanying notes to the financial statements. 3 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ GERMANY -- CONTINUED 100,622 Sudzucker AG 1,583,376 ------------ 24,287,808 ------------ GREECE -- 0.1% 75,000 Greek Organization of Football Prognostics SA 703,265 ------------ HONG KONG -- 2.2% 2,092,325 Great Eagle Holdings Ltd 1,213,957 2,083,000 Hang Lung Group Co Ltd 1,762,742 1,757,000 Hang Lung Properties Ltd 1,599,505 228,650 Hanison Construction Holdings Ltd 7,329 5,298,800 HKR International Ltd* 815,294 2,266,993 Hysan Development Co Ltd 1,744,042 145,200 Jardine Matheson Holdings Ltd 827,640 329,000 Liu Chong Hing Bank Ltd 301,618 3,186,490 New World Development Co Ltd 1,450,429 918,000 Orient Overseas International Ltd 488,479 910,699 SCMP Group Ltd 329,875 ------------ 10,540,910 ------------ INDIA -- 0.1% 154,000 Hexaware Ltd GDR* 214,611 231,000 Aptech Training GDS* 81,543 18,200 Videsh Sanchar Nigam Ltd ADR 67,522 ------------ 363,676 ------------ INDONESIA -- 0.4% 1,738,000 International Nickel* 1,252,119 9,084,000 Surya Citra Media 455,044 ------------ 1,707,163 ------------ IRELAND -- 0.4% 246,000 Greencore Group 617,773 379,440 IFG Group Plc 163,584 150,000 Irish Continental Group Plc 1,102,589 ------------ 1,883,946 ------------ ITALY -- 3.7% 659,000 Banca Intesa SPA 1,527,081
4 See accompanying notes to the financial statements. GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ ITALY -- CONTINUED 85,000 Banca Popolare di Bergamo Credit 1,522,608 209,800 Benetton Group SPA 1,435,877 174,200 Buzzi Unicem SPA 1,060,803 49,700 Davide Campari-Milano SPA 1,540,041 260,000 Enel SPA 1,527,243 663,800 ERG SPA 2,546,979 9,585 Ericsson SPA 175,209 57,716 Grouppo Editoriale L'Espresso 200,926 718,852 Locazione Attrezzature SPA 619,823 30,000 Pagnossin SPA 42,455 567,000 Parmalat Finanziaria SPA 935,002 70,552 RAS SPA 867,627 485,000 Snam Rete Gas SPA 1,719,792 433,000 Telecom Italia SPA (Savings Shares) 2,123,428 ------------ 17,844,894 ------------ JAPAN -- 22.2% 112,000 Arisawa Manufacturing 2,245,210 800,000 Bank of Yokohama 2,936,773 775,000 Brother Industries Ltd 4,673,927 110,500 Cawachi Ltd 7,355,762 825,000 Central Glass Co Ltd 3,893,846 400,000 Daikin Industries Ltd 6,394,587 441,000 Dainippon Pharmaceutical Co Ltd 3,607,080 475,000 Daito Trust Construction Co Ltd 9,260,943 109,500 Funai Electric Co Ltd 12,550,011 380,000 Izumi Co Ltd 3,930,979 1,150,000 JACCS Co 4,163,248 430 Japan Retail Fund Investment Corp 1,902,220 165,000 Koei Co Ltd 3,091,351 121,000 Kose Corp 3,490,040 700,000 NHK Spring Co Ltd 2,078,241 1,250,000 Nippon Paint Co 3,182,491 200,000 Nissin Company Ltd 1,344,893 210,000 Okamura Corp 790,442 1,100 Orix JREIT Inc 4,540,495 83,000 Sanyo Chemical Industries 500,562 2,150,000 Showa Denko* 3,037,006 1,085,000 Showa Shell Sekiyu 7,167,562 650,000 Sumitomo Realty and Development Co Ltd 2,518,080 200,000 TIS Inc 2,784,521
See accompanying notes to the financial statements. 5 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ JAPAN -- CONTINUED 343,000 Tokai Rubber Industries 3,191,372 570,000 Toyo Suisan Kaisha 5,496,299 ------------ 106,127,941 ------------ MEXICO -- 0.3% 1,346,700 Grupo Imsa SA 1,414,915 ------------ NETHERLANDS -- 1.2% 35,300 Fortis NV 483,949 3,760 Fugro NV 131,707 97,365 Hagemeyer NV 475,378 49,800 Imtech NV 587,735 99,144 Kas Bank NV 1,586,832 54,741 Koninklijke Vendex KBB NV 394,119 27,200 Laurus NV* 30,782 36,465 Nutreco Holding NV 495,205 59,604 VNU NV 1,311,163 25,263 Wegener NV 103,468 ------------ 5,600,338 ------------ NEW ZEALAND -- 0.6% 230,000 Air New Zealand Class B* 66,569 1,207,475 Evergreen Forests Ltd* 356,203 179,232 Fletcher Challenge Forests Ltd* 102,753 1,927,200 Tourism Holdings Ltd 1,094,133 2,358,857 Tranz Rail Holdings Ltd* 1,470,493 ------------ 3,090,151 ------------ NORWAY -- 2.5% 385,390 Ekornes ASA 4,679,511 251,800 Norske Skogindustrier AS Class A 3,215,567 130,350 Prosafe ASA* 1,873,825 409,000 Smedvig ASA Class A 1,763,854 100,000 Smedvig ASA Class B 362,873 ------------ 11,895,630 ------------ SINGAPORE -- 1.3% 2,159,000 Allgreen Properties Ltd 1,048,992 2,000,000 MobileOne Ltd* 1,414,484 1,233,800 Singapore Land Ltd 2,284,355
6 See accompanying notes to the financial statements. GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ SINGAPORE -- CONTINUED 1,400,000 United Overseas Land 1,344,335 ------------ 6,092,166 ------------ SOUTH AFRICA -- 1.3% 9,202,800 Allan Gray Property Trust 3,160,749 10,317,337 Martprop Property Fund 2,558,514 138,989 Western Areas Ltd* 560,085 ------------ 6,279,348 ------------ SOUTH KOREA -- 2.0% 100,000 Asia Cement Co Ltd 1,889,163 325,000 Dongkuk Steel Mill 1,147,635 331,920 Handsome Corp 1,943,720 29,610 Hanil Cement Manufacturing 804,963 113,270 Korea Electric Terminal Co 1,670,131 320,963 Kortek Corp 865,832 50,000 Sam Yang 705,818 240,000 Woongjin.com Co Ltd 764,043 ------------ 9,791,305 ------------ SPAIN -- 2.1% 64,000 ACS Actividades Cons y Serv 2,208,714 74,400 Altadis SA 1,763,341 70,000 Amadeus Global Travel Distribution 322,154 60,000 Augus de Barcelona SA 592,359 10,000 Cia de Distribucion Integral Logista SA 221,488 137,000 Cortefiel SA 620,166 106,800 Gas Natural SDG SA 2,094,985 70,000 Red Electrica de Espana 854,803 90,000 Union Fenosa SA 1,137,833 7,348 Uralita SA 43,954 ------------ 9,859,797 ------------ SWEDEN -- 2.8% 157,300 Autoliv Inc SDR 3,253,590 377,400 Billerud AB 4,435,304 170,500 PerBio Science AB* 2,164,062 349,200 SAAB AB Class B 3,652,462 ------------ 13,505,418 ------------
See accompanying notes to the financial statements. 7 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ SWITZERLAND -- 2.7% 1,752 Bank Sarasin & Cie AG 1,472,920 2,500 Belimo Holding AG 626,844 16,470 Bobst Group AG (Registered)* 412,965 61,180 Charles Voegele Holding AG* 776,030 700 Eichhof Holding AG 278,761 3,120 Forbo Holdings AG (Registered) 874,336 6,110 Geberit AG* 1,635,642 4,990 Helvetia Patria Holding 493,112 2,600 Hero AG 268,437 1,000 Jelmoli (Bearer) 601,032 3,250 Jelmoli (Registered) 385,878 28,970 Lonza Group AG 1,649,324 1,000 Schaffner Holding AG (Registered) 84,071 2,220 Sika AG 553,363 65,000 Swisslog Holding AG* 114,565 3,880 Unique Zurich Airport* 62,950 17,908 Valiant Holding (Registered) 1,063,122 10,650 Valora Holding AG 1,763,219 ------------ 13,116,571 ------------ THAILAND -- 0.2% 588,900 Electricity Generating Pcl (Foreign Registered) 550,567 1,000,000 Shin Satellite (Foreign Registered)*(a) 247,750 ------------ 798,317 ------------ UNITED KINGDOM -- 15.5% 2,484,540 Aggregate Industries Plc 2,758,946 175,000 Alliance & Leicester Plc 2,136,229 261,800 Alliance Unichem Plc 1,618,518 643,173 Anglo Irish Bank Corp 4,305,513 674,400 Balfour Beatty Plc 1,696,940 549,800 Bodycote International Plc 675,472 348,600 BPB Plc 1,444,080 500,000 Brambles Industries Plc 1,185,263 839,100 Carphone Warehouse Group Plc* 700,483 402,711 Cattle's Plc 1,690,436 130,000 Computacenter Plc 552,860 260,000 Cookson Group Plc* 70,643 463,424 Crest Nicholson 1,591,267 696,493 FKI Plc 696,624
8 See accompanying notes to the financial statements. GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ UNITED KINGDOM -- CONTINUED 2,207,600 Fyffes Plc 3,033,849 500,000 Galen Holdings Plc 2,677,670 465,000 Hays Plc 527,343 127,400 Imperial Tobacco Group Plc 1,987,614 311,700 Jarvis Plc 1,234,761 850,000 John Wood Group Plc 2,108,665 245,000 Kelda Group Plc 1,582,188 1,540,000 Kidde Plc 1,388,687 362,344 Kier Group Plc 2,611,081 205,000 Kingston Communications Plc* 145,303 60,376 Lonmin Plc 785,036 712,200 Matalan Plc 2,423,058 209,800 Mothercare Plc 315,585 220,300 Northern Rock Plc 2,338,743 866,436 Novar Plc 1,569,432 124,031 Pennon Group Plc 1,303,059 1,050,000 PHS Group Plc 1,141,160 220,000 Premier Farnell Plc 511,120 135,000 Provident Financial Plc 1,221,608 405,000 Rank Group Plc 1,489,533 423,700 Rexam Plc 2,153,936 750,000 RM Plc 1,139,979 629,300 Smith (David S.) Holdings Plc 1,486,816 230,000 Smith (WH) Group Plc 956,401 689,300 Somerfield Plc 857,716 305,000 SSL International Plc 992,037 288,600 Tate & Lyle 1,262,579 550,300 Tomkins Plc 1,629,542 110,000 Travis Perkins Plc 1,665,905 195,000 Trinity Mirror Plc 1,222,435 780,000 TT Electronics 1,050,434 230,700 Ultra Electronics Holdings 1,607,937 315,000 Viridian Group Plc 2,527,917 488,100 Westbury Plc 2,433,272 165,100 William Hill Plc 525,949 167,800 Wolseley 1,324,152 ------------ 74,355,776 ------------ TOTAL COMMON STOCKS (COST $459,190,334) 426,707,531 ------------
See accompanying notes to the financial statements. 9 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ PREFERRED STOCKS -- 1.4% AUSTRALIA -- 0.1% 1,150,000 Village Roadshow Ltd 19.08% 467,578 ------------ FRANCE -- 0.1% 6,800 Casino Guichard Perrachon SA 3.74% 314,123 ------------ GERMANY -- 1.1% 316,007 Dyckerhoff AG (Non Voting) 11.72% 1,515,636 15,686 Koegel Fahrzeugwerke AG* 43,956 57,826 Rheinmetall AG (Non Voting) 3.92% 623,248 10,000 Rheinmetall AG 2.51% 141,192 10,000 Villeroy & Boch AG (Non Voting) 5.78% 86,224 100,000 Volkswagen AG 5.30% 2,931,616 ------------ 5,341,872 ------------ ITALY -- 0.0% 10,000 IFI Istituto Finanziario Industries 4.82% 86,224 ------------ NEW ZEALAND -- 0.1% 915,787 Fletcher Challenge Forests Ltd* 525,019 ------------ TOTAL PREFERRED STOCKS (COST $8,492,244) 6,734,816 ------------ RIGHTS AND WARRANTS -- 0.0% SINGAPORE -- 0.0% 60,000 United Overseas Land Warrants, Expires 6/12/04* 15,870 ------------ TOTAL RIGHTS AND WARRANTS (COST $18,235) 15,870 ------------
See accompanying notes to the financial statements. 10 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ SHORT-TERM INVESTMENTS -- 4.0% CASH EQUIVALENTS -- 4.0% $ 19,000,000 Bank of Scotland Time Deposit, 1.31%, due 3/03/03 19,000,000 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $19,000,000) 19,000,000 ------------ TOTAL INVESTMENTS -- 94.6% (Cost $486,700,813) 452,458,217 Other Assets and Liabilities (net) -- 5.4% 25,599,194 ------------ TOTAL NET ASSETS -- 100.0% $478,057,411 ============ NOTES TO SCHEDULE OF INVESTMENTS:
144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. ADR - American Depositary Receipt GDR - Global Depository Receipt NVDR - Non-Voting Depository Receipt REIT - Real Estate Investment Trust SDR - Swedish Depository Receipt * Non-income producing security. + Direct placement securities are restricted as to resale. They have been valued at fair value by the Trustees after consideration of restricitions as to resale, financial condition and prospects of the issuer, general market conditions, and pertinent information in accordance with the Fund's Prospectus and the Investment Company Act of 1940, as amended. The Fund has limited rights to registration under the Securities Act of 1933 with respect to those restricted securities. See accompanying notes to the financial statements. 11 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003 Additional information on each restricted security is as follows:
MARKET VALUE AS A MARKET PERCENTAGE VALUE AS OF ACQUISITION ACQUISITION OF FUND'S FEBRUARY 28, ISSUER, DESCRIPTION DATE COST NET ASSETS 2003 ------------------------------------------------------------------------ Lihir Gold Ltd ADR 7/03/00 $47,302 0.02% $102,000
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). 12 See accompanying notes to the financial statements. GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY (SHOWING PERCENTAGE OF EQUITY INVESTMENTS) FEBRUARY 28, 2003 (UNAUDITED) At February 28, 2003, industry sector diversification of the Fund's equity investments was as follows:
INDUSTRY SECTOR - -------------------------------------------------------------------- Industrials 19.2% Consumer Discretionary 17.8 Financials 17.4 Materials 16.2 Consumer Staples 9.6 Information Technology 6.1 Health Care 5.5 Energy 4.1 Utilities 3.2 Telecommunication Services 0.9 ----- 100.0% =====
See accompanying notes to the financial statements. 13 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $486,700,813) (Note 1) $452,458,217 Cash 20,772 Foreign currency, at value (cost $17,410,082) (Note 1) 17,416,886 Receivable for investments sold 2,451,630 Receivable for Fund shares sold 9,400,000 Dividends and interest receivable 709,990 Foreign taxes receivable 101,070 Receivable for expenses reimbursed by Manager (Note 2) 57,372 ------------ Total assets 482,615,937 ------------ LIABILITIES: Payable for investments purchased 4,143,597 Payable to affiliate for (Note 2): Management fee 263,617 Shareholder service fee 47,939 Accrued expenses 103,373 ------------ Total liabilities 4,558,526 ------------ NET ASSETS $478,057,411 ============ NET ASSETS CONSIST OF: Paid-in capital $520,604,847 Accumulated undistributed net investment income 1,430,051 Accumulated net realized loss (9,728,109) Net unrealized depreciation (34,249,378) ------------ $478,057,411 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $275,738,628 ============ Class IV shares $202,318,783 ============ SHARES OUTSTANDING: Class III 30,195,478 ============ Class IV 22,152,446 ============ NET ASSET VALUE PER SHARE: Class III $ 9.13 ============ Class IV $ 9.13 ============
14 See accompanying notes to the financial statements. GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $878,800) $ 7,400,527 Interest 764,164 ------------ Total income 8,164,691 ------------ EXPENSES: Management fee (Note 2) 2,538,475 Custodian fees 391,788 Audit fees 43,669 Legal fees 41,849 Transfer agent fees 38,419 Registration fees 9,739 Trustees fees and related expenses (Note 2) 9,379 Miscellaneous 4,021 Fees reimbursed by Manager (Note 2) (528,868) ------------ 2,548,471 Shareholder service fee (Note 2) -- Class III 338,464 Shareholder service fee (Note 2) -- Class IV 136,998 ------------ Net expenses 3,023,933 ------------ Net investment income 5,140,758 ------------ REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (8,424,533) Foreign currency, forward contracts and foreign currency related transactions 2,255,154 ------------ Net realized loss (6,169,379) ------------ Change in net unrealized appreciation (depreciation) on: Investments (39,120,474) Foreign currency, forward contracts and foreign currency related transactions 43,465 ------------ Net unrealized loss (39,077,009) ------------ Net realized and unrealized loss (45,246,388) ------------ NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(40,105,630) ============
See accompanying notes to the financial statements. 15 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 5,140,758 $ 1,412,935 Net realized gain (loss) (6,169,379) 135,673 Change in net unrealized appreciation (depreciation) (39,077,009) 3,585,081 ------------ ------------ Net increase (decrease) in net assets from operations (40,105,630) 5,133,689 ------------ ------------ Distributions to shareholders from: Net investment income Class III (2,916,437) (2,447,282) Class IV (2,632,475) -- ------------ ------------ Total distributions from net investment income (5,548,912) (2,447,282) ------------ ------------ Net share transactions (Note 5): Class III 143,772,651 85,636,249 Class IV 230,373,020 -- ------------ ------------ Increase in net assets resulting from net share transactions 374,145,671 85,636,249 ------------ ------------ Total increase in net assets 328,491,129 88,322,656 NET ASSETS: Beginning of period 149,566,282 61,243,626 ------------ ------------ End of period (including accumulated undistributed net investment income of $1,430,051 and distributions in excess of net investment income of $396,068, respectively) $478,057,411 $149,566,282 ============ ============
16 See accompanying notes to the financial statements. GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28, ------------------------------------ 2003 2002 2001 -------- -------- -------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.59 $ 9.68 $ 10.00+ -------- -------- ------- Income from investment operations: Net investment income 0.16(e) 0.15 0.06 Net realized and unrealized gain (loss)(b) (0.51) 0.00(c) (0.33) -------- -------- ------- Total from investment operations (0.35) 0.15 (0.27) -------- -------- ------- Less distributions to shareholders: From net investment income (0.11) (0.24) (0.05) -------- -------- ------- Total distributions (0.11) (0.24) (0.05) -------- -------- ------- NET ASSET VALUE, END OF PERIOD $ 9.13 $ 9.59 $ 9.68 ======== ======== ======= TOTAL RETURN(a) (3.64)% 1.59% (2.64)%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $275,739 $149,566 $61,244 Net expenses to average daily net assets 0.85% 0.86%(d) 0.85%* Net investment income to average daily net assets 1.59% 1.48% 1.08%* Portfolio turnover rate 24% 17% 16% Fees and expenses reimbursed by the Manager to average daily net assets: 0.15% 0.26% 0.43%*
+ Period from June 30, 2000 (commencement of operations) to February 28, 2001. * Annualized. ** Not annualized. (a) Total return would have been lower had certain expenses not been reimbursed during the period shown. (b) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain (loss) on investments due to the timing of purchases and redemptions of Fund shares in relation to fluctuating market values of the investments of the Fund. (c) Net realized and unrealized loss was less than $0.01 per share (d) Includes transfer taxes not reimbursed by the Manager, which approximate .01% of average daily net assets. (e) Computed using average shares outstanding throughout the period. See accompanying notes to the financial statements. 17 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
THE PERIOD FROM JUNE 14, 2002 (COMMENCEMENT OF OPERATIONS) THROUGH FEBRUARY 28, 2003 ---------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.60 -------- Income from investment operations: Net investment income 0.08(b) Net realized and unrealized loss (1.43) -------- Total from investment operations (1.35) -------- Less distributions to shareholders: From net investment income (0.12) -------- Total distributions (0.12) -------- NET ASSET VALUE, END OF PERIOD $ 9.13 ======== TOTAL RETURN(a) (12.76)%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $202,319 Net expenses to average daily net assets 0.80%* Net investment income to average daily net assets 1.13%* Portfolio turnover rate 24% Fees and expenses reimbursed by the Manager to average daily net assets: 0.14%*
* Annualized. ** Not annualized. (a) Total return would have been lower had certain expenses not been reimbursed during the period shown. (b) Computed using average shares outstanding throughout the period. 18 See accompanying notes to the financial statements. GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Foreign Small Companies Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in a diversified portfolio of equity securities of non-U.S. issuers. The Fund's benchmark is the Salomon Smith Barney EMI World Ex-U.S. Index. Throughout the year ended February 28, 2003, the Fund had one class of shares outstanding: Class III. Effective June 14, 2002, the Fund also had Class IV shares outstanding. The principal economic difference between the classes of shares is the level of shareholder service fees borne by the classes. Eligibility for and automatic conversion between the classes of shares is generally based on the total amount of assets invested in a particular fund or with GMO, as more fully outlined in the Trust's prospectus. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Shares of investment trusts and other Funds of the Trust are valued at their net asset value as reported on each business day. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or 19 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in foreign currency values that are unfavorable to the Fund. There were no forward foreign currency contracts outstanding as of February 28, 2003. FUTURES CONTRACTS The Fund may purchase and sell futures contracts to manage its exposure to the financial markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. 20 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of February 28, 2003, there were no outstanding futures contracts. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 28, 2003, there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future, security or currency transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. At February 28, 2003, there were no open purchased option contracts. 21 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the financial markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. At February 28, 2003, there were no open swap agreements. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the 22 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- investment of the collateral, the risk of delay in recovery or loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 2003, the Fund had no securities on loan. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryover for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country's tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. Income dividends and capital gain distrbutions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003, the tax basis of distributions paid were as follows: ordinary income -- $2,447,282 and $5,548,912, respectively. As of February 28, 2003, the components of distributable earnings on a tax basis consisted of $2,316,048 of undistributed ordinary income. The temporary differences between book and tax basis distributable earnings are primarily due to passive foreign investment company transactions. At February 28, 2003, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code of $506,847, $777,168 and $2,715,721 expiring in 2009, 2010 and 2011, respectively. The Fund has elected to defer to March 1, 2003 post-October capital losses of $5,516,486. 23 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to foreign currency transactions. The financial highlights exclude these adjustments.
Accumulated Undistributed Net Accumulated Net Investment Income Realized Loss ----------------- --------------- $2,234,273 $(2,234,273)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and discounts. Non cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. ALLOCATION OF OPERATING ACTIVITY The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro-rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class' operations. INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. 24 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .70% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .15% for Class III shares and .10% for Class IV shares. GMO has entered into a binding agreement effective until at least June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent Trustees of the Trust (including legal fees), 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) exceed the management fee. The Fund's portion of the fee paid by the Trust to the independent Trustees during the year ended February 28, 2003, was $6,929. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2003 aggregated $416,643,042 and $80,485,774, respectively. At February 28, 2003 the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $487,783,373 $25,516,131 $(60,841,287) $(35,325,156)
4. PRINCIPAL SHAREHOLDERS At February 28, 2003, 46.3% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the outstanding shares of the Fund. Investment activities of these shareholders may have a material effect on the Fund. 25 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 ------------------------- ----------------------- Shares Amount Shares Amount Class III: ----------- ------------ ---------- ----------- Shares sold 17,915,318 $176,979,293 9,093,131 $84,040,770 Shares issued to shareholders in reinvestment of distributions 260,420 2,437,533 173,775 1,595,479 Shares repurchased (3,571,567) (35,644,175) -- -- ----------- ------------ ---------- ----------- Net increase 14,604,171 $143,772,651 9,266,906 $85,636,249 =========== ============ ========== ===========
Period from June 14, 2002 (commencement of operations) through February 28, 2003 -------------------------- Shares Amount Class IV: ----------- ------------- Shares sold 21,937,294 $228,359,202 Shares issued to shareholders in reinvestment of distributions 215,152 2,013,818 Shares repurchased -- -- ---------- ------------ Net increase 22,152,446 $230,373,020 ========== ============
26 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO FOREIGN SMALL COMPANIES FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Foreign Small Companies Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 27 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- During the year ended February 28, 2003, the Fund paid foreign taxes of $878,800 and recognized foreign source income of $8,279,327. 28 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 29 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the from February Boston, MA 02110 Trust 2002 - October Age: 64 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 30 PRINCIPAL OFFICERS:
Name, Address, Position(s) Term of Office(4) and Length Principal Occupation(s) and Age Held with Fund of Time Served During Past Five Years ------------------------- ------------------------------ ------------------------------ ------------------------------ Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief 40 Rowes Wharf Vice President from August Operating Officer (2000 - Boston, MA 02110 1998 - October 2002. present) and Member, Grantham, Age: 47 Mayo, Van Otterloo & Co. LLC. Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC. 40 Rowes Wharf February 1998. Boston, MA 02110 Age: 45 Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator, c/o GMO Trust Trust Grantham, Mayo, Van 40 Rowes Wharf Otterloo & Co. LLC. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer 40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003) Boston, MA 02110 and Member, Grantham, Mayo, Age: 37 Van Otterloo & Co. LLC. Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel, c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van 40 Rowes Wharf 2001. Otterloo & Co. LLC (June Boston, MA 02110 1999 - present); Associate/ Age: 58 Junior Partner, Hale and Dorr LLP (1991 - 1999). Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering c/o GMO Trust Laundering Compliance Officer Reporting Officer (February 40 Rowes Wharf 2003 - present) and Compliance Boston, MA 02110 Officer, Grantham, Mayo, Van Age: 32 Otterloo & Co. LLC.
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 31 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGEMENT Day-to-day management of the Fund's portfolio is the responsibility of the Asset Allocation Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the Global (U.S.+) Equity Allocation Fund returned - -10.8% for the fiscal year ended February 28, 2003. During the period, the Fund's benchmark, the GMO Global Equity Index (75% S&P 500/25% MSCI ACWI [All Country World Index] Free ex-US), returned -21.1%. During the fiscal year, both asset allocation and portfolio implementation added substantially to performance. Relative to the benchmark, the Fund was underweight in U.S. stocks by 22% and overweight international stocks (including emerging) by 14%. Within U.S. stocks, the portfolio was tilted towards the most attractively valued sectors including small cap value stocks and REITs, where we were overweight 7% and 9%, respectively. Both allocations added to performance, as small cap value and REITs outperformed the S&P 500 by 6.1% and 23.5%, respectively. Within international stocks, the portfolio was tilted towards the small cap sector, which continued to offer the greatest value by outperforming the MSCI EAFE index by 7.1%. The value bias of the GMO International Intrinsic Value Fund and the GMO U.S. Core Fund ensured their performance was again strong in a down market. International Intrinsic Value outperformed its SSB PMI EPAC Value benchmark by 11.3%, while U.S. Core outperformed the S&P 500 Index by 1.1%. Strong implementation within emerging market equities added 2.5% relative to the IFC Composite benchmark. The GMO Small Cap Value Fund and the GMO Real Estate Fund underperformed their benchmarks by 2.0% and 3.0%, respectively. The Fund's 8% overweight to fixed income was allocated to inflation indexed bonds, international fixed income, and to emerging bonds. While the last outperformed its benchmark by a strong 3.8%, the other bond funds underperformed due largely to exposure to certain asset-backed securities, which defaulted during the period. OUTLOOK With U.S. equities remaining stubbornly overpriced relative to economic fundamentals we continue to maintain a sizeable underweight to the S&P 500. However, many of the Fund's bets now differ substantially from those of a year ago. We have decreased our position in REITs in the face of increased risk and somewhat less attractive valuations. A modest allocation to large developed international equities, both value and growth, reflects our view that the asset class is fairly valued. With help from a depreciating dollar, this and overweights to the still cheap sectors of international small and emerging markets are expected to add value. With yields at near record lows, the Fund now has a relatively neutral weight in fixed income. Within fixed income we favor the short end of the curve and the still attractively priced emerging country debt asset class. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND CLASS III SHARES AND THE S&P 500 INDEX (75%)/MSCI ALL COUNTRY WORLD FREE EX-U.S. INDEX (25%) AS OF FEBRUARY 28, 2003 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND GMO GLOBAL EQUITY INDEX* S&P 500 INDEX Nov 26, 96 $10,000 $10,000 $10,000 Dec 31, 96 $10,070 $9,820 $9,818 Mar 31, 97 $10,233 $10,018 $10,081 Jun 30, 97 $11,447 $11,656 $11,841 Sep 30, 97 $12,471 $12,281 $12,728 Dec 31, 97 $12,074 $12,272 $13,093 Mar 31, 98 $13,380 $13,976 $14,920 Jun 30, 98 $12,953 $14,270 $15,412 Sep 30, 98 $11,201 $12,671 $13,879 Dec 31, 98 $12,794 $15,343 $16,835 Mar 31, 99 $12,865 $16,009 $17,674 Jun 30, 99 $14,425 $17,043 $18,920 Sep 30, 99 $13,694 $16,381 $17,738 Dec 31, 99 $15,261 $18,955 $20,377 Mar 31, 2000 $15,714 $19,327 $20,845 Jun 30, 2000 $15,433 $18,746 $20,291 Sep 30, 2000 $15,813 $18,224 $20,094 Dec 31, 2000 $15,833 $16,958 $18,522 Mar 31, 2001 $15,178 $14,892 $16,326 Jun 30, 2001 $16,081 $15,531 $17,282 Sep 30, 2001 $14,531 $13,249 $14,745 Dec 31, 2001 $15,716 $14,606 $16,321 Mar 31, 2002 $16,712 $14,696 $16,366 Jun 30, 2002 $16,159 $13,106 $14,173 Sep 30, 2002 $13,848 $10,774 $11,725 Dec 31, 2002 $14,736 $11,642 $12,714 Feb 28, 2003 $14,243 $11,125 $12,195
AVERAGE ANNUAL TOTAL RETURN SINCE INCEPTION 1 YEAR 5 YEAR 11/26/96 Class III -10.84% 2.15% 5.81%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. * The GMO Global Equity Index is a composite benchmark computed by GMO and comprised 75% by S&P 500 and 25% by MSCI AC World Free ex-U.S. Index. GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ MUTUAL FUNDS -- 100.0% 380,914 GMO Currency Hedged International Equity Fund, Class III 2,110,264 244,077 GMO Emerging Countries Fund, Class III 2,084,414 299,592 GMO Emerging Country Debt Fund, Class III 2,852,115 934,223 GMO Emerging Markets Fund, Class III 8,239,843 5,829 GMO Growth Fund, Class III 83,290 62,667 GMO Inflation Indexed Bond Fund, Class III 734,460 124,381 GMO Value Fund, Class III 837,084 100,779 GMO Global Hedged Equity Fund, Class III 970,501 16,162 GMO Short-Term Income Fund, Class III 140,287 369,781 GMO International Growth Fund, Class III 6,223,412 633,689 GMO International Intrinsic Value Fund, Class III 10,221,407 638,948 GMO International Small Companies Fund, Class III 6,070,007 310,649 GMO Real Estate Fund, Class III 3,258,711 397,213 GMO Small Cap Value Fund, Class III 3,896,664 3,207,342 GMO U.S. Core Fund, Class III 32,009,271 ------------------ TOTAL MUTUAL FUNDS (COST $91,358,115) 79,731,730 ------------------ PRIVATE INVESTMENT FUND -- 0.0% 175 GMO SPV I, LLC*(a) 2,808 ------------------ TOTAL PRIVATE INVESTMENT FUND (COST $3,505) 2,808 ------------------ SHORT-TERM INVESTMENTS -- 0.0% REPURCHASE AGREEMENT -- 0.0% $ 9,419 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/28/03, due 3/03/03, with a maturity value of $9,420 and an effective yield of .36%, collateralized by a U.S. Treasury Bond with a rate of 3.625%, maturity date of 3/31/04, and a market value, including accured interest of $10,135. 9,419 ------------------ TOTAL SHORT-TERM INVESTMENTS (COST $9,419) 9,419 ------------------ TOTAL INVESTMENTS -- 100.0% (Cost $91,371,039) 79,743,957 Other Assets and Liabilities (net) -- (0.0%) (7,679) ------------------ TOTAL NET ASSETS -- 100.0% $ 79,736,278 ================== NOTES TO THE SCHEDULE OF INVESTMENTS:
* Non-income producing security. (a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1).
See accompanying notes to the financial statements. 1 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $91,371,039) (Note 1) $ 79,743,957 Receivable for expenses reimbursed by Manager (Note 2) 6,468 ---------------- Total assets 79,750,425 ---------------- LIABILITIES: Accrued expenses 14,147 ---------------- Total liabilities 14,147 ---------------- NET ASSETS $ 79,736,278 ================ NET ASSETS CONSIST OF: Paid-in capital $ 93,329,002 Accumulated undistributed net investment income 526,755 Accumulated net realized loss (2,492,397) Net unrealized depreciation (11,627,082) ---------------- $ 79,736,278 ================ NET ASSETS ATTRIBUTABLE TO: Class III shares $ 79,736,278 ================ SHARES OUTSTANDING: Class III 10,617,012 ================ NET ASSET VALUE PER SHARE: Class III $ 7.51 ================
2 See accompanying notes to the financial statements. GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from investment company shares $ 1,633,794 Interest 1,579 ---------------- Total income 1,635,373 ---------------- EXPENSES: Audit fees 16,799 Custodian and transfer agent fees 9,620 Registration fees 5,046 Legal fees 2,504 Trustees fees and related expenses (Note 2) 1,953 Miscellaneous 1,099 Fees reimbursed by Manager (Note 2) (34,895) ---------------- 2,126 ---------------- Net expenses 2,126 ---------------- Net investment income 1,633,247 ---------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (767,874) Realized gains distributions from investment company shares 724,648 ---------------- Net realized loss on investments (43,226) ---------------- Change in net unrealized appreciation (depreciation) on investments (6,859,717) ---------------- Net realized and unrealized loss (6,902,943) ---------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (5,269,696) ================
See accompanying notes to the financial statements. 3 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 1,633,247 $ 1,132,202 Net realized loss (43,226) (1,055,568) Change in net unrealized appreciation (depreciation) (6,859,717) 334,258 ----------- ----------- Net increase (decrease) in net assets from operations (5,269,696) 410,892 ----------- ----------- Distributions to shareholders from: Net investment income Class III (1,700,368) (647,084) ----------- ----------- Total distributions from net investment income (1,700,368) (647,084) ----------- ----------- Net realized gains Class III -- (1,066,948) ----------- ----------- Total distributions from net realized gains -- (1,066,948) ----------- ----------- (1,700,368) (1,714,032) ----------- ----------- Net share transactions (Note 5): Class III 46,581,994 (1,348,291) ----------- ----------- Increase (decrease) in net assets resulting from net share transactions 46,581,994 (1,348,291) ----------- ----------- Total increase (decrease) in net assets 39,611,930 (2,651,431) NET ASSETS: Beginning of period 40,124,348 42,775,779 ----------- ----------- End of period (including accumulated undistributed net investment income of $526,755 and $551,020, respectively) $79,736,278 $40,124,348 =========== ===========
4 See accompanying notes to the financial statements. GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------------------------------------------ 2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- NET ASSET VALUE, BEGINNING OF PERIOD $ 8.66 $ 8.92 $ 9.49 $ 8.85 $ 10.48 ------- ------- ------- ------- ------- Income from investment operations: Net investment income(a) 0.15 0.23 0.24 0.25 0.16+ Net realized and unrealized gain (loss) (1.07) (0.14) 0.39 1.45 (0.40) ------- ------- ------- ------- ------- Total from investment operations (0.92) 0.09 0.63 1.70 (0.24) ------- ------- ------- ------- ------- Less distributions to shareholders: From net investment income (0.23) (0.13) (0.51) (0.43) (0.56) From net realized gains -- (0.22) (0.69) (0.63) (0.83) ------- ------- ------- ------- ------- Total distributions (0.23) (0.35) (1.20) (1.06) (1.39) ------- ------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 7.51 $ 8.66 $ 8.92 $ 9.49 $ 8.85 ======= ======= ======= ======= ======= TOTAL RETURN(b) (10.84)% 1.12% 6.57% 19.14% (2.84)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $79,736 $40,124 $42,776 $36,669 $32,474 Net expenses to average daily net assets(c) 0.00%(d) 0.00%(d) 0.00% 0.00% 0.00% Net investment income to average daily net assets(a) 3.06% 2.73% 2.56% 2.63% 1.64% Portfolio turnover rate 30% 13% 19% 18% 34% Fees and expenses reimbursed by the Manager to average daily net assets: 0.07% 0.07% 0.07% 0.09% 0.07%
(a) Recognition of net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the fund invests. (b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (c) Net expenses exclude expenses incurred indirectly through investment in underlying funds. (See Note 2.) (d) Net expenses to average daily net assets was less than 0.01%. + Computed using average shares outstanding throughout the period. See accompanying notes to the financial statements. 5 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Global (U.S.+) Equity Allocation Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund operates as a "fund-of-funds" in that, pursuant to management provided by the Manager, it makes investments in other funds of the Trust ("underlying funds"). The Fund seeks total return greater than that of the GMO Global Equity Index, a benchmark developed by the Manager, through investment to varying extents in underlying funds of the Trust. The Fund will pursue its objective by investing in Class III shares of domestic equity, international equity, and fixed income funds of the Trust. The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Shares of underlying funds are valued at their net asset value as reported on each business day. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost, which approximates fair value. Securities for which quotations are not readily available, or whose values the Manager has determined to be unreliable, are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. Securities may be valued by independent pricing services which use prices provided by market makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. 6 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- Certain investments in securities held by the underlying funds were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country's tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003, the tax basis of distributions paid was as follows: ordinary income -- $657,627 and $1,700,368 and long-term capital gains -- $1,056,405 and $0, respectively. For the year ended February 28, 2003, the components of distributable earnings on a tax basis consisted of $526,752 of undistributed ordinary income and $272,878 of undistributed long-term capital gains. These temporary differences between book and tax basis distributable earnings are primarily due to wash sale transactions. 7 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus U.S. GAAP. The financial highlights exclude these adjustments.
Accumulated Accumulated Undistributed Net Net Investment Income Realized Loss ----------------- ------------- $42,856 $(42,856)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Income dividends and capital gain distributions from underlying funds are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund will also incur certain fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have varied expense and fee levels and the Fund may own different proportions of underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary. INVESTMENT RISK The Fund is subject to the investment risk associated with an investment in the underlying funds, some of which may invest in foreign securities. There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even 8 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. Additionally, the investment risk associated with an investment in the underlying funds may be more pronounced to the extent that the underlying funds engage in derivative transactions. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES The Manager determines the allocation of the assets of the Fund among designated underlying funds. The Manager does not directly charge an advisory fee or shareholder service fee, but receives advisory and shareholder service fees from the underlying funds in which the Fund invests. GMO has entered into a binding agreement, effective until at least June 30, 2003, to reimburse the Fund for its total annual direct operating expenses (excluding fees and expenses of the independent Trustees of the Trust (including legal fees), 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). The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2003, shareholder service fees incurred indirectly by the Fund were 0.15% of the Fund's average daily net assets, indirect operating expenses (excluding shareholder service fees and investment-related expenses) were 0.501% of the Fund's average daily net assets, and indirect investment-related expenses (including, but not limited to, interest expense, foreign audit expense, and investment-related legal expense) were 0.009% of the Fund's average daily net assets. The Fund's portion of the fee paid by the Trust to the independent Trustees during the year ended February 28, 2003 was $1,630. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2003, aggregated $63,267,663 and $16,030,221, respectively. At February 28, 2003, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $94,136,314 $204,243 $(14,596,600) $(14,392,357)
9 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 4. PRINCIPAL SHAREHOLDERS At February 28, 2003, 80.5% of the outstanding shares of the Fund were held by four shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 ------------------------ ----------------------- Shares Amount Shares Amount Class III: --------- ----------- -------- ----------- Shares sold 6,144,908 $47,976,365 40,603 $ 350,000 Shares issued to shareholders in reinvestment of distributions 63,094 494,347 132,919 1,152,336 Shares repurchased (226,927) (1,888,718) (330,893) (2,850,627) --------- ----------- -------- ----------- Net increase (decrease) 5,981,075 $46,581,994 (157,371) $(1,348,291) ========= =========== ======== ===========
10 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly in all material respects, the financial position of GMO Global (U.S.+) Equity Allocation Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 11 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 12 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- ------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since Member, Grantham, Mayo, 39 None c/o GMO Trust Board of September Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the 1985. Boston, MA 02110 Trust President Age: 64 from February 2002 - October 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 13 PRINCIPAL OFFICERS:
Term of Office(4) Principal Occupation(s) Name, Address, Position(s) and Length of During Past and Age Held with Fund Time Served Five Years ------------------------- ------------------------------ ------------------------------ ------------------------------ Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief 40 Rowes Wharf Vice President from August Operating Officer (2000 - Boston, MA 02110 1998 - October 2002. present) and Member, Grantham, Age: 47 Mayo, Van Otterloo & Co. LLC. Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC. 40 Rowes Wharf February 1998. Boston, MA 02110 Age: 45 Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator, c/o GMO Trust Trust Grantham, Mayo, Van 40 Rowes Wharf Otterloo & Co. LLC. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer 40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003) Boston, MA 02110 and Member, Grantham, Mayo, Age: 37 Van Otterloo & Co. LLC. Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel, c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van 40 Rowes Wharf 2001. Otterloo & Co. LLC (June Boston, MA 02110 1999 - present); Associate/ Age: 58 Junior Partner, Hale and Dorr LLP (1991 - 1999). Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering c/o GMO Trust Laundering Compliance Officer Reporting Officer (February 40 Rowes Wharf 2003 - present) and Compliance Boston, MA 02110 Officer, Grantham, Mayo, Van Age: 32 Otterloo & Co. LLC.
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 14 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGEMENT Day-to-day management of the Fund's portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Global Bond Fund returned +17.8% for the fiscal year ended February 28, 2003, compared to +24.0% for the J.P. Morgan Global Government Bond Index. The Fund's exposure to various issues is achieved directly and indirectly through its investment in the GMO Emerging Country Debt Fund, the GMO Alpha LIBOR Fund (ALF), and the GMO Short-Duration Collateral Fund. The Fund underperformed the benchmark during the fiscal year by 6.2%. Bond market, emerging debt, and currency selection added value during the fiscal year, while issue selection underperformed. Issue selection dramatically hurt performance in late 2002. Credit related spread widening in the assets underlying the Fund's investment in ALF and the default of certain healthcare receivable asset-backed bonds held by ALF, which were allegedly involved in a massive fraud, contributed to the underperformance. National Century Financial Enterprises, the sponsor of $3.35 billion of health care asset-backed receivables allegedly violated the terms of the bonds' indentures by, among other things, spending cash collateral, accepting collateral other than permitted receivables, moving receivables between trusts to meet compliance tests, and reimbursing healthcare providers for more than the value of receivables purchased. National Century, its affiliated operations, the trusts, and many healthcare providers have declared bankruptcy. This event had a negative effect on the net asset value of ALF, and an indirect effect on GMO Global Bond Fund of -7.1% (through February 28, 2003). Overweight positions in Euro-member country bonds and the U.S. bond market as well as an underweight position in Japanese government bonds added value during the period. In addition, an underweight position in the U.S. dollar and overweight positions in the Australian dollar and Swedish krona generated significant gains. OUTLOOK The Fund is structured to benefit from outperformance in the Canadian, Euro-member country, Swedish, U.S., and emerging bond markets. We expect the Australian, Danish, Japanese, and Swiss bond markets to underperform. Strong relative performance is expected from Canadian dollars, Swedish krona, Swiss francs, and British gilt markets. The Danish krona, euro, Japanese yen, and Australian and U.S. dollars are expected to underperform. At the end of the period, 3.5% of the Fund was invested in the GMO Emerging Country Debt Fund. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO GLOBAL BOND FUND CLASS III SHARES AND THE J.P. MORGAN GLOBAL GOVERNMENT BOND INDEX AS OF FEBRUARY 28, 2003 GMO GLOBAL BOND FUND J.P. MORGAN GLOBAL GOV'T. BOND INDEX 12/28/95 $10,000 $10,000 12/31/95 $10,000 $10,002 3/31/96 $9,830 $9,827 6/30/96 $10,270 $9,886 9/30/96 $10,766 $10,166 12/31/96 $11,307 $10,442 3/31/97 $10,936 $10,034 6/30/97 $11,351 $10,329 9/30/97 $11,887 $10,506 12/31/97 $12,027 $10,589 3/31/98 $12,219 $10,693 6/30/98 $12,340 $10,935 9/30/98 $12,978 $11,856 12/31/98 $13,260 $12,210 3/31/99 $12,599 $11,734 6/30/99 $12,193 $11,332 9/30/99 $12,587 $11,778 12/31/99 $12,525 $11,590 3/31/2000 $12,629 $11,633 6/30/2000 $12,577 $11,638 9/30/2000 $12,368 $11,351 12/31/2000 $13,073 $11,861 3/31/2001 $12,681 $11,526 6/30/2001 $12,407 $11,344 9/30/2001 $13,281 $12,153 12/31/2001 $12,992 $11,766 3/31/2002 $12,826 $11,589 6/30/2002 $14,529 $12,902 9/30/2002 $14,931 $13,439 12/31/2002 $14,721 $14,046 2/28/2003 $15,217 $14,434
AVERAGE ANNUAL TOTAL RETURN SINCE INCEPTION 1 YEAR 5 YEAR 12/28/95 Class III 17.76% 4.51% 6.03%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE/ SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 4.3% AUSTRIA -- 1.3% USD 2,500,000 Bank Austria AG, 144A, 7.25%, due 02/15/17 3,043,500 ------------ CANADA -- 0.8% GBP 1,000,000 Province of Quebec, 8.63%, due 11/04/11 2,001,322 ------------ UNITED STATES -- 2.2% U.S. GOVERNMENT -- 2.2% USD 1,075,300 U.S. Treasury Inflation Indexed Note, 4.25%, due 01/15/10 1,271,038 USD 3,309,420 U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09(a) 3,809,970 ------------ 5,081,008 ------------ TOTAL DEBT OBLIGATIONS (COST $9,342,671) 10,125,830 ------------ MUTUAL FUNDS -- 93.5% 867,931 GMO Emerging Country Debt Fund, Class III 8,262,701 1,495,967 GMO Alpha LIBOR Fund 35,484,340 7,071,254 GMO Short-Duration Collateral Fund 176,852,053 ------------ TOTAL MUTUAL FUNDS (COST $222,919,467) 220,599,094 ------------ PRINCIPAL AMOUNT ------------- CALL OPTIONS PURCHASED -- 0.5% CROSS CURRENCY OPTIONS -- 0.5% GBP 15,300,000 GBP Call/JPY Put, Expires 01/23/04, Strike 184.00 637,241 GBP 9,600,000 GBP Call/JPY Put, Expires 04/14/03, Strike 181.00 404,102 USD 8,000,000 JPY Call/USD Put, Expires 07/03/03, Strike 117.30 192,612 ------------ 1,233,955 ------------ TOTAL CALL OPTIONS PURCHASED (COST $1,727,343) 1,233,955 ------------ PUT OPTIONS PURCHASED -- 0.0% CROSS CURRENCY OPTIONS -- 0.0% GBP 17,600,000 GBP Put/USD Call, Expires 06/05/03, Strike 1.428 5,544 ------------ TOTAL PUT OPTIONS PURCHASED (COST $719,242) 5,544 ------------
See accompanying notes to the financial statements. 1 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE ($) DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 0.5% CASH EQUIVALENTS -- 0.5% USD 1,055,717 Merrimac Cash Fund 1,055,717 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $1,055,717) 1,055,717 ------------ TOTAL INVESTMENTS -- 98.8% (Cost $235,764,440) 233,020,140 Other Assets and Liabilities (net) -- 1.2% 2,822,236 ------------ TOTAL NET ASSETS -- 100.0% $235,842,376 ============
NOTES TO SCHEDULE OF INVESTMENTS: - --------------------------------------------------------------------------------------- CURRENCY ABBREVIATIONS: AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc EUR - Euro GBP - British Pound JPY - Japanese Yen SEK - Swedish Krona USD - United States Dollar
(a) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 6). 2 See accompanying notes to the financial statements. GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $235,764,440) (Note 1) $233,020,140 Foreign currency, at value (cost $23,881) (Note 1) 23,600 Interest receivable 713,812 Receivable for open forward foreign currency contracts (Notes 1 and 6) 3,586,706 Receivable for variation margin on open futures contracts (Notes 1 and 6) 290,230 Net receivable for open swap contracts (Notes 1 and 6) 939,070 Receivable for expenses reimbursed by Manager (Note 2) 16,574 ------------ Total assets 238,590,132 ------------ LIABILITIES: Payable to affiliate for (Note 2): Management fee 34,399 Shareholder service fee 27,157 Payable for open forward foreign currency contracts (Notes 1 and 6) 2,642,218 Accrued expenses 43,982 ------------ Total liabilities 2,747,756 ------------ NET ASSETS $235,842,376 ============ NET ASSETS CONSIST OF: Paid-in capital $221,711,850 Distributions in excess of net investment income (899,487) Accumulated net realized gain 15,482,298 Net unrealized depreciation (452,285) ------------ $235,842,376 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $235,842,376 ============ SHARES OUTSTANDING: Class III 25,630,372 ============ NET ASSET VALUE PER SHARE: Class III $ 9.20 ============
See accompanying notes to the financial statements. 3 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from investment company shares $ 2,906,249 Interest (including securities lending income of $1,534) 1,026,440 ----------- Total income 3,932,689 ----------- EXPENSES: Management fee (Note 2) 525,898 Custodian and transfer agent fees 107,845 Audit fees 39,522 Legal fees 18,757 Trustees fees and related expenses (Note 2) 7,254 Registration fees 7,203 Miscellaneous 5,111 Fees reimbursed by Manager (Note 2) (173,297) ----------- 538,293 Indirectly incurred fees waived or borne by Manager (Note 2) (38,880) ----------- 499,413 ----------- Shareholder service fee (Note 2) - Class III 415,182 Shareholder service fee waived (Note 2) - Class III (14,143) ----------- 401,039 ----------- Net expenses 900,452 ----------- Net investment income 3,032,237 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (20,465,947) Realized gains distributions from investment company shares 971,647 Closed futures contracts 9,732,187 Closed swap contracts 6,976,557 Written options 89,267 Foreign currency, forward contracts and foreign currency related transactions 40,425,005 ----------- Net realized gain 37,728,716 ----------- Change in net unrealized appreciation (depreciation) on: Investments (237,563) Open futures contracts 1,364,108 Open swap contracts 790,602 Foreign currency, forward contracts and foreign currency related transactions 4,521,210 ----------- Net unrealized gain 6,438,357 ----------- Net realized and unrealized gain 44,167,073 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $47,199,310 ===========
4 See accompanying notes to the financial statements. GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 3,032,237 $ 14,901,012 Net realized gain (loss) 37,728,716 (6,033,954) Change in net unrealized appreciation (depreciation) 6,438,357 (13,106,609) ------------ ------------ Net increase (decrease) in net assets from operations 47,199,310 (4,239,551) ------------ ------------ Distributions to shareholders from: Net investment income Class III (37,454,172) (10,755,169) ------------ ------------ Total distributions from net investment income (37,454,172) (10,755,169) ------------ ------------ Net realized gains Class III (4,977,299) (5,266,132) ------------ ------------ Total distributions from net realized gains (4,977,299) (5,266,132) ------------ ------------ (42,431,471) (16,021,301) ------------ ------------ Net share transactions (Note 5): Class III (41,999,305) 2,222,393 ------------ ------------ Increase (decrease) in net assets resulting from net share transactions (41,999,305) 2,222,393 ------------ ------------ Total decrease in net assets (37,231,466) (18,038,459) NET ASSETS: Beginning of period 273,073,842 291,112,301 ------------ ------------ End of period (including distributions in excess of net investment income of $899,487 and $2,591,841, respectively) $235,842,376 $273,073,842 ============ ============
See accompanying notes to the financial statements. 5 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------------------------------------------------------- 2003 2002 2001(D) 2000 1999 --------- ---------- ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.33 $ 10.04 $ 9.41 $ 9.87 $ 10.15 --------- --------- --------- --------- --------- Income from investment operations: Net investment income 0.11(a)+ 0.53(a)+ 0.51(a)+ 0.51 0.55 Net realized and unrealized gain (loss) 1.47 (0.66) 0.12 (0.71) (0.25) --------- --------- --------- --------- --------- Total from investment operations 1.58 (0.13) 0.63 (0.20) 0.30 --------- --------- --------- --------- --------- Less distributions to shareholders: From net investment income (1.51) (0.39) -- (0.26) (0.46) From net realized gains (0.20) (0.19) -- -- (0.12) --------- --------- --------- --------- --------- Total distributions (1.71) (0.58) -- (0.26) (0.58) --------- --------- --------- --------- --------- NET ASSET VALUE, END OF PERIOD $ 9.20 $ 9.33 $ 10.04 $ 9.41 $ 9.87 ========= ========= ========= ========= ========= TOTAL RETURN(b) 17.76% (1.34)% 6.70% (2.07)% 2.69% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 235,842 $ 273,074 $ 291,112 $ 182,730 $ 163,210 Net operating expenses to average daily net assets 0.33%(e) 0.32%(e) 0.33%(e) 0.34% 0.34% Interest expense to average daily net assets -- -- -- 0.16%(c) -- Total net expenses to average daily net assets 0.33% 0.32% 0.33% 0.50% 0.34% Net investment income to average daily net assets 1.10%(a) 5.36%(a) 5.34%(a) 5.09% 5.86% Portfolio turnover rate 50% 28% 35% 116% 75% Fees and expenses reimbursed by the Manager to average daily net assets: 0.08% 0.08% 0.08% 0.08% 0.28%
+ Computed using average shares outstanding throughout the period. (a) Net investment income is affected by the timing of the declaration of dividends by other Funds of the Trust in which the Fund invests. (b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (c) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income. (d) Effective March 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium and discount on debt securities. The effect of this change on net investment income and net realized and unrealized gains and losses per share for the year ended February 28, 2001 was less than $0.01 per share. The effect of this change decreased the ratio of net investment income to average net assets from 5.36% to 5.34%. Per share and ratio/supplemental data for periods prior to March 1, 2000 have not been restated to reflect this change. (e) Net expenses exclude expenses incurred indirectly through investment in underlying funds. See Note 2. 6 See accompanying notes to the financial statements. GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Global Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through direct and indirect investment in global bond and currency markets. The Fund's benchmark is the J.P. Morgan Global Government Bond Index. At February 28, 2003, 75.0% of the Fund was invested in the GMO Short-Duration Collateral Fund and 15.0% of the Fund was invested in the GMO Alpha LIBOR Fund, separate funds of GMO Trust managed by GMO. Shares of the GMO Alpha LIBOR Fund and the GMO Short-Duration Collateral Fund are not publicly available for direct purchase. At February 28, 2003, 3.5% of the net assets of the Fund was invested in the GMO Emerging Country Debt Fund, a separate fund of GMO Trust managed by GMO. The financial statements of the GMO Alpha LIBOR Fund, the GMO Short-Duration Collateral Fund and the GMO Emerging Country Debt Fund should be read in conjunction with the Fund's financial statements. The Fund invested a substantial portion of its assets in GMO Alpha LIBOR Fund ("Alpha LIBOR Fund") to obtain the Fund's core portfolio exposure. In November 2002, certain bonds held by Alpha LIBOR Fund ("NPF bonds") defaulted amid allegations of fraud and significant violations of the bonds' indentures. Currently, no market exists for the NPF bonds, and they are being valued at fair value by the trustees of GMO Trust or persons acting at their direction. The devaluation of the NPF bonds had a negative impact on the Fund's net asset value per share. In late November 2002, Alpha LIBOR Fund undertook a reorganization transaction with a new series of GMO Trust, GMO Short-Duration Collateral Fund ("SDCF") and approximately 78% of the Fund's interest in Alpha LIBOR Fund was transferred to SDCF in exchange for SDCF shares. The reorganization was treated as a sale of the Alpha LIBOR Fund shares for financial reporting purposes and a distribution by Alpha LIBOR Fund for tax purposes. Accordingly, for financial reporting purposes, the Fund recognized a loss on the sale of the Alpha LIBOR shares of approximately $18,547,062. In addition, the Fund recognized for tax, but not for financial reporting purposes, ordinary income of $7,989,124 and long-term capital gains of $1,424,936 from Alpha LIBOR Fund. $27,961,122 was added to the tax cost basis of the Fund's holdings of Alpha LIBOR Fund. 7 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Shares of other Funds of the Trust are valued at their net asset value as reported on each business day. Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. Some fixed income securities are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and at its discretion may override a price supplied by a source (by taking a price supplied by another source). Securities may be valued by independent pricing services which use prices provided by market makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. Certain securities held by the Fund, or underlying Funds in which it invests, were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. 8 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in foreign currency values that are unfavorable to the Fund. The value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through forward currency contracts as of February 28, 2003. FUTURES CONTRACTS The Fund may purchase and sell futures contracts to manage its exposure to the financial markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. In 9 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 28, 2003. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 28, 2003, there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future, security or currency transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. See Schedule of Investments for all open purchased option contracts as of February 28, 2003. 10 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager. LOAN AGREEMENTS The Fund may invest in direct debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans from third parties. A loan is often administered by a bank or other financial institution (the "lender") that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the loan agreement and only upon receipt by the lender of payments from the borrower. The Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, the Fund may be subject to the credit risk of both the borrower and the lender that is selling the loan agreement. When the Fund purchases assignments from lenders it acquires direct rights against the borrower on the loan. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the financial markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate, total return, forward swap spread lock and credit default swap agreements to manage its exposure to interest rates and credit risk. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Total return swap agreements involve commitments to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. Forward swap spread lock swap agreements involve commitments to pay or receive a settlement amount calculated as the difference between the swap 11 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- spread and a fixed spread, multiplied by the notional amount times the duration of the swap rate. The swap spread is the difference between the benchmark swap rate (market rate) and the specific treasury rate. In a credit default swap, one party makes a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party on its obligation. The Fund may use credit default swaps to provide a measure of protection against defaults of sovereign or corporate issuers (i.e., to reduce risk where the Fund owns or has exposure to the issuer) or to take an active long or short position with respect to the likelihood of a particular issuer's default. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements are included as part of interest income. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market, and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in interest rates. See Note 6 for a summary of open swap agreements as of February 28, 2003. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. 12 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- REVERSE REPURCHASE AGREEMENTS The Fund may enter into reverse repurchase agreements with certain banks and broker/dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. Government securities or other liquid high grade debt obligations in the name of the counterparty equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities the Fund has sold may decline below the price at which it is obligated to repurchase them under the agreement. For the year ended February 28, 2003, the Fund did not enter into any reverse repurchase agreements. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 2003, the Fund had no securities on loan. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country's tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003 the tax basis of distributions paid was as follows: ordinary income -- $10,755,169 and $37,467,269, respectively, and long-term capital gains -- $5,266,132 and $4,964,202, respectively. 13 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- As of February 28, 2003, the components of distributable earnings on a tax basis consisted of $19,001,248 of undistributed ordinary income. The temporary difference between book and tax basis distributable earnings are primarily due to foreign currency transactions. The Fund elected to defer to March 1, 2003 post-October losses of $3,238,674. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to foreign currency transactions and the GMO Alpha LIBOR Fund transaction (See Note 1). The financial highlights exclude these adjustments.
Distributions In Excess of Net Accumulated Net Investment Income Realized Gain Paid-in Capital ----------------- --------------- --------------- $36,114,289 $(16,027,588) $(20,086,701)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Interest income is recorded on the accrual basis, and is adjusted for the amortization of premiums and of discounts. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date or non-cash dividends, if any, are recorded at the fair market value of the securities received. Interest income on inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities is recorded as interest income. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are 14 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .19% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. The Fund may invest in Class III shares of GMO Emerging Country Debt Fund ("ECDF"). Like the management fee (as described below), the Fund's shareholder service fee will be waived (but not below zero) to the extent of the indirect shareholder service fees paid in connection with the Fund's investment in ECDF. The Fund does not incur any indirect shareholder service fees as a result of the Fund's investment in Alpha LIBOR Fund and SDCF. For the year ended February 28, 2003, shareholder service fees incurred indirectly by the Fund were 0.005% of the Fund's average daily net assets. GMO has entered into a binding agreement effective until at least June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent Trustees of the Trust (including legal fees), 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 ("fund expenses")) and the amount of fees and operating expenses (excluding shareholder service fees (ECDF only) and fund expenses, as defined above) incurred indirectly by the Fund through its investment in the underlying funds (including GMO Alpha LIBOR Fund, GMO Short-Duration Collateral Fund, and ECDF) exceed the management fee. For the year ended February 28, 2003, indirect operating expenses (excluding shareholder service fees (GMO ECDF only) and investment-related expenses) and indirect investment-related expenses (including, but not limited to, interest expense, foreign audit expense, and investment-related legal expense) incurred by the Fund through its investment in underlying funds were 0.018% and 0.029% of the Fund's average daily net assets, respectively. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 28, 2003, was $5,267. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 15 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2003, aggregated $131,349,105 and $156,740,187, respectively. For the year ended February 28, 2003, the cost of purchases and proceeds from sales of investments exclude the initial transfer of GMO Alpha LIBOR Fund's investments in GMO Short-Duration Collateral Fund of $180,351,503. (See Note 1) At February 28, 2003, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $255,924,143 $1,479,924 $(24,383,927) $(22,904,003)
4. PRINCIPAL SHAREHOLDERS At February 28, 2003, 70.6% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 -------------------------- ------------------------ Shares Amount Shares Amount Class III: ----------- ------------- ---------- ------------ Shares sold 6,930,581 $ 62,503,500 1,298,968 $ 12,839,268 Shares issued to shareholders in reinvestment of distributions 4,515,798 39,648,710 1,624,503 15,156,606 Shares repurchased (15,099,456) (144,151,515) (2,644,157) (25,773,481) ----------- ------------- ---------- ------------ Net increase (decrease) (3,653,077) $ (41,999,305) 279,314 $ 2,222,393 =========== ============= ========== ============
16 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 28, 2003 is as follows: FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) ---------- ---------------- ----------------- ------------ -------------- Buys 3/25/03 AUD 64,200,000 $38,885,567 $ 1,107,082 4/01/03 CAD 49,700,000 33,318,571 848,546 3/04/03 CHF 82,700,000 60,988,201 1,266,357 4/29/03 CHF 52,000,000 38,392,640 44,558 4/22/03 EUR 75,000,000 80,697,026 (182,974) 4/15/03 GBP 6,700,000 10,524,533 (255,767) 3/18/03 JPY 9,940,000,000 84,120,031 (324,505) ----------- $ 2,503,297 =========== Sales 3/25/03 AUD 46,700,000 $28,285,918 $ (897,787) 4/01/03 CAD 27,100,000 18,167,672 (390,819) 3/04/03 CHF 82,700,000 60,988,201 (535,494) 4/15/03 GBP 4,500,000 7,068,716 113,360 3/18/03 JPY 3,350,000,000 28,350,312 (54,872) ----------- $(1,765,612) ===========
FORWARD CROSS CURRENCY CONTRACTS
Settlement Net Unrealized Date Deliver/Units of Currency Receive/In Exchange For Appreciation ---------- -------------------------- ------------------------ -------------- 3/11/03 CHF 36,653,400 EUR 25,200,000 $ 119,247 4/08/03 EUR 41,500,000 SEK 381,750,200 87,556 ----------- $ 206,803 ===========
17 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- FUTURES CONTRACTS
Net Unrealized Number of Contract Appreciation Contracts Type Expiration Date Value (Depreciation) --------- ------------------------------------- --------------- ------------- -------------- Buys 149 Canadian Government Bond 10 Yr. June 2003 $10,675,433 $ 14,899 58 Euro BOBL March 2003 7,092,656 166,488 50 Euro BOBL June 2003 6,050,475 (864) 40 Euro Bund March 2003 5,029,877 82,655 198 Euro Bund June 2003 24,670,604 (647) 3 Japanese Government Bond 10 Yr. June 2003 3,630,117 3,865 112 U.S. Long Bond June 2003 12,820,500 189,419 35 U.S. Treasury Note 10 Yr. June 2003 4,038,125 20,228 24 UK Gilt Long Bond June 2003 4,592,992 (5,866) --------- $ 470,177 ========= Sales 29 Australian Government Bond 10 Yr. March 2003 $ 1,887,172 $ (49,710) 57 Australian Government Bond 3 Yr. March 2003 3,607,383 (42,560) 11 Swiss Government Bond March 2003 1,067,308 (36,185) 6 U.S. Treasury Note 5 Yr. June 2003 682,219 (2,285) --------- $(130,740) =========
At February 28, 2003, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. WRITTEN OPTION TRANSACTIONS
Puts Calls ------------------------------ -------------------------------- Principal Amount Principal Amount of Contracts of Contracts (000's omitted) Premiums (000's omitted) Premiums ---------------- ------------ ---------------- -------------- Outstanding, beginning of period -- $ -- -- $ -- Options written -- -- 131,900 5,795,952 Options exercised -- -- (122,100) (5,706,685) Options expired -- -- (9,800) (89,267) ----------- -------- ------------ ----------- Outstanding, end of period -- $ -- -- $ -- =========== ======== ============ ===========
18 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS
Net Unrealized Expiration Appreciation Notional Amount Date Description (Depreciation) ------------------- ---------- -------------------------------------------------- -------------- CREDIT DEFAULT SWAPS 85,188,610 EUR 3/31/03 Agreement with Morgan Guaranty Trust Company dated $ 46,974 5/04/01 to pay .07% per year times the notional amount. The Fund receives payment only upon a default event in Belgium, the notional amount times the difference between the par value and the then-market value of Kingdom of Belgium, 5.75% due 3/28/08. 56,110,669 EUR 3/31/03 Agreement with Morgan Guaranty Trust Company dated (13,923) 3/26/98 to pay .07% per year times the notional amount. The Fund receives payment only upon a default event in Belgium, the notional amount times the difference between the par value and the then-market value of Kingdom of Belgium, 5.75% due 3/28/08. INTEREST RATE SWAPS 15,000,000 EUR 3/21/05 Agreement with UBS AG dated 3/17/00 to receive the 925,293 notional amount multiplied by 5.222% and to pay the notional amount multiplied by the 3 month Floating Rate EURIBOR adjusted by a specified spread. 14,900,000 SEK 9/25/07 Agreement with Citibank N.A. dated 9/24/02 to 46,610 receive the notional amount multiplied by 4.79% and to pay the notional amount multiplied by the 3 month Floating Rate Swedish STIBOR adjusted by a specified spread.
19 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Expiration Appreciation Notional Amount Date Description (Depreciation) ------------------- ---------- -------------------------------------------------- -------------- 11,500,000 CHF 5/11/11 Agreement with Morgan Guaranty Trust Company dated $ (940,654) 5/09/01 to pay the notional amount multiplied by 3.73% and to receive the notional amount multiplied by the 6 month Floating Rate Swiss LIBOR adjusted by a specified spread. 21,500,000 SEK 9/25/12 Agreement with Citibank N.A. dated 9/24/02 to 70,933 receive the notional amount multiplied by 5.08% and to pay the notional amount multiplied by the 3 month Floating Rate Swedish STIBOR adjusted by a specified spread. 3,000,000 EUR 3/21/30 Agreement with UBS AG dated 3/17/00 to receive the 592,413 notional amount multiplied by 5.895% and to pay the notional amount multiplied by the 3 month Floating Rate EURIBOR adjusted by a specified spread. TOTAL RETURN SWAPS 30,000,000 USD 7/24/03 Agreement with Morgan Guaranty Trust Company dated 64,437 7/18/01 to receive (pay) the notional amount multiplied by the return on the JP Morgan Non-U.S. Traded Total Return Government Bond Index and to pay the notional amount multiplied by the 1 month LIBOR adjusted by a specified spread. 75,000,000 USD 9/24/03 Agreement with Morgan Guaranty Trust Company dated 215,100 9/20/01 to receive (pay) the notional amount multiplied by the return on the JP Morgan Hedged Government Bond Index and to pay the notional amount multiplied by the 1 month LIBOR adjusted by a specific spread. ---------- $1,007,183 ==========
See Notes to the Schedule of Investments for definitions of currency abbreviations. 20 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO GLOBAL BOND FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Global Bond Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 21 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- For the fiscal year ended February 28, 2003, all of the Fund's distributions are from investment company taxable income, except that the Fund has designated 11.70% of the distributions as net capital gain dividends. 22 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 23 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the from February Boston, MA 02110 Trust 2002 - October Age: 64 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 24 PRINCIPAL OFFICERS:
Term of Office(4) Principal Occupation(s) Name, Address, Position(s) and Length of During Past and Age Held with Fund Time Served Five Years ------------------------- ------------------------------ ------------------------------ ------------------------------ Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief 40 Rowes Wharf Vice President from August Operating Officer (2000 - Boston, MA 02110 1998 - October 2002. present) and Member, Grantham, Age: 47 Mayo, Van Otterloo & Co. LLC. Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC. 40 Rowes Wharf February 1998. Boston, MA 02110 Age: 45 Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator, c/o GMO Trust Trust Grantham, Mayo, Van 40 Rowes Wharf Otterloo & Co. LLC. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer 40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003) Boston, MA 02110 and Member, Grantham, Mayo, Age: 37 Van Otterloo & Co. LLC. Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel, c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van 40 Rowes Wharf 2001. Otterloo & Co. LLC (June Boston, MA 02110 1999 - present); Associate/ Age: 58 Junior Partner, Hale and Dorr LLP (1991 - 1999). Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering c/o GMO Trust Laundering Compliance Officer Reporting Officer (February 40 Rowes Wharf 2003 - present) and Compliance Boston, MA 02110 Officer, Grantham, Mayo, Van Age: 32 Otterloo & Co. LLC.
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 25 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGEMENT Day-to-day management of the Fund's portfolio is the responsibility of the International Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Global Hedged Equity Fund returned +7.6% for the fiscal year ending February 28, 2003. During that period the Fund's benchmark, the Salomon Smith Barney 3 Month T-Bill Index, returned +1.6%. The Fund's objective is to outperform the Salomon Smith Barney 3 Month T-Bill Index by adding the alpha (value added) of our U.S. and international equity funds, as well as the value added of our asset allocation strategy, to a short-term fixed income return. As of February 28, 2003, the Fund held 44% of its assets in long U.S. equities, 36% in developed international equities, and 10% in emerging market equities. The long equity exposure is hedged, using S&P 500 futures and short EAFE futures, totaling approximately 100% of the value of the long assets. The Fund currently invests in GMO U.S. Core Fund, GMO Real Estate Fund, GMO Small Cap Value Fund, GMO Emerging Markets Fund, GMO International Small Companies Fund, GMO International Growth Fund, and GMO International Intrinsic Value Fund. The GMO Global Hedged Equity Fund's performance for the fiscal year was helped by a combination of strong implementation across a variety of funds and good performance from our asset allocation bets. Implementation was positive for the two largest holdings in the fund -- the GMO U.S. Core and GMO International Intrinsic Value Funds -- and was particularly strong for the latter. These positions, which make up over a combined 57% of the Fund, outperformed their benchmarks by 1.1% and 11.3%, respectively. The GMO International Growth Fund and the GMO Emerging Markets Fund outperformed their benchmarks by 7.1% and 2.5%, respectively. The GMO Real Estate Fund and the GMO Small Cap Value Fund underperformed their benchmarks. Asset allocation was also a strong contributor to performance. Our bets within the U.S., on small cap value stocks and REITs, beat the S&P 500 by 6.1% and 23.5%, respectively. Our bet in International, on the GMO International Small Companies Fund, beat EAFE by 7.1%, and that in emerging markets on the GMO Emerging Markets Fund beat EAFE by 5.9%. Our emerging markets position is hedged 50% with S&P 500 futures and 50% with EAFE futures. Against that blended benchmark, our emerging markets outperformed by 8.5%. GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- OUTLOOK GMO's global equity alpha is positioned to continue to benefit as the excesses of the long bull market are corrected. Our expectation is that emerging equities will significantly outperform developed markets, given their much cheaper valuations. Long positions in global small value stocks and REITs (although less attractive than in the past) also look likely to continue to add value relative to overpriced large cap equities. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO GLOBAL HEDGED EQUITY FUND CLASS III SHARES AND THE SALOMON SMITH BARNEY 3 MONTH T-BILL INDEX AS OF FEBRUARY 28, 2003 GMO GLOBAL HEDGED SALOMON SMITH BARNEY EQUITY FUND 3 MONTH T-BILL INDEX 7/29/94 $10,000 $10,000 9/30/94 $10,020 $10,075 12/31/94 $10,041 $10,206 3/31/95 $10,142 $10,349 6/30/95 $10,474 $10,500 9/30/95 $10,651 $10,648 12/31/95 $10,848 $10,793 3/31/96 $10,899 $10,932 6/30/96 $10,961 $11,071 9/30/96 $11,067 $11,215 12/31/96 $11,291 $11,360 3/31/97 $11,123 $11,504 6/30/97 $11,092 $11,653 9/30/97 $11,405 $11,803 12/31/97 $11,111 $11,957 3/31/98 $11,124 $12,111 6/30/98 $10,668 $12,265 9/30/98 $10,541 $12,420 12/31/98 $10,324 $12,562 3/31/99 $10,177 $12,700 6/30/99 $10,992 $12,843 9/30/99 $10,841 $12,995 12/31/99 $10,494 $13,157 3/31/2000 $10,646 $13,333 6/30/2000 $11,072 $13,525 9/30/2000 $11,611 $13,725 12/31/2000 $12,527 $13,941 3/31/2001 $13,453 $14,135 6/30/2001 $13,837 $14,287 9/30/2001 $14,358 $14,417 12/31/2001 $14,419 $14,511 3/31/2002 $15,135 $14,574 6/30/2002 $15,928 $14,638 9/30/2002 $16,197 $14,701 12/31/2002 $16,096 $14,758 2/28/2003 $16,163 $14,788
AVERAGE ANNUAL TOTAL RETURN 1 YEAR 5 YEAR SINCE INCEPTION 7/29/94 Class III 7.61% 7.93% 5.75%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ MUTUAL FUNDS -- 89.6% UNITED STATES -- 89.6% 287,881 GMO Emerging Markets Fund, Class III 2,539,110 172,473 GMO International Growth Fund, Class III 2,902,728 325,225 GMO International Intrinsic Value Fund, Class III 5,245,878 141,352 GMO International Small Companies Fund, Class III 1,342,847 118,151 GMO Real Estate Fund, Class III 1,239,399 63,576 GMO Small Cap Value Fund, Class III 623,679 973,241 GMO U.S. Core Fund, Class III 9,712,943 ------------ 23,606,584 ------------ TOTAL MUTUAL FUNDS (COST $24,736,461) 23,606,584 ------------ COMMON STOCKS -- 0.0% ITALY -- 0.0% 12,500 Grassetto SPA*(a) 135 ------------ TOTAL COMMON STOCKS (COST $7,041) 135 ------------ SHORT-TERM INVESTMENTS -- 13.0% CASH EQUIVALENTS -- 5.3% $ 100,000 Bank of Scotland Time Deposit, 1.31%, due 3/03/03 100,000 1,300,000 Royal Bank of Canada GC Time Deposit, 1.33%, due 3/03/03 1,300,000 ------------ 1,400,000 ------------ U.S. GOVERNMENT -- 7.7% 2,020,000 U.S. Treasury Bill, 1.16%, due 4/24/03(b) 2,016,413 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $3,416,413) 3,416,413 ------------ TOTAL INVESTMENTS -- 102.6% (Cost $28,159,915) 27,023,132 Other Assets and Liabilities (net) -- (2.6%) (693,967) ------------ TOTAL NET ASSETS -- 100.0% $ 26,329,165 ============
NOTES TO SCHEDULE OF INVESTMENTS:
* Non-income producing security. (a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). (b) All or a portion of this security is held as collateral for open futures contracts (Note 6). See accompanying notes to the financial statements. 1 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $28,159,915) (Note 1) $27,023,132 Cash 79,866 Foreign currency, at value (cost $517) (Note 1) 523 Interest receivable 52 Receivable for open forward foreign currency contracts (Notes 1 and 6) 930,273 Receivable for expenses reimbursed by Manager (Note 2) 17,577 ----------- Total assets 28,051,423 ----------- LIABILITIES: Payable for investments purchased 99,834 Payable to affiliate for (Note 2): Management fee 9,784 Shareholder service fee 2,935 Payable for open forward foreign currency contracts (Notes 1 and 6) 1,421,784 Payable for variation margin on open futures contracts (Notes 1 and 6) 147,988 Accrued expenses 39,933 ----------- Total liabilities 1,722,258 ----------- NET ASSETS $26,329,165 =========== NET ASSETS CONSIST OF: Paid-in capital $30,341,158 Accumulated undistributed net investment income 196,741 Accumulated net realized loss (3,847,079) Net unrealized depreciation (361,655) ----------- $26,329,165 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $26,329,165 =========== SHARES OUTSTANDING: Class III 2,733,471 =========== NET ASSET VALUE PER SHARE: Class III $ 9.63 ===========
2 See accompanying notes to the financial statements. GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from investment company shares $ 402,405 Interest 37,153 ---------- Total income 439,558 ---------- EXPENSES: Management fee (Note 2) 81,351 Custodian fees 86,221 Audit fees 30,696 Transfer agent fees 27,738 Registration fees 3,954 Trustees fees and related expenses (Note 2) 1,285 Legal fees 235 Miscellaneous 1,191 Fees reimbursed by Manager (Note 2) (63,763) ---------- 168,908 Indirectly incurred fees waived or borne by Manager (Note 2) (67,837) ---------- 101,071 ---------- Shareholder service fee (Note 2) - Class III 24,405 Shareholder service fee waived (Note 2) - Class III (21,069) ---------- 3,336 ---------- Net expenses 104,407 ---------- Net investment income 335,151 ---------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (898,822) Realized gains distributions from investment company shares 103,312 Closed futures contracts 2,159,364 Foreign currency, forward contracts and foreign currency related transactions (224,100) ---------- Net realized gain 1,139,754 ---------- Change in net unrealized appreciation (depreciation) on: Investments (700,929) Open futures contracts 1,084,623 Foreign currency, forward contracts and foreign currency related transactions (832,845) ---------- Net unrealized loss (449,151) ---------- Net realized and unrealized gain 690,603 ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,025,754 ==========
See accompanying notes to the financial statements. 3 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 335,151 $ 483,321 Net realized gain 1,139,754 2,286,789 Change in net unrealized appreciation (depreciation) (449,151) (38,162) ----------- ------------ Net increase in net assets from operations 1,025,754 2,731,948 ----------- ------------ Distributions to shareholders from: Net investment income Class III (525,883) (1,324,504) ----------- ------------ Total distributions from net investment income (525,883) (1,324,504) ----------- ------------ Net share transactions (Note 5): Class III 9,201,261 (41,278,455) ----------- ------------ Increase (decrease) in net assets resulting from net share transactions 9,201,261 (41,278,455) ----------- ------------ Total increase (decrease) in net assets 9,701,132 (39,871,011) NET ASSETS: Beginning of period 16,628,033 56,499,044 ----------- ------------ End of period (including accumulated undistributed net investment income of $196,741 and $187,536, respectively) $26,329,165 $ 16,628,033 =========== ============
4 See accompanying notes to the financial statements. GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28, ---------------------------------------------------------------- 2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.23 $ 8.73 $ 7.72 $ 7.59 $ 8.72 ------- ------- ------- ------- ------- Income from investment operations: Net investment income(d) 0.20(b) 0.17(b) 0.15 0.16 0.17(b) Net realized and unrealized gain (loss) 0.49 0.96 1.68 0.20 (0.88) ------- ------- ------- ------- ------- Total from investment operations 0.69 1.13 1.83 0.36 (0.71) ------- ------- ------- ------- ------- Less distributions to shareholders: From net investment income (0.29) (0.63) (0.82) (0.23) (0.42) ------- ------- ------- ------- ------- Total distributions (0.29) (0.63) (0.82) (0.23) (0.42) ------- ------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 9.63 $ 9.23 $ 8.73 $ 7.72 $ 7.59 ======= ======= ======= ======= ======= TOTAL RETURN(a) 7.61% 13.32% 24.84% 4.74% (8.13)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's)(c) $26,329 $16,628 $56,499 $46,718 $50,671 Net expenses to average daily net assets 0.64% 0.37% 0.25% 0.21% 0.17% Net investment income to average daily net assets(d) 2.06% 1.88% 1.80% 1.89% 1.99% Portfolio turnover rate 111% 22% 15% 13% 21% Fees and expenses reimbursed by the Manager to average daily net assets: 0.94% 0.78% 0.64% 0.54% 0.61%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) Computed using average shares outstanding throughout the period. (c) Net expenses exclude expenses incurred indirectly through investment in underlying funds. See Note 2. (d) Recognition of net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the fund invests. See accompanying notes to the financial statements. 5 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Global Hedged Equity Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund operates as a "fund-of-funds" in that, pursuant to management provided by the Manager, it makes investments in other funds of the Trust ("underlying funds"). The Fund seeks high total return consistent with minimal exposure to general equity market risk. The Fund invests a substantial portion of its assets in other Funds of the Trust ("underlying funds"). The Fund's benchmark is the Salomon Smith Barney 3 Month T-Bill Index. The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their 6 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in foreign currency values that are unfavorable to the Fund. The value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through currency contracts as of February 28, 2003. FUTURES CONTRACTS The Fund may purchase and sell futures contracts to manage its exposure to the financial markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. 7 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 28, 2003. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 28, 2003, there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future, security or currency transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. At February 28, 2003, there were no open purchased option contracts. 8 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the financial markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. At February 28, 2003, there were no open swap agreements. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryover for U.S. federal income tax 9 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country's tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003, the tax basis of distributions paid was as follows: ordinary income -- $1,324,504 and $525,883, respectively. As of Febrary 28, 2003, there were no distributable earnings on a tax basis. The temporary differences between book and tax basis distributable earnings are primarily due to foreign currency transactions and losses on wash sale transactions. At February 28, 2003, the Fund had a capital loss carryforward of $4,421,884. However, restrictions on annual utilization of this carryforward under the Code resulting from significant shareholder activity are expected to limit maximum utilization to offset future capital gains prior to expiration to approximately $2,094,980 of which $1,571,235 expires in 2006 and $523,745 expires in 2007. The Fund has elected to defer to March 1, 2003 post-October capital losses of $285,408. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to foreign currency transactions and limitations of capital loss carryovers. The financial highlights exclude these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain Paid-in Capital ----------------- ----------------- --------------- $199,937 $2,126,968 $(2,326,905)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. 10 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and discounts. Non cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual Fund. Expenses which are not readily identifiable to a specific Fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the Funds. In addition, the Fund will also incur fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have varied expense and fee levels and the Fund may own different proportions of underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary. See Note 2. INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .50% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. The Fund will invest in Class III shares of each underlying fund being offered. Like the management fee (as described below), the Fund's shareholder service fee will be waived (but not below zero) to the extent of the indirect shareholder service fees paid in connection with the Fund's investment in shares of the underlying funds. For the year ended February 28, 2003, shareholder service fees incurred indirectly by the Fund were .129% of the Fund's average daily net assets. 11 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- GMO has entered into a binding agreement effective until at least June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, custody fees, fees and expenses of the independent Trustees of the Trust (including legal fees), 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 ("fund expenses")) plus the amount of fees and expenses (excluding shareholder service fees and fund expenses) incurred indirectly by the Fund though investment in underlying funds, exceed the management fee. Because GMO will not reimburse expenses incurred indirectly by the Fund to the extent they exceed .50%, and because the amount of fees and expenses incurred indirectly by the Fund will vary, the operating expenses (excluding shareholder service fee and fund expenses, as defined above) incurred indirectly by the Fund through its investment in the underlying funds may exceed .50% of the Fund's average daily net assets. For the year ended February 28, 2003, indirect operating expenses (excluding shareholder service fees and investment-related expenses) and indirect investment-related expenses (including but not limited to interest expense, foreign audit expense and investment-related legal expense) incurred by the Fund were .438% and .001% of Class III's average daily net assets, respectively. As of February 28, 2003, substantially all of the Fund's shares were held by accounts for which the Manager has investment discretion. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 28, 2003, was $1,216. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2003 aggregated $27,822,188 and $16,542,530, respectively. At February 28, 2003, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $29,194,569 $ -- $(2,171,437) $(2,171,437)
12 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 4. PRINCIPAL SHAREHOLDERS At February 28, 2003, 60.3% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the outstanding shares of the Fund. One of the shareholders is another Fund of GMO Trust. Investment activities of these shareholders may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 ------------------------ ------------------------ Shares Amount Shares Amount ---------- ------------ ---------- ------------ Class III: Shares sold 2,164,937 $ 20,773,802 158,832 $ 1,450,027 Shares issued to shareholders in reinvestment of distributions 54,717 509,414 131,282 1,152,335 Shares repurchased (1,287,322) (12,081,955) (4,957,264) (43,880,817) ---------- ------------ ---------- ------------ Net increase (decrease) 932,332 $ 9,201,261 (4,667,150) $(41,278,455) ========== ============ ========== ============
13 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 28, 2003 is as follows: FUTURES CONTRACTS
Net Unrealized Number of Appreciation Contracts Type Expiration Date Contract Value (Depreciation) --------- -------------- --------------- -------------- -------------- Sales 41 CAC40 March 2003 $ 1,216,987 $ (9,985) 11 DAX March 2003 753,288 148,192 63 FTSE 100 March 2003 3,603,089 213,004 3 HANG SENG March 2003 173,558 (376) 7 IBEX 35 March 2003 452,487 5,620 5 MIB30 March 2003 632,021 29,501 46 OMX March 2003 254,895 (768) 15 SPI 200 March 2003 635,827 42,832 61 S&P 500 March 2003 12,823,725 717,445 43 TSE TOPIX March 2003 2,971,538 121,168 ---------- $1,266,633 ==========
At February 28, 2003, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. 14 GMO GLOBAL HEDGED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) ---------- --------------------------------------------- ----------------- ------------ -------------- Buys 4/28/03 AUD 263,639 $ 159,136 $ 15,453 3/28/03 CHF 1,904,130 1,404,915 119,088 3/28/03 DKK 1,549,792 224,623 21,158 3/28/03 EUR 5,207,923 5,607,924 538,166 3/28/03 GBP 2,397,349 3,770,015 79,779 4/28/03 HKD 2,574,662 330,069 529 4/28/03 JPY 337,535,500 2,861,012 130,486 3/28/03 SEK 2,156,180 252,976 21,750 4/28/03 SGD 341,715 196,651 3,864 ----------- $ 930,273 =========== Sales 4/28/03 AUD 1,232,366 $ 743,872 $ (52,173) 3/28/03 CHF 3,136,721 2,314,351 (188,895) 3/28/03 DKK 2,161,810 313,328 (30,128) 3/28/03 EUR 8,551,956 9,208,798 (784,290) 3/28/03 GBP 4,191,934 6,592,136 (95,875) 4/28/03 HKD 3,878,896 497,271 (767) 4/28/03 JPY 617,092,170 5,230,585 (218,187) 3/28/03 NOK 790,000 109,938 (6,802) 3/28/03 SEK 3,855,178 452,313 (40,649) 4/28/03 SGD 341,040 196,262 (4,018) ----------- $(1,421,784) ===========
CURRENCY ABBREVIATIONS: AUD - Australian Dollar CHF - Swiss Franc DKK - Danish Krona EUR - Euro GBP - British Pound HKD - Hong Kong Dollar JPY - Japanese Yen NOK - Norwegian Krone SEK - Swedish Krona SGD - Singapore Dollar 15 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO GLOBAL HEDGED EQUITY FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Global Hedged Equity Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 16 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) Occupation(s) Complex Other Name, Address, Position(s) and Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 17 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the from February Boston, MA 02110 Trust 2002 - October Age: 64 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 18 PRINCIPAL OFFICERS:
Term of Office(4) Principal Occupation(s) Name, Address, Position(s) and Length of During Past and Age Held with Fund Time Served Five Years ------------------------- ------------------------------ ------------------------------ ------------------------------ Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief 40 Rowes Wharf Vice President from August Operating Officer (2000 - Boston, MA 02110 1998 - October 2002. present) and Member, Grantham, Age: 47 Mayo, Van Otterloo & Co. LLC. Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC. 40 Rowes Wharf February 1998. Boston, MA 02110 Age: 45 Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator, c/o GMO Trust Trust Grantham, Mayo, Van 40 Rowes Wharf Otterloo & Co. LLC. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer 40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003) Boston, MA 02110 and Member, Grantham, Mayo, Age: 37 Van Otterloo & Co. LLC. Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel, c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van 40 Rowes Wharf 2001. Otterloo & Co. LLC (June Boston, MA 02110 1999 - present); Associate/ Age: 58 Junior Partner, Hale and Dorr LLP (1991 - 1999). Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering c/o GMO Trust Laundering Compliance Officer Reporting Officer (February 40 Rowes Wharf 2003 - present) and Compliance Boston, MA 02110 Officer, Grantham, Mayo, Van Age: 32 Otterloo & Co. LLC.
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 19 GMO GROWTH FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO GROWTH FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Day-to-day management of the Fund's portfolio is the responsibility of the U.S. Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Growth Fund returned -21.1% for the fiscal year ended February 28, 2003, as compared to -25.6% for the Russell 1000 Growth Index. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in U.S. equity securities throughout the period. U.S. equities were no place to be if one was looking to avoid the downward slide of global equity markets in 2002 or the start 2003. Across the board, all sectors posted negative absolute returns, and large capitalization growth stocks fared worst of all. From accounting fraud to war anticipation anxiety, there was no shortage of reasons to worry, and the markets reflected this both in volatility and retrenchment towards companies with tangible products and transparent processes. The Fund's outperformance for the fiscal year came firmly on the back of stock selection. The portfolio uses two momentum-based stock selection strategies, price momentum and earnings revision momentum, and one value-based stock selection strategy. All three stock selection strategies added value, with the price momentum strategy leading the charge. By sector, stock selection was strongest within technology, as well as within financial services and consumer discretionary stocks. Selection was strong across the majority of sectors, with the exception of utilities, within which selection detracted from relative performance. In combination, stock selection contributed 3.4% to performance versus the benchmark for the fiscal year. Sector selection also contributed positively to relative performance for the year through overweights in utilities, consumer staples and materials processing sectors, all of which outperformed. These gains were somewhat dampened by an underweight in technology during technology's October, November and February gains. An underweight in healthcare stocks also detracted moderately from performance. For the period, sector selection contributed 1.1% to performance relative to the Russell 1000 Growth Index. OUTLOOK We believe that our process of stock selection that includes momentum disciplines alongside an intrinsic value discipline in our large cap growth portfolios is well suited to the continued choppy market environment that we anticipate. The Fund currently maintains an overweight position in the producer durables, financial services, and materials and processing sectors. Underweighted sectors include healthcare and technology. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO GROWTH FUND CLASS III SHARES AND THE RUSSELL 1000 GROWTH INDEX AS OF FEBRUARY 28, 2003 GMO GROWTH FUND RUSSELL 1000 GROWTH INDEX 2/28/93 $10,000 $10,000 3/31/93 $10,264 $10,193 6/30/93 $9,944 $10,035 9/30/93 $10,218 $10,184 12/31/93 $10,690 $10,576 3/31/94 $9,910 $10,110 6/30/94 $10,011 $10,005 9/30/94 $10,822 $10,775 12/31/94 $10,869 $10,853 3/31/95 $11,907 $11,887 6/30/95 $12,987 $13,055 9/30/95 $14,420 $14,239 12/31/95 $15,201 $14,888 3/31/96 $15,848 $15,687 6/30/96 $16,977 $16,685 9/30/96 $17,452 $17,287 12/31/96 $18,301 $18,330 3/31/97 $18,413 $18,429 6/30/97 $21,536 $21,914 9/30/97 $24,420 $23,561 12/31/97 $23,673 $23,919 3/31/98 $27,227 $27,543 6/30/98 $28,234 $28,794 9/30/98 $25,500 $26,178 12/31/98 $32,502 $33,178 3/31/99 $34,382 $35,286 6/30/99 $36,703 $36,644 9/30/99 $35,667 $35,302 12/31/99 $45,191 $44,179 3/31/2000 $50,233 $47,327 6/30/2000 $49,501 $46,049 9/30/2000 $49,312 $43,572 12/31/2000 $39,673 $34,272 3/31/2001 $31,159 $27,109 6/30/2001 $34,068 $29,390 9/30/2001 $28,132 $23,686 12/31/2001 $31,502 $27,272 3/31/2002 $31,089 $26,567 6/30/2002 $26,758 $21,606 9/30/2002 $22,617 $18,355 12/31/2002 $24,388 $19,668 2/28/2003 $23,788 $19,102
AVERAGE ANNUAL TOTAL RETURN SINCE 1 YEAR 5 YEAR 10 YEAR INCEPTION Class III -21.13% -2.05% 9.05% N/A 9/11/2002 Class M N/A N/A N/A -6.31%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Performance for Class M may vary due to different fees. Past performance is not indicative of future performance. Information is unaudited. GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ COMMON STOCKS -- 98.2% AUTO & TRANSPORTATION -- 2.1% 9,900 ArvinMeritor Inc 151,272 30,000 Expeditors International Washington Inc 1,025,700 4,900 FedEx Corp 251,860 7,100 Gentex Corp* 190,848 27,000 Harley Davidson Inc 1,068,930 2,400 Hunt (JB) Transportation Services Inc* 58,896 8,000 Tidewater Inc 244,960 63,600 United Parcel Service, Class B 3,659,544 ------------ 6,652,010 ------------ CONSUMER DISCRETIONARY -- 16.4% 22,900 Abercrombie & Fitch Co, Class A* 629,750 8,200 Advance Auto Parts* 319,964 111,800 Amazon.com Inc* 2,460,718 48,100 American Eagle Outfitters Inc* 696,007 44,300 Apollo Group Inc, Class A* 2,052,862 19,100 Applebees International Inc 489,724 9,700 Autozone Inc* 638,260 23,900 Bed, Bath & Beyond Inc* 789,656 64,500 Big Lots Inc* 712,725 12,400 Black and Decker Corp 455,080 12,900 Blockbuster Inc 197,370 33,900 Callaway Golf Co 389,172 7,100 Career Education Corp* 330,150 12,800 Catalina Marketing Corp* 231,680 23,600 CDW Computer Centers Inc* 1,030,376 51,300 Cendant Corp* 631,503 27,700 Chicos FAS Inc* 500,539 28,600 Circuit City Stores Inc 126,412 17,700 Claire's Stores Inc 403,914 26,200 Clear Channel Communications Inc* 956,562 40,100 Coach Inc* 1,432,773 20,100 Columbia Sportswear Co* 718,575 35,200 Corinthian Colleges Inc* 1,319,296 9,400 Cox Radio Inc, Class A* 201,160 33,600 Dollar Tree Stores Inc* 693,840 2,600 E.W. Scripps Company 208,260 8,900 Eastman Kodak Co 263,440
See accompanying notes to the financial statements. 1 GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ CONSUMER DISCRETIONARY -- CONTINUED 31,800 eBay Inc* 2,493,756 26,200 Electronic Arts Inc* 1,383,360 12,200 Fisher Scientific International Inc* 350,506 18,600 Fox Entertainment Group Inc, Class A* 497,178 27,800 G TECH Holdings Corp* 808,980 7,300 Getty Images Inc* 214,255 9,000 Gillette Co 271,710 14,100 Harrahs Entertainment Inc* 463,044 34,700 Hilton Hotels Corp 381,353 9,300 Hollywood Entertainment Corp* 130,758 70,600 Home Depot Inc 1,655,570 40,500 Jones Apparel Group Inc* 1,148,580 10,000 Kimberly-Clark Corp 458,300 22,100 Kohls Corp* 1,080,690 18,980 Limited Brands Inc 225,482 49,600 Lowes Cos Inc 1,949,280 24,200 Mandalay Resort Group* 610,808 16,700 MGM Mirage* 427,854 1,200 Mohawk Industries Inc* 59,256 14,800 New York Times Co, Class A 687,608 48,200 Newell Rubbermaid Inc 1,359,240 15,100 Oakley Inc* 120,649 10,200 Outback Steakhouse Inc 328,440 23,400 Pier 1 Imports Inc 373,698 14,700 Pixar Inc* 793,653 2,200 Procurenet Inc(a)* 0 16,800 RadioShack Corp 329,952 16,800 Rent-A-Center Inc* 839,160 25,700 Ross Stores Inc 879,197 49,900 Service Corp International* 153,193 24,500 Staples Inc* 424,095 40,000 Starbucks Corp* 938,000 32,100 Take-Two Interactive Software* 671,211 7,300 Target Corp 209,145 108,000 The Gap Inc 1,408,320 10,200 Timberland Co* 391,680 41,200 Tribune Co 1,847,820 22,900 Viacom Inc, Class B* 850,277 74,900 Wal Mart Stores Inc 3,599,694 100 Washington Post Co, Class B 71,350
2 See accompanying notes to the financial statements. GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ CONSUMER DISCRETIONARY -- CONTINUED 27,300 Weight Watchers International Inc* 1,142,505 9,600 Williams-Sonoma Inc* 223,488 80,300 Yahoo! Inc* 1,674,255 ------------ 52,807,118 ------------ CONSUMER STAPLES -- 9.1% 195,584 Altria Group Inc 7,559,322 20,000 Anheuser Busch Cos Inc 930,000 8,900 Clorox Co 376,559 89,800 Coca Cola Co 3,611,756 117,800 Coca Cola Enterprises Inc 2,377,204 12,200 Colgate-Palmolive Co 613,782 9,000 Constellation Brands Inc, Class A* 221,670 77,500 CVS Corp 1,929,750 300 Dean Foods Co* 12,651 5,400 Dole Food Co 177,120 5,000 Dreyers Grand Ice Cream Inc 364,000 4,900 Hershey Foods Corp 316,589 7,900 Kraft Foods Inc 233,919 20,500 Pepsi Bottling Group Inc 476,625 38,900 PepsiCo Inc 1,490,648 63,000 Procter and Gamble Co 5,157,180 92,926 Safeway Inc* 1,848,298 10,100 Sara Lee Corp 199,980 11,000 The Dial Corp 200,090 39,300 Walgreen Co 1,105,902 19,100 Winn-Dixie Stores Inc 233,020 ------------ 29,436,065 ------------ FINANCIAL SERVICES -- 15.9% 96,400 AFLAC Corp 3,012,500 42,800 Allstate Corp 1,353,764 117,500 American Express Co 3,945,650 7,000 Automatic Data Processing Inc 227,500 14,700 Bank of America Corp 1,017,828 32,100 Capital One Financial Corp 994,137 8,300 Charter One Financial Inc 239,953 55,300 Checkfree Corp* 1,160,194 22,800 Countrywide Financial Corp 1,217,292 7,200 Equifax Inc 138,096
See accompanying notes to the financial statements. 3 GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ FINANCIAL SERVICES -- CONTINUED 218,800 Fannie Mae 14,025,080 30,700 Fidelity National Financial Inc 1,007,881 11,700 First American Financial Corp 270,270 129,300 Freddie Mac 7,066,245 15,300 General Growth Properties, REIT 799,731 4,400 Global Payments Inc 122,936 14,000 Golden West Financial Corp 1,013,600 8,200 Greater Bay Bancorp 131,282 5,000 Greenpoint Financial Corp 212,400 17,900 Household International Inc 499,947 42,900 Janus Capital Group Inc 507,507 2,200 M & T Bank Corp 173,844 15,800 MBNA Corp 218,830 19,500 Moody's Corp 859,950 7,900 National Processing Inc* 112,575 11,100 New York Community Bancorp Inc 317,571 7,900 North Fork Bancorp 254,696 27,800 Principal Financial Group 766,446 77,600 Providian Financial Corp* 473,360 11,900 Regions Financial Corp 385,322 5,300 Silicon Valley Bancshares* 91,955 6,300 Simon Property Group Inc, REIT 218,232 3,900 Total System Services Inc 61,425 20,100 Wachovia Corp 713,148 27,900 Washington Mutual Inc 963,387 147,000 Wells Fargo & Co 6,666,450 ------------ 51,240,984 ------------ HEALTH CARE -- 24.9% 24,100 Abbott Laboratories 858,442 13,050 Accredo Health Inc* 309,937 17,900 Aetna Inc 753,948 1,600 AmerisourceBergen Corp 88,000 63,500 Amgen Inc* 3,469,640 32,400 Amylin Pharmaceuticals Inc* 497,016 31,500 Anthem Inc* 1,877,715 2,100 Bard (CR) 124,110 47,600 Boston Scientific Corp* 2,102,492 223,400 Bristol Myers Squibb Co 5,205,220 4,200 Cerner Corp* 139,524
4 See accompanying notes to the financial statements. GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ HEALTH CARE -- CONTINUED 11,300 Charles River Laboratories International Inc* 337,983 4,400 Chiron Corp* 160,688 19,700 Coventry Health Care Inc* 558,101 10,000 Express Scripts Inc, Class A* 517,200 37,900 Forest Laboratories Inc* 1,887,420 26,000 Guidant Corp* 929,760 66,000 HCA - The Healthcare Company 2,721,840 16,500 Health Net Inc* 414,315 6,000 Idexx Laboratories Inc* 218,760 87,764 Johnson & Johnson 4,603,222 4,400 Lifepoint Hospital Inc* 93,324 19,300 Lilly (Eli) & Co 1,091,608 39,200 Lincare Holdings Inc* 1,172,080 7,100 Medtronic Inc 317,370 290,500 Merck & Co Inc 15,323,875 30,900 Mid Atlantic Medical Services Inc* 1,104,675 13,200 Oxford Health Plans Inc* 369,600 513,436 Pfizer Inc 15,310,662 5,000 Pharmaceutical Product Development Inc* 156,850 30,700 Pharmacia Corp 1,268,524 5,500 Renal Care Group Inc* 160,985 307,200 Schering Plough Corp 5,535,744 10,000 Scios Inc* 436,400 17,800 St Jude Medical Inc* 813,104 500 Stericycle Inc* 17,715 28,100 Steris Corp* 709,525 23,200 Stryker Corp 1,512,640 15,400 Tenet Healthcare Corp* 279,818 1,900 Triad Hospitals Inc* 49,381 32,900 UnitedHealth Group Inc 2,727,410 7,200 Universal Health Services, Class B* 279,648 22,500 Varian Medical Systems Inc* 1,137,375 11,900 Wellpoint Health Network Inc* 809,319 38,300 Zimmer Holdings Inc* 1,700,137 ------------ 80,153,102 ------------ INTEGRATED OILS -- 0.3% 9,100 Amerada Hess Corp 405,223 21,400 Occidental Petroleum Corp 639,860 ------------ 1,045,083 ------------
See accompanying notes to the financial statements. 5 GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ MATERIALS & PROCESSING -- 1.2% 3,500 AptarGroup Inc 106,050 3,900 Avery Dennison Corp 223,860 31,300 Crown Holdings Inc* 179,036 12,800 Eastman Chemical Co 412,032 10,200 Ecolab Inc 500,310 20,700 Energizer Holdings Inc* 549,585 3,700 Harsco Corp 111,629 10,900 IMC Global Inc 96,029 35,700 Sealed Air Corp* 1,294,839 5,400 Sigma Aldrich Corp 236,628 3,500 Valspar Corp 143,290 ------------ 3,853,288 ------------ OTHER -- 3.0% 24,400 3 M Co 3,059,028 14,300 Fortune Brands Inc 626,912 143,600 General Electric Co 3,453,580 62,500 Honeywell International Inc 1,430,625 21,300 ITT Industries Inc 1,197,699 ------------ 9,767,844 ------------ OTHER ENERGY -- 3.9% 26,800 Apache Corp 1,749,504 6,200 BJ Services Co* 213,094 13,300 Burlington Resources Inc 616,455 66,700 Chesapeake Energy Corp 541,604 10,500 Cooper Cameron Corp* 546,000 30,100 Devon Energy Corp 1,450,820 8,100 Enron Corp(b)* 478 21,700 Ensco International Inc 607,166 1,500 EOG Resources Inc 61,950 72,400 Halliburton Co 1,466,824 24,500 Nabors Industries Ltd* 971,425 11,300 Noble Corp* 410,190 13,200 Patterson-UTI Energy Inc* 437,448 22,000 Pioneer Natural Resources Co* 575,300 18,400 Pogo Producing Co 731,400 20,100 Rowan Cos Inc 394,563 23,900 Smith International Inc* 833,154 14,300 Weatherford International Ltd* 572,572
6 See accompanying notes to the financial statements. GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ OTHER ENERGY -- CONTINUED 16,500 XTO Energy Inc 415,965 ------------ 12,595,912 ------------ PRODUCER DURABLES -- 2.8% 51,500 Applied Materials Inc* 668,470 92,400 Boeing Co 2,546,544 4,500 Danaher Corp 292,590 17,900 DR Horton Inc 327,749 1,000 Kennametal Inc 29,920 6,900 Lexmark International Group Inc* 430,629 2,200 Mettler-Toledo International Inc* 65,692 7,960 Northrop Grumman Corp 690,132 17,500 Novellus System Inc* 510,125 1,700 NVR Inc* 564,315 7,200 Rockwell Collins 141,480 15,300 Toll Brothers Inc* 296,361 37,800 United Technologies Corp 2,214,324 13,400 Waters Corp* 310,478 ------------ 9,088,809 ------------ TECHNOLOGY -- 15.9% 34,100 Acxiom Corp* 520,366 25,500 Adaptec Inc* 155,295 10,500 Applera Corp-Applied Biosystems Group 192,675 35,100 Autodesk Inc 508,599 38,400 BEA Systems Inc* 373,248 114,300 BMC Software Inc* 2,217,420 120,700 Ciena Corp* 654,194 373,900 Cisco Systems Inc* 5,227,122 28,100 Computer Associates International Inc 375,135 13,500 Compuware Corp* 49,815 109,100 Comverse Technology Inc* 1,112,820 87,300 Corning Inc* 429,516 28,200 Cree Inc* 479,964 214,600 Dell Computer Corp* 5,785,616 91,000 EMC Corp* 672,490 81,600 Foundry Networks Inc* 723,792 112,800 Gateway Inc* 245,904 29,600 IBM Corp 2,307,320 18,600 Imation Corp* 669,600
See accompanying notes to the financial statements. 7 GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ TECHNOLOGY -- CONTINUED 39,400 Ingram Micro Inc, Class A* 408,184 278,408 Intel Corp 4,805,322 15,800 Intuit Inc* 750,816 15,500 J.D. Edwards & Co* 185,845 9,500 Keane Inc* 76,095 6,700 L-3 Communications Holdings Inc* 242,004 6,500 Mercury Interactive Corp* 210,925 334,600 Microsoft Corp 7,930,020 18,800 NetScreen Technologies Inc* 367,164 732,300 Oracle Corp* 8,758,308 11,500 Perot Systems Corp* 115,115 7,000 QLogic Corp* 247,870 72,600 Qualcomm Inc* 2,510,508 7,000 Reynolds & Reynolds Inc, Class A 171,150 9,000 Sandisk Corp* 150,120 20,500 Silicon Laboratories Inc* 555,960 6,300 Symantec Co* 254,961 137,400 Tellabs Inc* 836,766 ------------ 51,278,024 ------------ UTILITIES -- 2.7% 24,900 AT & T Wireless Services Inc* 147,159 11,800 Bellsouth Corp 255,706 3,200 Energen Corp 97,344 42,400 Exelon Corp 2,083,960 156,800 Level 3 Communications Inc* 774,592 102,200 Nextel Communications Inc, Class A* 1,438,976 11,200 PPL Corp 393,904 233,600 Qwest Communications International Inc* 836,288 57,200 SBC Communications Inc 1,189,760 44,300 Verizon Communications Inc 1,531,894 ------------ 8,749,583 ------------ TOTAL COMMON STOCKS (COST $340,230,750) 316,667,822 ------------
See accompanying notes to the financial statements. 8 GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ SHORT-TERM INVESTMENTS -- 6.6% CASH EQUIVALENTS -- 2.9% 4,031,076 Dreyfus Money Market Fund(c) 4,031,076 $ 2,848,526 Harris Trust & Savings Bank Eurodollar Time Deposit, 1.26%, due 3/24/03(c) 2,848,526 2,350,034 Merrimac Money Market Fund(c) 2,350,034 ------------ 9,229,636 ------------ U.S. GOVERNMENT -- 0.4% $ 1,215,000 U.S. Treasury Bill, 1.14%, due 4/24/03(d) 1,212,865 ------------ REPURCHASE AGREEMENT -- 3.3% $ 10,628,526 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/28/03, due 3/03/03, with a maturity value of $10,628,845, and an effective yield of 0.36%, collateralized by a U.S. Treasury Note with a rate of 3.625%, maturity date of 3/31/04, and a market value, including accrued interest of $11,436,076. 10,628,526 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $21,071,027) 21,071,027 ------------ TOTAL INVESTMENTS -- 104.8% (Cost $361,301,777) 337,738,849 Other Assets and Liabilities (net) -- (4.8%) (15,381,895) ------------ TOTAL NET ASSETS -- 100.0% $322,356,954 ============
NOTES TO THE SCHEDULE OF INVESTMENTS: - ------------------------------------------------------------------------------------ REIT - Real Estate Investment Trust
* Non-income producing security. (a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). (b) Bankrupt issuer. (c) Represents investment of security lending collateral (Note 1). (d) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 6). See accompanying notes to the financial statements. 9 GMO GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value, including securities on loan of $8,788,361 (cost $361,301,777) (Note 1) $337,738,849 Receivable for investments sold 7,699,033 Receivable for Fund shares sold 78,421 Dividends and interest receivable 273,724 Receivable for variation margin on open futures contracts (Notes 1 and 6) 3,375 Receivable for expenses reimbursed by Manager (Note 2) 33,348 ------------ Total assets 345,826,750 ------------ LIABILITIES: Payable for investments purchased 14,006,185 Payable upon return of securities loaned (Note 1) 9,229,636 Payable for Fund shares repurchased 67,452 Payable to affiliate for (Note 2): Management fee 78,243 Shareholder service fee 33,311 12b-1 fee -- Class M 7,897 Administration fee -- Class M 3,005 Accrued expenses 44,067 ------------ Total liabilities 23,469,796 ------------ NET ASSETS $322,356,954 ============ NET ASSETS CONSIST OF: Paid-in capital $392,053,583 Accumulated undistributed net investment income 360,430 Accumulated net realized loss (46,494,297) Net unrealized depreciation (23,562,762) ------------ $322,356,954 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $302,050,743 ============ Class M shares $ 20,306,211 ============ SHARES OUTSTANDING: Class III 21,140,175 ============ Class M 1,424,928 ============ NET ASSET VALUE PER SHARE: Class III $ 14.29 ============ Class M $ 14.25 ============
10 See accompanying notes to the financial statements. GMO GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends $ 1,635,180 Interest (including securities lending income of $9,119) 57,636 ------------ Total income 1,692,816 ------------ EXPENSES: Management fee (Note 2) 464,149 Custodian and transfer agent fees 56,111 Registration fees 32,880 Audit fees 32,040 Legal fees 6,468 Trustees fees and related expenses (Note 2) 3,481 Miscellaneous 2,560 Fees reimbursed by Manager (Note 2) (129,508) ------------ 468,181 Shareholder service fee (Note 2) -- Class III 201,156 ------------ 12b-1 fee (Note 2) -- Class M 16,368 ------------ Administration fee (Note 2) -- Class M 13,095 ------------ Net expenses 698,800 ------------ Net investment income 994,016 ------------ REALIZED AND UNREALIZED GAIN (LOSS): Net realized loss on: Investments (13,312,604) Closed futures contracts (561,489) ------------ Net realized loss (13,874,093) ------------ Change in net unrealized appreciation (depreciation) on: Investments (17,304,272) Open futures contracts 18,828 ------------ Net unrealized loss (17,285,444) ------------ Net realized and unrealized loss (31,159,537) ------------ NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(30,165,521) ============
See accompanying notes to the financial statements. 11 GMO GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 994,016 $ 611,554 Net realized loss (13,874,093) (28,648,788) Change in net unrealized appreciation (depreciation) (17,285,444) 11,637,650 ------------ ------------ Net decrease in net assets from operations (30,165,521) (16,399,584) ------------ ------------ Distributions to shareholders from: Net investment income Class III (676,350) (515,217) Class M (53,573) -- ------------ ------------ Total distributions from net investment income (729,923) (515,217) ------------ ------------ (729,923) (515,217) ------------ ------------ Net share transactions (Note 5): Class III 216,475,101 18,232,801 Class M 20,471,432 -- ------------ ------------ Increase in net assets resulting from net share transactions 236,946,533 18,232,801 ------------ ------------ Total increase in net assets 206,051,089 1,318,000 NET ASSETS: Beginning of period 116,305,865 114,987,865 ------------ ------------ End of period (including accumulated undistributed net investment income of $360,430 and $96,337, respectively) $322,356,954 $116,305,865 ============ ============
12 See accompanying notes to the financial statements. GMO GROWTH FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------------------------------------------------ 2003 2002 2001* 2000* 1999* ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 18.23 $ 21.19 $ 54.45 $ 45.54 $ 48.18 -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.10 0.10 0.14 0.22 0.33 Net realized and unrealized gain (loss) (3.94) (2.97) (10.78) 18.84 9.79 -------- -------- -------- -------- -------- Total from investment operations (3.84) (2.87) (10.64) 19.06 10.12 -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.10) (0.09) (0.15) (0.26) (0.33) From net realized gains -- -- (22.47) (9.89) (12.43) -------- -------- -------- -------- -------- Total distributions (0.10) (0.09) (22.62) (10.15) (12.76) -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 14.29 $ 18.23 $ 21.19 $ 54.45 $ 45.54 ======== ======== ======== ======== ======== TOTAL RETURN(a) (21.13)% (13.57)% (25.76)% 45.24% 22.90% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $302,051 $116,306 $114,988 $204,662 $158,084 Net expenses to average daily net assets 0.48% 0.48% 0.48% 0.48% 0.48% Net investment income to average daily net assets 0.72% 0.54% 0.27% 0.50% 0.64% Portfolio turnover rate 72% 101% 111% 48% 50% Fees and expenses reimbursed by the Manager to average daily net assets: 0.09% 0.07% 0.07% 0.06% 0.23%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. * Amounts were restated to reflect a 1:11 reverse stock split effective March 16, 2001. See accompanying notes to the financial statements. 13 GMO GROWTH FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS M SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM SEPTEMBER 11, 2002 (COMMENCEMENT OF OPERATIONS) THROUGH FEBRUARY 28, 2003 ---------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 15.27 ------- Income from investment operations: Net investment income 0.04 Net realized and unrealized loss (1.01) ------- Total from investment operations (0.97) ------- Less distributions to shareholders: From net investment income (0.05) ------- Total distributions (0.05) ------- NET ASSET VALUE, END OF PERIOD $ 14.25 ======= TOTAL RETURN(a) (6.31)%++ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $20,306 Net expenses to average daily net assets 0.78%* Net investment income to average daily net assets 0.51%* Portfolio turnover rate 72% Fees and expenses reimbursed by the Manager to average daily net assets: 0.09%*
(a) The total return would have been lower had certain expenses not been reimbursed during the period shown. * Annualized. ++ Not annualized. 14 See accompanying notes to the financial statements. GMO GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Growth Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks long-term growth of capital. The Fund's benchmark is the Russell 1000 Growth Index. Effective September 11, 2002, the Fund had Class M shares outstanding. Throughout the year ended February 28, 2003, the Fund also offered Class III shares. Class M shares bear an administrative fee and a 12b-1 fee, while Class III shares bear a shareholder service fee. (See Note 2) The principal economic difference between the classes of shares is the level of fees borne by the classes. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. 15 GMO GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- FUTURES CONTRACTS The Fund may purchase and sell futures contracts to manage its exposure to the financial markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 28, 2003. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the financial markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a 16 GMO GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of February 28, 2003, the Fund held no open swap agreements. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 2003, the Fund loaned securities having a market value of $8,788,361 collateralized by cash in the amount of $9,229,636 which was invested in short-term instruments. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country's tax treaty with the United States. 17 GMO GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003, the tax basis of distributions paid from ordinary income were $515,217 and $729,923, respectively. As of February 28, 2003, the components of distributable earnings on a tax basis consisted of $343,981 of undistributed ordinary income. At February 28, 2003, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code, of $29,677,991 expiring in 2010 and $10,843,791 expiring in 2011. The Fund elected to defer to March 1, 2003 post-October losses of $2,756,582. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. ALLOCATION OF OPERATING ACTIVITY The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro-rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service, 12b-1, and administration fees, which are directly attributable to a class of shares, are charged to that class' operations. 18 GMO GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. The Fund pays GMO an administrative fee monthly at the annual rate of .20% of the average daily Class M net assets for support services provided to Class M shareholders. Fund Distributors, Inc. (the "Distributor") serves as the Fund's distributor. Pursuant to a Rule 12b-1 distribution plan adopted by the Fund, Class M shares of the Fund pay a fee, at the annual rate of .25% of average daily Class M net assets for any activities or expenses primarily intended to result in the sale of Class M shares of the Fund. This fee may be spent by the Distributor on personal services rendered to Class M shareholders of the Fund and/or maintenance of Class M shareholder accounts. GMO has entered into a binding agreement effective until at least June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees (Class III only), administrative fee (Class M only), 12b-1 fee (Class M only), fees and expenses of the independent Trustees of the Trust (including legal fees), 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) exceed the management fee. As of February 28, 2003, greater than 10% of the Fund's shares were held by accounts for which the Manager has investment discretion. The Fund's portion of the fee paid by the Trust to the independent Trustees during the year ended February 28, 2003 was $2,639. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 19 GMO GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2003, aggregated $337,852,963 and $100,906,834, respectively. At February 28, 2003, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Net Gross Unrealized Gross Unrealized Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- ------------ $364,501,096 $5,597,536 $(32,359,783) $(26,762,247)
4. PRINCIPAL SHAREHOLDERS At February 28, 2003, 64.5% of the outstanding shares of the Fund were held by four shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 -------------------------- ------------------------ Shares Amount Shares Amount Class III: ---------- ------------ --------- ----------- Shares sold 15,300,314 $224,944,617 1,047,429 $20,120,460 Shares issued to shareholders in reinvestment of distributions 35,730 556,653 27,067 501,089 Shares repurchased (574,513) (9,026,169) (122,608) (2,388,748) ---------- ------------ --------- ----------- Net increase 14,761,531 $216,475,101 951,888 $18,232,801 ========== ============ ========= ===========
20 GMO GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - --------------------------------------------------------------------------------
Period from September 11, 2002 (commencement of operations) through February 28, 2003 ------------------------ Shares Amount Class M: --------- ----------- Shares sold 1,537,897 $22,128,809 Shares issued to shareholders in reinvestment of distributions 3,862 53,573 Shares repurchased (116,831) (1,710,950) --------- ----------- Net increase 1,424,928 $20,471,432 ========= ===========
6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 28, 2003 is as follows: FUTURES CONTRACTS
Number of Contract Net Unrealized Contracts Type Expiration Date Value Appreciation --------------------- ------------------------------ --------------- ---------- -------------- Buys 5 S&P 500 March 2003 $1,051,125 $166 ====
At February 28, 2003, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. 21 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO GROWTH FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Growth Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 22 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 23 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the from February Boston, MA 02110 Trust 2002 - October Age: 64 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 24 PRINCIPAL OFFICERS:
Term of Office(4) and Principal Occupation(s) Name, Address, Position(s) Length of During Past and Age Held with Fund Time Served Five Years ------------------------- ------------------------------ ------------------------------ ------------------------------ Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief 40 Rowes Wharf Vice President from August Operating Officer (2000 - Boston, MA 02110 1998 - October 2002. present) and Member, Grantham, Age: 47 Mayo, Van Otterloo & Co. LLC. Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC. 40 Rowes Wharf February 1998. Boston, MA 02110 Age: 45 Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator, c/o GMO Trust Trust Grantham, Mayo, Van 40 Rowes Wharf Otterloo & Co. LLC. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer 40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003) Boston, MA 02110 and Member, Grantham, Mayo, Age: 37 Van Otterloo & Co. LLC. Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel, c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van 40 Rowes Wharf 2001. Otterloo & Co. LLC (June Boston, MA 02110 1999 - present); Associate/ Age: 58 Junior Partner, Hale and Dorr LLP (1991 - 1999). Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering c/o GMO Trust Laundering Compliance Officer Reporting Officer (February 40 Rowes Wharf 2003 - present) and Compliance Boston, MA 02110 Officer, Grantham, Mayo, Van Age: 32 Otterloo & Co. LLC.
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 25 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGEMENT Day-to-day management of the Fund's portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Inflation Indexed Bond Fund returned +16.7% during the fiscal year that ended February 28, 2003, compared to +19.3% for the Lehman Brothers U.S. Treasury Inflation Notes Index. The Fund underperformed the benchmark by 2.6% during the fiscal year. Issue selection dramatically hurt performance in late 2002. Value was lost due to credit related spread widening in the assets underlying the Fund's investment in the GMO Alpha LIBOR Fund (ALF), and the default of certain healthcare receivable asset-backed bonds held by ALF. These bonds were allegedly involved in a massive fraud. National Century Financial Enterprises, the sponsor of $3.35 billion of healthcare asset-backed receivables, allegedly violated the terms of the bonds' indentures by, among other things, spending cash collateral, accepting collateral other than permitted receivables, moving receivables between trusts to meet compliance tests, and reimbursing healthcare providers for more than the value of receivables purchased. National Century, its affiliated operations, the trusts, and many healthcare providers have declared bankruptcy. This event had a negative effect on the net asset value of ALF, and an indirect effect on GMO Inflation Indexed Bond Fund of -1.7% (through February 28, 2003). Real (inflation-adjusted) yields on Treasury Inflation-Protected Securities (TIPs) are currently 2.2%. In addition to inflation-indexed bonds issued by the U.S. Treasury Department, the Fund holds inflation-indexed bonds issued by various U.S. Government agencies. While the Fund is permitted to own securities of foreign countries that are not in the benchmark, currently the portfolio is entirely invested in the United States. In addition, the Fund maintains an interest rate exposure quite similar to that of its benchmark. At fiscal year end, approximately 97% of the portfolio is AAA-rated and the remaining 3% is A-rated. OUTLOOK The real yields offered by inflation indexed-bonds provides a low-risk vehicle for achieving stable real returns over the next 5 to 10 years. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO INFLATION INDEXED BOND FUND CLASS III SHARES AND THE LEHMAN BROTHERS U.S. TREASURY INFLATION NOTES INDEX AS OF FEBRUARY 28, 2003 GMO INFLATION LEHMAN BROTHERS U.S. INDEXED BOND FUND TREASURY INFLATION NOTES INDEX 3/31/97 $10,000 $10,000 6/30/97 $10,090 $10,083 9/30/97 $10,250 $10,230 12/31/97 $10,336 $10,349 3/31/98 $10,367 $10,385 6/30/98 $10,501 $10,524 9/30/98 $10,749 $10,810 12/31/98 $10,767 $10,758 3/31/99 $10,854 $10,805 6/30/99 $11,008 $10,959 9/30/99 $11,037 $11,016 12/31/99 $11,058 $11,015 3/31/2000 $11,507 $11,491 6/30/2000 $11,749 $11,760 9/30/2000 $12,034 $12,012 12/31/2000 $12,531 $12,467 3/31/2001 $13,171 $13,065 6/30/2001 $13,429 $13,278 9/30/2001 $13,723 $13,597 12/31/2001 $13,608 $13,451 3/31/2002 $13,761 $13,651 6/30/2002 $14,542 $14,448 9/30/2002 $15,669 $15,596 12/31/2002 $15,539 $15,680 2/28/2003 $16,145 $16,389
AVERAGE ANNUAL TOTAL RETURN SINCE INCEPTION 1 YEAR 5 YEAR 3/31/97 Class III 16.67% 9.24% 8.43%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ DEBT OBLIGATIONS -- 100.8% UNITED STATES -- 100.8% CORPORATE DEBT -- 2.6% 6,850,000 JP Morgan and Co. Series MTNA, Variable Rate, CPI + 4.00%, 6.01%, due 02/15/12 7,158,250 ------------ U.S. GOVERNMENT -- 92.4% 30,648,925 U.S. Treasury Inflation Indexed Bond, 3.88%, due 04/15/29 39,546,691 45,972,405 U.S. Treasury Inflation Indexed Bond, 3.63%, due 04/15/28 56,689,722 17,670,990 U.S. Treasury Inflation Indexed Bond, 3.50%, due 01/15/11 20,139,406 52,959,625 U.S. Treasury Inflation Indexed Note, 4.25%, due 01/15/10 62,599,934 24,908,901 U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09 28,676,373 43,785,353 U.S. Treasury Inflation Indexed Note, 3.63%, due 01/15/08(a) 49,463,766 ------------ 257,115,892 ------------ U.S. GOVERNMENT AGENCY -- 5.8% 14,844,440 Tennessee Valley Authority (Indexed Principal), 3.38%, due 01/15/07 16,238,690 ------------ TOTAL UNITED STATES 280,512,832 ------------ TOTAL DEBT OBLIGATIONS (COST $254,709,059) 280,512,832 ------------ MUTUAL FUNDS -- 18.0% 478,077 GMO Alpha LIBOR Fund 11,339,997 1,545,061 GMO Short-Duration Collateral Fund 38,641,966 ------------ TOTAL MUTUAL FUNDS (COST $50,866,051) 49,981,963 ------------ TOTAL INVESTMENTS -- 118.8% (Cost $305,575,110) 330,494,795 Other Assets and Liabilities (net) -- (18.8%) (52,407,032) ------------ TOTAL NET ASSETS -- 100.0% $278,087,763 ============ NOTES TO SCHEDULE OF INVESTMENTS:
CPI - Consumer Price Index Variable rates - The rates shown on variable rate notes are the current interest rates at February 28, 2003, which are subject to change based on the terms of the security.
(a) All or a portion of this security has been segregated to cover collateral requirements on reverse repurchase agreements (Note 6). See accompanying notes to the financial statements. 1 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $305,575,110) (Note 1) $330,494,795 Cash 223,629 Receivable for Fund shares sold 100,000 Interest receivable 1,826,375 Receivable for expenses reimbursed by Manager (Note 2) 18,060 ------------ Total assets 332,662,859 ------------ LIABILITIES: Payable for investments purchased 6,370,200 Payable for Fund shares repurchased 13,473,706 Payable to affiliate for (Note 2): Management fee 21,097 Shareholder service fee 31,646 Payable for reverse repurchase agreements (Notes 1 and 6) 34,619,128 Accrued expenses and other liabilities 59,319 ------------ Total liabilities 54,575,096 ------------ NET ASSETS $278,087,763 ============ NET ASSETS CONSIST OF: Paid-in capital $248,658,016 Accumulated undistributed net investment income 670,597 Accumulated net realized gain 3,839,465 Net unrealized appreciation 24,919,685 ------------ $278,087,763 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $278,087,763 ============ SHARES OUTSTANDING: Class III 23,719,547 ============ NET ASSET VALUE PER SHARE: Class III $ 11.72 ============
2 See accompanying notes to the financial statements. GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Interest $11,771,315 Dividends from investment company shares 194,237 ----------- Total income 11,965,552 ----------- EXPENSES: Management fee (Note 2) 241,490 Interest expense (Notes 1 and 6) 368,160 Custodian and transfer agent fees 84,598 Audit fees 30,661 Legal fees 14,424 Registration fees 7,127 Trustees fees and related expenses (Note 2) 6,903 Miscellaneous 3,112 Fees reimbursed by Manager (Note 2) (135,718) ----------- 620,757 Shareholder service fee (Note 2) - Class III 362,235 ----------- Net expenses 982,992 ----------- Net investment income 10,982,560 ----------- REALIZED AND UNREALIZED GAIN: Net realized gain on: Investments 6,275,231 Realized gains distributions from investment company shares 57,138 ----------- Net realized gain 6,332,369 ----------- Change in net unrealized appreciation (depreciation) on investments 21,696,687 ----------- Net realized and unrealized gain 28,029,056 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $39,011,616 ===========
See accompanying notes to the financial statements. 3 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 10,982,560 $ 3,750,662 Net realized gain 6,332,369 1,199,410 Change in net unrealized appreciation (depreciation) 21,696,687 (758,918) ------------ ------------ Net increase in net assets from operations 39,011,616 4,191,154 ------------ ------------ Distributions to shareholders from: Net investment income Class III (12,116,397) (4,356,432) ------------ ------------ Total distributions from net investment income (12,116,397) (4,356,432) ------------ ------------ Net realized gains Class III (6,220,182) (663,955) ------------ ------------ Total distributions from net realized gains (6,220,182) (663,955) ------------ ------------ (18,336,579) (5,020,387) ------------ ------------ Net share transactions (Note 5): Class III 108,138,941 84,216,157 ------------ ------------ Increase in net assets resulting from net share transactions 108,138,941 84,216,157 ------------ ------------ Total increase in net assets 128,813,978 83,386,924 NET ASSETS: Beginning of period 149,273,785 65,886,861 ------------ ------------ End of period (including undistributed net investment income of $670,597 and $20,298, respectively) $278,087,763 $149,273,785 ============ ============
4 See accompanying notes to the financial statements. GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF CASH FLOWS FOR THE YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net investment income $ 10,982,560 Net accretion (3,585,183) ------------ 7,397,377 ------------ Investments purchased (334,579,025) Investments sold 193,252,990 ------------ (141,326,035) ------------ Realized gain distributions from investment company shares 57,138 CHANGES IN ASSETS AND LIABILITIES: (Increase) decrease in interest receivable (690,757) (Increase) decrease in receivable for fund shares sold (45,971) (Increase) decrease in receivable for securities sold 75,000 (Increase) decrease in receivable for expenses reimbursed by Manager (15,372) Increase (decrease) in payable for Fund shares repurchased 13,463,038 Increase (decrease) in payable for securities purchased 6,370,200 Increase (decrease) in payable to affiliate for: Management fee 21,097 Shareholder service fee 14,719 Increase (decrease) in accrued expenses and other liabilities 3,345 ------------ NET CASH USED FOR OPERATING ACTIVITIES (114,676,221) ------------ CASH FLOWS FROM FINANCING ACTIVITIES* Proceeds from shares sold 177,027,387 Shares redeemed (84,945,692) Cash Distributions paid (2,279,333) Increase (decrease) in payable for reverse repurchase agreements 25,087,652 ------------ NET CASH PROVIDED (USED IN) FINANCING ACTIVITIES 114,890,014 ------------ NET INCREASE IN CASH 213,793 Cash and cash equivalents, beginning of period 9,836 ------------ Cash and cash equivalents, end of period $ 223,629 ------------ *SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Reinvestment of dividends and distributions 16,057,246
See accompanying notes to the financial statements. 5 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------------------------------------------ 2003 2002 2001(C) 2000 1999 -------- -------- -------- -------- -------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.81 $ 10.64 $ 9.72 $ 9.88 $ 10.04 -------- -------- ------- ------- ------- Income from investment operations: Net investment income 0.51 0.30 0.71+ 0.65+ 0.61 Net realized and unrealized gain (loss) 1.25 0.29 0.90 (0.30) (0.18) -------- -------- ------- ------- ------- Total from investment operations 1.76 0.59 1.61 0.35 0.43 -------- -------- ------- ------- ------- Less distributions to shareholders: From net investment income (0.56) (0.37) (0.69) (0.51) (0.59) From net realized gains (0.29) (0.05) -- -- -- -------- -------- ------- ------- ------- Total distributions (0.85) (0.42) (0.69) (0.51) (0.59) -------- -------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 11.72 $ 10.81 $ 10.64 $ 9.72 $ 9.88 ======== ======== ======= ======= ======= TOTAL RETURN(a) 16.67% 5.66% 16.86% 3.57% 4.28% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $278,088 $149,274 $65,887 $51,951 $25,147 Net operating expenses to average daily net assets 0.25% 0.25% 0.25% 0.25% 0.25% Interest expense to average daily net assets 0.15%(b) 0.17%(b) 0.37%(b) 0.45%(b) -- Total net expenses to average daily net assets(d) 0.40% 0.42% 0.62% 0.70% 0.25% Net investment income to average daily net assets 4.55% 4.15% 6.87% 6.49% 4.93% Portfolio turnover rate 75% 40% 32% 112% 94% Fees and expenses reimbursed by the Manager to average daily net assets: 0.06% 0.09% 0.11% 0.13% 0.30%
+ Computed using average shares outstanding throughout the period. (a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income. (c) Effective March 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium and discount on debt securities. The effect of this change for the year ended February 28, 2001 was to decrease net investment income per share by $0.001, increase net realized and unrealized gains and losses per share by $0.001 and decrease the ratio of net investment income to average net assets from 6.88% to 6.87%. Per share and ratios/supplemental data for periods prior to March 1, 2000 have not been restated to reflect this change. (d) Net expenses exclude expenses incurred indirectly through investment in GMO Alpha LIBOR Fund and GMO Short-Duration Collateral Fund. 6 See accompanying notes to the financial statements. GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Inflation Indexed Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in government bonds that are indexed or otherwise "linked" to general measures of inflation in the country of issue ("inflation indexed bonds"). The Fund's benchmark is the Lehman Brothers U.S. Treasury Inflation Notes Index. Inflation indexed securities issued by the U.S. Treasury are fixed income securities whose principal value is periodically adjusted according to the rate of U.S. inflation. Inflation indexed bonds issued by a foreign government are generally adjusted to reflect a comparable local inflation index. At February 28, 2003, 4.1% of the Fund was invested in the GMO Alpha LIBOR Fund and 13.9% of the Fund was invested in the GMO Short-Duration Collateral Fund, separate funds of GMO Trust managed by GMO. Shares of the GMO Alpha LIBOR Fund and the GMO Short-Duration Collateral Fund are not publicly available for direct purchase. The financial statements of the GMO Alpha LIBOR Fund and the GMO Short-Duration Collateral Fund should be read in conjunction with the Fund's financial statements. The Fund invested a substantial portion of its assets in GMO Alpha LIBOR Fund ("Alpha LIBOR Fund") to obtain the Fund's core portfolio exposure. In November 2002, certain bonds held by Alpha LIBOR Fund ("NPF bonds") defaulted amid allegations of fraud and significant violations of the bonds' indentures. Currently, no market exists for the NPF bonds, and they are being valued at fair value by the trustees of GMO Trust or persons acting at their direction. The devaluation of the NPF bonds had a negative impact on the Fund's net asset value per share. In late November 2002, Alpha LIBOR Fund undertook a reorganization transaction with a new series of GMO Trust, GMO Short-Duration Collateral Fund ("SDCF") and approximately 78% of the Fund's interest in Alpha LIBOR Fund was transferred to SDCF in exchange for SDCF shares. The reorganization was treated as a sale of the Alpha LIBOR Fund shares for financial reporting purposes and a distribution by Alpha LIBOR Fund for tax purposes. Accordingly, for financial reporting purposes, the Fund recognized a loss on the sale of the Alpha LIBOR shares of approximately $3,434,839. In addition, the Fund recognized for tax, but not for financial reporting 7 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- purposes, ordinary income of $1,831,077 and long-term capital gains of $326,590 from Alpha LIBOR Fund. $5,592,506 was added to the tax cost basis of the Fund's holdings of Alpha LIBOR Fund. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of other GMO Funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. Some fixed income securities are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and at its discretion may override a price supplied by a source (by taking a price supplied by another source). Securities may be valued by independent pricing services which use prices provided by market makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. 8 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- Certain investments in securities held by the Fund were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in foreign currency values that are unfavorable to the Fund. At February 28, 2003, the Fund held no open forward currency contracts. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the financial markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by 9 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- another instrument. The Fund may enter into interest rate, total return and forward swap spread lock swap agreements to manage its exposure to interest rates. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Total return swap agreements involve commitments to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. Forward swap spread lock swap agreements involve commitments to pay or receive a settlement amount calculated as the difference between the swap spread and a fixed spread, multiplied by the notional amount times the duration of the swap rate. The swap spread is the difference between the benchmark swap rate (market rate) and the specific treasury rate. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements are included as part of interest income. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in interest rates. At February 28, 2003, the Fund held no open swap agreements. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. 10 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. REVERSE REPURCHASE AGREEMENTS The Fund may enter into reverse repurchase agreements with certain banks and broker/dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. Government securities or other liquid high grade debt obligations in the name of the counterparty equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities the Fund sold may decline below the price at which it is obligated to repurchase them under the agreement. At February 28, 2003, the Fund had entered into a reverse repurchase agreement having a market value of $34,619,128, collateralized by a security with a market value of $35,311,511. See Note 6 for a summary of open reverse repurchase agreements as of February 28, 2003. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 2003, the Fund had no securities on loan. STATEMENT OF CASH FLOWS The cash flow amount shown in the Statement of Cash Flows is the amount reported as cash in the Fund's Statement of Assets and Liabilities and represents cash on hand at its custodian at February 28, 2003. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country's tax treaty with the United States. 11 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. For the years ended February 28, 2002 and February 28, 2003, the tax basis of distributions paid was as follows: ordinary income -- $4,512,657 and $14,060,204, respectively and long-term capital gains -- $507,730 and $4,276,375, respectively. As of February 28, 2003, the components of distributable earnings on a tax basis consisted of $2,316,810 and $2,237,878 of undistributed ordinary income and undistributed long-term capital gains, respectively. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to the GMO Alpha LIBOR Fund transaction. (See Note 3) The financial highlights exclude these adjustments.
Accumulated Accumulated Undistributed Net Net Investment Income Realized Gain Paid-in Capital ----------------- ----------------- --------------- $1,824,732 $3,767,774 $(5,592,506)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Interest income on U.S. Treasury inflation indexed securities is accrued daily based upon the inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities is recorded as interest income. 12 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .10% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until at least June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent Trustees of the Trust (including legal fees), 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) exceed the management fee. The Fund incurs fees and expenses indirectly as a shareholder in GMO Alpha LIBOR Fund and GMO Short-Duration Collateral Fund. For the year ended February 28, 2003, indirect operating expenses (excluding investment-related expenses) were 0.001% of the Fund's average daily net assets, and indirect investment-related expenses (including, but not limited to, interest expense, foreign audit expense, and investment-related legal expense) were 0.003% of the Fund's average daily net assets. As of February 28, 2003, a signficant portion of the Fund's shares were held by accounts for which the Manager has investment discretion. The Fund's portion of the fee paid by the Trust to the independent Trustees during the year ended February 28, 2003 was $5,162. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 13 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 3. PURCHASES AND SALES OF SECURITIES For the year ended February 28, 2003, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases Sales ------------ ------------ U.S. Government securities $228,832,269 $120,546,952 Investments (non-U.S. Government securities) 105,746,756 72,706,038
At February 28, 2003, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Appreciation -------------- ---------------- ---------------- -------------- $311,165,888 $20,232,359 $(903,452) $19,328,907
4. PRINCIPAL SHAREHOLDERS At February 28, 2003, 42.8% of the outstanding shares of the Fund were held by three shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 ------------------------- ------------------------- Shares Amount Shares Amount Class III: ----------- ------------ ----------- ------------ Shares sold 15,785,072 $177,127,387 9,048,815 $ 99,841,544 Shares issued to shareholders in reinvestment of distributions 1,440,111 16,057,246 435,023 4,642,847 Shares repurchased (7,316,454) (85,045,692) (1,865,029) (20,268,234) ----------- ------------ ----------- ------------ Net increase 9,908,729 $108,138,941 7,618,809 $ 84,216,157 =========== ============ =========== ============
14 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 28, 2003 is as follows: REVERSE REPURCHASE AGREEMENT
Face Value Description Market Value ----------- ------------------------------------------------------- ------------ Barclays Bank, 1.24%, dated 2/21/03, to be repurchased $34,619,128 on demand, at face value, plus accrued interest. $34,619,128 ===========
Average balance outstanding $25,068,147 Average interest rate 1.53% Maximum balance outstanding $72,119,500 Average shares outstanding 20,974,918 Average balance per share outstanding 1.20
Average balance outstanding was calculated based on daily balances outstanding during the period that the Fund had entered into reverse repurchase agreements. 15 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO INFLATION INDEXED BOND FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Inflation Indexed Bond Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 16 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- For the fiscal year ended February 28, 2003, all of the Fund's distributions are from investment company taxable income, except that the Fund designated 23.32% of distributions as net capital gain dividends. 17 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 18 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the from February Boston, MA 02110 Trust 2002 - October Age: 64 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 19 PRINCIPAL OFFICERS:
Term of Office(4) and Principal Occupation(s) Name, Address, Position(s) Length of During Past and Age Held with Fund Time Served Five Years ------------------------------------ -------------- -------------- -------------------------------------------------- Scott Eston President and President and Chief Financial Officer (1997 - present), Chief c/o GMO Trust Chief Chief Operating Officer (2000 - present) and Member, 40 Rowes Wharf Executive Executive Grantham, Mayo, Van Otterloo & Co. LLC. Boston, MA 02110 Officer of the Officer since Age: 47 Trust October 2002; Vice President from August 1998 - October 2002. Susan Randall Harbert Chief Chief Member, Grantham, Mayo, Van Otterloo & Co. LLC. c/o GMO Trust Financial Financial 40 Rowes Wharf Officer and Officer Since Boston, MA 02110 Treasurer of February 2000; Age: 45 the Trust Treasurer since February 1998. Brent Arvidson Assistant Since Senior Fund Administrator, Grantham, Mayo, Van c/o GMO Trust Treasurer of September Otterloo & Co. LLC. 40 Rowes Wharf the Trust 1998. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President Vice President General Counsel, Anti-Money Laundering Reporting c/o GMO Trust and Clerk of since February Officer (July 2002 - February 2003) and Member, 40 Rowes Wharf the Trust 1997; Clerk Grantham, Mayo, Van Otterloo & Co. LLC. Boston, MA 02110 since March Age: 37 2001; May 1999 - August 1999. Elaine M. Hartnett, Esq. Vice President Vice President Associate General Counsel, Grantham, Mayo, Van c/o GMO Trust and Secretary since August Otterloo & Co. LLC (June 1999 - present); 40 Rowes Wharf of the Trust 1999; Associate/ Junior Partner, Hale and Dorr LLP Boston, MA 02110 Secretary (1991 - 1999). Age: 58 since March 2001. Julie Perniola Vice President Since February Anti-Money Laundering Reporting Officer (February c/o GMO Trust and Anti- 2003. 2003 - present) and Compliance Officer, Grantham, 40 Rowes Wharf Money Mayo, Van Otterloo & Co. LLC. Boston, MA 02110 Laundering Age: 32 Compliance Officer
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 20 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGEMENT Day-to-day management of the Fund's portfolio is the responsibility of the International Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE Class III shares of GMO International Disciplined Equity Fund returned -8.3% for the fiscal year ended February 28, 2003. This was +9.2% ahead of the MSCI EAFE Index, which returned -17.5% over the same period. International stocks, like the U.S. market, suffered their third straight year of negative returns in 2002. World equity markets were hit by the continued global economic slowdown which came on top of valuation levels that remained high by historical standards. With the addition of corporate governance scandals and a perilous geopolitical situation, these factors combined to produce the worst bear market since 1974. In U.S. dollar terms, foreign stocks fared slightly better than domestic equities. The EAFE Index outperformed the S&P 500 (which returned -22.7%) solely due to weakness in the dollar. Foreign investors have been slowing their inflows on declining confidence in the U.S. economy. With the continued large U.S. trade deficit and lower U.S. interest rates, this seems to have put an end to the long post 1995 dollar rally. In local currency terms, European markets fell even further than the U.S. Germany led the way down, with that country's DAX index falling a Nasdaq-like - -44% in calendar year 2002. Europe continued to suffer from the unraveling of the "TMT" bubble in the technology, media, and telecommunications sectors. Faith has all but vanished that 3rd generation mobile phone technology will deliver pots of gold to these sectors. The insurance sector suffered from a brutal combination of rising liabilities for natural (and unnatural) disasters with deteriorating asset values as equity holdings declined in value. There were questions about the viability of the Eurozone as a single currency region and the appropriateness of its stability pact, which limits government deficits. Adhering to this pact means, for example, that Germany has neither fiscal policy nor monetary policy (now ceded to the ECB) available to stimulate its economy. In Japan, frustration continued to mount over the lack of reform. GDP growth is stagnant and some economic indicators forecast a return to recession in 2003. The solvency of the financial sector remains a concern, and several big banks have been forced to raise additional capital at the expense of current shareholders. Prime Minister Koizumi appeared to practice business as usual with the appointment of an establishment candidate to head the central bank. And the strength of the yen against the U.S. dollar poses problems for exporters. Despite the fact that the Nikkei 225 index hit a 20-year low, Japan was the best performing major market. The MSCI Japan index fell "only" by 10%, as the decline was at least somewhat anticipated in the prices. Within this difficult environment, GMO's disciplined investment approach produced strong relative performance. The focus on higher quality, reasonably valued stocks helped ease the pain. GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- Generally the most defensive sectors performed strongest in these times of uncertainty. Utility stocks led the way, and telecommunications stocks and consumer staples also outperformed the benchmark (though all sectors fell in absolute terms). Energy stocks outperformed only slightly despite a run up in oil prices to nearly $40/barrel. The outperformance of the telecommunications sector came after two dismal years, as share prices have fallen enough that the basic revenue from the traditional business is providing some valuation support even as hopes of future growth dissipate. Technology stocks performed the worst of the major sectors. Sector allocation was a modest benefit to the portfolio, predominantly from an overweight position in electric utilities. Country allocation was also a positive, as the portfolio benefited from overweights in some of the smaller markets that performed relatively well. Austria was the most notable of these as overweighting that market, which managed positive absolute return, added close to a percentage point of relative return. Allocations to Canada and the Pacific region outside Japan were also positive as those regions enjoyed relatively strong economic growth. Currency allocation was also positive as the portfolio benefited not just in absolute terms from not holding the U.S. dollar, but also in relative terms from overweighting the euro and other continental currencies at the expense of the pound and yen. OUTLOOK The silver lining to the pain of a tough bear market is that the bad news is now out in the open. With lower stock prices, dividend yields are now meaningful and there is a lower hurdle on earnings growth required to deliver capital gains. Also, many CEOs have been replaced by a more prudent generation focused on reducing debt and other more conservative means of enhancing shareholder value. Lower valuations and continued dollar weakness position international equities both to enjoy positive returns and to outperform the U.S. market. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO INTERNATIONAL DISCIPLINED EQUITY FUND CLASS III SHARES AND THE MSCI EAFE INDEX AS OF FEBRUARY 28, 2003 GMO INTERNATIONAL DISCIPLINED EQUITY FUND MSCI EAFE INDEX 1/29/2002 $10,000 $10,000 3/31/2002 $10,755 $10,592 6/30/2002 $11,085 $10,367 9/30/2002 $9,302 $8,321 12/31/2002 $9,796 $8,858 2/28/2003 $9,355 $8,294
AVERAGE ANNUAL TOTAL RETURN SINCE INCEPTION 1 YEAR 1/29/2002 Class III -8.28% -5.97%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ COMMON STOCKS -- 94.6% AUSTRALIA -- 4.2% 29,713 Australia and New Zealand Banking Group Ltd 296,074 11,485 Commonwealth Bank of Australia 171,036 34,371 CSR Ltd 135,577 98,743 General Property Trust Units 165,984 13,869 Leighton Holdings Ltd 75,663 42,800 National Australia Bank Ltd 750,625 33,234 Orica Ltd 165,983 66,141 Qantas Airways Ltd 123,624 16,314 St. George Bank Ltd 174,243 30,020 TABCORP Holdings Ltd 182,176 94,880 Telstra Corp Ltd 230,312 86,993 Westfield Trust Units 171,045 36,771 Woodside Petroleum Ltd 242,112 ------------ 2,884,454 ------------ AUSTRIA -- 4.1% 10,500 Austrian Airlines* 72,428 1,600 Bau Holdings AG 118,127 2,800 Boehler Uddeholm (Bearer) 139,666 2,500 Brau Union AG 180,531 5,613 Erste Bank Der Oesterreichischen Sparkassen AG 375,686 3,600 Flughafen Wien AG 130,371 513 Generali Holding Vienna AG 86,254 3,800 Mayr-Melnhof Karton AG (Bearer) 297,425 2,900 Oesterreichische Brau Beteiligungs AG 237,078 5,474 OMV AG 591,463 18,737 Telekom Austria AG* 197,505 4,200 VA Technologie AG (Bearer) 65,638 927 Verbund-Oesterreichische Elektrizitaetswirtschafts AG 82,238 3,803 Voestalpine AG 90,790 8,900 Wienerberger AG 151,656 ------------ 2,816,856 ------------ BELGIUM -- 2.1% 11,899 Almanij NV 383,075 1,988 Bekaert SA 70,172 1,284 Electrabel SA 322,448 10,186 Fortis B 139,427
See accompanying notes to the financial statements. 1 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ BELGIUM -- CONTINUED 9,405 KBC Bancassurance Holding 284,233 3,547 Solvay Et Cie 210,263 ------------ 1,409,618 ------------ CANADA -- 1.5% 11,000 Bank of Montreal 310,109 9,200 EnCana Corp 300,244 2,400 Magna International Inc 133,226 7,000 Royal Bank of Canada 272,990 ------------ 1,016,569 ------------ DENMARK -- 0.3% 14 D/S 1912 95,465 5,125 Group 4 Falck A/S 80,676 ------------ 176,141 ------------ FINLAND -- 0.4% 31,900 Sampo Oyj 199,415 3,500 UPM-Kymmene Oyj 100,343 ------------ 299,758 ------------ FRANCE -- 4.3% 4,403 Assurances Generales de France 121,201 14,542 Axa 177,736 19,436 BNP Paribas 804,408 6,600 Cie de Saint-Gobain 199,391 4,221 Essilor International SA 163,778 6,180 L'Oreal SA 398,982 1,750 Pernod Ricard 135,520 3,061 Renault SA 129,392 11,900 Societe Generale Class A 638,726 442 Unibail 27,773 29,805 Wanadoo* 149,055 ------------ 2,945,962 ------------ GERMANY -- 6.8% 2,900 Adidas-Salomon AG 231,296 87,200 Bankgesellschaft Berlin AG* 134,397
2 See accompanying notes to the financial statements. GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ GERMANY -- CONTINUED 20,000 BASF AG 726,437 10,300 Bayerische Motoren Werke AG 288,080 15,000 Continental AG* 235,230 30,800 DaimlerChrysler AG (Registered) 939,454 5,400 Degussa AG 137,937 20,100 E. On AG 854,636 10,200 RWE AG 227,017 12,400 Siemens AG (Registered) 494,495 6,900 Sudzucker AG 108,578 26,100 Thyssen Krupp AG 248,674 ------------ 4,626,231 ------------ HONG KONG -- 2.0% 81,500 CLP Holdings Ltd 334,398 115,000 Hang Lung Group Co Ltd 97,319 50,000 Henderson Land Development Co Ltd 141,683 109,000 Hong Kong Electric Holdings Ltd 415,785 45,000 Hong Kong Land Holdings 55,350 162,000 YUE Yuen Industrial Holdings* 301,189 ------------ 1,345,724 ------------ IRELAND -- 0.8% 14,572 Allied Irish Banks Plc 184,856 22,299 Bank of Ireland 245,626 7,509 Irish Life & Permanent Plc 73,648 ------------ 504,130 ------------ ITALY -- 3.2% 79,323 ENI-Ente Nazionale Idrocarburi SPA 1,177,257 19,153 RAS SPA 235,538 58,351 Telecom Italia Mobile SPA 262,883 37,378 Telecom Italia SPA 259,845 47,955 Telecom Italia SPA (Savings Shares) 235,171 ------------ 2,170,694 ------------ JAPAN -- 21.3% 6,400 Acom Co Ltd 210,040 6,000 Alps Electric Co Ltd 73,284
See accompanying notes to the financial statements. 3 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ JAPAN -- CONTINUED 17,000 Bridgestone Corp 191,964 39,000 Brother Industries Ltd 235,204 27,000 Canon Sales Co Inc 195,948 14,600 Chubu Electric Power Co Inc 267,981 10,100 Chugoku Electric Power Co Inc 154,458 44,000 Cosmo Oil Co Ltd 59,920 15,000 Daiichi Pharmaceuticals Co Ltd 200,973 26,000 Dainippon Printing Co Ltd 262,584 51,000 Daiwa House Industry Co Ltd 289,888 53 East Japan Railway Co 244,322 31,000 Fuji Heavy Industries Ltd 119,569 2,400 Hoya Corp 154,079 80,000 Itochu Corp 190,823 31 Japan Tobacco Inc 184,859 24,825 JFE Holdings Inc* 360,537 102,000 Kajima Corp 204,474 3,000 Kansai Electric Power 45,498 175,000 Kawasaki Heavy Industries Ltd* 152,463 20,000 Kirin Brewery Co Ltd 148,023 436,000 Kobe Steel Ltd* 265,528 29,000 Komatsu Ltd 111,364 6,100 Kyushu Electric Power Co Inc 89,675 22,000 Matsushita Electric Industrial Co Ltd 195,204 91,000 Mazda Motor Corp 192,430 23,000 Minolta Co Ltd* 112,836 41,000 Mitsubishi Corp 274,316 54,000 Mitsubishi Electric Corp* 144,335 17,000 Mitsubishi Estate Co Ltd 117,767 115,000 Mitsubishi Motors* 279,171 67 Mitsubishi Tokyo Finance Group Inc 296,959 170 Mizuho Holding Inc* 150,983 63,000 Nippon Express Co Ltd 248,856 117 Nippon Telegraph & Telephone Corp 423,565 64,000 Nissan Motor Co 480,169 9,000 Nitto Denko Corp 252,738 39,000 Nomura Holdings Inc 458,532 90 NTT Docomo Inc* 169,761 9,000 Ono Pharmaceutical Co Ltd 282,428 6,200 Promise Co 202,428 171,000 Resona Holdings Inc* 82,444
4 See accompanying notes to the financial statements. GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ JAPAN -- CONTINUED 3,700 Rohm Co Ltd 424,064 14,000 Sankyo Co Ltd 186,864 76,000 Sekisui Chemical 190,281 11,000 Sekisui House Ltd 77,598 4,700 Shikoku Electric Power 72,552 63,000 Shimizu Corp 155,069 3,000 Shin-Etsu Chemical Co Ltd 98,203 14,000 Shiseido Co Ltd 162,351 3,000 Showa Shell Sekiyu 19,818 3,300 SMC Corp 252,612 19,000 Sony Corp 721,590 503,000 Sumitomo Metal Industries* 221,239 41 Sumitomo Mitsui Financial Group Inc* 95,716 13,000 Suzuki Motor Corp 148,446 113,000 Taiheiyo Cement Corp 188,293 122,000 Taisei Corp 229,089 17,000 Taisho Pharmaceutical Co Ltd 248,475 17,000 Takeda Chemical Industries Ltd 626,940 5,850 Takefuji Corp 289,964 5,800 Tohoku Electric Power Co Inc 84,038 11,000 Tokyo Electric Power 211,673 21,000 Tokyu Corp 68,742 17,000 Toppan Printing Co Ltd 117,048 91,000 Toshiba Corp* 264,783 16,000 Toyota Motor Corp 375,555 4,600 Uni-Charm Corp 174,701 ------------ 14,484,084 ------------ NETHERLANDS -- 4.4% 49,510 ABN Amro Holdings NV 787,088 56,320 Aegon NV 603,982 2,876 DSM NV 105,547 24,769 Koninklijke Philips Electronics NV 413,254 125,111 Ron KPN NV* 829,294 4,532 Unilever NV 256,929 410 Wolters Kluwer NV 5,670 ------------ 3,001,764 ------------
See accompanying notes to the financial statements. 5 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ NEW ZEALAND -- 0.2% 55,263 Telecom Corp of New Zealand 129,497 ------------ NORWAY -- 1.8% 37,500 DNB Holdings Class A 141,834 4,950 Elkem AS Class A 89,811 12,580 Norsk Hydro AS 481,952 6,800 Orkla ASA 94,905 56,100 Statoil ASA 430,632 ------------ 1,239,134 ------------ PORTUGAL -- 0.3% 34,507 Electricidade de Portugal SA 52,812 25,337 Portugal Telecom SA 162,484 ------------ 215,296 ------------ SINGAPORE -- 0.4% 3,000 Great Eastern Holdings Ltd 14,662 1,798 Haw Par Corp Ltd 3,577 28,000 Singapore Airlines Ltd 152,143 11,000 Singapore Press Holdings Ltd 115,114 ------------ 285,496 ------------ SPAIN -- 3.6% 14,526 Altadis SA 344,278 14,600 CIA ESP Petroleos 298,982 32,270 Endesa SA 386,065 10,300 Gas Natural SDG SA 202,044 53,475 Repsol YPF SA 749,260 11,842 Telefonica Moviles SA* 75,942 39,174 Telefonica SA* 379,996 ------------ 2,436,567 ------------ SWEDEN -- 1.2% 7,100 Electrolux AB 123,076 8,850 Hennes & Mauritz AB 186,693 41,500 Nordea AB 180,944 9,300 Sandvik AB 215,313
6 See accompanying notes to the financial statements. GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ SWEDEN -- CONTINUED 28,500 TeliaSonera AB 95,793 ------------ 801,819 ------------ SWITZERLAND -- 7.8% 5,944 Logitech International SA* 199,229 54,257 Novartis AG 1,992,624 4,559 Roche Holding AG (Bearer) 438,753 24,083 Roche Holding AG (Genusschein) 1,446,578 4,035 Swiss Reinsurance Co 217,223 2,533 Swisscom AG 752,802 1,060 ZKB Finanz Vision AG* 86,379 2,076 Zurich Financial Services AG 176,062 ------------ 5,309,650 ------------ UNITED KINGDOM -- 23.9% 52,100 Abbey National Plc 320,045 17,100 Alliance & Leicester Plc 208,740 6,340 Alliance Unichem Plc 39,196 34,330 Associated British Food 274,421 13,367 AstraZeneca Plc 431,193 52,239 Aviva Plc 325,630 23,632 BAA Plc 161,175 100,400 Barclays Plc 580,374 86,170 BG Group Plc 332,190 55,300 Boots Group Plc 472,098 31,934 BP Plc 201,197 66,267 British American Tobacco 647,138 317,374 BT Group Plc 817,330 125,500 Corus Group Plc* 34,593 43,400 Diageo Plc 430,664 20,721 Gallaher Group Plc 203,333 51,300 GUS Plc 410,073 55,023 HBOS Plc 573,734 59,715 HSBC Holdings Plc 643,351 37,869 Imperial Chemical Industries Plc 90,664 25,591 Imperial Tobacco Group Plc 399,255 145,055 Invensys Plc 36,556 123,552 Kingfisher Plc 445,163 16,492 Land Securities Group Plc 193,266
See accompanying notes to the financial statements. 7 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ UNITED KINGDOM -- CONTINUED 113,033 Lloyds TSB Group Plc 630,255 72,731 Marks & Spencer Group Plc 349,977 92,019 National Grid Transco Plc 591,352 23,272 Next Plc 293,246 10,750 Premier Farnell Plc 24,975 23,955 Reckitt Benckiser Plc 377,692 39,916 Reed Elsevier Plc 291,410 45,076 Rentokil Initial Plc 129,751 151,605 Rolls-Royce 189,840 137,106 Royal & Sun Alliance Insurance Group 154,408 25,932 Royal Bank of Scotland Group 593,485 25,368 Sainsbury (J) 92,701 31,204 Scottish & Newcastle Plc 165,142 40,276 Scottish & Southern Energy Plc 399,664 80,009 Scottish Power Plc 459,351 179,961 Shell Transport & Trading (Registered) 1,042,412 32,358 Six Continents Plc 315,486 34,888 Smith & Nephew Plc 201,125 47,200 Tate & Lyle 206,492 42,734 THUS Group Plc* 5,742 10,253 United Utilities 95,282 642,773 Vodafone Group Plc 1,151,641 5,818 Whitbread Plc 47,744 24,580 Wolseley 193,967 ------------ 16,274,519 ------------ TOTAL COMMON STOCKS (COST $71,102,219) 64,373,963 ------------ PREFERRED STOCKS -- 0.4% AUSTRALIA -- 0.1% 20,806 News Corporation Ltd 0.93% 107,827 ------------ GERMANY -- 0.3% 1,800 RWE AG 4.35% 36,473 5,300 Volkswagen AG 5.30% 155,376 ------------ 191,849 ------------ TOTAL PREFERRED STOCKS (COST $342,604) 299,676 ------------
See accompanying notes to the financial statements. 8 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ SHORT-TERM INVESTMENTS -- 3.3% CASH EQUIVALENTS -- 2.1% $ 1,400,000 Bank of Scotland Time Deposit, 1.31%, due 3/03/03 1,400,000 ------------ U.S. GOVERNMENT -- 1.2% 850,000 U.S. Treasury Bill, 1.19%, due 4/24/03(a) 848,477 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $2,248,477) 2,248,477 ------------ TOTAL INVESTMENTS -- 98.3% (Cost $73,693,300) 66,922,116 Other Assets and Liabilities (net) -- 1.7% 1,124,513 ------------ TOTAL NET ASSETS -- 100.0% $ 68,046,629 ============ NOTES TO SCHEDULE OF INVESTMENTS:
* Non-income producing security. (a) All or a portion of this security is held as collateral for open futures contracts (Note 6). See accompanying notes to the financial statements. 9 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY (SHOWING PERCENTAGE OF EQUITY INVESTMENTS) FEBRUARY 28, 2003 (UNAUDITED) At February 28, 2003, industry sector diversification of the Fund's equity investments was as follows:
INDUSTRY SECTOR - -------------------------------------------------------------------- Financials 23.3% Consumer Discretionary 13.9 Health Care 9.7 Telecommunication Services 9.5 Energy 9.2 Consumer Staples 8.8 Industrials 8.4 Utilities 8.3 Materials 6.1 Information Technology 2.8 ----- 100.0% =====
10 See accompanying notes to the financial statements. GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $73,693,300) (Note 1) $66,922,116 Cash 71,266 Foreign currency, at value (cost $158,008) (Note 1) 157,463 Dividends and interest receivable 108,494 Foreign taxes receivable 59,541 Receivable for open forward foreign currency contracts (Notes 1 and 6) 1,918,959 Receivable for expenses reimbursed by Manager (Note 2) 4,564 ----------- Total assets 69,242,403 ----------- LIABILITIES: Payable to affiliate for (Note 2): Management fee 21,117 Shareholder service fee 7,919 Payable for open forward foreign currency contracts (Notes 1 and 6) 1,097,369 Payable for variation margin on open futures contracts (Notes 1 and 6) 938 Accrued expenses 68,431 ----------- Total liabilities 1,195,774 ----------- NET ASSETS $68,046,629 =========== NET ASSETS CONSIST OF: Paid-in capital $77,030,287 Accumulated undistributed net investment income 121,850 Accumulated net realized loss (3,112,728) Net unrealized depreciation (5,992,780) ----------- $68,046,629 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $68,046,629 =========== SHARES OUTSTANDING: Class III 3,771,687 =========== NET ASSET VALUE PER SHARE: Class III $ 18.04 ===========
See accompanying notes to the financial statements. 11 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $226,575) $ 1,670,938 Interest 45,532 ----------- Total income 1,716,470 ----------- EXPENSES: Management fee (Note 2) 289,406 Custodian fees 208,105 Audit fees 33,112 Transfer agent fees 27,202 Registration fees 6,826 Legal fees 3,835 Trustees fees and related expenses (Note 2) 1,498 Miscellaneous 1,908 Fees reimbursed by Manager (Note 2) (280,639) ----------- 291,253 Shareholder service fee (Note 2) - Class III 108,527 ----------- Net expenses 399,780 ----------- Net investment income 1,316,690 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (2,401,540) Closed futures contracts (652,489) Foreign currency, forward contracts and foreign currency related transactions 1,289,891 ----------- Net realized loss (1,764,138) ----------- Change in net unrealized appreciation (depreciation) on: Investments (7,666,311) Open futures contracts (78,132) Foreign currency, forward contracts and foreign currency related transactions 812,539 ----------- Net unrealized loss (6,931,904) ----------- Net realized and unrealized loss (8,696,042) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(7,379,352) ===========
12 See accompanying notes to the financial statements. GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
PERIOD FROM JANUARY 29, 2002 YEAR ENDED (COMMENCEMENT OF OPERATIONS) FEBRUARY 28, 2003 THROUGH FEBRUARY 28, 2002 ----------------- ---------------------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 1,316,690 $ 53,760 Net realized loss (1,764,138) (11,583) Change in net unrealized appreciation (depreciation) (6,931,904) 939,124 ----------- ----------- Net increase (decrease) in net assets from operations (7,379,352) 981,301 ----------- ----------- Distributions to shareholders from: Net investment income Class III (2,585,607) -- ----------- ----------- Total distributions from net investment income (2,585,607) -- ----------- ----------- Net share transactions: (Note 5) Class III 30,930,287 46,100,000 ----------- ----------- Increase in net assets resulting from net share transactions 30,930,287 46,100,000 ----------- ----------- Total increase in net assets 20,965,328 47,081,301 NET ASSETS: Beginning of period 47,081,301 -- ----------- ----------- End of period (including accumulated undistributed net investment income of $121,850 and $68,232, respectively) $68,046,629 $47,081,301 =========== ===========
See accompanying notes to the financial statements. 13 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM JANUARY 29, 2002 (COMMENCEMENT YEAR ENDED OF OPERATIONS) THROUGH FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ---------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 20.40 $ 20.00 ------- -------- Income from investment operations: Net investment income+ 0.37 0.02 Net realized and unrealized gain (loss) (2.03) 0.38 ------- -------- Total from investment operations (1.66) 0.40 ------- -------- Less distributions to shareholders: From net investment income (0.70) -- ------- -------- Total distributions (0.70) -- ------- -------- NET ASSET VALUE, END OF PERIOD $ 18.04 $ 20.40 ======= ======== TOTAL RETURN(a) (8.28)% 2.00%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $68,047 $ 47,081 Net expenses to average daily net assets 0.55% 0.55%* Net investment income to average daily net assets 1.82% 1.56%* Portfolio turnover rate 64% 0%(b) Fees and expenses reimbursed by the Manager to average daily net assets: 0.39% 1.89%*
* Annualized. ** Not annualized. + Computed using average shares outstanding throughout the period. (a) Total return would have been lower had certain expenses not been reimbursed during the period shown. (b) Portfolio turnover rate was less than 1%. 14 See accompanying notes to the financial statements. GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO International Disciplined Equity Fund (the "Fund"), which commenced operations on January 29, 2002, is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in equity securities of non-U.S. issuers. The Fund's benchmark is the Morgan Stanley Capital International ("MSCI") EAFE Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign 15 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in foreign currency values that are unfavorable to the Fund. The value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through currency contracts as of February 28, 2003. FUTURES CONTRACTS The Fund may purchase and sell futures contracts to manage its exposure to the financial markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are 16 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 28, 2003. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 28, 2003, there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future, security or currency transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. At February 28, 2003, there were no open purchased option contracts. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the financial markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by 17 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. At February 28, 2003, there were no open swap agreements. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of collateral, the risk of delay in recovery or loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 2003, the Fund had no securities on loan. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryover for U.S. federal income tax 18 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country's tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. During the year ended February 28, 2003, the tax basis of distributions was paid as follows: ordinary income -- $2,585,607. As of February 28, 2003, the components of distributable earnings on a tax basis consisted of $761,388 of undistributed ordinary income. The temporary differences between book and tax basis distributable earnings are primarily due to foreign currency transactions. At February 28, 2003, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code of $1,686,686 expiring in 2011. The Fund has elected to defer to March 1, 2003 post-October capital losses of $1,388,413. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to foreign currency transactions. The financial highlights exclude these adjustments.
Accumulated Undistributed Net Accumulated Net Investment Income Realized Loss ----------------- --------------- $1,322,535 $(1,322,535)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. 19 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .40% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until at least June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent Trustees of the Trust (including legal fees), 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) exceed the management fee. As of February 28, 2003, a significant portion of the Fund's shares were held by accounts for which the Manager has investment discretion. 20 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- The Fund's portion of the fee paid by the Trust to the independent Trustees during the year ended February 28, 2003, was $1,099. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2003 aggregated $73,179,416 and $43,335,678, respectively. At February 28, 2003 the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $73,731,676 $2,825,624 $(9,635,184) $(6,809,560)
4. PRINCIPAL SHAREHOLDERS At February 28, 2003, 95.4% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the outstanding shares of the Fund. Investment activities of these shareholders may have a material effect on the Fund. 21 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Period from January 29, 2002 (commencement of operations) Year Ended through February 28, February 28, 2003 2002 ---------------------- ------------------------ Shares Amount Shares Amount --------- ----------- ---------- ------------ Class III: Shares sold 1,412,193 $29,960,294 2,308,021 $46,100,000 Shares issued to shareholders in reinvestment of distributions 51,473 969,993 -- -- Shares repurchased -- -- -- -- --------- ----------- --------- ----------- Net increase 1,463,666 $30,930,287 2,308,021 $46,100,000 ========= =========== ========= ===========
The Fund was formed on January 29, 2002 with a $12,023,655 purchase and an initial taxable contribution of securities in-kind, which had a market value of $34,076,345 on the date of contribution. 22 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 28, 2003 is as follows: FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) ---------- ---------------- ----------------- ------------ -------------- Buys 4/28/03 AUD 1,457,195 $ 879,581 $ 85,410 4/28/03 CAD 1,130,513 756,759 25,251 3/28/03 CHF 2,007,345 1,481,070 126,083 3/28/03 DKK 15,328,120 2,221,621 209,261 3/28/03 EUR 9,008,260 9,700,149 869,512 3/28/03 GBP 776,204 1,220,640 16,720 4/28/03 HKD 8,969,748 1,149,914 1,820 4/28/03 JPY 188,308,400 1,596,136 51,934 3/28/03 NOK 11,558,250 1,608,472 78,575 4/28/03 NZD 1,659,012 917,100 112,909 3/28/03 SEK 34,332,240 4,028,068 335,244 4/28/03 SGD 2,267,526 1,304,919 6,240 ----------- $ 1,918,959 =========== Sales 4/28/03 CAD 1,329,797 $ 890,159 $ (48,257) 3/28/03 CHF 589,280 434,786 (34,786) 3/28/03 EUR 5,914,990 6,369,297 (443,628) 3/28/03 GBP 2,905,301 4,568,808 (72,825) 4/28/03 HKD 13,261,160 1,700,069 (2,611) 4/28/03 JPY 670,719,700 5,685,141 (220,495) 3/28/03 NOK 4,766,460 663,311 (39,633) 4/28/03 NZD 834,202 461,146 (66,318) 3/28/03 SEK 14,804,725 1,736,981 (136,904) 4/28/03 SGD 2,660,603 1,531,128 (31,912) ----------- $(1,097,369) ===========
23 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- CURRENCY ABBREVIATIONS: AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc DKK - Danish Krona EUR - Euro GBP - British Pound HKD - Hong Kond Dollar JPY - Japanese Dollar NOK - Norwegian Krone NZD - New Zealand Dollar SEK - Swedish Krona SGD - Singapore Dollar FUTURES CONTRACTS
Net Unrealized Appreciation Number of Contracts Type Expiration Date Contract Value (Depreciation) ------------------- ----------------- --------------- -------------- -------------- Buys 1 DAX March 2003 $ 68,481 $ (4,038) 3 FTSE 100 March 2003 171,576 (8,474) 3 MIB30 March 2003 379,213 2,126 12 TOPIX March 2003 829,266 (28,284) 34 MSCI March 2003 609,953 (11,825) -------- $(50,495) ========
At February 28, 2003, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. 24 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO INTERNATIONAL DISCIPLINED EQUITY FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO International Disciplined Equity Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 25 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- During the year ended February 28, 2003, the Fund paid foreign taxes of $226,575 and recognized foreign source income of $1,897,513. 26 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 27 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the from February Boston, MA 02110 Trust 2002 - October Age: 64 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 28 PRINCIPAL OFFICERS:
Term of Office(4) and Name, Address, Position(s) Length of Principal Occupation(s) During and Age Held with Fund Time Served Past Five Years ------------------------- ------------------------------ ------------------------------ ------------------------------ Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief 40 Rowes Wharf Vice President from August Operating Officer (2000 - Boston, MA 02110 1998 - October 2002. present) and Member, Grantham, Age: 47 Mayo, Van Otterloo & Co. LLC. Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC. 40 Rowes Wharf February 1998. Boston, MA 02110 Age: 45 Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator, c/o GMO Trust Trust Grantham, Mayo, Van 40 Rowes Wharf Otterloo & Co. LLC. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti-Money c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer 40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003) Boston, MA 02110 and Member, Grantham, Mayo, Age: 37 Van Otterloo & Co. LLC. Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel, c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van 40 Rowes Wharf 2001. Otterloo & Co. LLC (June Boston, MA 02110 1999 - present); Associate/ Age: 58 Junior Partner, Hale and Dorr LLP (1991 - 1999). Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering c/o GMO Trust Laundering Compliance Officer Reporting Officer (February 40 Rowes Wharf 2003 - present) and Compliance Boston, MA 02110 Officer, Grantham, Mayo, Van Age: 32 Otterloo & Co. LLC.
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 29 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGEMENT Day-to-day management of the Fund's portfolio is the responsibility of the Asset Allocation Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the International Equity Allocation Fund returned -5.6% for the fiscal year ended February 28, 2003. During the period, the Fund's benchmark, the MSCI ACWI [All Country World Index] Free ex-US, returned -16.6%. During the fiscal year, both asset allocation and implementation added to performance. Relative to the benchmark, the Fund was underweight developed international stocks by 28%, balanced by a 24% overweight to emerging market equities and a 4% overweight to emerging country debt. Within international stocks, the portfolio was tilted towards the most attractively valued sectors including international small, where the Fund was overweight 7.9%. As the value/growth spread returned to its historical par, we allocated 25% to the GMO International Growth Fund. The allocation to international growth slightly detracted value, while that to international small companies added to performance. The value bias of the GMO International Intrinsic Value Fund ensured another year of strong performance in a down market, as it outperformed its SSB PMI EPAC Value benchmark by 11.3%. In addition, the GMO International Small Companies Fund, the GMO International Growth Fund, and the GMO Emerging Markets Fund all outperformed their benchmarks by 4.1%, 7.1%, and 2.5% respectively. The GMO Emerging Country Debt Fund outperformed its J.P. Morgan EMBI Global benchmark by 3.8%. OUTLOOK With large developed international equities -- both value and growth -- fairly valued, and with help from a depreciating dollar, we expect attractive returns over the rest of the current cycle. We continue to hold substantial overweights to the still cheap sectors of international small and emerging markets. With yields at near record lows, the Fund now has emerging country debt as its sole fixed income bet. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO INTERNATIONAL EQUITY ALLOCATION FUND CLASS III SHARES AND THE MSCI ALL COUNTRY WORLD FREE EX-U.S. INDEX AS OF FEBRUARY 28, 2003 GMO INTERNATIONAL EQUITY MSCI ALL COUNTRY WORLD FREE ALLOCATION FUND EX-U.S. INDEX 10/11/96 $10,000 $10,000 12/31/96 $10,268 $10,187 3/31/97 $10,389 $10,162 6/30/97 $11,288 $11,481 9/30/97 $11,578 $11,375 12/31/97 $10,447 $10,395 3/31/98 $11,868 $11,815 6/30/98 $11,020 $11,640 9/30/98 $9,266 $9,880 12/31/98 $10,655 $11,898 3/31/99 $10,754 $12,180 6/30/99 $12,348 $12,749 9/30/99 $12,321 $13,181 12/31/99 $13,507 $15,575 3/31/2000 $13,199 $15,697 6/30/2000 $13,071 $15,057 9/30/2000 $12,454 $13,829 12/31/2000 $12,626 $13,225 3/31/2001 $11,887 $11,482 6/30/2001 $12,415 $11,447 9/30/2001 $11,063 $9,751 12/31/2001 $11,902 $10,617 3/31/2002 $12,931 $10,784 6/30/2002 $13,121 $10,481 9/30/2002 $11,140 $8,452 12/31/2002 $11,854 $9,030 2/28/2003 $11,532 $8,534
AVERAGE ANNUAL TOTAL RETURN SINCE INCEPTION 1 YEAR 5 YEAR 10/11/96 Class III -5.58% 0.55% 2.26%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- MUTUAL FUNDS -- 100.0% 929,666 GMO Emerging Countries Fund, Class III 7,939,351 451,842 GMO Emerging Country Debt Fund, Class III 4,301,534 1,583,874 GMO Emerging Markets Fund, Class III 13,969,773 1,545,176 GMO International Growth Fund, Class III 26,005,305 2,643,428 GMO International Intrinsic Value Fund, Class III 42,638,491 936,951 GMO International Small Companies Fund, Class III 8,901,034 ------------- TOTAL MUTUAL FUNDS (COST $113,383,931) 103,755,488 ------------- SHORT-TERM INVESTMENTS -- 0.0% REPURCHASE AGREEMENT -- 0.0% $ 17,458 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/28/03, due 3/03/03, with a maturity value of $17,458 and an effective yield of 0.36%, collateralized by a U.S. Treasury Bond with a rate of 3.625%, maturity date of 3/31/04 and a market value, including accrued interest of $18,783. 17,458 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $17,458) 17,458 ------------- TOTAL INVESTMENTS -- 100.0% (Cost $113,401,389) 103,772,946 Other Assets and Liabilities (net) -- (0.0%) (5,007) ------------- TOTAL NET ASSETS -- 100.0% $ 103,767,939 =============
See accompanying notes to the financial statements. 1 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $113,401,389) (Note 1) $103,772,946 Receivable for expenses reimbursed by Manager (Note 2) 9,240 ------------ Total assets 103,782,186 ------------ LIABILITIES: Accrued expenses 14,247 ------------ Total liabilities 14,247 ------------ NET ASSETS $103,767,939 ============ NET ASSETS CONSIST OF: Paid-in capital $120,845,107 Accumulated undistributed net investment income 2,507,690 Accumulated net realized loss (9,956,415) Net unrealized depreciation (9,628,443) ------------ $103,767,939 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $103,767,939 ============ SHARES OUTSTANDING: Class III 12,610,843 ============ NET ASSET VALUE PER SHARE: Class III $ 8.23 ============
2 See accompanying notes to the financial statements. GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from investment company shares $ 3,694,067 Interest 1,994 ------------ Total income 3,696,061 ------------ EXPENSES: Audit fees 16,770 Custodian and transfer agent fees 13,773 Registration fees 10,050 Legal fees 4,180 Trustees fees and related expenses (Note 2) 2,889 Miscellaneous 1,465 Fees reimbursed by Manager (Note 2) (45,936) ------------ 3,191 ------------ Net expenses 3,191 ------------ Net investment income 3,692,870 ------------ REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (2,078,540) Realized gains distributions from investment company shares 73,520 ------------ Net realized loss on investments (2,005,020) ------------ Change in net unrealized appreciation (depreciation) on investments (8,571,150) ------------ Net realized and unrealized loss (10,576,170) ------------ NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (6,883,300) ============
See accompanying notes to the financial statements. 3 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 3,692,870 $ 1,880,452 Net realized loss (2,005,020) (4,468,470) Change in net unrealized appreciation (depreciation) (8,571,150) (1,997,367) ------------ ----------- Net decrease in net assets from operations (6,883,300) (4,585,385) ------------ ----------- Distributions to shareholders from: Net investment income Class III (3,111,365) (1,638,687) ------------ ----------- Total distributions from net investment income (3,111,365) (1,638,687) ------------ ----------- Net share transactions (Note 5): Class III 48,050,692 (1,039,236) ------------ ----------- Increase (decrease) in net assets resulting from net share transactions 48,050,692 (1,039,236) ------------ ----------- Total increase (decrease) in net assets 38,056,027 (7,263,308) NET ASSETS: Beginning of period 65,711,912 72,975,220 ------------ ----------- End of period (including accumulated undistributed net investment income of $2,507,690 and $1,874,990, respectively) $103,767,939 $65,711,912 ============ ===========
4 See accompanying notes to the financial statements. GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, -------------------------------------------- 2003 2002 2001 2000 1999 -------- ------- ------- ------- ------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.02 $ 9.67 $ 9.87 $ 8.28 $ 10.18 -------- ------- ------- ------- ------- Income from investment operations: Net investment income(a) 0.36+ 0.25+ 0.16+ 0.22+ 0.19+ Net realized and unrealized gain (loss) (0.83) (0.66) (0.06) 1.73 (1.01) -------- ------- ------- ------- ------- Total from investment operations (0.47) (0.41) 0.10 1.95 (0.82) -------- ------- ------- ------- ------- Less distributions to shareholders: From net investment income (0.32) (0.24) (0.30) (0.08) (0.50) From net realized gains -- -- -- (0.28) (0.58) -------- ------- ------- ------- ------- Total distributions (0.32) (0.24) (0.30) (0.36) (1.08) -------- ------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 8.23 $ 9.02 $ 9.67 $ 9.87 $ 8.28 ======== ======= ======= ======= ======= TOTAL RETURN(b) (5.58)% (4.26)% 0.87% 23.58% (8.77)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $103,768 $65,712 $72,975 $76,047 $90,161 Net expenses to average daily net assets(c) 0.00%(d) 0.00%(d) 0.00% 0.00% 0.00% Net investment income to average daily net assets(a) 4.11% 2.83% 1.62% 2.24% 2.06% Portfolio turnover rate 19% 50% 14% 8% 36% Fees and expenses reimbursed by the Manager to average daily net assets: 0.05% 0.05% 0.05% 0.04% 0.05%
(a) Recognition of net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the fund invests. (b) The total returns would have been lower had cetain expenses not been reimbursed during the periods shown. (c) Net expenses exclude expenses incurred indirectly through investment in underlying funds. See Note 2. (d) Net expenses to average daily net assets was less than 0.01%. + Computed using average shares outstanding throughout the period. See accompanying notes to the financial statements. 5 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO International Equity Allocation Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund operates as a "fund-of-funds" in that, pursuant to management provided by the Manager, it makes investments in other funds of the Trust ("underlying funds"). The Fund seeks total return greater than the return of the MSCI All Country World Free ex-U.S. Index through investment to varying extents in underlying funds of the Trust. The Fund will pursue its objective by investing in Class III shares of international equity and fixed income funds of the Trust. The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Shares of underlying funds are valued at their net asset value as reported on each business day. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost, which approximates fair value. Securities for which quotations are not readily available or whose values the manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. Securities held by the underlying funds may be valued by independent pricing services which use prices provided by market makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. 6 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- Certain investments in securities held by the underlying funds were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country's tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003, the tax basis of distributions paid for ordinary income were $1,638,687 and $3,111,365, respectively. As of February 28, 2003, the components of distributable earnings on a tax basis consisted of $2,507,690 of undistributed ordinary income. The temporary differences between book and tax basis distributable earnings are primarily due to wash sale transactions. 7 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- At February 28, 2003, the Fund had capital loss carryforwards available to offset future capital gains, if any, to the extent permitted by the Code, of $180,039, $3,610,151 and $1,731,139 expiring in 2008, 2010 and 2011, respectively. The Fund elected to defer to March 1, 2003 post-October losses of $492,503. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus U.S. GAAP. The financial highlights exclude these adjustments.
Accumulated Accumulated Undistributed Net Net Investment Income Realized Loss ----------------- ----------------- $51,195 $(51,195)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Income dividends and capital gain distributions from underlying funds are recorded on the ex-dividend date. Non-cash dividends, if any, are recorded at fair market value of the securities received. Interest income is recorded on the accrual basis. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund will also incur certain fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have varied expense and fee levels and the Fund may own different proportions of underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary. INVESTMENT RISK The Fund is subject to the investment risk associated with an investment in the underlying funds, some of which may invest in foreign securities. There are certain additional risks involved in 8 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. Additionally, the investment risk associated with an investment in the underlying funds may be more pronounced to the extent that the underlying funds engage in derivative transactions. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES The Manager determines the allocation of the assets of the Fund among designated underlying funds. The Manager does not directly charge an advisory fee or shareholder service fee, but receives advisory and shareholder service fees from the underlying funds in which the Fund invests. GMO has entered into a binding agreement effective until at least June 30, 2003 to reimburse the Fund for its total annual operating expenses (excluding fees and expenses of the independent Trustees of the Trust (including legal fees), 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). The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2003, shareholder service fees incurred indirectly by the Fund were 0.15% of the Fund's average daily net assets, indirect operating expenses (excluding shareholder service fees and investment-related expenses) were 0.651% of the Fund's average daily net assets, and indirect investment-related expenses (including, but not limited to, interest expense, foreign audit expense, and investment-related legal expense) were 0.007% of the Fund's average daily net assets. The Fund's portion of the fee paid by the Trust to the independent Trustees during the year ended February 28, 2003 was $2,271. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2003, aggregated $66,054,117 and $17,351,351, respectively. 9 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- At February 28, 2003, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $117,343,973 $1,575,093 $(15,146,120) $(13,571,027)
4. PRINCIPAL SHAREHOLDERS At February 28, 2003, 24.8% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 ----------------------- ------------------------ Shares Amount Shares Amount Class III: ---------- ----------- ---------- ------------ Shares sold 5,969,247 $53,418,077 1,898,333 $ 17,425,743 Shares issued to shareholders in reinvestment of distributions 314,940 2,836,415 179,905 1,624,546 Shares repurchased (959,472) (8,203,800) (2,340,194) (20,089,525) ---------- ----------- ---------- ------------ Net increase (decrease) 5,324,715 $48,050,692 (261,956) $ (1,039,236) ========== =========== ========== ============
10 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO INTERNATIONAL EQUITY ALLOCATION FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO International Equity Allocation Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 11 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 12 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the from February Boston, MA 02110 Trust 2002 - October Age: 64 2002.
3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 13 PRINCIPAL OFFICERS:
Term of Office(4) Principal Occupation(s) Name, Address, Position(s) Held with and Length of During Past and Age Fund Time Served Five Years -------------------------- --------------------- ----------------- -------------------------------------------------- Scott Eston President and Chief President and Chief Financial Officer (1997 - present), Chief c/o GMO Trust Executive Officer of Chief Executive Operating Officer (2000 - present) and Member, 40 Rowes Wharf the Trust Officer since Grantham, Mayo, Van Otterloo & Co. LLC. Boston, MA 02110 October 2002; Age: 47 Vice President from August 1998 - October 2002. Susan Randall Harbert Chief Financial Chief Financial Member, Grantham, Mayo, Van Otterloo & Co. LLC. c/o GMO Trust Officer and Treasurer Officer Since 40 Rowes Wharf of the Trust February 2000; Boston, MA 02110 Treasurer since Age: 45 February 1998. Brent Arvidson Assistant Treasurer Since September Senior Fund Administrator, Grantham, Mayo, Van c/o GMO Trust of the Trust 1998. Otterloo & Co. LLC. 40 Rowes Wharf Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President and Vice President General Counsel, Anti- Money Laundering Reporting c/o GMO Trust Clerk of the Trust since February Officer (July 2002 - February 2003) and Member, 40 Rowes Wharf 1997; Clerk since Grantham, Mayo, Van Otterloo & Co. LLC. Boston, MA 02110 March 2001; May Age: 37 1999 - August 1999. Elaine M. Hartnett, Esq. Vice President and Vice President Associate General Counsel, Grantham, Mayo, Van c/o GMO Trust Secretary of the since August Otterloo & Co. LLC (June 1999 - present); 40 Rowes Wharf Trust 1999; Secretary Associate/Junior Partner, Hale and Dorr LLP Boston, MA 02110 since March 2001. (1991 - 1999). Age: 58 Julie Perniola Vice President and Since February Anti-Money Laundering Reporting Officer (February c/o GMO Trust Anti- Money 2003. 2003 - present) and Compliance Officer, Grantham, 40 Rowes Wharf Laundering Compliance Mayo, Van Otterloo & Co. LLC. Boston, MA 02110 Officer Age: 32
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 14 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGEMENT Day-to-day management of the Fund's portfolio is the responsibility of the International Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of GMO International Growth Fund returned -11.4% for the fiscal year ended February 28, 2003. This was +6.1% ahead of the MSCI EAFE Index, which returned -17.5% over the same period, and +7.1% ahead of the Salomon Smith Barney PMI Europac Growth Index, which returned -18.5%. International stocks, like the U.S. market, suffered their third straight year of negative returns in 2002. World equity markets were hit by the continued global economic slowdown which came on top of valuation levels that remained high by historical standards. With the addition of corporate governance scandals and a perilous geopolitical situation, these factors combined to produce the worst bear market since 1974. In U.S. dollar terms, foreign stocks fared slightly better than domestic equities. The MSCI EAFE Index outperformed the S&P 500 (which returned -22.7%) solely due to weakness in the dollar. Foreign investors have been slowing their inflows on declining confidence in the U.S. economy. With the continued large U.S. trade deficit and lower U.S. interest rates, this seems to have put an end to the long post 1995 dollar rally. In local currency terms, European markets fell even further than the U.S. Germany led the way down, with that country's DAX index falling a Nasdaq-like - -44% in calendar year 2002. European and particularly growth stocks continued to suffer from the unraveling of the "TMT" bubble in the technology, media, and telecommunications sectors. Faith has all but vanished that third generation mobile phone technology will deliver pots of gold to investors in these sectors. The insurance sector suffered from a brutal combination of rising liabilities for natural (and unnatural) disasters with deteriorating asset values as equity holdings declined in value. There were questions about the viability of the Eurozone as a single currency region and the appropriateness of its stability pact, which limits government deficits. Adhering to this pact means, for example, that Germany has neither fiscal policy nor monetary policy (now ceded to the ECB) available to stimulate its economy. In Japan, frustration continued to mount over the lack of reform. GDP growth is stagnant and some economic indicators forecast a return to recession in 2003. The solvency of the financial sector remains a concern, and several big banks have been forced to raise additional capital at the expense of current shareholders. Prime Minister Koizumi appeared to practice business as usual with the appointment of an establishment candidate to head the central bank. And the strength of the Yen against the dollar poses problems for exporters. Despite the fact that the Nikkei 225 index hit a 20-year low, Japan was the best performing major market. The MSCI Japan index fell "only" by 10%, as the decline was at least somewhat anticipated in the prices. Within this difficult environment, GMO's disciplined investment approach produced strong relative performance. The focus on higher quality, reasonably valued growth stocks helped ease the pain. GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- Generally, the most defensive sectors performed strongest in these times of uncertainty, particularly within the growth universe. The portfolio's biggest overweight was in utility stocks, which were the best performers. Telecommunications stocks and consumer staples also outperformed the benchmark (though all sectors fell in absolute terms). Energy stocks outperformed only slightly despite a run up in oil prices to nearly $40/barrel. The outperformance of the telecommunications sector came after 2 dismal years, as share prices have fallen enough that the basic revenue from the traditional business is providing some valuation support even as hopes of future growth dissipate. Technology stocks, which were underweight in the portfolio, performed the worst of the major sectors. Country allocation was also a positive, as the portfolio benefited from overweights in some of the smaller markets that enjoyed relatively strong economic growth and stock market performance. Allocations to Canada and Australia, where combined the portfolio has about 1/10 of the assets invested, were the biggest contributors. Overweighting the Austrian market also helped performance. These gains were partially offset by the allocation to the disastrous German market. Currency allocation was also positive as the portfolio benefited not just in absolute terms from not holding the U.S. dollar, but also in relative terms from overweighting the euro and other continental currencies at the expense of the pound and yen. OUTLOOK The silver lining to the pain of a tough bear market is that the bad news is now out in the open. With lower stock prices, dividend yields are now meaningful and there is a lower hurdle on earnings growth required to deliver capital gains. Also, many CEOs have been replaced by a more prudent generation focused on reducing debt and other more conservative means of enhancing shareholder value. Lower valuations and continued dollar weakness position international equities both to enjoy positive returns and to outperform the U.S. market. Growth stocks in particular have returned to roughly their normal valuation level relative to value stocks. While it is not at all impossible that they shoot through fair value on the downside, the case for investing in international growth stocks is much stronger than it was a year or two ago. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO INTERNATIONAL GROWTH FUND CLASS III SHARES AND THE MSCI EAFE INDEX AS OF FEBRUARY 28, 2003 GMO SALOMON INTERNATIONAL MSCI SMITH BARNEY GROWTH FUND EAFE INDEX PMI GROWTH EPAC INDEX 11/30/2001 $10,000 $10,000 $10,000 12/31/2001 $10,220 $10,059 $10,106 3/31/2002 $10,250 $10,111 $9,949 6/30/2002 $10,190 $9,896 $9,501 9/30/2002 $8,515 $7,943 $7,674 12/31/2002 $9,145 $8,456 $8,293 2/28/2003 $8,705 $7,917 $7,717
AVERAGE ANNUAL TOTAL RETURN SINCE INCEPTION 1 YEAR 11/30/2001 Class III -11.40% -10.50%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- COMMON STOCKS -- 94.4% AUSTRALIA -- 7.0% 65,925 Australia and New Zealand Banking Group Ltd 656,908 191,820 Australian Gas Light Co Ltd 1,259,513 348,322 AXA Asia Pacific Holdings Ltd 454,465 42,781 Commonwealth Bank of Australia 637,099 31,282 CSL Ltd 265,579 164,726 Foster's Group Ltd 431,844 58,044 Lend Lease Corp Ltd 306,801 321,360 Lihir Gold Ltd* 271,074 79,753 National Australia Bank Ltd 1,398,705 67,433 Orica Ltd 336,786 65,991 Patrick Corp Ltd 453,328 137,571 Qantas Airways Ltd 257,134 130,616 QBE Insurance Group Ltd 642,041 231,007 Santos Ltd 820,092 153,226 Stockland Trust Group Units 451,908 100,298 TABCORP Holdings Ltd 608,658 267,876 Telstra Corp Ltd 650,242 31,054 Wesfarmers Ltd 479,985 62,825 Westfield Holdings Ltd 478,473 67,062 Westpac Banking Corp 571,787 132,358 Woodside Petroleum Ltd 871,488 43,609 Woolworths Ltd 306,190 ------------- 12,610,100 ------------- AUSTRIA -- 1.8% 2,645 Bau Holdings AG 195,278 2,241 Brau Union AG 161,828 12,241 Erste Bank Der Oesterreichischen Sparkassen AG 819,307 6,062 Mayr-Melnhof Karton AG (Bearer) 474,472 4,652 Oesterreichische Brau Beteiligungs AG 380,306 8,274 OMV AG 894,001 16,870 Wienerberger AG 287,465 ------------- 3,212,657 ------------- BELGIUM -- 1.5% 18,804 Almanij NV 605,374 30,798 Dexia 281,154 1,438 Electrabel SA 361,121
See accompanying notes to the financial statements. 1 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- BELGIUM -- CONTINUED 49,039 Fortis B 671,249 15,406 KBC Bancassurance Holding 465,593 12,245 UCB SA 279,922 ------------- 2,664,413 ------------- CANADA -- 5.3% 37,800 Bank of Nova Scotia 1,335,864 33,100 Canadian Natural Resources 1,136,438 15,500 Cognos Inc* 375,795 28,500 EnCana Corp 930,105 19,600 Imperial Oil Ltd 623,600 24,900 Investors Group Inc 436,059 9,400 Loblaw Cos Ltd 353,336 19,800 MDS Inc 282,155 17,600 Molson Inc 369,295 25,400 Onex Corp 236,985 22,200 Petro-Canada 790,664 7,900 Precision Drilling Corp* 285,764 14,000 Royal Bank of Canada 545,979 12,800 Shell Canada Ltd 412,404 10,200 Sobeys Inc 272,630 17,900 Suncor Energy Inc 324,406 18,700 Talisman Energy Inc 743,080 ------------- 9,454,559 ------------- DENMARK -- 0.2% 20,700 Danske Bank A/S 325,852 ------------- FINLAND -- 1.1% 110,700 Nokia Oyj 1,479,474 82,600 Sampo Oyj 516,352 ------------- 1,995,826 ------------- FRANCE -- 2.9% 15,776 BNP Paribas 652,929 13,192 Carrefour SA 499,775 12,834 L'Oreal SA 828,566 7,495 Peugeot SA 331,203 10,450 Publicis Groupe 188,318
2 See accompanying notes to the financial statements. GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- FRANCE -- CONTINUED 37,176 Renault SA 1,571,478 5,634 Sanofi-Synthelabo SA 301,309 10,112 Societe Generale Class A 542,756 2,659 Total Fina Elf SA 351,356 ------------- 5,267,690 ------------- GERMANY -- 6.4% 5,700 Adidas-Salomon AG 454,616 4,900 Allianz AG (Registered) 351,201 5,800 Altana AG 237,547 55,400 BASF AG 2,012,231 14,000 Bayerische Motoren Werke AG 391,565 12,900 DaimlerChrysler AG (Registered) 393,472 10,300 Deutsche Bank AG 419,631 68,500 E. On AG 2,912,566 14,000 RWE AG 311,592 9,900 SAP AG 823,741 7,300 Schering AG 270,657 55,800 Siemens AG (Registered) 2,225,226 33,900 T-Online International* 206,802 9,800 Volkswagen AG 392,395 ------------- 11,403,242 ------------- GREECE -- 0.1% 22,890 National Bank of Greece SA 271,379 ------------- HONG KONG -- 2.3% 320,400 Bank of East Asia 597,738 155,000 CLP Holdings Ltd 635,971 143,000 Esprit Holdings Ltd 278,699 26,400 Hang Seng Bank Ltd 288,572 312,500 Hong Kong Electric Holdings Ltd 1,192,045 56,000 Hutchison Whampoa Ltd 336,039 45,600 KMB Holdings Ltd 191,776 354,000 Li & Fung Ltd 356,310 142,000 YUE Yuen Industrial Holdings* 264,005 ------------- 4,141,155 -------------
See accompanying notes to the financial statements. 3 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- IRELAND -- 2.7% 142,724 Allied Irish Banks Plc 1,810,555 241,562 Bank of Ireland 2,660,833 42,766 Ryanair Holdings Plc* 272,872 ------------- 4,744,260 ------------- ITALY -- 4.1% 630,338 Banca Intesa SPA 1,460,663 254,400 Banca Intesa SPA 424,998 175,770 ENI-Ente Nazionale Idrocarburi SPA 2,608,656 34,325 Mediaset Spa 249,350 428,805 Olivetti and Co SPA* 413,176 493,292 Telecom Italia Mobile SPA 2,222,381 ------------- 7,379,224 ------------- JAPAN -- 18.4% 37,000 Alps Electric Co Ltd 451,918 26,000 Banyu Pharmaceutical Co Ltd 307,008 67,000 Bridgestone Corp 756,566 11,000 Canon Inc 397,293 26,700 Chubu Electric Power Co Inc 490,074 35,000 Daiichi Pharmaceuticals Co Ltd 468,936 12,700 Daito Trust Construction Co Ltd 247,608 25,000 Denso Corp 374,075 127 East Japan Railway Co 585,451 22,900 FamilyMart 371,901 14,000 Fanuc Ltd 609,854 97,000 Fuji Heavy Industries Ltd 374,134 19,000 Fuji Photo Film Co Ltd 602,664 115,000 Furukawa Electric Co Ltd 263,608 13,000 Honda Motor Co Ltd 475,026 57 Japan Telecom Co Ltd 169,228 42 Japan Tobacco Inc 250,455 18,000 Kao Corp 379,869 245 KDDI Corp 768,831 3,500 Keyence Corp 568,704 49,900 Konami Corp 1,027,756 140,000 Mitsubishi Electric Corp* 374,202 5,600 Nidec Corp 308,835 31,000 Nikon Corp* 239,924
4 See accompanying notes to the financial statements. GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- JAPAN -- CONTINUED 116,000 Nippon Express Co Ltd 458,211 418 Nippon Telegraph & Telephone Corp 1,513,250 14,800 Nissin Food Products 296,688 14,000 Nitto Denko Corp 393,149 53,000 Nomura Holdings Inc 623,134 375 NTT Docomo Inc* 707,338 26,000 Ono Pharmaceutical Co Ltd 815,902 190,000 Osaka Gas Co Ltd 483,739 10,300 Rohm Co Ltd 1,180,503 57,000 Sankyo Co Ltd 760,804 5,700 SMC Corp 436,329 53,500 Sony Corp 2,031,846 16,000 Stanley Electric Co Ltd 197,589 32,000 Suzuki Motor Corp 365,405 41,000 Taisho Pharmaceutical Co Ltd 599,264 74,100 Takeda Chemical Industries Ltd 2,732,721 10,840 Takefuji Corp 537,301 8,600 TDK Corp 365,896 33,800 Terumo Corp 523,761 48,500 Tohoku Electric Power Co Inc 702,732 13,900 Tokyo Electric Power 267,477 17,900 Tokyo Electron Ltd 816,079 73,000 Tokyu Corp 238,960 124,500 Toyota Motor Corp 2,922,288 16,800 Uni-Charm Corp 638,038 19 Yahoo Japan Corp* 327,849 47,000 Yamaha Motor Co 368,526 28,000 Yamanouchi Pharmaceutical Co Ltd 762,614 ------------- 32,931,313 ------------- NETHERLANDS -- 2.3% 23,706 ABN Amro Holdings NV 376,867 14,936 DSM NV 548,138 108,091 ING Groep NV 1,462,081 28,723 Koninklijke Ahold NV 108,352 44,113 Koninklijke Philips Electronics NV 735,996 35,423 Numico NV 187,077 15,979 Royal Dutch Petroleum 632,915 ------------- 4,051,426 -------------
See accompanying notes to the financial statements. 5 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- NEW ZEALAND -- 0.7% 520,277 Telecom Corp of New Zealand 1,219,158 ------------- NORWAY -- 0.4% 53,600 Statoil ASA 411,442 52,500 Tandberg ASA* 249,126 ------------- 660,568 ------------- PORTUGAL -- 0.2% 55,628 Portugal Telecom SA 356,737 ------------- SINGAPORE -- 2.7% 493,000 Chartered Semiconductor Manufacturing Ltd* 201,265 71,600 Creative Technology Ltd 452,865 127,000 DBS Group Holdings Ltd 701,032 3,311 Haw Par Corp Ltd 6,587 189,000 Keppel Corp Ltd 449,909 51,000 Oversea-Chinese Banking Corp 258,057 114,000 Singapore Airlines Ltd 619,441 51,000 Singapore Press Holdings Ltd 533,709 715,000 Singapore Telecom 534,456 81,000 United Overseas Bank 484,375 70,000 Venture Corp Ltd 539,344 ------------- 4,781,040 ------------- SPAIN -- 5.6% 8,560 ACS Actividades Cons y Serv 295,415 38,767 Altadis SA 918,810 17,353 CIA ESP Petroleos 355,358 108,276 Endesa SA 1,295,369 42,589 Gas Natural SDG SA 835,424 25,550 Metrovacesa SA 695,329 311,402 Repsol YPF SA 4,363,178 29,287 Union Fenosa SA 370,264 85,489 Vallehermoso SA 837,553 ------------- 9,966,700 ------------- SWEDEN -- 2.1% 72,350 Hennes & Mauritz AB 1,526,246
6 See accompanying notes to the financial statements. GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- SWEDEN -- CONTINUED 125,500 Swedish Match AB 943,942 32,500 Tele2 AB Class B* 937,684 91,216 TeliaSonera AB 306,590 ------------- 3,714,462 ------------- SWITZERLAND -- 5.9% 8,970 Adecco SA 270,555 2,215 Givaudan 908,215 11,771 Logitech International SA* 394,537 1,411 Nestle SA 284,073 44,920 Novartis AG 1,649,717 11,112 Roche Holding AG (Bearer) 1,069,407 64,178 Roche Holding AG (Genusschein) 3,854,940 5,830 Swiss Reinsurance Co 313,857 5,545 Swisscom AG 1,647,961 5,460 UBS AG* 229,111 ------------- 10,622,373 ------------- UNITED KINGDOM -- 20.7% 167,668 Abbey National Plc 1,029,966 37,347 Alliance & Leicester Plc 455,896 47,666 AstraZeneca Plc 1,537,612 157,686 Barclays Plc 911,522 43,272 Barratt Development 279,447 103,262 BG Group Plc 398,081 213,055 British American Tobacco 2,080,614 109,679 BT Group Plc 282,455 40,461 Cadbury Schweppes Plc 204,574 58,011 Cattle's Plc 243,509 254,048 Centrica Plc 564,213 31,505 Daily Mail & General Trust Plc 240,178 21,921 Diageo Plc 217,525 190,355 Dixons Group Plc (New Shares) 275,842 36,583 Exel Plc 324,699 89,718 Gallaher Group Plc 880,391 19,943 GlaxoSmithKline Plc 350,560 56,283 GUS Plc 449,906 44,301 HBOS Plc 461,934 173,380 Imperial Tobacco Group Plc 2,704,965
See accompanying notes to the financial statements. 7 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- UNITED KINGDOM -- CONTINUED 350,727 Kingfisher Plc 1,263,684 150,743 Lloyds TSB Group Plc 840,521 315,608 Morrison Supermarkets 790,411 795,671 National Grid Transco Plc 5,113,306 87,944 Next Plc 1,108,165 79,979 Northern Rock Plc 849,071 43,637 Pearson Plc 329,917 47,599 Provident Financial Plc 430,721 61,688 Royal Bank of Scotland Group 1,411,804 106,779 Scottish & Southern Energy Plc 1,059,582 97,589 Scottish Power Plc 560,282 108,383 Smiths Group Plc 1,031,113 257,775 Tesco 657,755 137,679 Tomkins Plc 407,693 23,332 Travis Perkins Plc 353,353 38,832 Unilever Plc 346,190 3,059,410 Vodafone Group Plc 5,481,472 92,454 Wimpey (George) 394,642 40,922 Wolseley 322,926 69,599 WPP Group Plc 428,361 ------------- 37,074,858 ------------- TOTAL COMMON STOCKS (COST $179,953,384) 168,848,992 ------------- PREFERRED STOCKS -- 0.6% GERMANY -- 0.6% 1,400 Porsche AG (Non Voting) 0.83% 452,676 21,800 Volkswagen AG 5.30% 639,092 ------------- 1,091,768 ------------- TOTAL PREFERRED STOCKS (COST $1,272,363) 1,091,768 -------------
See accompanying notes to the financial statements. 8 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------- ------------------------------------------------------- ------------- SHORT-TERM INVESTMENTS -- 4.0% CASH EQUIVALENTS -- 3.0% $ 5,300,000 Bank of Scotland Time Deposit, 1.31%, due 3/03/03 5,300,000 ------------- U.S. GOVERNMENT -- 1.0% 1,800,000 U.S. Treasury Bill, 1.17%, due 4/24/03(a) 1,796,867 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $7,096,867) 7,096,867 ------------- TOTAL INVESTMENTS -- 99.0% (Cost $188,322,614) 177,037,627 Other Assets and Liabilities (net) -- 1.0% 1,766,412 ------------- TOTAL NET ASSETS -- 100.0% $ 178,804,039 ============= NOTES TO SCHEDULE OF INVESTMENTS:
* Non-income producing security. (a) All or a portion of this security is held as collateral for open futures contracts (Note 6). See accompanying notes to the financial statements. 9 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY (SHOWING PERCENTAGE OF EQUITY INVESTMENTS) FEBRUARY 28, 2003 (UNAUDITED) At February 28, 2003, industry sector diversification of the Fund's equity investments was as follows:
INDUSTRY SECTOR - -------------------------------------------------------------------- Financials 20.4% Consumer Discretionary 14.3 Utilities 10.8 Health Care 10.1 Telecommunication Services 10.1 Energy 10.0 Consumer Staples 9.3 Industrials 6.4 Information Technology 5.7 Materials 2.9 ----- 100.0% =====
10 See accompanying notes to the financial statements. GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $188,322,614) (Note 1) $177,037,627 Cash 58,539 Foreign currency, at value (cost $154,763) (Note 1) 156,788 Receivable for Fund shares sold 50,000 Dividends and interest receivable 215,224 Foreign taxes receivable 114,457 Receivable for open forward foreign currency contracts (Notes 1 and 6) 5,020,982 Receivable for expenses reimbursed by Manager (Note 2) 35,924 ------------ Total assets 182,689,541 ------------ LIABILITIES: Payable to affiliate for (Note 2): Management fee 74,487 Shareholder service fee 20,692 Payable for open forward foreign currency contracts (Notes 1 and 6) 3,677,815 Payable for variation margin on open futures contracts (Notes 1 and 6) 35,572 Accrued expenses 76,936 ------------ Total liabilities 3,885,502 ------------ NET ASSETS $178,804,039 ============ NET ASSETS CONSIST OF: Paid-in capital $203,828,410 Distributions in excess of net investment income (65,113) Accumulated net realized loss (14,652,240) Net unrealized depreciation (10,307,018) ------------ $178,804,039 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $178,804,039 ============ SHARES OUTSTANDING: Class III 10,621,652 ============ NET ASSET VALUE PER SHARE: Class III $ 16.83 ============
See accompanying notes to the financial statements. 11 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $349,892) $ 2,891,078 Interest 146,243 ------------ Total income 3,037,321 ------------ EXPENSES: Management fee (Note 2) 813,201 Custodian fees 257,774 Audit fees 31,090 Transfer agent fees 27,646 Registration fees 7,082 Legal fees 5,757 Trustees fees and related expenses (Note 2) 3,639 Miscellaneous 3,176 Fees reimbursed by Manager (Note 2) (332,051) ------------ 817,314 Shareholder service fee (Note 2) Class III 225,890 ------------ Net expenses 1,043,204 ------------ Net investment income 1,994,117 ------------ REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (13,690,497) Closed futures contracts (623,360) Foreign currency, forward contracts and foreign currency related transactions 3,147,019 ------------ Net realized loss (11,166,838) ------------ Change in net unrealized appreciation (depreciation) on: Investments (8,209,800) Open futures contracts (366,298) Foreign currency, forward contracts and foreign currency related transactions 1,287,819 ------------ Net unrealized loss (7,288,279) ------------ Net realized and unrealized loss (18,455,117) ------------ NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(16,461,000) ============
12 See accompanying notes to the financial statements. GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
PERIOD FROM NOVEMBER 30, 2001 YEAR ENDED (COMMENCEMENT OF OPERATIONS) FEBRUARY 28, 2003 THROUGH FEBRUARY 28, 2002 ----------------- ----------------------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 1,994,117 $ 52,612 Net realized loss (11,166,838) (332,890) Change in net unrealized appreciation (depreciation) (7,288,279) (1,056,739) ------------ ----------- Net decrease in net assets from operations (16,461,000) (1,337,017) ------------ ----------- Distributions to shareholders from: Net investment income Class III (5,264,354) -- ------------ ----------- Total distributions from net investment income (5,264,354) -- ------------ ----------- Net share transactions (Note 5): Class III 115,645,427 86,220,983 ------------ ----------- Increase in net assets resulting from net share transactions 115,645,427 86,220,983 ------------ ----------- Total increase in net assets 93,920,073 84,883,966 NET ASSETS: Beginning of period 84,883,966 -- ------------ ----------- End of period (including distributions in excess of net investment income of $65,113 and accumulated undistributed net investment income of $58,107, respectively) $178,804,039 $84,883,966 ============ ===========
See accompanying notes to the financial statements. 13 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28, ------------------------ 2003 2002(1) ---------- ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 19.65 $ 20.00 --------- -------- Income from investment operations: Net investment income(b) 0.25 0.01 Net realized and unrealized loss (2.46) (0.36) --------- -------- Total from investment operations (2.21) (0.35) --------- -------- Less distributions to shareholders: From net investment income (0.61) -- --------- -------- Total distributions (0.61) -- --------- -------- NET ASSET VALUE, END OF PERIOD $ 16.83 $ 19.65 ========= ======== TOTAL RETURN(a) (11.40)% (1.75)%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 178,804 $ 84,884 Net expenses to average daily net assets 0.69% 0.69%* Net investment income to average daily net assets 1.32% 0.36%* Portfolio turnover rate 78% 15% Fees and expenses reimbursed by the Manager to average daily net assets: 0.22% 0.65%*
(1) Period from November 30, 2001 (commencement of operations) through February 28, 2002. * Annualized. ** Not Annualized. (a) The total return would have been lower had certain expenses not been reimbursed during the periods shown. (b) Computed using average shares outstanding throughout the period. 14 See accompanying notes to the financial statements. GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO International Growth Fund (the "Fund"), which commenced operations on November 30, 2001, is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks a high total return through investing primarily in equity securities of non-U.S. issuers. The Fund's benchmark is the Salomon Smith Barney PMI Europac Growth Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign 15 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in foreign currency values that are unfavorable to the Fund. The value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through currency contracts as of February 28, 2003. FUTURES CONTRACTS The Fund may purchase and sell futures contracts to manage its exposure to the financial markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business 16 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 28, 2003. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 28, 2003, there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future, security or currency transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. At February 28, 2003, there were no open purchased option contracts. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager. 17 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the financial markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. At February 28, 2003, there were no open swap agreements. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 2003, the Fund had no securities on loan. 18 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryover for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country's tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. Income dividends and capital gain distrbutions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. During the year ended February 28, 2003, the tax basis of distributions paid was as follows: ordinary income -- $5,264,354. As of February 28, 2003, the components of distributable earnings on a tax basis consisted of $648,975 of undistributed ordinary income. The temporary differences between book and tax basis distributable earnings are primarily due to foreign currency transactions. At February 28, 2003, the Fund had a capital loss carryforward available to offset any future capital gains, if any, to the extent permitted by the Code of $2,281,901 expiring in 2011. The Fund has elected to defer to March 1, 2003 post-October capital losses of $11,113,912. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of 19 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus U.S. GAAP. The financial highlights exclude these adjustments.
Distributions in Excess of Net Accumulated Net Investment Income Realized Loss ----------------- --------------- $3,147,017 $(3,147,017)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments of domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .54% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder 20 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until at least June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent Trustees of the Trust (including legal fees), 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) exceed the management fee. As of February 28, 2003, a significant portion of the Fund's shares were held by accounts for which the Manager has investment discretion. The Fund's portion of the fee paid by the Trust to the independent Trustees during the year ended February 28, 2003, was $2,553. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2003 aggregated $224,634,409 and $107,875,263 respectively. At February 28, 2003 the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $189,584,421 $4,703,502 $(17,250,296) $(12,546,794)
4. PRINCIPAL SHAREHOLDERS At February 28, 2003, 37.4% of the outstanding shares of the Fund were held by three shareholders, each holding in excess of 10% of the outstanding shares of the Fund. One of the shareholders is another fund of GMO Trust. Investment activities of these shareholders may have a material effect on the Fund. 21 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Period from November 30, 2001 (commencement of Year Ended operations) through February 28, 2003 February 28, 2002* ------------------------ ---------------------- Shares Amount Shares Amount Class III: ---------- ------------ --------- ----------- Shares sold 9,766,373 $179,023,615 4,406,481 $87,915,983 Shares issued to shareholders in reinvestment of distributions 196,825 3,476,163 -- -- Shares repurchased (3,661,941) (66,854,351) (86,086) (1,695,000) ---------- ------------ --------- ----------- Net increase 6,301,257 $115,645,427 4,320,395 $86,220,983 ========== ============ ========= ===========
* The Fund was formed with an initial tax-free contribution of securities in-kind, which had a market value of $41,670,412, including unrealized loss of $1,962,000, on the date of contribution. 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 28, 2003 is as follows: FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) ---------- ---------------- ----------------- ------------ -------------- Buys 4/28/03 AUD 1,777,073 $ 1,072,663 $ 72,663 4/28/03 CAD 3,131,321 2,096,089 96,089 3/28/03 CHF 4,868,537 3,592,129 305,840 3/28/03 DKK 46,072,939 6,677,703 625,671 3/28/03 EUR 28,286,969 30,459,581 2,474,379 3/28/03 GBP 5,442,557 8,558,835 31,694
22 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- FORWARD CURRENCY CONTRACTS -- CONTINUED
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) ---------- ---------------- ----------------- ------------ -------------- 4/28/03 HKD 7,021,428 $ 900,141 $ 484 4/28/03 JPY 1,218,587,600 10,328,969 277,397 3/28/03 NOK 48,870,535 6,800,934 368,080 4/28/03 NZD 2,825,602 1,561,990 176,176 3/28/03 SEK 60,987,650 7,155,444 569,679 4/28/03 SGD 1,953,010 1,123,921 22,830 ----------- $ 5,020,982 =========== Sales 4/28/03 AUD 6,449,829 $ 3,893,198 $ (377,654) 4/28/03 CAD 13,536,550 9,061,292 (440,167) 3/28/03 CHF 599,040 441,987 (38,539) 3/28/03 EUR 18,800,073 20,244,033 (1,519,884) 3/28/03 GBP 4,673,988 7,350,203 (57,507) 4/28/03 HKD 25,351,810 3,250,079 (3,691) 4/28/03 JPY 2,633,036,200 22,318,090 (880,624) 3/28/03 NOK 10,492,130 1,460,109 (43,226) 4/28/03 NZD 1,370,716 757,730 (108,569) 3/28/03 SEK 24,404,340 2,863,266 (197,748) 4/28/03 SGD 866,150 498,453 (10,206) ----------- $(3,677,815) ===========
CURRENCY ABBREVIATIONS: AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc DKK - Danish Krona EUR - Euro GBP - British Pound HKD - Hong Kong Dollar JPY - Japanese Yen NOK - Norwegian Krone NZD - New Zealand Dollar SEK - Swedish Krona SGD - Singapore Dollar 23 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- FUTURES CONTRACTS
Net Unrealized Appreciation Number of Contracts Type Expiration Date Contract Value (Depreciation) ------------------- --------------------------- --------------- -------------- -------------- Buys 4 DAX March 2003 $ 273,923 $ (20,549) 20 MIB30 March 2003 2,528,088 (50,551) 100 MSCI March 2003 1,793,980 (34,779) 2 S&P Toronto 60 March 2003 99,852 (1,793) 87 SPI 200 March 2003 3,687,797 (264,370) --------- $(372,042) ========= Sales 32 FTSE 100 March 2003 $1,830,140 $ (6,556) 163 OMX March 2003 903,214 (2,722) --------- $ (9,278) =========
At February 28, 2003, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. 24 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO INTERNATIONAL GROWTH FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO International Growth Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provides a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 25 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- During the year ended February 28, 2003, the Fund paid foreign taxes of $349,892 and recognized foreign source income of $3,240,970. 26 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------- --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 27 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Five Overseen Directorships and Age Held with Fund Time Served Years by Trustee Held by Trustee ------------------------- --------------- --------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the from February Boston, MA 02110 Trust 2002 - October Age: 64 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 28 PRINCIPAL OFFICERS:
Term of Office(4) and Principal Occupation(s) Name, Address, Position(s) Length of During Past and Age Held with Fund Time Served Five Years ------------------------------- --------------- ----------------------------------- ----------------------------------- Scott Eston President and President and Chief Executive Chief Financial Officer (1997 - c/o GMO Trust Chief Executive Officer since October 2002; Vice present), Chief Operating Officer 40 Rowes Wharf Officer of the President from August 1998 - (2000 - present) and Member, Boston, MA 02110 Trust October 2002. Grantham, Mayo, Van Otterloo & Co. Age: 47 LLC. Susan Randall Harbert Chief Financial Chief Financial Officer Since Member, Grantham, Mayo, Van c/o GMO Trust Officer and February 2000; Treasurer since Otterloo & Co. LLC. 40 Rowes Wharf Treasurer of February 1998. Boston, MA 02110 the Trust Age: 45 Brent Arvidson Assistant Since September 1998. Senior Fund Administrator, c/o GMO Trust Treasurer of Grantham, Mayo, Van Otterloo & Co. 40 Rowes Wharf the Trust LLC. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President Vice President since February 1997; General Counsel, Anti- Money c/o GMO Trust and Clerk of Clerk since March 2001; May 1999 - Laundering Reporting Officer (July 40 Rowes Wharf the Trust August 1999. 2002 - February 2003) and Member, Boston, MA 02110 Grantham, Mayo, Van Otterloo & Co. Age: 37 LLC. Elaine M. Hartnett, Esq. Vice President Vice President since August 1999; Associate General Counsel, c/o GMO Trust and Secretary Secretary since March 2001. Grantham, Mayo, Van Otterloo & Co. 40 Rowes Wharf of the Trust LLC (June 1999 - present); Boston, MA 02110 Associate/ Junior Partner, Hale and Age: 58 Dorr LLP (1991 - 1999). Julie Perniola Vice President Since February 2003. Anti-Money Laundering Reporting c/o GMO Trust and Anti- Money Officer (February 2003 - present) 40 Rowes Wharf Laundering and Compliance Officer, Grantham, Boston, MA 02110 Compliance Mayo, Van Otterloo & Co. LLC. Age: 32 Officer
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 29 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGEMENT Day-to-day management of the Fund's portfolio is the responsibility of the International Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE Class III shares of GMO International Intrinsic Value Fund returned -4.1% for the fiscal year ended February 28, 2003. This is +13.4% ahead of the MSCI EAFE Index, which returned -17.5% over the same period, and +11.3% ahead of the Salomon Smith Barney PMI Europac Value Index, which returned -15.4%. International stocks, like the U.S. market, suffered their third straight year of negative returns in 2002. World equity markets were hit by the continued global economic slowdown which came on top of valuation levels that remained high by historical standards. With the addition of corporate governance scandals and a perilous geopolitical situation, this combined to produce the worst bear market since 1974. In U.S. dollar terms, foreign stocks fared slightly better than domestic equities. The EAFE Index outperformed the S&P 500 (which returned -22.7%) solely due to weakness in the dollar. Foreign investors have been slowing their inflows on declining confidence in the U.S. economy. With the continued large U.S. trade deficit and lower U.S. interest rates, this seems to have put an end to the long post 1995 dollar rally. In local currency terms, European markets fell even further than the U.S. Germany led the way down, with that country's DAX index falling a Nasdaq-like - -44% in calendar year 2002. Europe continued to suffer from the unraveling of the "TMT" bubble in the technology, media, and telecommunications sectors. Faith has all but vanished that third generation mobile phone technology will deliver pots of gold to investors in those sectors. The insurance industry suffered from a brutal combination of rising liabilities for natural (and unnatural) disasters with deteriorating asset values as equity holdings declined in value. There were questions about the viability of the Eurozone as a single currency region and the appropriateness of its stability pact, which limits government deficits. Adhering to this pact means, for example, that Germany has neither fiscal policy nor monetary policy (now ceded to the ECB) available to stimulate its economy. In Japan, frustration continued to mount over the lack of reform. GDP growth is stagnant and some economic indicators forecast a return to recession in 2003. The solvency of the financial sector remains a concern, and several big banks have been forced to raise additional capital at the expense of current shareholders. Prime Minister Koizumi appeared to practice business as usual with the appointment of an establishment candidate to head the central bank. Additionally, the strength of the yen against the dollar poses problems for exporters. Despite the fact that the Nikkei 225 index hit a 20-year low, Japan was the best performing major market. The MSCI Japan index fell "only" by 10%, as the decline was at least somewhat anticipated in the prices. Within this difficult environment, GMO's disciplined valuation based investment approach produced strong relative performance. GMO's stock selection process, which involves the application of quantitative techniques to forecast returns based upon an evaluation of stock valuation, dividend yield, price momentum, and other factors, performed well in the fiscal year. GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- The portfolio's sector allocation contributed about 2.0% of value added against MSCI EAFE and +1.0% against the Fund's benchmark. It was generally the most defensive sectors that performed strongest in these times of uncertainty. Utility stocks led the way and were the portfolio's largest overweight, boosting relative performance. Telecommunications stocks and consumer staples also outperformed the benchmark (all sectors fell in absolute terms). Energy stocks outperformed only slightly despite a run up in oil prices to nearly $40/barrel. The outperformance of the telecommunications sector came after two dismal years, as share prices have fallen enough that the basic revenue from the traditional business is providing some valuation support even as hopes of future growth dissipate. Technology stocks where the portfolio remains underweight were the worst performers of the major sectors. Country allocation was also a positive, as the portfolio benefited from overweights in some of the smaller markets that performed relatively well. Austria was the most notable of these as overweighting that market, which managed positive absolute return, added close to a percentage point of relative return. Allocations to Canada and the Pacific region outside Japan were also positive as those regions enjoyed relatively strong growth. Currency allocation was also positive as the portfolio benefited not just in absolute terms from not holding the U.S. dollar, but also in relative terms from overweighting the euro and other continental currencies at the expense of the pound and yen. OUTLOOK The silver lining to the pain of a tough bear market is that the bad news is now out in the open. With lower stock prices, dividend yields are now meaningful and there is a lower hurdle on earnings growth required to deliver capital gains. Also, many CEOs have been replaced by a more prudent generation focused on reducing debt and other more conservative means of enhancing shareholder value. Lower valuations and continued dollar weakness position international equities both to enjoy positive returns and to outperform the U.S. market. This one note of caution for this strategy is that the significant outperformance of value stocks (or rather their relatively moderate declines) versus growth stocks now leaves value stocks at roughly fair value versus growth. Hence while the outlook for international stocks in general is improved, the outlook for this strategy's outperformance within that universe has moderated. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO INTERNATIONAL INTRINSIC VALUE FUND CLASS III SHARES AND THE MSCI EAFE INDEX AS OF FEBRUARY 28, 2003 GMO INTERNATIONAL INTRINSIC VALUE FUND MSCI EAFE INDEX 2/28/93 $10,000 $10,000 3/31/93 $10,767 $10,872 6/30/93 $11,371 $11,965 9/30/93 $12,312 $12,759 12/31/93 $13,346 $12,869 3/31/94 $13,857 $13,319 6/30/94 $14,102 $13,999 9/30/94 $14,176 $14,013 12/31/94 $13,900 $13,870 3/31/95 $13,870 $14,128 6/30/95 $14,478 $14,231 9/30/95 $14,827 $14,824 12/31/95 $15,334 $15,424 3/31/96 $15,676 $15,870 6/30/96 $15,966 $16,121 9/30/96 $15,948 $16,101 12/31/96 $16,798 $16,357 3/31/97 $16,546 $16,101 6/30/97 $17,813 $18,190 9/30/97 $18,236 $18,062 12/31/97 $16,953 $16,648 3/31/98 $19,784 $19,097 6/30/98 $19,704 $19,300 9/30/98 $16,722 $16,556 12/31/98 $19,259 $19,977 3/31/99 $18,969 $20,255 6/30/99 $20,497 $20,770 9/30/99 $21,286 $21,681 12/31/99 $22,074 $25,364 3/31/2000 $20,863 $25,337 6/30/2000 $21,655 $24,333 9/30/2000 $20,640 $22,370 12/31/2000 $21,766 $21,770 3/31/2001 $19,885 $18,786 6/30/2001 $20,600 $18,590 9/30/2001 $18,493 $15,987 12/31/2001 $19,130 $17,102 3/31/2002 $20,158 $17,189 6/30/2002 $21,371 $16,825 9/30/2002 $18,197 $13,505 12/31/2002 $19,016 $14,376 2/28/2003 $18,356 $13,460 COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO INTERNATIONAL INTRINSIC VALUE FUND CLASS III SHARES AND THE MSCI EAFE INDEX AS OF FEBRUARY 28, 2003 SALOMON SMITH BARNEY PMI VALUE EPAC INDEX 2/28/93 $10,000 3/31/93 $11,142 6/30/93 $12,093 9/30/93 $12,968 12/31/93 $13,115 3/31/94 $13,695 6/30/94 $14,544 9/30/94 $14,591 12/31/94 $14,450 3/31/95 $14,722 6/30/95 $14,857 9/30/95 $15,543 12/31/95 $16,254 3/31/96 $16,660 6/30/96 $17,080 9/30/96 $17,228 12/31/96 $17,654 3/31/97 $17,306 6/30/97 $19,669 9/30/97 $19,732 12/31/97 $18,174 3/31/98 $21,068 6/30/98 $21,369 9/30/98 $17,834 12/31/98 $21,236 3/31/99 $21,913 6/30/99 $22,724 9/30/99 $23,822 12/31/99 $26,194 3/31/2000 $25,341 6/30/2000 $25,572 9/30/2000 $24,238 12/31/2000 $24,422 3/31/2001 $21,679 6/30/2001 $22,038 9/30/2001 $19,077 12/31/2001 $19,992 3/31/2002 $20,413 6/30/2002 $20,478 9/30/2002 $16,546 12/31/2002 $17,378 2/28/2003 $16,347
AVERAGE ANNUAL TOTAL RETURN SINCE INCEPTION 1 YEAR 5 YEAR 10 YEAR 9/29/96 Class II -4.11% -0.29% n/a 2.19% Class III -4.05% -0.21% 6.26% n/a 1/9/98 Class IV -4.02% -0.14% n/a 2.18%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Performance for Classes II and IV may vary due to different shareholder servicing fees. Past performance is not indicative of future performance. Information is unaudited. GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- COMMON STOCKS -- 92.8% AUSTRALIA -- 3.7% 803,581 AMP Diversified Property Trust 1,263,022 497,077 Australia and New Zealand Banking Group Ltd 4,953,112 417,234 Boral Ltd 1,124,201 450,834 Caltex Australia Ltd* 547,177 422,054 CSR Ltd 1,664,803 1,655,325 General Property Trust Units 2,782,559 1,954,422 Goodman Fielder Ltd 2,099,293 190,981 Lion Nathan Ltd 606,140 916,718 National Australia Bank Ltd 16,077,368 1,200 National Australia Bank Ltd ADR 106,188 307,848 Orica Ltd 1,537,509 695,087 Santos Ltd 2,467,609 72,241 St. George Bank Ltd 771,574 915,173 Telstra Corp Ltd 2,221,491 1,612,968 Westfield Trust Units 3,171,408 144,243 Westpac Banking Corp 1,229,851 493,257 Woodside Petroleum Ltd 3,247,763 -------------- 45,871,068 -------------- AUSTRIA -- 4.5% 140,909 Austrian Airlines* 971,979 17,385 Bau Holdings AG 1,283,522 136,603 Boehler Uddeholm (Bearer) 6,813,837 74,192 Brau Union AG 5,357,597 101,309 Erste Bank Der Oesterreichischen Sparkassen AG 6,780,751 86,357 Flughafen Wien AG 3,127,339 9,535 Generali Holding Vienna AG 1,603,184 51,744 Mayr-Melnhof Karton AG (Bearer) 4,049,994 41,457 Oesterreichische Brau Beteiligungs AG 3,389,157 125,062 OMV AG 13,512,880 176,031 RHI AG* 1,555,755 81,913 VA Technologie AG (Bearer) 1,280,145 202,280 Voestalpine AG 4,829,085 117,486 Wienerberger AG 2,001,964 -------------- 56,557,189 -------------- BELGIUM -- 2.7% 95,681 AGFA-Gevaert NV 2,061,468
See accompanying notes to the financial statements. 1 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- BELGIUM -- CONTINUED 153,251 Almanij NV 4,933,745 23,648 Bekaert SA 834,726 50,354 Delhaize Group 767,400 32,885 Electrabel SA 8,258,325 395,867 Fortis B 5,418,651 290,195 KBC Bancassurance Holding 8,770,132 37,080 Solvay Et Cie 2,198,065 -------------- 33,242,512 -------------- CANADA -- 2.8% 123,100 Bank of Montreal 3,470,399 275,500 Bank of Nova Scotia 9,736,257 44,000 Canadian Natural Resources 1,510,673 39,300 CP Ships Ltd 489,338 291,300 EnCana Corp 9,506,649 27,400 Magna International Inc 1,520,996 144,900 National Bank of Canada 3,160,995 97,000 Quebecor Inc* 1,208,431 100,100 Royal Bank of Canada 3,903,752 26,500 Shell Canada Ltd 853,806 -------------- 35,361,296 -------------- FINLAND -- 1.2% 53,700 Finnair Class A 211,254 656,400 Fortum Oyj 4,315,554 132,800 Kesko Oyj 1,477,121 78,554 Rautaruukki Oyj 300,563 585,800 Sampo Oyj 3,661,976 38,100 Stockmann AB Class A 562,579 22,100 Stockmann AB Class B 327,516 162,500 Stora Enso Oyj 1,592,045 65,100 UPM-Kymmene Oyj 1,866,383 23,400 Wartsila Oyj ABP 315,257 -------------- 14,630,248 -------------- FRANCE -- 4.6% 38,037 Assurances Generales de France 1,047,045 428,453 BNP Paribas 17,732,607 33,896 Bongrain SA 1,369,992
2 See accompanying notes to the financial statements. GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- FRANCE -- CONTINUED 27,858 Carrefour SA 1,055,391 188,174 Cie de Saint-Gobain 5,684,875 78,334 Credit Agricole SA 1,169,333 19,143 Danone 2,265,429 62,846 Eurazeo 3,298,715 187,768 France Telecom SA 4,160,858 5,470 Fromageries Bel Vache qui Rit 672,095 6,821 Imerys SA 726,345 85,019 Renault SA 3,593,865 278,267 Societe Generale Class A 14,935,825 -------------- 57,712,375 -------------- GERMANY -- 6.2% 38,826 AGIV Real Estate AG* 79,509 167,700 Bankgesellschaft Berlin AG* 258,468 199,800 BASF AG 7,257,108 1,300 BASF AG ADR 47,554 157,880 Bewag AG Class A 2,263,169 142,400 Commerzbank AG 897,851 150,256 Continental AG* 2,356,313 732,650 DaimlerChrysler AG (Registered) 22,347,100 38,530 Degussa AG 984,205 308,800 Deutsche Telekom 3,547,911 42,800 Douglas Holdings AG 636,592 478,940 E. On AG 20,364,150 5,300 Gehe AG 198,789 59,297 HeidelbergCement AG 1,412,418 41,650 MAN AG 601,531 84,600 Schwarz Pharma AG 3,122,979 49,723 Sudzucker AG 782,435 417,908 Thyssen Krupp AG 3,981,724 168,100 Volkswagen AG 6,730,769 -------------- 77,870,575 -------------- HONG KONG -- 2.7% 539,000 Cheung Kong Infrastructure Holdings Ltd 977,914 1,386,598 CLP Holdings Ltd 5,689,264 623,409 Great Eagle Holdings Ltd 361,699 170,000 Guoco Group 983,062
See accompanying notes to the financial statements. 3 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- HONG KONG -- CONTINUED 2,153,511 Hang Lung Development Co Ltd 1,822,412 542,815 Henderson Land Development Co Ltd 1,538,153 1,039,900 Hong Kong Aircraft Engineering Co Ltd 3,020,058 2,094,469 Hong Kong Electric Holdings Ltd 7,989,441 588,700 Hong Kong Ferry Co Ltd 430,253 361,000 Hong Kong Land Holdings 444,030 636,562 Jardine Matheson Holdings Ltd 3,628,403 1,593,911 Jardine Strategic Holdings Ltd 4,016,656 1,882,862 Mandarin Oriental* 771,973 808,400 YUE Yuen Industrial Holdings* 1,502,968 -------------- 33,176,286 -------------- IRELAND -- 0.7% 342,470 Allied Irish Banks Plc 4,344,474 342,294 Bank of Ireland 3,770,408 -------------- 8,114,882 -------------- ITALY -- 4.1% 186,458 Banca Popolare di Bergamo Credit 3,340,029 1,069,100 Banca Popolare di Milano* 4,159,716 1,548,839 ENI-Ente Nazionale Idrocarburi SPA 22,986,794 134,676 Fiat SPA (Savings Shares) 634,322 588,000 Grassetto SPA*(a) 6,337 258,850 IFIL Finanziaria di Partecipazioni SPA 771,403 361,425 IFIL Finanziaria di Partecipazioni SPA (Savings Shares) 808,304 153,302 Italcementi SPA 831,101 29,437 Italmobiliare SPA 996,234 38,400 Natuzzi SPA ADR 345,600 651,535 Parmalat Finanziaria SPA 1,074,403 168,155 RAS SPA 2,067,919 248,331 Saipem SPA 1,547,024 982,472 SMI (Societa Metallurgica Italy) 357,911 1,233,798 Telecom Italia Mobile SPA 5,558,512 484,369 Telecom Italia SPA 3,367,241 547,722 Telecom Italia SPA (Savings Shares) 2,686,023 -------------- 51,538,873 -------------- JAPAN -- 22.0% 78,200 Acom Co Ltd 2,566,428
4 See accompanying notes to the financial statements. GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- JAPAN -- CONTINUED 159,000 Alps Electric Co Ltd 1,942,026 480,000 Ashikaga Bank Ltd* 511,567 45,800 Autobacs Seven 980,114 198,000 Bank of Yokohama 726,851 72,000 Best Denki Co Ltd 213,153 301,000 Brother Industries Ltd 1,815,293 244,000 Canon Sales Co Inc 1,770,793 400,000 Chiba Bank 1,245,084 240,100 Chubu Electric Power Co Inc 4,406,995 53,000 Chudenko Corp 569,338 192,700 Chugoku Electric Power Co Inc 2,946,937 1,493,000 Cosmo Oil Co Ltd 2,033,182 275,000 Daicel Chemical Industries Ltd 895,538 665,000 Daido Steel Co Ltd 933,728 202,000 Daiichi Pharmaceuticals Co Ltd 2,706,433 306,000 Dainippon Printing Co Ltd 3,090,412 101,000 Daio Paper Corp 733,846 31,900 Daito Trust Construction Co Ltd 621,945 931,000 Daiwa House Industry Co Ltd 5,291,876 192,000 Daiwa Kosho Lease Co Ltd 469,342 138,000 Denso Corp 2,064,893 1,018 East Japan Railway Co 4,692,831 271,000 Ezaki Glico Co Ltd 1,379,928 50,500 FamilyMart 820,131 51,300 Fast Retailing Co Ltd 1,366,843 489,000 Fuji Heavy Industries Ltd 1,886,099 136,400 Fuji Photo Film Co Ltd 4,326,496 208,000 Fukuyama Transporting Co Ltd 774,117 155,000 Gunze Ltd 567,689 38,200 Heiwa Corp 520,211 289,000 Hino Motors 1,141,578 106,000 Hitachi Kokusai Electric Inc* 312,015 88,000 Hitachi Metals Ltd 227,025 203,300 Hokkaido Electric Power 2,844,222 209,000 House Foods Corp 1,997,632 1,558,000 Itochu Corp 3,716,270 184,000 Itoham Foods Inc 522,935 29,000 Japan Airport Terminal Co Ltd 165,574 199,000 Japan Securities Finance Co 664,876 454 Japan Tobacco Inc 2,707,295
See accompanying notes to the financial statements. 5 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- JAPAN -- CONTINUED 408,175 JFE Holdings Inc* 5,927,989 1,182,000 Kajima Corp 2,369,499 336,000 Kamigumi Co Ltd 1,560,279 242,000 Kandenko Co 749,182 255,100 Kansai Electric Power 3,868,846 2,643,000 Kawasaki Heavy Industries Ltd* 2,302,635 206,000 Kawasaki Kisen Kaisha Ltd 454,777 903 KDDI Corp 2,833,690 199,000 Keio Electric Railway Co Ltd 924,094 159,000 Kinden Corp 554,096 496,000 Kirin Brewery Co Ltd 3,670,966 159,000 Kissei Pharmaceutical Co Ltd 2,103,413 4,169,000 Kobe Steel Ltd* 2,538,955 456,000 Komatsu Ltd 1,751,102 34,300 Konami Corp 706,454 268,000 Kyushu Electric Power Co Inc 3,939,810 125,700 Lopro Corp 510,349 465,000 Maeda Corp 1,408,078 132,000 Maeda Road Construction 455,538 102,000 Makita Corp 681,582 53,000 Maruichi Steel Tube 589,063 1,229,000 Mazda Motor Corp 2,598,858 306 Millea Holdings Inc* 2,119,805 440,000 Minolta Co Ltd* 2,158,596 155,000 Mitsubishi Corp 1,037,048 1,204,000 Mitsubishi Electric Corp* 3,218,135 1,662,000 Mitsubishi Material* 1,855,648 1,077,000 Mitsubishi Motors* 2,614,498 1 Mitsubishi Tokyo Finance Group Inc 886 396,000 Mitsui Chemicals Inc 1,520,694 4,189 Mizuho Holding Inc* 3,720,406 4,161,000 Mizuho Trust & Banking Co Ltd* 1,794,976 79,000 Nagase & Co 340,123 670,000 Nippon Express Co Ltd 2,646,564 113,000 Nippon Hodo Co 523,781 1,221,000 Nippon Light Metal 1,136,054 845,000 Nippon Shinpan Co 1,050,666 621,000 Nippon Suisan Kaisha Ltd 1,386,712 1,978 Nippon Telegraph & Telephone Corp 7,160,787 1 Nippon Unipac Holding 1,587
6 See accompanying notes to the financial statements. GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- JAPAN -- CONTINUED 597,000 Nishimatsu Construction 1,732,045 828,000 Nissan Motor Co 6,212,189 290,000 Nisshin Oillio Group Ltd 694,185 1,228,000 Nisshin Steel Co Ltd* 830,958 206,000 Nisshinbo Industries Inc 768,416 2,403,000 Nissho Iwai Corp* 752,049 136,000 Nomura Holdings Inc 1,598,985 723,000 Obayashi Corp 1,724,559 389,000 Okumura Corp 1,437,877 102,000 Olympus Optical Co Ltd 1,647,875 133,000 Ono Pharmaceutical Co Ltd 4,173,652 63,000 PanaHome Corp 232,870 121,050 Promise Co 3,952,235 5,079,000 Resona Holdings Inc* 2,448,746 29,400 Rinnai Corp 610,505 142,000 Royal Co Ltd 882,808 93,000 Ryosan Co 921,150 524,000 Sankyo Co Ltd 6,994,054 242,000 Sanwa Shutter Corp 824,919 346,000 Seino Transportation Co Ltd 2,165,701 828,000 Sekisui Chemical 2,073,064 295,000 Sekisui House Ltd 2,081,032 191,600 Shikoku Electric Power 2,957,665 662,000 Shimizu Corp 1,629,452 213,000 Shiseido Co Ltd 2,470,061 157,000 Showa Shell Sekiyu 1,037,150 190,400 Sony Corp 7,231,093 158,000 Sumitomo Forestry Co Ltd 772,459 4,853,000 Sumitomo Metal Industries* 2,134,540 201,000 Suzuki Motor Corp 2,295,200 1,188,000 Taiheiyo Cement Corp 1,979,581 1,253,000 Taisei Corp 2,352,853 260,000 Taisho Pharmaceutical Co Ltd 3,800,211 202,700 Takeda Chemical Industries Ltd 7,475,339 118,960 Takefuji Corp 5,896,431 78,000 Takuma Corp 438,740 197,000 Toagosei Co Ltd 269,943 528,700 Tohoku Electric Power Co Inc 7,660,504 207,900 Tokyo Electric Power 4,000,613 328,000 Tokyo Gas Co 993,225
See accompanying notes to the financial statements. 7 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- JAPAN -- CONTINUED 514,000 TonenGeneral Sekiyu KK 3,121,607 423,000 Toppan Printing Co Ltd 2,912,430 1,446,000 Toshiba Corp* 4,207,435 407,000 Toshiba TEC Corp* 998,351 211,000 Toyo Ink Manufacturing Co Ltd 613,948 123,000 Toyo Seikan Kaisha 1,362,910 251,300 Toyota Motor Corp 5,898,562 2,138 UFJ Holdings Inc 2,513,698 44,300 Uni-Charm Corp 1,682,444 83,000 Victor Co of Japan Ltd* 605,168 108,000 Wacoal Corp 818,507 187,000 Yamaha Corp 2,105,282 179,000 Yamazaki Baking Co Ltd 1,009,879 -------------- 273,960,917 -------------- MALAYSIA -- 0.0% 511,000 MBF Holdings Berhad*(a) 6,724 751,000 Promet Berhad*(a)(b) 1,976 234,000 Saship Holdings*(a)(b) 616 45,821 Silverstone Corp BHD* 2,231 -------------- 11,547 -------------- NETHERLANDS -- 5.0% 1,551,040 ABN Amro Holdings NV 24,657,736 174,626 Aegon NV 1,872,708 74,051 Corio NV 2,130,985 71,434 DSM NV 2,621,563 13,872 Gamma Holdings NV 388,732 274,036 ING Groep NV 3,706,718 99,509 KLM-Koninklijke Luchtvaart Mij NV 691,768 47,757 Koninklijke Volker Wessels 772,087 317,439 Koninklijke Wessanen NV 1,649,094 161,837 Numico NV 854,697 287,653 OCE NV 2,594,971 1,887,396 Ron KPN NV* 12,510,548 123,914 Unilever NV 7,024,967 25,754 Wereldhave NV 1,472,544 -------------- 62,949,118 --------------
See accompanying notes to the financial statements. 8 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- NEW ZEALAND -- 0.5% 544,100 BIL International Ltd (New Zealand Exchange)* 143,913 284,457 BIL International Ltd (Singapore Exchange)* 74,415 2,786,983 Telecom Corp of New Zealand 6,530,698 -------------- 6,749,026 -------------- NORWAY -- 2.7% 74,844 Bergesen D.Y. ASA Class A 1,441,507 34,350 Bergesen D.Y. ASA Class B 556,116 1,455,929 DNB Holdings Class A 5,506,685 50,360 Elkem AS Class A 913,713 303,428 Fred Olsen Energy* 343,022 114,400 Frontline Ltd 1,213,446 49,950 Gjensidige NOR ASA 1,254,841 2,245,504 Kvaerner ASA* 908,851 193,277 Norsk Hydro AS 7,404,629 215,514 Norske Skogindustrier AS Class A 2,752,183 240,304 Orkla ASA 3,353,836 109,750 Smedvig ASA Class A 473,308 938,133 Statoil ASA 7,201,250 206,542 Tandberg Data ASA* 90,803 -------------- 33,414,190 -------------- PORTUGAL -- 0.0% 43,637 Banco Espirito Santo SA 569,087 -------------- SINGAPORE -- 1.9% 68,000 Cerebos Pacific Ltd 81,327 4,035,500 Comfort Group 2,088,348 150,800 Creative Technology Ltd 953,799 491,000 DBS Group Holdings Ltd 2,710,290 278,000 Fraser & Neave Ltd 1,278,786 744,193 Haw Par Corp Ltd 1,480,555 1,030,104 Hotel Properties Ltd 571,573 1,244,000 Keppel Corp Ltd 2,961,309 436,000 Singapore Airlines Ltd 2,369,088 179,000 Singapore Land Ltd 331,415 3,918,000 Singapore Telecom 2,928,672 2,053,201 Straits Trading Co Ltd 1,664,614 1,409,960 United Industrial Corp Ltd 567,503
See accompanying notes to the financial statements. 9 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- SINGAPORE -- CONTINUED 573,000 United Overseas Bank 3,426,501 -------------- 23,413,780 -------------- SPAIN -- 3.2% 74,534 Altadis SA 1,766,517 158,449 CIA ESP Petroleos 3,244,750 467,917 Endesa SA 5,597,962 5,800 Endesa SA ADR 69,890 110,882 Iberdrola SA 1,699,413 1,857,344 Repsol YPF SA 26,023,990 3,200 Repsol YPF SA ADR 44,864 125,859 Vallehermoso SA 1,233,066 -------------- 39,680,452 -------------- SWEDEN -- 1.0% 369,632 Gambro AB Class A 1,546,468 255,180 Gambro AB Class B 1,064,625 94,900 Holmen AB Class B 2,319,803 473,300 Nordea AB 2,063,630 114,317 SAS AB* 424,541 21,600 SKF AB Series A 571,160 1,122,304 TeliaSonera AB 3,772,229 36,100 Volvo AB Class A 604,566 -------------- 12,367,022 -------------- SWITZERLAND -- 4.6% 3,584 Bqe Cant Vaudoise* 202,855 64,076 Micronas Semiconductor Hold* 1,370,357 1,282 Pargesa Holdings SA (Bearer) 2,306,844 46,268 Roche Holding AG (Bearer) 4,452,783 420,640 Roche Holding AG (Genusschein) 25,266,319 7,715 SIG Holding AG 645,761 2,632 Sika AG 656,059 52,685 Swisscom AG 15,657,858 7,014 Valora Holding AG 1,161,241 15,522 ZKB Finanz Vision AG* 1,264,883 9,981 ZKB Pharma Vision AG* 748,943
10 See accompanying notes to the financial statements. GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- SWITZERLAND -- CONTINUED 38,325 Zurich Financial Services AG 3,250,277 -------------- 56,984,180 -------------- UNITED KINGDOM -- 18.7% 1,539,738 Abbey National Plc 9,458,441 1,200 Abbey National Plc ADR 14,280 301,563 Alliance & Leicester Plc 3,681,187 362,397 Associated British Food 2,896,868 849,547 Aviva Plc 5,295,616 270,630 AWG Plc* 2,242,177 427,309 BAA Plc 2,914,326 1,737,181 Barclays Plc 10,041,978 225,035 Barratt Development 1,453,256 1,068,772 Boots Group Plc 9,124,151 171,469 BP Plc 1,080,323 678,717 British American Tobacco 6,628,092 229,372 British Energy Plc 16,258 511,082 British Energy Plc (Deferred Shares)*(a) -- 6,655,017 BT Group Plc 17,138,589 1,300 BT Group Plc ADR 33,215 505,481 Coats 431,929 384,741 Diageo Plc 3,817,835 1,320,215 Friends Provident Plc 1,840,332 221,843 Gallaher Group Plc 2,176,917 284,956 Great Portland Estates Plc 987,435 734,599 GUS Plc 5,872,114 919,526 HBOS Plc 9,588,047 928,084 HSBC Holdings Plc 9,998,884 164,588 Inchcape Plc 1,849,696 417,994 Kelda Group Plc 2,699,368 1,922,941 Kingfisher Plc 6,928,436 298,645 Land Securities Group Plc 3,499,744 3,304,903 Lloyds TSB Group Plc 18,427,657 2,807,074 mmO2 Plc* 2,100,176 1,678,611 National Grid Transco Plc 10,787,439 252,746 Next Plc 3,184,802 871,898 Northern Foods Plc 1,593,059 179,065 Northern Rock Plc 1,900,985 129,172 Pennon Group Plc 1,357,070 368,554 Rank Group Plc 1,355,489
See accompanying notes to the financial statements. 11 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- UNITED KINGDOM -- CONTINUED 233,015 RMC Group 1,350,641 1,443,403 Rolls-Royce 1,807,436 2,547,957 Royal & Sun Alliance Insurance Group 2,869,500 195,780 Royal Bank of Scotland Group 4,480,661 786,938 Sainsbury (J) 2,875,654 526,700 Scottish & Newcastle Plc 2,787,473 701,296 Scottish & Southern Energy Plc 6,959,051 1,461,906 Scottish Power Plc 8,393,152 2,650 Scottish Power Plc ADR 60,712 263,168 Severn Trent Plc 2,918,192 1,133,312 Shell Transport & Trading (Registered) 6,564,631 828,004 Six Continents Plc 8,072,931 1,092,180 Somerfield Plc 1,359,031 193,822 Standard Chartered Plc 2,127,865 309,748 Tate & Lyle 1,355,098 864,575 Taylor Woodrow Plc 2,458,035 45,173 TDG Plc 112,776 298,763 Tomkins Plc 884,693 507,898 United Utilities 4,719,942 316,054 Whitbread Plc 2,593,625 206,745 Wilson (Connolly) Holdings 527,543 601,731 Wimpey (George) 2,568,501 442,349 Wolseley 3,490,687 -------------- 233,754,001 -------------- TOTAL COMMON STOCKS (COST $1,374,404,858) 1,157,928,624 -------------- PREFERRED STOCKS -- 0.6% GERMANY -- 0.5% 89,446 RWE AG 4.35% 1,812,412 9,000 Villeroy & Boch AG (Non Voting) 5.78% 77,602 132,450 Volkswagen AG 5.30% 3,882,925 -------------- 5,772,939 -------------- ITALY -- 0.1% 135,802 Fiat SPA 4.95% 644,017 100,961 Fondiaria-Sai SPA 8.00% 566,930
12 See accompanying notes to the financial statements. GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- ITALY -- CONTINUED 86,700 IFI Istituto Finanziario Industries 4.82% 747,562 -------------- 1,958,509 -------------- TOTAL PREFERRED STOCKS (COST $12,685,824) 7,731,448 -------------- RIGHTS AND WARRANTS -- 0.0% FRANCE -- 0.0% 1,252,228 Eurotunnel SA Paris Warrants, Expires 10/31/03* 13,497 42,538 Wendel Investissement Warrants, Expires 3/27/03* 458 -------------- 13,955 -------------- UNITED KINGDOM -- 0.0% 2,311,000 Eurotunnel SA Warrants, Expires 10/31/03* 4,732 -------------- TOTAL RIGHTS AND WARRANTS (COST $220,431) 18,687 -------------- SHORT-TERM INVESTMENTS -- 10.7% CASH EQUIVALENTS -- 9.9% $ 46,200,000 Dresdner GC Time Deposit, 1.31%, due 3/03/03 46,200,000 77,550,313 The Boston Global Investment Trust(c) 77,550,313 -------------- 123,750,313 --------------
See accompanying notes to the financial statements. 13 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE ($) DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- U.S. GOVERNMENT -- 0.8% 10,200,000 U.S. Treasury Bill, 1.22%, due 4/24/03(d) 10,181,596 -------------- TOTAL SHORT-TERM INVESTMENTS (COST $133,931,909) 133,931,909 -------------- TOTAL INVESTMENTS -- 104.1% (Cost $1,521,243,022) 1,299,610,668 Other Assets and Liabilities (net) -- (4.1%) (51,477,440) -------------- TOTAL NET ASSETS -- 100.0% $1,248,133,228 ============== NOTES TO SCHEDULE OF INVESTMENTS:
ADR - American Depositary Receipt
* Non-income producing security. (a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). (b) Bankrupt issuer. (c) Represents investment of security lending collateral (Note 1). (d) All or a portion of this security is held as collateral for open futures contracts (Note 6). 14 See accompanying notes to the financial statements. GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY (SHOWING PERCENTAGE OF EQUITY INVESTMENTS) FEBRUARY 28, 2003 (UNAUDITED) At February 28, 2003, industry sector diversification of the Fund's equity investments was as follows:
INDUSTRY SECTOR - -------------------------------------------------------------------- Financials 28.6% Consumer Discretionary 12.5 Utilities 11.0 Energy 10.4 Telecommunication Services 7.9 Industrials 7.8 Consumer Staples 7.7 Materials 6.8 Health Care 5.6 Information Technology 1.7 ----- 100.0% =====
See accompanying notes to the financial statements. 15 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value, including securities on loan of $71,232,218 (cost $1,521,243,022) (Note 1) $1,299,610,668 Cash 81,174 Foreign currency, at value (cost $968,379) (Note 1) 946,633 Receivable for investments sold 559,322 Receivable for Fund shares sold 18,478,354 Dividends and interest receivable 2,375,730 Foreign taxes receivable 932,931 Receivable for open forward foreign currency contracts (Notes 1 and 6) 49,428,337 Receivable for variation margin on open futures contracts (Notes 1 and 6) 626,649 Receivable for expenses reimbursed by Manager (Note 2) 58,688 -------------- Total assets 1,373,098,486 -------------- LIABILITIES: Payable upon return of securities loaned (Note 1) 77,550,313 Payable for Fund shares repurchased 7,776,543 Payable to affiliate for (Note 2): Management fee 514,201 Shareholder service fee 130,231 Payable for open forward foreign currency contracts (Notes 1 and 6) 38,789,439 Accrued expenses 204,531 -------------- Total liabilities 124,965,258 -------------- NET ASSETS $1,248,133,228 ============== NET ASSETS CONSIST OF: Paid-in capital $1,653,019,080 Accumulated undistributed net investment income 1,858,662 Accumulated net realized loss (191,183,697) Net unrealized depreciation (215,560,817) -------------- $1,248,133,228 ============== NET ASSETS ATTRIBUTABLE TO: Class II shares $ 67,896,039 ============== Class III shares $ 845,997,198 ============== Class IV shares $ 334,239,991 ============== SHARES OUTSTANDING: Class II 4,232,529 ============== Class III 52,454,814 ============== Class IV 20,733,449 ============== NET ASSET VALUE PER SHARE: Class II $ 16.04 ============== Class III $ 16.13 ============== Class IV $ 16.12 ==============
16 See accompanying notes to the financial statements. GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $4,415,303) $ 35,599,214 Interest (including securities lending income of $946,187) 1,952,974 ------------ Total income 37,552,188 ------------ EXPENSES: Management fee (Note 2) 7,000,434 Custodian fees 995,820 Legal fees 74,101 Audit fees 66,697 Transfer agent fees 55,918 Trustees fees and related expenses (Note 2) 27,807 Registration fees 26,651 Miscellaneous 32,805 Fees reimbursed by Manager (Note 2) (1,246,654) ------------ 7,033,579 Shareholder service fee (Note 2) - Class II 113,654 Shareholder service fee (Note 2) - Class III 1,387,501 Shareholder service fee (Note 2) - Class IV 287,744 ------------ Net expenses 8,822,478 ------------ Net investment income 28,729,710 ------------ REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (53,382,257) Closed futures contracts (9,464,665) Foreign currency, forward contracts and foreign currency related transactions 22,329,444 ------------ Net realized loss (40,517,478) ------------ Change in net unrealized appreciation (depreciation) on: Investments (37,994,430) Open futures contracts (4,540,769) Foreign currency, forward contracts and foreign currency related transactions 9,363,228 ------------ Net unrealized loss (33,171,971) ------------ Net realized and unrealized loss (73,689,449) ------------ NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(44,959,739) ============
See accompanying notes to the financial statements. 17 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 28,729,710 $ 32,221,106 Net realized loss (40,517,478) (103,502,172) Change in net unrealized appreciation (depreciation) (33,171,971) (84,795,934) -------------- -------------- Net decrease in net assets from operations (44,959,739) (156,077,000) -------------- -------------- Distributions to shareholders from: Net investment income Class II (2,069,691) (1,302,950) Class III (34,394,773) (45,392,797) Class IV (13,242,397) (9,503,029) -------------- -------------- Total distributions from net investment income (49,706,861) (56,198,776) -------------- -------------- Net share transactions (Note 5): Class II 30,892,601 29,909,052 Class III (148,543,077) (50,856,645) Class IV 116,271,839 125,957,168 -------------- -------------- Increase (decrease) in net assets resulting from net share transactions (1,378,637) 105,009,575 -------------- -------------- Total decrease in net assets (96,045,237) (107,266,201) NET ASSETS: Beginning of period 1,344,178,465 1,451,444,666 -------------- -------------- End of period (including accumulated undistributed net investment income of $1,858,662 and distributions in excess of net investment income of $176,685, respectively) $1,248,133,228 $1,344,178,465 ============== ==============
18 See accompanying notes to the financial statements. GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS II SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, --------------------------------------------------------------------- 2003 2002 2001 2000 1999 --------- --------- --------- --------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 17.41 $ 20.30 $ 20.85 $ 20.33 $ 23.16 -------- -------- -------- -------- -------- Income from investment operations: Net investment income(b) 0.37 0.28 0.40 0.41 0.39 Net realized and unrealized gain (loss) (1.05) (2.44) 1.11 1.33 (0.46) -------- -------- -------- -------- -------- Total from investment operations (0.68) (2.16) 1.51 1.74 (0.07) -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.69) (0.73) (0.22) (0.56) (0.48) From net realized gains -- -- (1.84) (0.66) (2.28) -------- -------- -------- -------- -------- Total distributions (0.69) (0.73) (2.06) (1.22) (2.76) -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 16.04 $ 17.41 $ 20.30 $ 20.85 $ 20.33 ======== ======== ======== ======== ======== TOTAL RETURN(a) (4.11)% (10.71)% 7.25% 8.09% (0.76)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 67,896 $ 42,495 $ 15,284 $ 21,162 $ 18,295 Net expenses to average daily net assets 0.76% 0.76% 0.76% 0.76% 0.76% Net investment income to average daily net assets 2.06% 1.56% 1.88% 1.84% 1.71% Portfolio turnover rate 51% 51% 31% 53% 60% Fees and expenses reimbursed by the Manager to average daily net assets: 0.10% 0.10% 0.08% 0.09% 0.28%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) Computed using average shares outstanding throughout the period. See accompanying notes to the financial statements. 19 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ----------------------------------------------------------------------------- 2003 2002 2001 2000 1999 --------- ----------- ----------- ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 17.50 $ 20.37 $ 20.91 $ 20.38 $ 23.20 -------- ---------- ---------- ---------- ---------- Income from investment operations: Net investment income(b) 0.40 0.44 0.44 0.47 0.42 Net realized and unrealized gain (loss) (1.08) (2.59) 1.09 1.28 (0.47) -------- ---------- ---------- ---------- ---------- Total from investment operations (0.68) (2.15) 1.53 1.75 (0.05) -------- ---------- ---------- ---------- ---------- Less distributions to shareholders: From net investment income (0.69) (0.72) (0.23) (0.56) (0.49) From net realized gains -- -- (1.84) (0.66) (2.28) -------- ---------- ---------- ---------- ---------- Total distributions (0.69) (0.72) (2.07) (1.22) (2.77) -------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 16.13 $ 17.50 $ 20.37 $ 20.91 $ 20.38 ======== ========== ========== ========== ========== TOTAL RETURN(a) (4.05)% (10.60)% 7.32% 8.20% (0.68)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $845,997 $1,053,104 $1,280,603 $1,799,929 $1,998,447 Net expenses to average daily net assets 0.69% 0.69% 0.69% 0.69% 0.69% Net investment income to average daily net assets 2.26% 2.37% 2.07% 2.09% 1.84% Portfolio turnover rate 51% 51% 31% 53% 60% Fees and expenses reimbursed by the Manager to average daily net assets: 0.10% 0.10% 0.08% 0.09% 0.28%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) Computed using average shares outstanding throughout the period. 20 See accompanying notes to the financial statements. GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, --------------------------------------------------------------------- 2003 2002 2001 2000 1999 --------- --------- --------- --------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 17.50 $ 20.37 $ 20.90 $ 20.37 $ 23.19 -------- -------- -------- -------- -------- Income from investment operations: Net investment income(b) 0.38 0.36 0.50 0.55 0.42 Net realized and unrealized gain (loss) (1.05) (2.49) 1.05 1.21 (0.46) -------- -------- -------- -------- -------- Total from investment operations (0.67) (2.13) 1.55 1.76 (0.04) -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.71) (0.74) (0.24) (0.57) (0.50) From net realized gains -- -- (1.84) (0.66) (2.28) -------- -------- -------- -------- -------- Total distributions (0.71) (0.74) (2.08) (1.23) (2.78) -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 16.12 $ 17.50 $ 20.37 $ 20.90 $ 20.37 ======== ======== ======== ======== ======== TOTAL RETURN(a) (4.02)% (10.52)% 7.45% 8.18% (0.60)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $334,240 $248,579 $155,558 $291,894 $567,219 Net expenses to average daily net assets 0.63% 0.63% 0.63% 0.63% 0.63% Net investment income to average daily net assets 2.13% 1.97% 2.34% 2.47% 1.85% Portfolio turnover rate 51% 51% 31% 53% 60% Fees and expenses reimbursed by the Manager to average daily net assets: 0.10% 0.10% 0.08% 0.09% 0.28%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) Computed using average shares outstanding throughout the period. See accompanying notes to the financial statements. 21 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO International Intrinsic Value Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in equity securities of non-U.S. issuers. The Fund's benchmark is the SSB PMI Value EPAC Index. Throughout the year ended February 28, 2003, the Fund had three classes of shares outstanding: Class II, Class III and Class IV. The principal economic difference among the classes of shares is the level of shareholder service fees borne by the classes. Eligibility for and automatic conversion among the various classes of shares is generally based on the total amount of assets invested in a particular fund or with GMO, as more fully outlined in the Trust's prospectus. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Shares of mutual funds are valued at their net asset value as reported on each business day. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their 22 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in foreign currency values that are unfavorable to the Fund. The value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through currency contracts as of February 28, 2003. FUTURES CONTRACTS The Fund may purchase and sell futures contracts to manage its exposure to the financial markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures 23 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 28, 2003. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 28, 2003, there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future, security or currency 24 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. At February 28, 2003, there were no open purchased option contracts. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the financial markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. At February 28, 2003, there were no open swap agreements. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities 25 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 2003, the Fund loaned securities having a market value of $71,232,218 collateralized by cash in the amount of $77,550,313 which was invested in a short-term instrument. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryover for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country's tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003, the tax basis of distributions paid were as follows: ordinary income -- $56,198,776 and $49,706,861, respectively. As of February 28, 2003, the components of distributable earning on a tax basis consisted of $8,687,165 of undistributed ordinary income. The temporary differences between book and tax basis distributable earnings are primarily due to passive foreign investment company transactions. At February 28, 2003, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code of $63,430,844 and $95,091,208 expiring in 2010 and 2011, respectively. The Fund has elected to defer to March 1, 2003 post-October capital losses of $22,379,754. 26 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus U.S. GAAP. The net gains resulting from redemption in-kind transactions were $2,219,910. The financial highlights exclude these adjustments.
Accumulated Undistributed Net Accumulated Net Investment Income Realized Loss Paid-in Capital ----------------- ----------------- --------------- $23,012,498 $(20,788,733) $(2,223,765)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and discounts. Non cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. ALLOCATION OF OPERATING ACTIVITY The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro-rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class' operations. INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental 27 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .54% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .22% for Class II shares, .15% for Class III shares, and .09% for Class IV shares. GMO has entered into a binding agreement effective until at least June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent Trustees of the Trust (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes) exceed the management fee. As of February 28, 2003, a significant portion of the Fund's shares were held by accounts for which the Manager has investment discretion. The Fund's portion of the fee paid by the Trust to the independent Trustees during the year ended February 28, 2003, was $18,700. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2003, aggregated $633,408,241 and $684,181,036, respectively. At February 28, 2003, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in the value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $1,532,342,278 $56,548,944 $(289,280,554) $(232,731,610)
28 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 4. PRINCIPAL SHAREHOLDER At February 28, 2003, 10.8% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 ---------------------------- ---------------------------- Shares Amount Shares Amount Class II: ------------ -------------- ------------ -------------- Shares sold 2,552,285 $ 45,282,901 1,624,477 $ 28,823,075 Shares issued to shareholders in reinvestment of distributions 98,783 1,661,781 68,492 1,192,782 Shares repurchased (858,945) (16,052,081) (5,596) (106,805) ------------ -------------- ------------ -------------- Net increase 1,792,123 $ 30,892,601 1,687,373 $ 29,909,052 ============ ============== ============ ============== Year Ended Year Ended February 28, 2003 February 28, 2002 ---------------------------- ---------------------------- Shares Amount Shares Amount Class III: ------------ -------------- ------------ -------------- Shares sold 18,150,851 $ 313,632,458 9,555,643 $ 172,725,472 Shares issued to shareholders in reinvestment of distributions 1,458,645 24,738,029 1,736,570 31,031,226 Shares repurchased (27,340,396) (486,913,564) (13,971,133) (254,613,343) ------------ -------------- ------------ -------------- Net decrease (7,730,900) $ (148,543,077) (2,678,920) $ (50,856,645) ============ ============== ============ ==============
29 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - --------------------------------------------------------------------------------
Year Ended Year Ended February 28, 2003 February 28, 2002 ---------------------------- ---------------------------- Shares Amount Shares Amount Class IV: ------------ -------------- ------------ -------------- Shares sold 13,102,251 $ 231,497,089 7,356,392 $ 140,727,918 Shares issued to shareholders in reinvestment of distributions 684,808 11,576,480 387,104 6,911,650 Shares repurchased (7,261,462) (126,801,730) (1,170,451) (21,682,400) ------------ -------------- ------------ -------------- Net increase 6,525,597 $ 116,271,839 6,573,045 $ 125,957,168 ============ ============== ============ ==============
6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 28, 2003 is as follows: FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) ---------- ---------------- ----------------- ------------ -------------- Buys 4/28/03 AUD 66,865,325 $ 40,360,746 $ 3,339,441 4/28/03 CAD 44,922,277 30,070,726 1,557,600 3/28/03 CHF 67,940,165 50,127,966 4,275,518 3/28/03 DKK 479,996,536 69,569,559 6,617,618 3/28/03 EUR 221,161,729 238,148,296 21,741,317 3/28/03 GBP 33,856,474 53,241,889 1,020,297 4/28/03 HKD 286,309,942 36,704,677 58,976 4/28/03 JPY 1,430,401,280 12,124,340 589,857 3/28/03 NOK 399,424,353 55,584,797 2,493,308 4/28/03 NZD 27,898,318 15,422,167 1,936,522 3/28/03 SEK 625,980,000 73,443,797 5,514,461 4/28/03 SGD 37,244,950 21,433,784 283,422 ------------ $ 49,428,337 ============
30 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- FORWARD CURRENCY CONTRACTS -- CONTINUED
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) ---------- ---------------- ----------------- ------------ -------------- Sales 4/28/03 AUD 30,147,105 $ 18,197,169 $ (1,770,370) 4/28/03 CAD 69,127,408 46,273,508 (2,295,966) 3/28/03 CHF 42,830,710 31,601,577 (2,713,236) 3/28/03 DKK 131,779,680 19,099,834 (1,082,989) 3/28/03 EUR 203,483,762 219,112,554 (19,936,152) 3/28/03 GBP 47,468,937 74,648,525 (830,446) 4/28/03 HKD 456,865,869 58,569,794 (89,426) 4/28/03 JPY 11,339,545,913 96,116,038 (4,216,056) 3/28/03 NOK 273,413,005 38,048,773 (2,268,485) 4/28/03 NZD 14,391,524 7,955,623 (1,137,487) 3/28/03 SEK 222,337,736 26,086,021 (2,383,251) 4/28/03 SGD 5,269,740 3,032,639 (65,575) ------------ $(38,789,439) ============
CURRENCY ABBREVIATIONS: AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc DKK - Danish Krona EUR - Euro GBP - British Pound HKD - Hong Kong Dollar JPY - Japanese Yen NOK - Norwegian Krone NZD - New Zealand Dollar SEK - Swedish Krona SGD - Singapore Dollar
31 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- FUTURES CONTRACTS
Net Unrealized Number of Contract Appreciation Contracts Type Expiration Date Value (Depreciation) --------- ---------------------- --------------- ------------ -------------- Buys 223 DAX March 2003 $15,271,201 $(2,636,573) 356 FTSE 100 March 2003 20,360,309 (1,464,928) 24 MIB30 March 2003 3,033,705 (36,986) 599 MSCI March 2003 10,745,939 (208,324) 193 TSE TOPIX March 2003 13,337,365 (565,532) ----------- $(4,912,343) =========== Sales 217 S&P Toronto 60 March 2003 $10,833,977 $ (89,517) 142 SPI 200 March 2003 6,019,163 210,813 ----------- $ 121,296 ===========
At February 28, 2003 , the Fund had sufficient cash and/or securities to cover any commitments of margin requirements of the relevant broker or exchange. 32 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO INTERNATIONAL INTRINSIC VALUE FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO International Intrinsic Value Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 33 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- During the year ended February 28, 2003, the Fund paid foreign taxes of $4,415,303 and recognized foreign source income of $40,014,517. 34 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------- --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf Boston, MA and Consultant, 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 35 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------- --------------- --------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the from February Boston, MA 02110 Trust 2002 - October Age: 64 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 36 PRINCIPAL OFFICERS:
Term of Office(4) and Principal Occupation(s) Name, Address, Position(s) Length of During Past and Age Held with Fund Time Served Five Years -------------------------- -------------- -------------- --------------------------------------------- Scott Eston President and President and Chief Financial Officer (1997 - present), c/o GMO Trust Chief Chief Chief Operating Officer (2000 - present) and 40 Rowes Wharf Executive Executive Member, Grantham, Mayo, Van Otterloo & Co. Boston, MA 02110 Officer of the Officer since LLC. Age: 47 Trust October 2002; Vice President from August 1998 - October 2002. Susan Randall Harbert Chief Chief Member, Grantham, Mayo, Van Otterloo & Co. c/o GMO Trust Financial Financial LLC. 40 Rowes Wharf Officer and Officer Since Boston, MA 02110 Treasurer of February 2000; Age: 45 the Trust Treasurer since February 1998. Brent Arvidson Assistant Since Senior Fund Administrator, Grantham, Mayo, c/o GMO Trust Treasurer of September Van Otterloo & Co. LLC. 40 Rowes Wharf the Trust 1998. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President Vice President General Counsel, Anti- Money Laundering c/o GMO Trust and Clerk of since February Reporting Officer (July 2002 - February 2003) 40 Rowes Wharf Boston, MA the Trust 1997; Clerk and Member, Grantham, Mayo, Van Otterloo & 02110 since March Co. LLC. Age: 37 2001; May 1999-August 1999. Elaine M. Hartnett, Esq. Vice President Vice President Associate General Counsel, Grantham, Mayo, c/o GMO Trust and Secretary since August Van Otterloo & Co. LLC (June 1999 - 40 Rowes Wharf of the Trust 1999; present); Associate/ Junior Partner, Hale and Boston, MA 02110 Secretary Dorr LLP (1991 - 1999). Age: 58 since March 2001. Julie Perniola Vice President Since February Anti-Money Laundering Reporting Officer c/o GMO Trust and Anti- 2003. (February 2003 - present) and Compliance 40 Rowes Wharf Money Officer, Grantham, Mayo, Van Otterloo & Co. Boston, MA 02110 Laundering LLC. Age: 32 Compliance Officer
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 37 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGEMENT Day-to-day management of the Fund's portfolio is the responsibility of the International Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE Class III shares of GMO International Small Companies Fund returned -6.3% for the fiscal year ended February 28, 2003. This was 11.2% ahead of the MSCI EAFE Index, which returned -17.5% over the same period, and 4.1% ahead of the Salomon Smith Barney EMI World ex-US Index of smaller capitalization stocks, which returned -10.4%. International stocks, like the U.S. market, suffered their third straight year of negative returns in 2002. World equity markets were hit by the continued global economic slowdown which came on top of valuation levels that remained high by historical standards. With the addition of corporate governance scandals and a perilous geopolitical situation, these factors combined to produce the worst bear market since 1974. Smaller foreign stocks enjoyed significantly stronger performance than did large caps, although they still declined in value. Smaller companies generally were priced at less challenging valuation levels, and so were better able to withstand a tough macro environment. In addition, the smaller capitalization universe excludes some of the most disastrously overextended bubble stocks, such as the trio of Deutsche Telekom, France Telecom, and Vivendi. Through asset writedowns each suffered losses in excess of 20 billion euros for 2002. In U.S. dollar terms, large cap foreign stocks fared slightly better than domestic equities. The EAFE Index outperformed the S&P 500 (which returned - -22.7%) solely due to weakness in the dollar. Foreign investors have been slowing their inflows on declining confidence in the U.S. economy. With the continued large U.S. trade deficit and lower U.S. interest rates, this seems to have put an end to the long post 1995 dollar rally. In local currency terms, European markets fell even further than the U.S. Germany led the way down, with that country's DAX index falling a Nasdaq-like - -44% in calendar year 2002. Europe continued to suffer from the unraveling of the "TMT" bubble in the technology, media, and telecommunications sectors. Faith has all but vanished that third generation mobile phone technology will deliver pots of gold to these sectors. The insurance sector suffered from a brutal combination of rising liabilities for natural (and unnatural) disasters with deteriorating asset values as equity holdings declined in value. There were questions about the viability of the Eurozone as a single currency region and the appropriateness of its stability pact, which limits government deficits. Adhering to this pact means, for example, that Germany has neither fiscal policy nor monetary policy (now ceded to the ECB) available to stimulate its economy. In Japan, frustration continued to mount over the lack of reform. GDP growth is stagnant and some economic indicators forecast a return to recession in 2003. The solvency of the financial sector remains a concern, and several big banks have been forced to raise additional capital at the expense of current shareholders. Prime Minister Koizumi appeared to practice business as usual with the appointment of an establishment candidate to head the central bank. And the strength of the yen against the U.S. dollar poses GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- problems for exporters. Despite the fact that the Nikkei 225 index hit a 20-year low, Japan was the best performing major market. The MSCI Japan index fell "only" by 10%, as the decline was at least somewhat anticipated in the prices. Within this difficult environment, GMO's disciplined investment approach produced strong relative performance within the small cap universe. GMO's stock selection process, which involves the application of quantitative techniques to forecast returns based upon an evaluation of stock valuation, dividend yield, price momentum, and other factors, performed well over the fiscal year. Generally, the most defensive sectors performed strongest in these times of uncertainty. Utility stocks led the way, and the portfolio benefited from overweighting the sector. Telecommunications stocks and consumer staples also outperformed the benchmark (though all sectors fell in absolute terms). Energy stocks outperformed as oil prices ran up to nearly $40/barrel. The outperformance of the telecommunications sector came after two dismal years, as share prices have fallen enough that the basic revenue from the traditional business is providing some valuation support even as hopes of future growth dissipate. Technology stocks performed the worst of the major sectors, which were underweighted in the portfolio. Sector allocation was a modest benefit to the portfolio, predominantly from an overweight position in electric utilities. Country allocation was also a positive, as the portfolio benefited from overweights in some of the smaller markets that performed relatively well. Austria was the most notable of these as overweighting that market, which managed positive absolute return, added close to a percentage point of relative return. The portfolio benefited from an allocation to emerging markets including Turkey, South Africa, and Russia that was initiated mid-year. Allocations to Canada and the Pacific region outside Japan were also positive as those regions enjoyed relatively strong economic growth. Currency allocation was also positive as the portfolio benefited not just in absolute terms from not holding the U.S. dollar, but also in relative terms from overweighting the euro and other continental currencies at the expense of the pound and yen. OUTLOOK The silver lining to the tough bear market is that the bad news is now out in the open. With lower stock prices, dividend yields are now meaningful and there is a lower hurdle on earnings growth required to deliver capital gains. Smaller stocks remain cheaper than large cap stocks and are poised to benefit from any recovery in the global economy. Lower valuations and continued dollar weakness position international equities to outperform the U.S. market. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO INTERNATIONAL SMALL COMPANIES FUND CLASS III SHARES AND THE SALOMON SMITH BARNEY EMI WORLD EX-U.S. INDEX AS OF FEBRUARY 28, 2003 GMO INTERNATIONAL SMALL SALOMON SMITH BARNEY COMPANIES FUND EMI WORLD EX-U.S. INDEX MSCI EAFE INDEX 2/28/93 $9,940 $10,000 $10,000 3/31/93 $10,856 $11,007 $10,872 6/30/93 $12,319 $12,170 $11,965 9/30/93 $13,426 $12,916 $12,759 12/31/93 $14,572 $12,552 $12,869 3/31/94 $16,091 $13,675 $13,319 6/30/94 $16,386 $14,175 $13,999 9/30/94 $15,948 $14,075 $14,013 12/31/94 $15,262 $13,615 $13,870 3/31/95 $14,804 $13,531 $14,128 6/30/95 $15,200 $13,525 $14,231 9/30/95 $15,869 $14,060 $14,824 12/31/95 $16,012 $14,328 $15,424 3/31/96 $16,776 $15,152 $15,870 6/30/96 $17,298 $15,821 $16,121 9/30/96 $16,988 $15,463 $16,101 12/31/96 $17,588 $15,367 $16,357 3/31/97 $17,471 $15,084 $16,101 6/30/97 $18,796 $16,169 $18,190 9/30/97 $18,809 $15,517 $18,062 12/31/97 $16,965 $13,921 $16,648 3/31/98 $19,871 $16,315 $19,097 6/30/98 $19,688 $16,256 $19,300 9/30/98 $16,791 $13,797 $16,556 12/31/98 $18,407 $15,612 $19,977 3/31/99 $18,326 $15,834 $20,255 6/30/99 $19,679 $16,808 $20,770 9/30/99 $20,103 $17,662 $21,681 12/31/99 $20,432 $19,320 $25,364 3/31/2000 $20,331 $19,712 $25,337 6/30/2000 $21,022 $19,369 $24,333 9/30/2000 $20,237 $18,349 $22,370 12/31/2000 $21,001 $17,328 $21,770 3/31/2001 $20,169 $15,481 $18,786 6/30/2001 $21,445 $15,952 $18,590 9/30/2001 $18,890 $13,494 $15,987 12/31/2001 $19,594 $14,608 $17,102 3/31/2002 $21,086 $15,485 $17,189 6/30/2002 $22,158 $15,795 $16,825 9/30/2002 $18,268 $13,012 $13,505 12/31/2002 $19,349 $13,543 $14,376 2/28/2003 $18,606 $13,023 $13,460
AVERAGE ANNUAL TOTAL RETURN 1 YEAR 5 YEAR 10 YEAR Class III -7.42% -0.21% 6.41%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 60 bp on the purchase and 60 bp on the redemption. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ COMMON STOCKS -- 92.2% ARGENTINA -- 0.2% 32,869 Grupo Financiero Galicia SA ADR* 83,487 71,900 Perez Companc SA ADR* 524,151 80,800 Telecom Argentina SA ADR* 324,816 9,400 Tenaris SA ADR* 210,466 ------------ 1,142,920 ------------ AUSTRALIA -- 4.9% 1,191,038 AMP Diversified Property Trust 1,872,004 323,359 Ansell Ltd* 1,124,400 508,504 Australian Gas Light Co Ltd 3,338,897 127,746 Bank of Western Australia 273,655 293,548 BHP Steel Ltd 614,582 844,580 Boral Ltd 2,275,648 306,624 CFS Gandel Retail Trust 241,897 83,588 Coca Cola Amatil Ltd 288,627 74,259 CSL Ltd 630,446 1,286,460 General Property Trust Units 2,162,506 96,799 James Hardie Industries NV 388,875 111,733 Jupiters Ltd 417,002 383,591 Orica Ltd 1,915,798 117,459 Origin Energy Ltd 306,504 202,991 Patrick Corp Ltd 1,394,455 1,539,250 Principal Office Fund 1,289,050 178,421 QBE Insurance Group Ltd 877,026 653,251 Santos Ltd 2,319,088 674,495 Stockland Trust Group Units 1,989,282 424,793 TABCORP Holdings Ltd 2,577,856 ------------ 26,297,598 ------------ AUSTRIA -- 3.3% 74,886 Austrian Airlines* 516,558 11,261 Bau Holdings AG 831,392 56,328 Boehler Uddeholm (Bearer) 2,809,674 11,136 Brau Union AG 804,160 106 BWT AG 1,040 52,603 Flughafen Wien AG 1,904,969 105,824 Immofinanz Immobilien Anlagen AG* 675,218 43,955 Mayr-Melnhof Karton AG (Bearer) 3,440,351
See accompanying notes to the financial statements. 1 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ AUSTRIA -- CONTINUED 12,952 Oesterreichische Brau Beteiligungs AG 1,058,841 45,237 RHI AG* 399,803 81,128 VA Technologie AG (Bearer) 1,267,877 84,980 Voestalpine AG 2,028,751 107,089 Wienerberger AG 1,824,799 ------------ 17,563,433 ------------ BELGIUM -- 1.9% 108,643 AGFA-Gevaert NV 2,340,738 15,966 Barco NV 825,991 22,926 Bekaert SA 809,241 6,015 CMB SA 318,054 29,564 Colruyt SA 1,754,118 42,621 Delhaize Group 649,548 11,145 Sofina SA 320,723 12,206 Solvay Et Cie 723,559 22,126 Tessenderlo Chemie 624,802 73,487 UCB SA 1,679,923 5,870 Umicore 239,402 ------------ 10,286,099 ------------ CANADA -- 6.1% 142,600 Air Canada* 306,296 114,000 Brascan Corp 2,245,872 26,800 Canadian Natural Resources 920,137 72,100 Canadian Pacific Railway Ltd 1,509,464 147,900 Canadian Tire Corp 2,968,325 55,300 Cognos Inc* 1,340,741 53,000 CP Ships Ltd 659,921 77,000 Dofasco Inc 1,390,838 17,000 Fairfax Financial Holdings Ltd 914,928 46,000 Fairmont Hotels & Resorts Inc 938,649 140,700 Hudson's Bay Co 793,315 36,500 Inco Ltd* 777,873 64,900 MDS Inc 924,840 136,600 Methanex Corp 1,265,324 159,100 Moore Corp Ltd* 1,743,927 39,100 National Bank of Canada 852,967 81,500 Nexen Inc 1,749,476
2 See accompanying notes to the financial statements. GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ CANADA -- CONTINUED 43,600 Nova Chemicals Corp 782,564 148,800 Onex Corp 1,388,321 44,200 Penn West Petroleum Ltd* 1,191,187 21,400 Precision Drilling Corp* 774,095 183,400 Quebecor Inc* 2,284,806 32,800 Quebecor World Inc 748,337 82,800 Sears Canada Inc 936,488 29,800 Sobeys Inc 796,507 62,500 Torstar Corp 1,004,749 123,500 TransAlta Corp 1,374,433 ------------ 32,584,380 ------------ CHINA -- 0.7% 2,874,000 China Petroleum & Chemical Corp Class H 541,701 386,000 China Resources Enterprise Ltd 346,450 586,000 China Southern Airlines Co Ltd 159,666 508,000 Cosco Pacific Ltd 459,207 874,000 Denway Motors Ltd 336,193 506,000 Huaneng Power International Inc Class H 450,911 1,166,000 Legend Holdings Ltd 399,924 2,892,000 PetroChina Co Ltd Class H 604,424 108,000 Shanghai Industrial Holdings Ltd Class H 167,558 618,000 Yanzhou Coal Mining Co Ltd Class H 265,454 ------------ 3,731,488 ------------ CZECH REPUBLIC -- 0.4% 26,700 Ceske Radiokomunikace* 172,129 25,900 Ceski Telecom AS* 237,275 139,400 CEZ AS 435,151 4,700 Komercni Banka AS 337,285 1,400 Philip Morris CR AS 523,478 143,900 Unipetrol* 196,768 ------------ 1,902,086 ------------ FINLAND -- 3.2% 36,600 Amer Group Class A 1,313,601 56,950 Elisa Communications Oyj* 349,870 85,100 Finnair Class A 334,781 333,200 Huhtamaki Oyj Class I 3,023,815
See accompanying notes to the financial statements. 3 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ FINLAND -- CONTINUED 35,800 KCI Konecranes International 792,927 191,500 Kemira Oyj 1,213,624 102,900 Kesko Oyj 1,144,546 77,100 Metso Oyj 797,744 29,900 M-real Oyj 227,195 17,500 Orion-Yhtymae Oyj 273,492 115,200 Outokumpu Class A 961,018 144,900 Pohjola Group Plc 2,280,129 217,429 Rautaruukki Oyj 831,925 59,400 Sponda Oyj 346,355 3,200 Stockmann AB Class A 47,251 34,347 Stockmann AB Class B 509,014 24,880 Tietoenator Oyj 343,241 63,300 Uponor Oyj 1,294,906 5,700 Wartsila Oyj ABP 76,793 96,800 Wartsila Oyj Class B 1,253,016 ------------ 17,415,243 ------------ FRANCE -- 5.4% 111,061 Alcatel SA 800,803 590,831 Alstom* 1,865,817 116,288 Altran Technologies SA 323,365 114,288 Arcelor* 1,144,339 31,630 Autoroutes du Sud de la France* 811,020 15,870 Business Objects SA* 269,399 11,217 Eiffage SA 785,829 85,946 Equant NV* 454,826 67,759 Essilor International SA 2,629,103 13,217 Eurazeo 693,745 44,026 Euronext NV 810,941 2,175 Gecina SA 233,601 503,403 Havas SA 1,492,061 5,097 Hermes International 638,350 2,631 Imerys SA 280,166 182,602 JC Decaux SA* 1,672,872 10,979 M6-Metropole Television 206,015 113,840 Michelin SA Class B 3,693,172 50,352 Pernod Ricard 3,899,255 12,295 Remy Cointreau SA 331,289 113,166 Rhodia SA 609,852
4 See accompanying notes to the financial statements. GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ FRANCE -- CONTINUED 187,588 SCOR SA 837,035 7,357 Seb SA 621,663 98,791 Soc Air France 935,932 2,207 Technip-Coflexip SA 142,722 8,068 Unibail 506,959 7,101 Vallourec 390,326 64,799 Wendel Investissement 1,697,121 ------------ 28,777,578 ------------ GERMANY -- 4.1% 36,730 Adidas-Salomon AG 2,929,482 43,776 AGIV Real Estate AG* 89,645 50 AMB Aachener & Muenchener Beteiligungs AG 2,247 1,500 AVA Allg Handels der Verbrau 46,561 78,570 Bankgesellschaft Berlin AG* 121,096 28,370 Bewag AG Class A 406,677 2,450 BHW Holding AG 15,844 65,950 Bilfinger & Berger 1,314,997 27,892 Celanese AG* 550,135 119,400 Commerzbank AG 752,833 230,180 Continental AG* 3,609,680 23,000 Deutsche Boerse AG 891,179 87,500 Deutsche Lufthansa AG* 733,712 22,890 Douglas Holdings AG 340,458 27,100 Epcos AG* 293,544 21,895 HeidelbergCement AG 521,525 32,480 Hochtief AG 428,835 22,100 IKB Deutsche Industriebank AG 287,024 70,700 Infineon Technologies AG* 454,155 46,375 IWKA AG 545,314 111,950 MAN AG 1,616,840 44,400 Merck KGaA 1,071,937 95,590 MG Technologies AG 542,952 77,540 Schwarz Pharma AG 2,862,362 1,419 Springer (Axel) Verlag AG* 64,999 51,168 Sudzucker AG 805,174 39,400 TUI AG 392,804 196,200 WCM Beteiligungs & Grundbesitz* 422,929
See accompanying notes to the financial statements. 5 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ GERMANY -- CONTINUED 1,521 Wella AG 107,540 ------------ 22,222,480 ------------ HONG KONG -- 3.1% 283,000 Asia Satellite Telecommunications Holdings Ltd 359,234 359,000 ASM Pacific Technology 823,954 153,200 Dah Sing Financial Services 742,516 747,500 Esprit Holdings Ltd 1,456,835 293,000 Great Eagle Holdings Ltd 169,997 345,000 Guoco Group 1,995,038 1,557,000 Hang Lung Group Co Ltd 1,317,614 1,603,200 HKR International Ltd* 246,675 85,500 Hong Kong Aircraft Engineering Co Ltd 248,308 681,000 Hopewell Holdings Ltd 541,370 196,800 KMB Holdings Ltd 827,665 886,000 Li & Fung Ltd 891,782 28,000 Mandarin Oriental* 11,480 3,158,000 New World Development Co Ltd 1,437,461 1,801,000 QPL International Holdings Ltd* 334,840 22,212 SCMP Group Ltd 8,046 4,899,000 Shun Tak Holdings Ltd 1,237,454 676,000 Sino Land 203,690 308,000 Television Broadcasts Ltd 935,954 990,000 Tom.com Ltd* 252,606 1,374,000 YUE Yuen Industrial Holdings* 2,554,526 ------------ 16,597,045 ------------ HUNGARY -- 0.1% 48,500 OTP Bank Rt 472,825 ------------ INDIA -- 0.3% 17,700 Dr. Reddy's Laboratories Ltd ADR 322,848 45,300 ICICI Banking Ltd ADR* 322,083 30,400 Ranbaxy Laboratories Ltd GDR 437,760 26,900 State Bank of India GDR 381,980 ------------ 1,464,671 ------------ INDONESIA -- 0.3% 1,459,000 Bank Central Asia Tbk 406,487
6 See accompanying notes to the financial statements. GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ INDONESIA -- CONTINUED 3,555,000 Indofood Sukses Makmur Tbk 230,104 386,000 Indonesian Satellite Corp Tbk PT 341,093 1,630,000 Telekomunikasi IndonesiaTbk PT Class B 655,963 ------------ 1,633,647 ------------ IRELAND -- 0.6% 111,171 DCC Ord 1,144,282 343,405 Independent News & Media Plc 488,561 58,103 Irish Life & Permanent Plc 569,873 107,032 Kerry Group Plc 1,297,790 ------------ 3,500,506 ------------ ITALY -- 1.5% 72,896 Banca Popolare di Bergamo Credit 1,305,789 19,933 Banca Popolare di Lodi Scrl 184,116 851,398 Banca Popolare di Milano* 3,312,669 113,100 Bulgari SPA 509,539 102,000 Fornara SPA*(a)(b) -- 213,400 Grassetto SPA*(a) 2,300 345,145 Grouppo Editoriale L'Espresso 1,201,551 225,300 Parmalat Finanziaria SPA 371,527 852,204 Pirelli SPA 736,641 51,715 Saipem SPA 322,168 ------------ 7,946,300 ------------ JAPAN -- 16.6% 508,000 AIOI Insurance Co Ltd 1,026,957 71,000 Alps Electric Co Ltd 867,194 70,400 Aoyama Trading 994,443 22,400 Bandai Co 767,350 358,000 Brother Industries Ltd 2,159,053 104,000 Canon Sales Co Inc 754,764 17,000 Chudenko Corp 182,618 166,000 Citizen Watch Co Ltd 853,694 647,000 Cosmo Oil Co Ltd 881,091 19,100 CSK Corp 363,502 312,000 Daido Steel Co Ltd 438,080 680,500 Daiei Inc* 742,521 28,600 Daiichikosho Co Ltd 720,897
See accompanying notes to the financial statements. 7 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ JAPAN -- CONTINUED 121,000 Dainippon Screen Manufacturing Co Ltd* 547,558 17,000 Daio Paper Corp 123,519 44,900 Daito Trust Construction Co Ltd 875,403 118,000 Daiwa House Industry Co Ltd 670,721 59,000 Dowa Mining Co 221,578 42,000 Enix Corp 666,103 51,000 Ezaki Glico Co Ltd 259,691 106,200 FamilyMart 1,724,711 293,000 Furukawa Electric Co Ltd 671,626 86,000 Gunze Ltd 314,976 12,800 H I S Co Ltd 176,477 378,400 Haseko Corp* 150,432 26,100 Heiwa Corp 355,432 81,000 Hitachi Metals Ltd 208,966 1,005,500 Hitachi Zosen Corp* 476,278 63,200 Hokkaido Electric Power 884,185 29,000 House Foods Corp 277,183 61,000 Ibiden Co Ltd 501,002 2,046,000 Isuzu Motors Ltd* 969,135 141,000 Itoham Foods Inc 400,727 78,000 Izumiya Co Ltd 311,406 83,000 Japan Securities Finance Co 277,310 86,000 JSRubber Corp 869,275 563,000 Kajima Corp 1,128,619 238,000 Kamigumi Co Ltd 1,105,198 144,000 Kandenko Co 445,794 661,000 Kanebo Ltd* 710,061 2,189,000 Kawasaki Heavy Industries Ltd* 1,907,101 221,000 Kawasaki Kisen Kaisha Ltd 487,892 292,000 Keisei Electric Railway Co 834,815 225,000 Kenwood Corp* 333,051 49,000 Kissei Pharmaceutical Co Ltd 648,222 4,084,000 Kobe Steel Ltd* 2,487,190 63,000 Kyudenko Corp 221,146 87,000 Lopro Corp 353,225 187,000 Maeda Corp 566,259 69,000 Maeda Road Construction 238,122 59,000 Makita Corp 394,248 1,057,000 Marubeni Corp* 1,037,107 16,200 Matsumotokiyoshi Co Ltd 665,951
8 See accompanying notes to the financial statements. GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ JAPAN -- CONTINUED 396,000 Mazda Motor Corp 837,386 602,000 Minolta Co Ltd* 2,953,352 152,000 Mitsubishi Gas Chemical Co Inc 254,565 1,297,000 Mitsubishi Material* 1,448,120 362,000 Mitsui Engineering & Shipbuilding* 281,700 956,000 Mitsui Trust Holding Inc 1,698,118 59,000 Mitsumi Electric Co Ltd 519,509 92,000 Nagase & Co 396,092 77,000 Nagoya Railroad Co Ltd 199,949 6,400 Nichii Gakkan Co 310,188 835,000 Nichimen Corp* 367,266 193,000 Nichiro Corp 205,693 121,000 Nippon Chemi-Con Corp 356,168 105,000 Nippon Hodo Co 486,699 1,517,000 Nippon Light Metal 1,411,461 129,500 Nippon Mining Holdings Inc* 214,692 28,000 Nippon Paint Co 71,288 897,000 Nippon Shinpan Co 1,115,322 95,000 Nippon Soda Co Ltd* 170,353 566,000 Nippon Suisan Kaisha Ltd 1,263,895 563,000 Nishimatsu Construction 1,633,402 52,000 Nisshin Oillio Group Ltd 124,475 1,641,000 Nisshin Steel Co Ltd* 1,110,425 1,895,000 Nissho Iwai Corp* 593,064 6,000 Noritake Co Ltd 17,661 269,000 NSK Ltd 766,784 369,000 Obayashi Corp 880,169 105,000 Okasan Securities Co Ltd 255,783 50,000 Onward Kashiyama Co Ltd 377,670 872,000 Orient Corp* 376,164 11,000 Royal Co Ltd 68,387 45,800 Ryosan Co 453,642 27,000 Sanki Engineering 123,781 38,000 Sankyo Co Ltd 842,123 145,000 Sanyo Securities Co Ltd*(b) 1,226 210,000 Seino Transportation Co Ltd 1,314,443 482,000 Sekisui Chemical 1,206,784 7,890 SFCG Co Ltd 560,592 30,700 Shimachu Co 558,300 5,500 Shimamura Co Ltd 285,642
See accompanying notes to the financial statements. 9 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ JAPAN -- CONTINUED 524,000 Shimizu Corp 1,289,778 23,300 Shinko Electric Industries 340,952 858,000 Shinko Securities Co Ltd* 1,030,543 418,000 Showa Denko* 590,450 124,000 Showa Shell Sekiyu 819,150 99,500 Snow Brand Milk Products Co Ltd* 160,749 74,000 Stanley Electric Co Ltd 913,851 1,368,000 Sumitomo Heavy Industries Ltd* 960,406 6,085,000 Sumitomo Metal Industries* 2,676,422 215,000 Sumitomo Metal Mining Co Ltd 798,351 341,000 Sumitomo Realty and Development Co Ltd 1,321,023 140,000 Sumitomo Rubber Industries 567,224 49,400 Suzuken Co Ltd 1,199,222 1,127,600 Taiheiyo Cement Corp 1,878,936 1,320,000 Taisei Corp 2,478,664 65,000 Taiyo Yuden Co Ltd 600,930 85,800 THK Co Ltd 870,882 294,000 Toda Corp 482,436 147,000 Toho Gas Co Ltd 353,123 406,000 Tokyu Land Corp* 446,437 50,000 Toshiba Ceramics Co Ltd* 109,114 142,000 Toshiba TEC Corp* 348,319 127,000 Toyo Ink Manufacturing Co Ltd 369,533 48,000 Tsumura & Co* 365,405 26,600 Uni-Charm Corp 1,010,226 162,000 Victor Co of Japan Ltd* 1,181,172 66,000 Wacoal Corp 500,199 80,000 Yamaha Corp 900,656 160,000 Yamaha Motor Co 1,254,557 76,000 Yodogawa Steel Works 212,138 192,000 Yokohama Rubber Co 511,567 ------------ 88,904,607 ------------ MALAYSIA -- 0.1% 170,000 Berjaya Sports Toto 144,053 88,000 Perusahaan Otomobil Nasional 185,263 357,000 Promet Berhad*(a)(b) 939 312,000 Rekapacific Berhad*(a) 821 ------------ 331,076 ------------
See accompanying notes to the financial statements. 10 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ MEXICO -- 0.1% 89,000 Cemex SA de CV CPO 320,024 ------------ NETHERLANDS -- 4.1% 503,946 Buhrmann NV 1,395,903 86,046 Corio NV 2,476,168 117,498 CSM 2,344,094 18,576 DSM NV 681,722 2,917,471 Getronics NV* 377,334 300,815 Hagemeyer NV 1,468,709 46,868 Hunter Douglas NV 1,357,825 149,623 KLM NV 1,040,151 263,478 Koninklijke Vendex KBB NV 1,896,964 49,664 Koninklijke Volker Wessels 802,918 278,294 Numico NV 1,469,732 220,527 OCE NV 1,989,415 145,606 Randstad Holdings NV 1,241,349 29,018 Rodamco Europe NV 1,342,662 11,045 Van der Moolen Holding NV 145,828 37,382 Wereldhave NV 2,137,401 ------------ 22,168,175 ------------ NEW ZEALAND -- 0.1% 296,811 Fletcher Building Ltd 584,826 ------------ NORWAY -- 0.2% 69,200 Frontline Ltd 734,007 43,800 Tandberg ASA* 207,842 ------------ 941,849 ------------ PHILIPPINES -- 0.2% 3,772,000 Ayala Land Inc 321,684 387,000 Bank of the Philippine Islands 227,125 78,000 Philippine Long Distance Telephone* 418,432 2,350,000 SM Prime Holdings 228,427 ------------ 1,195,668 ------------ POLAND -- 0.3% 10,400 Bank Pekao SA* 234,416
See accompanying notes to the financial statements. 11 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ POLAND -- CONTINUED 13,700 BRE Bank SA 238,075 132,900 KGHM Polska Miedz SA* 424,541 102,500 Polski Koncern Naftowy Orlen 449,234 155,900 Telekomunikacja Polska SA* 464,148 ------------ 1,810,414 ------------ PORTUGAL -- 0.4% 136,858 Multimedia Servicos de Telecomunicacoes e Multimedia SGPS SA PT* 1,622,561 60,275 Vodafone Telecel-Comunicacoes Pessoais SA 554,146 ------------ 2,176,707 ------------ RUSSIA -- 0.3% 88,500 AO Mosenergo ADR 367,275 17,600 JSC Mining & Smelting Co ADR* 437,800 7,400 Mobile Telesystems ADR* 316,424 21,600 Tatneft ADR 362,880 ------------ 1,484,379 ------------ SINGAPORE -- 2.1% 623,000 Comfort Group 322,399 415,100 Creative Technology Ltd 2,625,478 1,823,000 Datacraft Asia Ltd* 1,221,410 343,000 Elec & Eltek International Co Ltd 637,980 149,000 Hotel Properties Ltd 82,675 115,000 Marco Polo Developments Ltd 115,056 455,000 MobileOne Ltd* 321,795 5,867,000 Neptune Orient Lines Ltd* 3,002,403 5,560,100 Pacific Century Region Developments Ltd* 783,270 232,000 Singapore Exchange Ltd 165,414 651,000 ST Assembly Test Services Ltd* 464,158 15,057 Van Der Horst Ltd*(a) 6,423 2,124,000 Want Want Holdings Ltd 1,444,320 ------------ 11,192,781 ------------ SOUTH AFRICA -- 0.7% 81,764 ABSA Group Ltd 338,609 356,000 FirstRand Ltd 311,193 61,000 Gencor Ltd 315,774
12 See accompanying notes to the financial statements. GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ SOUTH AFRICA -- CONTINUED 15,000 Goldfields Ltd 187,846 6,000 Impala Platinum Holdings Ltd 364,682 106,065 Iscor Ltd 233,432 28,000 Nedcor Ltd 333,288 75,000 Remgro Ltd 544,011 422,000 Sanlam Ltd 371,502 108,000 Standard Bank Investment Corp 384,992 58,900 Tiger Brands Ltd 462,284 ------------ 3,847,613 ------------ SOUTH KOREA -- 1.0% 5,000 Hankuk Electric Glass 216,563 46,100 Hansol Paper Manufacturing Ltd 209,712 37,200 Hyundai Department Store Co Ltd* 309,156 14,400 Hyundai Mobis 267,214 15,300 Hyundai Motor Co 321,727 44,300 Inchon Iron & Steel Co 189,277 3,300 Kangwon Land Inc 355,255 48,900 KIA Motors Corp 309,299 10,600 Kookmin Credit Card Co Ltd* 158,070 9,900 KT Freetel* 203,200 8,100 LG Card Co Ltd 223,935 9,500 LG Electronics Inc 320,739 20,000 LG Engineering & Construction Ltd 236,250 4,250 LG Household & Health Care Ltd 90,793 64,300 Samsung Corp 332,907 3,800 Samsung Fire & Marine Insurance 181,460 4,900 Samsung SDI Co Ltd 279,144 24,700 Shinhan Financial Group Co Ltd 259,695 2,600 Shinsegae Co Ltd 335,442 33,700 SK Corp 355,732 20,706 SK Global* 137,040 ------------ 5,292,610 ------------ SPAIN -- 3.1% 27,209 Acerinox SA 1,057,197 58,934 ACS Actividades Cons y Serv 2,033,880 96,894 Amadeus Global Travel Distribution 445,926 30,766 Augus de Barcelona SA 303,742
See accompanying notes to the financial statements. 13 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ SPAIN -- CONTINUED 63,200 Corp Mapfre SA 514,964 42,822 Ebro Puleva SA 335,075 69,443 Enagas 483,503 2,021,626 Iberia (Lineas Aer de Espana) 2,832,581 110,467 Metrovacesa SA 3,006,299 47,839 NH Hoteles SA* 407,331 78,992 Telefonica Publicidad e Informacion SA 281,805 437,195 Vallehermoso SA 4,283,288 42,984 Zardoya-Otis SA 579,102 ------------ 16,564,693 ------------ SWEDEN -- 4.3% 19,900 Custos AB 315,725 31,500 Drott AB Class B 353,537 360,648 Gambro AB Class A 1,508,881 249,912 Gambro AB Class B 1,042,646 38,300 Getinge Industrier AB Class B 722,429 45,570 Holmen AB Class B 1,113,945 25,310 Kinnevik Investment Class B 267,705 35,900 Lundbergforetagen AB 793,184 5,600 Nobel Biocare AB*(a) 285,199 49,800 SAAB AB Class B 520,884 468,200 Skanska AB Class B 2,410,055 107,500 SKF AB Class B 2,836,262 39,735 SKF AB Series A 1,050,696 95,570 SSAB Swedish Steel Class A 1,162,474 717,200 Swedish Match AB 5,394,382 72,775 Tele2 AB Class B* 2,099,690 432,600 Telelogic AB* 274,538 125,500 Trelleborg AB Class B 1,032,436 ------------ 23,184,668 ------------ SWITZERLAND -- 3.5% 277,560 ABB Ltd* 575,180 22,455 Centerpulse AG* 4,322,091 3,025 Ciba Specialty Chemicals AG 196,201 1,252 Forbo Holdings AG (Registered) 350,855 983 Geberit AG* 263,148 1,987 Givaudan 814,729
14 See accompanying notes to the financial statements. GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ SWITZERLAND -- CONTINUED 1,393 Helvetia Patria Holding 137,656 40 Intershop Holdings AG (Bearer)* 15,044 190 Jelmoli (Registered) 22,559 3,822 Kuoni Reisen Holdings AG (Registered)* 732,832 46,617 Logitech International SA* 1,562,495 63,864 Micronas Semiconductor Hold* 1,365,823 50 Motor-Columbus (Bearer) 82,965 848 Movenpick Holdings (Bearer)* 353,333 6,400 Nobel Biocare Holding AG* 362,158 353 Pargesa Holdings SA (Bearer) 635,192 5,239 SGS Societe Generale Surveillance Holdings SA (Registered) 1,777,242 3,070 SIG Holding AG 256,965 7,144 Sulzer AG (Registered)* 833,730 25,449 Swiss Life Holding* 1,463,881 2,204 Unaxis Holding AG 127,429 3,749 Valora Holding AG 620,686 34,527 Vontobel Holdings AG 430,314 13,171 ZKB Finanz Vision AG* 1,073,301 8,193 ZKB Pharma Vision AG* 614,777 ------------ 18,990,586 ------------ TAIWAN -- 0.9% 204,000 Asustek Computer Inc 346,360 911,000 Cheng Loong Corp* 273,955 896,820 China Development Financial Holding Corp* 338,082 567,000 China Steel Corp 352,437 462,000 Chinatrust Financial Holding Co* 370,930 315,700 Compal Electronics Inc 304,344 197,000 Delta Electronics Inc 206,354 271,000 Formosa Chemicals & Fibre Co 269,830 518,000 International Bank of Taipei 223,597 395,000 Inventec Co Ltd 227,338 59,000 MediaTek Inc 434,647 446,105 Mega Financial Holdings Co Ltd* 216,955 152,000 Micro-Star International Co Ltd 238,389 393,000 Prodisc Technology Inc* 208,092 121,000 Quanta Computer Inc 208,921 735,000 Taiwan Cement Corp* 259,101
See accompanying notes to the financial statements. 15 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ TAIWAN -- CONTINUED 214,000 Yulon Motor Co 253,105 ------------ 4,732,437 ------------ THAILAND -- 0.5% 346,000 Advanced Info Service Pcl (Foreign Registered) 315,391 522,000 Bangkok Expressway Pcl (Foreign Registered)(a) 183,008 2,200,000 Charoen Pokphand Foods Pcl (Foreign Registered)(a) 215,964 3,845,000 Jasmine International Pcl (Foreign Registered)* 386,432 1,780,000 Land & House Pcl NVDR 309,945 102,500 PTT Exploration & Production Pcl (Foreign Registered)(a) 309,045 367,800 PTT Pcl (Foreign Registered)(a) 376,096 15,000 Siam Cement Pcl NVDR 431,927 2,683,000 Thai Petrochemical (Foreign Registered)* 201,923 ------------ 2,729,731 ------------ TURKEY -- 0.4% 83,292,000 Akbank TAS* 318,247 42,552,000 Aksa Akrilik Kimya Sanayii 413,126 61,906,000 Aksigorta AS 217,146 46,620,000 Arcelik AS 423,420 20,000,000 Aselsan Askeri Elektroni* 200,438 78,274,000 Hurriyet Gazeteci* 215,725 105,437,570 Trakya Cam Sanayii 224,546 142,910,000 Vestel Elektronik Sanayi* 326,728 ------------ 2,339,376 ------------ UNITED KINGDOM -- 17.2% 44,034 3i Group Plc 330,144 408,922 Aegis Group Plc 388,066 71,135 Alliance & Leicester Plc 868,347 73,176 Alliance Unichem Plc 452,394 156,736 Arriva Plc 711,000 323,834 AWG Plc* 2,682,973 423,209 Barratt Development 2,733,046 106,193 Berkley Group 1,051,258 257,251 BPB Plc 1,065,666 412,577 Britannic Group Plc 883,796 244,100 British Energy Plc 17,302 1,172,836 Cable & Wireless 1,108,400
16 See accompanying notes to the financial statements. GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ UNITED KINGDOM -- CONTINUED 635,505 Carlton Communications Plc 850,836 1,500 Carlton Communications Plc ADR 9,420 374,537 Cattle's Plc 1,572,172 154,857 Charter Plc (Registered)* 112,201 642,834 Coats 549,296 62,524 Cobham Group Plc 942,961 2,843,653 Cookson Group Plc* 772,634 1,201,504 Cordiant Communications Group Plc* 558,284 2,324,053 Corus Group Plc* 640,608 30,192 Daily Mail & General Trust Plc 230,168 122,965 De La Rue Plc 397,048 147,080 De Vere Group Plc 602,910 319,254 Debenhams Plc 1,358,971 502,485 Edonis Plc* 288,884 90,408 Egg Plc* 138,842 158,292 Eidos Plc* 284,231 172,007 Emap Plc 1,905,980 306,943 EMI Group Plc 513,683 445,556 Friends Provident Plc 621,089 699,901 Fyffes Ord 965,572 241,603 GKN Plc 599,365 761,702 Granada Compass Plc 650,868 352,186 Great Portland Estates Plc 1,220,402 112,321 Hammerson Plc 866,892 413,062 Hays Plc 468,442 376,723 IMI Plc 1,376,633 244,505 Imperial Chemical Industries Plc 585,382 118,588 Inchcape Plc 1,332,732 656,069 International Power Plc* 937,787 1,335,015 Invensys Plc 336,445 679,673 Kelda Group Plc 4,389,267 222,491 Laird Group 530,925 141,010 Liberty International Plc 1,254,892 764,653 LogicaCMG Plc 1,448,297 240,206 London Stock Exchange Plc 1,208,823 346,539 Misys Plc 1,045,271 334,199 Morgan Crucible* 194,767 105,725 Mothercare Plc 159,034 67,687 Next Plc 852,910 779,597 Northern Foods Plc 1,424,414
See accompanying notes to the financial statements. 17 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ UNITED KINGDOM -- CONTINUED 81,648 Northern Rock Plc 866,789 512,481 Novar Plc 928,290 42,652 P&O Princess Cruises Plc 268,053 493,455 Peninsular & Oriental Steam Navigation Co 1,222,211 154,661 Pennon Group Plc 1,624,856 216,823 Premier Farnell Plc 503,739 319,358 Provident Financial Plc 2,889,854 73,980 RAC Plc 414,832 425,422 Rank Group Plc 1,564,642 188,368 Rexam Plc 957,594 152,614 RMC Group 884,607 1,876,558 Rolls-Royce 2,349,834 1,601,993 Royal & Sun Alliance Insurance Group 1,804,159 65,115 Schroders Plc 438,712 178,123 Severn Trent Plc 1,975,153 204,928 Shire Pharmaceuticals Plc* 1,058,725 632,929 Signet Group Plc 752,680 239,872 Slough Estates 1,158,026 181,203 Smith (WH) Group Plc 753,490 549,912 Somerfield Plc 684,271 1,810,241 Stagecoach Holdings Plc 1,119,139 499,171 Tate & Lyle 2,183,793 882,869 Taylor Woodrow Plc 2,510,046 92,008 TDG Plc 229,701 2,035,145 THUS Group Plc* 273,434 1,257,213 Tomkins Plc 3,722,844 92,733 Travis Perkins Plc 1,404,403 202,194 Trinity Mirror Plc 1,267,534 280,959 United Business Media Plc 969,159 86,512 United Utilities 803,964 501,912 Whitbread Plc 4,118,826 215,283 Wilson (Connolly) Holdings 549,329 685,675 Wimpey (George) 2,926,818 103,629 Wolseley 817,762 ------------ 92,488,999 ------------ TOTAL COMMON STOCKS (COST $567,558,348) 494,819,518 ------------
See accompanying notes to the financial statements. 18 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ PREFERRED STOCKS -- 1.0% BRAZIL -- 0.4% 2,278,000 Ambev Ciade Rebid 1.67% 320,413 6,002,000 Bco Itau SA (Registered) 264,027 33,901,000 Brasil Telecom Participacoes SA 2.19% 167,083 14,850 Companhia Vale do Rio Doce Class A 407,761 14,400 Empresa Brasileira de Aeronautica SA ADR 148,464 67,719 Petroleo Brasileiro SA (Petrobras) 3.01% 810,010 26,074,000 Tele Norte Leste Participacoes SA 3.44% 173,145 ------------ 2,290,903 ------------ GERMANY -- 0.4% 48,100 Dyckerhoff AG (Non Voting) 11.72% 230,698 5,300 Porsche AG (Non Voting) 0.83% 1,713,702 35,500 Rheinmetall AG (Non Voting) 3.92% 382,619 ------------ 2,327,019 ------------ ITALY -- 0.1% 33,488 IFI Istituto Finanziario Industries 4.82% 288,747 ------------ SOUTH KOREA -- 0.1% 20,000 Hyundai Motor Co Pfd 5.05% 211,117 ------------ TOTAL PREFERRED STOCKS (COST $6,797,013) 5,117,786 ------------ RIGHTS AND WARRANTS -- 0.0% FRANCE -- 0.0% 2 Pernod-Ricard Rights*(a) 39 13,893 Wendel Investissement Warrants, Expires 3/27/03* 150 ------------ 189 ------------ TOTAL RIGHTS AND WARRANTS (COST $31,260) 189 ------------ SHORT-TERM INVESTMENTS -- 16.6% CASH EQUIVALENTS -- 15.8% $ 24,800,000 Banc One Corp, 1.31%, due 3/03/03 24,800,000
See accompanying notes to the financial statements. 19 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ CASH EQUIVALENTS -- 15.8%-- CONTINUED $ 59,922,844 The Boston Global Investment Trust(c) 59,922,844 ------------ 84,722,844 ------------ U.S. GOVERNMENT -- 0.8% $ 4,500,000 U.S. Treasury Bill, 1.21%, due 4/24/03(d) 4,491,883 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $89,214,727) 89,214,727 ------------ TOTAL INVESTMENTS -- 109.8% (Cost $663,601,348) 589,152,220 Other Assets and Liabilities (net) -- (9.8%) (52,503,966) ------------ TOTAL NET ASSETS -- 100.0% $536,648,254 ============ NOTES TO SCHEDULE OF INVESTMENTS:
ADR American Depositary Receipt GDR Global Depository Receipt NVDR Non-Voting Depository Receipt * Non-income producing security. (a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). (b) Bankrupt issuer. (c) Represents investment of security lending collateral (Note 1). (d) All or a portion of this security is held as collateral for open futures contracts (Note 6). 20 See accompanying notes to the financial statements. GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY (SHOWING PERCENTAGE OF EQUITY INVESTMENTS) FEBRUARY 28, 2003 (UNAUDITED) At February 28, 2003, industry sector diversification of the Fund's equity investments was as follows:
INDUSTRY SECTOR - -------------------------------------------------------------------- Consumer Discretionary 20.7% Industrials 20.1 Financials 17.6 Materials 12.0 Information Technology 7.9 Consumer Staples 7.7 Health Care 4.8 Utilities 4.1 Energy 3.2 Telecommunication Services 1.9 ----- 100.0% =====
See accompanying notes to the financial statements. 21 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value, including securities on loan of $55,304,553 (cost $663,601,348) (Note 1) $589,152,220 Cash 67,548 Foreign currency, at value (cost $725,138) (Note 1) 734,016 Receivable for investments sold 584,654 Receivable for Fund shares sold 7,297,274 Dividends and interest receivable 747,692 Foreign taxes receivable 150,230 Receivable for open forward foreign currency contracts (Notes 1 and 6) 17,161,257 Receivable for expenses reimbursed by Manager (Note 2) 103,572 ------------ Total assets 615,998,463 ------------ LIABILITIES: Payable for investments purchased 222,923 Payable upon return of securities loaned (Note 1) 59,922,844 Payable for Fund shares repurchased 7,000,000 Payable to affiliate for (Note 2): Management fee 246,651 Shareholder service fee 61,663 Payable for open forward foreign currency contracts (Notes 1 and 6) 11,527,313 Payable for variation margin on open futures contracts (Notes 1 and 6) 196,334 Accrued expenses 172,481 ------------ Total liabilities 79,350,209 ------------ NET ASSETS $536,648,254 ============ NET ASSETS CONSIST OF: Paid-in capital $639,920,090 Distributions in excess of net investment income (86,486) Accumulated net realized loss (32,938,066) Net unrealized depreciation (70,247,284) ------------ $536,648,254 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $536,648,254 ============ SHARES OUTSTANDING: Class III 56,468,485 ============ NET ASSET VALUE PER SHARE: Class III $ 9.50 ============
22 See accompanying notes to the financial statements. GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $1,071,070) $ 9,724,769 Interest (including securities lending income of $411,466) 1,016,494 ------------ Total income 10,741,263 ------------ EXPENSES: Management fee (Note 2) 2,684,104 Custodian fees 648,592 Audit fees 51,419 Transfer agent fees 28,557 Legal fees 16,251 Registration fees 12,072 Trustees fees and related expenses (Note 2) 10,747 Miscellaneous 5,927 Fees reimbursed by Manager (Note 2) (761,727) ------------ 2,695,942 Shareholder service fee (Note 2) Class III 671,026 ------------ Net expenses 3,366,968 ------------ Net investment income 7,374,295 ------------ REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (9,764,715) Closed futures contracts (14,662,366) Foreign currency, forward contracts and foreign currency related transactions 8,629,557 ------------ Net realized loss (15,797,524) ------------ Change in net unrealized appreciation (depreciation) on: Investments (49,354,028) Open futures contracts (1,523,104) Foreign currency, forward contracts and foreign currency related transactions 5,668,274 ------------ Net unrealized loss (45,208,858) ------------ Net realized and unrealized loss (61,006,382) ------------ NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(53,632,087) ============
See accompanying notes to the financial statements. 23 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 7,374,295 $ 4,386,723 Net realized loss (15,797,524) (4,506,586) Change in net unrealized appreciation (depreciation) (45,208,858) (14,191,285) ------------ ------------ Net decrease in net assets from operations (53,632,087) (14,311,148) ------------ ------------ Distributions to shareholders from: Net investment income Class III (15,340,291) (7,227,558) ------------ ------------ Total distributions from net investment income (15,340,291) (7,227,558) ------------ ------------ Net realized gains Class III -- (9,648) ------------ ------------ Total distributions from net realized gains -- (9,648) ------------ ------------ (15,340,291) (7,237,206) ------------ ------------ Net share transactions (Note 5): Class III 352,008,250 88,068,118 ------------ ------------ Increase in net assets resulting from net share transactions 352,008,250 88,068,118 ------------ ------------ Total increase in net assets 283,035,872 66,519,764 NET ASSETS: Beginning of period 253,612,382 187,092,618 ------------ ------------ End of period (including distributions in excess of net investment income of $86,486 and accumulated undistributed net investment income of $206,945, respectively) $536,648,254 $253,612,382 ============ ============
24 See accompanying notes to the financial statements. GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, -------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ------------ ------------ ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 10.44 $ 11.68 $ 11.54 $ 11.02 $ 12.22 -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.15 0.22 0.23 0.25 0.55 Net realized and unrealized gain (loss) (0.80) (1.11) 1.02 0.83 (1.15) -------- -------- -------- -------- -------- Total from investment operations (0.65) (0.89) 1.25 1.08 (0.60) -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.29) (0.35) (0.25) (0.15) (0.21) From net realized gains -- (0.00)(c) (0.86) (0.41) (0.39) -------- -------- -------- -------- -------- Total distributions (0.29) (0.35) (1.11) (0.56) (0.60) -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 9.50 $ 10.44 $ 11.68 $ 11.54 $ 11.02 ======== ======== ======== ======== ======== TOTAL RETURN(a) (6.30)% (7.57)% 11.09% 9.62% (5.06)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $536,648 $253,612 $187,093 $173,362 $158,142 Net expenses to average daily net assets 0.75% 0.75% 0.75% 0.75% 0.75% Net investment income to average daily net assets 1.65% 2.02% 2.05% 2.19% 1.67% Portfolio turnover rate 44% 34% 60% 55% 8% Fees and expenses reimbursed by the Manager to average daily net assets: 0.17% 0.22% 0.22% 0.24% 0.81% Purchase and redemption fees consisted of the following per share amounts:(b) $ 0.06 $ 0.05 $ 0.04 -- --
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. Calculation excludes purchase premiums and redemption fees. (b) Effective March 1, 2000 the Fund adopted the provisions of the revised AICPA Audit and Accounting Guide for Investment Companies which requires the disclosure of the per share effect of purchase and redemption fees. Periods prior to March 1, 2000 have not been restated to reflect this change. Amounts calculated using average shares outstanding throughout the period. (c) The distribution from net realized gains was less than $.01 per share. See accompanying notes to the financial statements. 25 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO International Small Companies Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in equity securities of non-U.S. issuers. The Fund's benchmark is the Salomon Smith Barney EMI World Ex-U.S. Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign 26 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in foreign currency values that are unfavorable to the Fund. The value of the currencies the Fund has committed to buy or sell is shown under Note 6, and represents the currency exposure the Fund has acquired or hedged through currency contracts as of February 28, 2003. FUTURES CONTRACTS The Fund may purchase and sell futures contracts to manage its exposure to the financial markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are 27 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 28, 2003. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 28, 2003, there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future, security or currency transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. At February 28, 2003, there were no open purchased option contracts. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the financial markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by 28 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. At February 28, 2003, there were no open swap agreements. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of collateral, the risk of delay in recovery or loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 2003, the Fund loaned securities having a market value of $55,304,553 collateralized by cash in the amount of $59,922,844, which was invested in a short-term instrument. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, 29 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- if any, after giving effect to any available capital loss carryover for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country's tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003, the tax basis of distributions paid was as follows: ordinary income -- $7,227,869 and $15,340,291, respectively; and long-term capital gains -- $9,337 and $0, respectively. As of February 28, 2003, the components of distributable earnings on a tax basis consisted of $4,433,152 of undistributed ordinary income. The temporary differences between book and tax basis distributable earnings are primarily due to foreign currency transactions, passive foreign investment company transactions and losses on wash sale transactions. At February 28, 2003, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code of $6,078,276 and $20,471,179 expiring in 2010 and 2011, respectively. The Fund has elected to defer to March 1, 2003 post-October capital losses of $5,992,691. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This 30 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to foreign currency transactions. The financial highlights exclude these adjustments.
Distributions in excess of Net Accumulated Net Investment Income Realized Loss ----------------- --------------- $7,672,565 $(7,672,565)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual Fund. Expenses which are not readily identifiable to a specific Fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the Funds. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is 0.60% of the amount invested. In the case of cash redemptions, the fee is .60% of the amount redeemed. If the Manager determines that any portion of a cash purchase or redemption fee is offset by a corresponding cash redemption or purchase occurring on the same day, the purchase premium or redemption fee charged by the Fund will be reduced by 100% with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived if the Manager determines the Fund is either substantially overweighted or underweighted in cash so that a redemption or purchase will not require a securities transaction. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the years ended February 28, 2002 and February 28, 2003, the Fund received $879,541 and $2,531,977 in purchase premiums and $24,542 and $54,833 in redemption fees, respectively. There is no premium for reinvested distributions. 31 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .60% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until at least June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent Trustees of the Trust (including legal fees), 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) exceed the management fee. As of February 28, 2003, greater than 10% of the Fund's shares were held by accounts for which the Manager has investment discretion. The Fund's portion of the fee paid by the Trust to the independent Trustees during the year February 28, 2003, was $7,761. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2003, aggregated $505,624,460 and $180,474,274, respectively. At February 28, 2003, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in the value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $664,404,649 $33,961,809 $(109,214,238) $(75,252,429)
32 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 4. PRINCIPAL SHAREHOLDER At February 28, 2003, 27.0% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 ------------------------ ---------------------- Shares Amount Shares Amount Class III: ---------- ------------ --------- ----------- Shares sold 36,029,447 $390,124,687 8,537,304 $91,049,348 Shares issued to shareholders in reinvestment of distributions 769,131 7,538,961 220,972 2,296,421 Shares repurchased (4,627,128) (45,655,398) (480,530) (5,277,651) ---------- ------------ --------- ----------- Net increase 32,171,450 $352,008,250 8,277,746 $88,068,118 ========== ============ ========= ===========
6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 28, 2003 is as follows: FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Units Appreciation Date Deliver/Receive of Currency Value (Depreciation) ---------- ---------------- -------------- ----------- -------------- Buys 4/28/03 AUD 16,376,251 $ 9,884,910 $ 958,500 4/28/03 CAD 58,797,881 39,358,980 1,559,081 3/28/03 CHF 45,146,308 33,310,084 2,856,644 3/28/03 DKK 119,924,800 17,381,616 1,647,753 3/28/03 EUR 67,076,084 72,227,936 6,649,632 3/28/03 GBP 15,258,609 23,995,327 195,274 4/28/03 HKD 38,157,820 4,891,798 7,794
33 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- FORWARD CURRENCY CONTRACTS -- CONTINUED
Net Unrealized Settlement Units Appreciation Date Deliver/Receive of Currency Value (Depreciation) ---------- ---------------- -------------- ----------- -------------- 4/28/03 JPY 2,152,617,200 $18,245,972 $ 686,434 3/28/03 NOK 148,974,219 20,731,590 1,281,162 4/28/03 NZD 7,762,222 4,290,950 466,167 3/28/03 SEK 70,097,120 8,224,222 729,002 4/28/03 SGD 10,437,255 6,006,448 123,814 ------------ $ 17,161,257 ============ Sales 4/28/03 AUD 13,596,841 $ 8,207,223 $ (797,126) 4/28/03 CAD 48,995,554 32,797,356 (1,708,153) 3/28/03 CHF 16,581,162 12,233,999 (1,037,976) 3/28/03 DKK 16,344,470 2,368,929 (226,209) 3/28/03 EUR 66,294,503 71,386,325 (3,853,637) 3/28/03 GBP 23,511,289 36,973,295 (641,051) 4/28/03 HKD 104,574,282 13,406,329 (19,755) 4/28/03 JPY 5,097,878,276 43,210,536 (1,846,040) 3/28/03 NOK 39,931,894 5,557,013 (371,076) 4/28/03 NZD 4,328,615 2,392,855 (342,891) 3/28/03 SEK 63,332,528 7,430,559 (683,399) ------------ $(11,527,313) ============
CURRENCY ABBREVIATIONS: AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc DKK - Danish Krona EUR - Euro GBP - British Pound HKD - Hong Kong Dollar JPY - Japanese Yen NOK - Norwegian Krone NZD - New Zealand Dollar SEK - Swedish Krona SGD - Singapore Dollar
34 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- FUTURES CONTRACTS
Net Unrealized Number of Contract Appreciation Contracts Type Expiration Date Value (Depreciation) --------- ------------- --------------- ------------ -------------- Buys 28 DAX March 2003 $ 1,917,460 $ (244,940) 20 FTSE 100 March 2003 1,143,838 (7,225) 17 Hang Seng March 2003 983,498 3,030 12 IBEX 35 March 2003 775,693 (9,895) 16 MIB 30 March 2003 2,022,470 (126,484) 381 MSCI March 2003 6,835,063 (132,507) 157 OMX March 2003 869,967 550 318 TSE TOPIX March 2003 21,975,555 (1,037,479) ----------- $(1,554,950) =========== Sales 320 CAC 40 March 2003 $ 9,498,436 $ (77,934) 99 SPI 200 March 2003 4,196,459 176,162 ----------- $ 98,228 ===========
At February 28, 2003, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. 35 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO INTERNATIONAL SMALL COMPANIES FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO International Small Companies Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 36 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- During the year ended February 28, 2003, the Fund paid foreign taxes of $1,071,070 and recognized foreign source income of $10,795,839. 37 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 38 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the from February Boston, MA 02110 Trust 2002 - October Age: 64 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 39 PRINCIPAL OFFICERS:
Term of Office(4) Principal Occupation(s) Name, Address, Position(s) and Length of During Past and Age Held with Fund Time Served Five Years ------------------------- ------------------------------ ------------------------------ ------------------------------ Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief 40 Rowes Wharf Vice President from August Operating Officer (2000 - Boston, MA 02110 1998 - October 2002. present) and Member, Grantham, Age: 47 Mayo, Van Otterloo & Co. LLC. Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC. 40 Rowes Wharf February 1998. Boston, MA 02110 Age: 45 Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator, c/o GMO Trust Trust Grantham, Mayo, Van 40 Rowes Wharf Otterloo & Co. LLC. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer 40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003) Boston, MA 02110 and Member, Grantham, Mayo, Age: 37 Van Otterloo & Co. LLC. Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel, c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van 40 Rowes Wharf 2001. Otterloo & Co. LLC (June Boston, MA 02110 1999 - present); Associate/ Age: 58 Junior Partner, Hale and Dorr LLP (1991 - 1999). Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering c/o GMO Trust Laundering Compliance Officer Reporting Officer (February 40 Rowes Wharf 2003 - present) and Compliance Boston, MA 02110 Officer, Grantham, Mayo, Van Age: 32 Otterloo & Co. LLC.
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 40 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGEMENT Day-to-day management of the Fund's portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO International Bond Fund returned +25.2% for the fiscal year ended February 28, 2003, compared to +28.8% for the J.P. Morgan Non-U.S. Government Bond Index. The Fund's exposure to various issues is achieved directly and indirectly through its investment in the GMO Emerging Country Debt Fund, the GMO Alpha LIBOR Fund (ALF), and the GMO Short-Duration Collateral Fund. The Fund underperformed the benchmark during the fiscal year by 3.6%. Bond market, emerging debt, and currency selection added value during the fiscal year, while issue selection underperformed. Issue selection dramatically hurt performance in late 2002. Credit related spread widening in the assets underlying the Fund's investment in ALF and the default of certain healthcare receivable asset-backed bonds held by ALF, which were allegedly involved in a massive fraud, contributed to the underperformance. National Century Financial Enterprises, the sponsor of $3.35 billion of health care asset-backed receivables allegedly violated the terms of the bonds' indentures by, among other things, spending cash collateral, accepting collateral other than permitted receivables, moving receivables between trusts to meet compliance tests, and reimbursing healthcare providers for more than the value of receivables purchased. National Century, its affiliated operations, the trusts, and many healthcare providers have declared bankruptcy. This event had a negative effect on the net asset value of ALF, and an indirect effect on GMO International Bond Fund of -5.0% (through February 28, 2003). Overweight positions in Euro-member country bonds and the U.S. bond market, as well as an underweight position in Japanese government bonds, added value during the period. In addition, an underweight position in the U.S. dollar and overweight positions in the Australian dollar, and Swedish krona generated significant gains. OUTLOOK The Fund is structured to benefit from outperformance in the Canadian, Euro-member country, Swedish, U.S., and emerging bond markets. We expect the Australian, Danish, Japanese, and Swiss bond markets to underperform. Strong relative performance is expected from Canadian dollars, Swedish krona, Swiss francs, and British gilt markets. The Danish krona, euro, Japanese yen and Australian and US dollars are expected to underperform. At the end of the period, 3.8% of the Fund was invested in Emerging Country Debt Fund. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO INTERNATIONAL BOND FUND CLASS III SHARES AND THE J.P. MORGAN NON-U.S. GOVERNMENT BOND INDEX AS OF FEBRUARY 28, 2003 GMO INTERNATIONAL J.P. MORGAN NON-U.S. BOND FUND GOV'T. BOND INDEX 12/22/93 $10,000 $10,000 12/31/93 $9,900 $9,900 3/31/94 $9,960 $10,017 6/30/94 $10,080 $10,148 9/30/94 $10,576 $10,321 12/31/94 $10,411 $10,387 3/31/95 $11,507 $11,848 6/30/95 $12,446 $12,394 9/30/95 $12,598 $12,241 12/31/95 $13,254 $12,581 3/31/96 $13,266 $12,370 6/30/96 $13,896 $12,455 9/30/96 $14,675 $12,896 12/31/96 $15,463 $13,244 3/31/97 $14,677 $12,475 6/30/97 $15,160 $12,794 9/30/97 $15,711 $12,866 12/31/97 $15,599 $12,744 3/31/98 $15,750 $12,828 6/30/98 $15,810 $13,084 9/30/98 $16,700 $14,387 12/31/98 $17,282 $15,074 3/31/99 $16,283 $14,328 6/30/99 $15,623 $13,668 9/30/99 $16,343 $14,426 12/31/99 $16,335 $14,144 3/31/2000 $16,266 $13,970 6/30/2000 $16,130 $13,877 9/30/2000 $15,518 $13,243 12/31/2000 $16,291 $13,794 3/31/2001 $15,535 $13,127 6/30/2001 $15,157 $12,866 9/30/2001 $16,309 $13,858 12/31/2001 $15,865 $13,298 3/31/2002 $15,658 $13,064 6/30/2002 $18,124 $14,881 9/30/2002 $18,400 $15,312 12/31/2002 $18,788 $16,238 2/28/2003 $19,535 $16,757
AVERAGE ANNUAL TOTAL RETURN SINCE INCEPTION 1 YEAR 5 YEAR 12/22/93 Class III 25.17% 4.32% 7.56%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset of values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE/ SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 25.0% BULGARIA -- 2.4% USD 10,000,000 Bulgaria Discount Strips, 0.00%, due 07/28/24(a) 2,964,307 ------------ CANADA -- 7.1% CAD 2,000,000 Province of British Columbia, 7.88%, due 11/30/23 1,631,091 GBP 3,500,000 Province of Quebec, 8.63%, due 11/04/11 7,004,627 ------------ 8,635,718 ------------ CAYMAN ISLANDS -- 10.0% CAD 2,000,000 Government of Canada (Cayman), 7.25%, due 06/01/08 1,495,503 EUR 10,000,000 MBNA America Euro Structured Offering, Variable Rate, 3 mo. EURIBOR + .14%, 2.83%, due 05/19/04 10,778,000 ------------ 12,273,503 ------------ JAPAN -- 0.9% USD 1,030,000 Japan Highway Public Corporation, 7.63%, due 09/22/04 1,122,185 ------------ SUPRA NATIONAL -- 0.4% CAD 700,000 European Investment Bank, 8.50%, due 08/30/05 520,842 ------------ UNITED STATES -- 4.2% U.S. GOVERNMENT -- 4.2% USD 4,479,320 U.S. Treasury Inflation Indexed Note, 3.63%, due 01/15/08(b) 5,060,232 ------------ TOTAL DEBT OBLIGATIONS (COST $27,468,646) 30,576,787 ------------ MUTUAL FUNDS -- 69.5% 483,701 GMO Emerging Country Debt Fund, Class III 4,604,832 619,387 GMO Alpha LIBOR Fund 14,691,865 2,633,646 GMO Short-Duration Collateral Fund 65,867,490 ------------ TOTAL MUTUAL FUNDS (COST $86,006,184) 85,164,187 ------------
See accompanying notes to the financial statements. 1 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PRINCIPAL AMOUNT DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------- CALL OPTIONS PURCHASED -- 0.5% CROSS CURRENCY OPTIONS -- 0.5% GBP 8,000,000 GBP Call/JPY Put, Expires 01/23/04 Strike 184.00 333,198 GBP 4,700,000 GBP Call/JPY Put, Expires 04/14/03, Strike 181.00 197,841 USD 4,200,000 JPY Call/USD Put, Expires 07/03/03, Strike 117.30 101,121 ------------ 632,160 ------------ TOTAL CALL OPTIONS PURCHASED (COST $886,491) 632,160 ------------ PUT OPTIONS PURCHASED -- 0.0% CROSS CURRENCY OPTIONS -- 0.0% GBP 9,100,000 GBP Put/USD Call, Expires 06/05/03, Strike 1.43 2,867 ------------ TOTAL PUT OPTIONS PURCHASED (COST $371,881) 2,867 ------------ PAR VALUE ($) ------------- SHORT-TERM INVESTMENTS -- 0.8% CASH EQUIVALENTS -- 0.8% USD 1,003,875 Merrimac Cash Fund 1,003,875 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $1,003,875) 1,003,875 ------------ TOTAL INVESTMENTS -- 95.8% (Cost $115,737,077) 117,379,876 Other Assets and Liabilities (net) -- 4.2% 5,140,627 ------------ TOTAL NET ASSETS -- 100.0% $122,520,503 ============
See accompanying notes to the financial statements. 2 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
NOTES TO SCHEDULE OF INVESTMENTS: Variable rates - The rates shown on variable rate notes are the current interest rates at February 28, 2003, which are subject to change based on the terms of the security. CURRENCY ABBREVIATIONS: AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc EUR - Euro GBP - British Pound JPY - Japanese Yen SEK - Swedish Krona USD - United States Dollar
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). (b) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts and open swap contracts (Note 6). See accompanying notes to the financial statements. 3 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $115,737,077) (Note 1) $117,379,876 Receivable for investments sold 9,090,915 Receivable for Fund shares sold 8,300,000 Interest receivable 1,463,836 Receivable for open forward foreign currency contracts (Notes 1 and 6) 1,659,560 Receivable for variation margin on open futures contracts (Notes 1 and 6) 57,443 Net receivable for open swap contracts (Notes 1 and 6) 2,222,370 Receivable for expenses reimbursed by Manager (Note 2) 11,930 ------------ Total assets 140,185,930 ------------ LIABILITIES: Payable for Fund shares repurchased 16,400,000 Payable to affiliate for (Note 2): Management fee 24,867 Shareholder service fee 14,920 Payable for open forward foreign currency contracts (Notes 1 and 6) 1,185,129 Accrued expenses 40,511 ------------ Total liabilities 17,665,427 ------------ NET ASSETS $122,520,503 ============ NET ASSETS CONSIST OF: Paid-in capital $110,127,090 Distributions in excess of net investment income (568,991) Accumulated net realized gain 8,707,103 Net unrealized appreciation 4,255,301 ------------ $122,520,503 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $122,520,503 ============ SHARES OUTSTANDING: Class III 12,321,002 ============ NET ASSET VALUE PER SHARE: Class III $ 9.94 ============
4 See accompanying notes to the financial statements. GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Interest (including securities lending income of $835) $ 2,568,536 Dividends from investment company shares 1,173,155 ----------- Total income 3,741,691 ----------- EXPENSES: Management fee (Note 2) 336,004 Custodian and transfer agent fees 72,135 Audit fees 36,863 Legal fees 9,337 Registration fees 7,008 Trustees fees and related expenses (Note 2) 4,031 Miscellaneous 2,747 Fees reimbursed by Manager (Note 2) (125,516) ----------- 342,609 Indirectly incurred fees waived or borne by Manager (Note 2) (21,029) ----------- 321,580 ----------- Shareholder service fee (Note 2) - Class III 201,602 Shareholder service fee waived (Note 2) - Class III (7,675) ----------- 193,927 ----------- Net expenses 515,507 ----------- Net investment income 3,226,184 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (8,442,805) Realized gains distributions from investment company shares 396,140 Closed futures contracts 985,447 Closed swap contracts 3,269,594 Written options 40,079 Foreign currency, forward contracts and foreign currency related transactions 20,397,793 ----------- Net realized gain 16,646,248 ----------- Change in net unrealized appreciation on: Investments 6,168,094 Open futures contracts 348,500 Open swap contracts 1,627,041 Foreign currency, forward contracts and foreign currency related transactions 2,886,299 ----------- Net unrealized gain 11,029,934 ----------- Net realized and unrealized gain 27,676,182 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $30,902,366 ===========
See accompanying notes to the financial statements. 5 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 3,226,184 $ 8,164,480 Net realized gain (loss) 16,646,248 (10,470,647) Change in net unrealized appreciation (depreciation) 11,029,934 (4,431,557) ------------ ------------ Net increase (decrease) in net assets from operations 30,902,366 (6,737,724) ------------ ------------ Distributions to shareholders from: Net investment income Class III (15,448,356) (499,961) ------------ ------------ Total distributions from net investment income (15,448,356) (499,961) ------------ ------------ Net share transactions (Note 5): Class III (27,981,311) (70,305,217) ------------ ------------ Decrease in net assets resulting from net share transactions (27,981,311) (70,305,217) ------------ ------------ Total decrease in net assets (12,527,301) (77,542,902) NET ASSETS: Beginning of period 135,047,804 212,590,706 ------------ ------------ End of period (including distribution in excess of net investment income of $568,991 and $2,419,906, respectively) $122,520,503 $135,047,804 ============ ============
6 See accompanying notes to the financial statements. GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, --------------------------------------------------------------------- 2003 2002 2001(D) 2000 1999 --------- --------- --------- --------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.05 $ 9.44 $ 9.19 $ 10.06 $ 10.45 -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.24(a)+ 0.45(a)+ 0.63(a)+ 0.70(a) 0.71 Net realized and unrealized gain (loss) 1.96 (0.81) (0.34) (0.99) (0.42) -------- -------- -------- -------- -------- Total from investment operations 2.20 (0.36) 0.29 (0.29) 0.29 -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (1.31) (0.03) -- (0.39) (0.45) From net realized gains -- -- (0.04) (0.19) (0.23) -------- -------- -------- -------- -------- Total distributions (1.31) (0.03) (0.04) (0.58) (0.68) -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 9.94 $ 9.05 $ 9.44 $ 9.19 $ 10.06 ======== ======== ======== ======== ======== TOTAL RETURN(b) 25.17% (3.80)% 3.20% (2.98)% 2.48% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $122,521 $135,048 $212,591 $145,373 $181,829 Net operating expenses to average daily net assets 0.38%(e) 0.38%(e) 0.39%(e) 0.40% 0.40% Interest expense to average daily net assets -- -- -- 0.03%(c) -- Total net expenses to average daily net assets 0.38% 0.38% 0.39% 0.43% 0.40% Net investment income to average daily net assets 2.40%(a) 4.85%(a) 6.82%(a) 6.51%(a) 6.45% Portfolio turnover rate 40% 36% 114% 39% 106% Fees and expenses reimbursed by the Manager to average daily net assets: 0.11% 0.11% 0.04% 0.98% 0.24%
(a) Net investment income is affected by the timing of the declaration of dividends by other Funds of the Trust in which the Fund invests. (b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (c) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income. (d) Effective March 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing premium and discount on debt securities. The effect of this change for the year ended February 28, 2001 was to decrease net investment income per share by $0.01, increase net realized and unrealized gains and losses per share by $0.01 and decrease the ratio of net investment income to average net assets from 6.97% to 6.82%. Per share and ratios/supplemental data for periods prior to March 1, 2000 have not been restated to reflect this change. (e) Net expenses exclude expenses incurred indirectly through investment in underlying funds. See Note 2. + Computed using average shares outstanding throughout the period. See accompanying notes to the financial statements. 7 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO International Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through direct and indirect investment in foreign bond and currency markets. The Fund's benchmark is the J.P. Morgan Non-U.S. Government Bond Index. At February 28, 2003, 53.8% of the Fund was invested in the GMO Short-Duration Collateral Fund and 12.0% of the Fund was invested in the GMO Alpha LIBOR Fund, separate funds of GMO Trust managed by GMO. Shares of the GMO Alpha LIBOR Fund and the GMO Short-Duration Collateral Fund are not publicly available for direct purchase. At February 28, 2003, 3.7% of the net assets of the Fund was invested in the GMO Emerging Country Debt Fund, a separate fund of GMO Trust managed by GMO. The financial statements of the GMO Alpha LIBOR Fund, the GMO Short-Duration Collateral Fund and the GMO Emerging Country Debt Fund should be read in conjunction with the Fund's financial statements. The Fund invested a substantial portion of its assets in GMO Alpha LIBOR Fund ("Alpha LIBOR Fund") to obtain the Fund's core portfolio exposure. In November 2002, certain bonds held by Alpha LIBOR Fund ("NPF bonds") defaulted amid allegations of fraud and significant violations of the bonds' indentures. Currently, no market exists for the NPF bonds, and they are being valued at fair value by the trustees of GMO Trust or persons acting at their direction. The devaluation of the NPF bonds had a negative impact on the Fund's net asset value per share. In late November 2002, Alpha LIBOR Fund undertook a reorganization transaction with a new series of GMO Trust, GMO Short-Duration Collateral Fund ("SDCF") and approximately 78% of the Fund's interest in Alpha LIBOR Fund was transferred to SDCF in exchange for SDCF shares. The reorganization was treated as a sale of the Alpha LIBOR Fund shares for financial reporting purposes and a distribution by Alpha LIBOR Fund for tax purposes. Accordingly, for financial reporting purposes, the Fund recognized a loss on the sale of the Alpha LIBOR shares of approximately $17,424,200. In addition, the Fund recognized for tax, but not for financial reporting purposes, ordinary income of $6,635,832 and long-term capital gains of $1,183,564 from Alpha LIBOR Fund. $25,243,596 was added to the tax cost basis of the Fund's holdings of Alpha LIBOR Fund. 8 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. Some fixed income securities are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and at its discretion may override a price supplied by a source (by taking a price supplied by another source). Securities may be valued by independent pricing services which use prices provided by market makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. Certain securities held by the Fund, or underlying Funds in which it invests, were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market maker may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. 9 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in foreign currency values that are unfavorable to the Fund. The value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through forward currency contracts as of February 28, 2003. FUTURES CONTRACTS The Fund may purchase and sell futures contracts to manage its exposure to the financial markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are 10 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 28, 2003. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 28, 2003, there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future, security or currency transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. See the Schedule of Investments for all open purchased option contracts as of February 28, 2003. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager. 11 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- LOAN AGREEMENTS The Fund may invest in direct debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans from third parties. A loan is often administered by a bank or other financial institution (the "lender") that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the loan agreement and only upon receipt by the lender of payments from the borrower. The Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, the Fund may be subject to the credit risk of both the borrower and the lender that is selling the loan agreement. When the Fund purchases assignments from lenders it acquires direct rights against the borrower on the loan. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the financial markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate, total return, forward swap spread lock and credit default swap agreements to manage its exposure to interest rates and credit risk. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Total return swap agreements involve commitments to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. Forward swap spread lock swap agreements involve commitments to pay or receive a settlement amount calculated as the difference between the swap spread and a fixed spread, multiplied by the notional amount times the duration of the swap rate. The swap spread is the difference between the benchmark swap rate (market rate) and the specific treasury rate. In a credit default swap, one party makes a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party on its obligation. The Fund may use credit default swaps to provide a measure of protection against defaults of sovereign or corporate issuers (i.e., to reduce risk where the Fund owns or has exposure 12 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- to the issuer) or to take an active long or short position with respect to the likelihood of a particular issuer's default. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements are included as part of interest income. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market, and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in interest rates. See Note 6 for a summary of open swap agreements as of February 28, 2003. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. REVERSE REPURCHASE AGREEMENTS The Fund may enter into reverse repurchase agreements with certain banks and broker/dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. Government securities or other liquid high grade debt obligations in the name of the counterparty equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities the Fund has sold may decline below the price at which it is obligated to repurchase them under the agreement. For the year ended February 28, 2003, the Fund did not enter into any reverse repurchase agreements. 13 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recover or loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 2003, the Fund had no securities on loan. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country's tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003, the tax basis of distributions paid from ordinary income were $499,961 and $15,448,356, respectively. As of February 28, 2003, the components of distributable earnings on a tax basis consisted of $13,543,148 of undistributed ordinary income. The temporary difference between book and tax basis distributable earnings are primarily due to foreign currency transactions, losses on wash sale transactions, and differing treatments for amortization of premiums and discounts on debt securities. The Fund elected to defer to March 1, 2003 post-October losses of $4,511,190. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of 14 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- the Fund and is primarily attributable to foreign currency transactions, the GMO Alpha LIBOR Fund transactions (See Note 1), and redemption in kind transactions. Net losses resulting from redemption in kind transactions were $17,512. The financial highlights exclude these adjustments.
Distributions in Accumulated Excess of Net Net Investment Income Realized Gain Paid-in Capital ----------------- ------------- --------------- $14,073,087 $(5,578,321) $(8,494,766)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Interest income is recorded on the accrual basis, and is adjusted for the amortization of premium and discounts. Dividend income is recorded on the ex-dividend date. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Interest income on inflation indexed securities is accrued daily based upon an inflation adjusted principal. Additionally, any increase in the principal or face amount of these securities is recorded as interest income. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. 15 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .25% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. The Fund may invest in Class III shares of GMO Emerging Country Debt Fund ("ECDF"). Like the management fee (as described below), the Fund's shareholder service fee will be waived (but not below zero) to the extent of the indirect shareholder service fees paid in connection with the Fund's investment in ECDF. The Fund does not incur any indirect shareholder service fees as a result of the Fund's investment in Alpha LIBOR Fund and SDCF. For the year ended February 28, 2003, the shareholder service fees incurred indirectly by the Fund were 0.006% of the Fund's average daily net assets. GMO has entered into a binding agreement effective until at least June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent Trustees of the Trust (including legal fees), 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 ("fund expenses")) and the amount of fees and operating expenses (excluding shareholder service fees (ECDF only) and fund expenses, as defined above) incurred indirectly by the Fund through its investment in the underlying funds (including GMO Alpha LIBOR Fund, GMO Short-Duration Collateral Fund, and ECDF) exceed the management fee. For the year ended February 28, 2003, indirect operating expenses (excluding shareholder service fees (GMO ECDF only) and investment-related expenses) and indirect investment-related expenses (including, but not limited to, interest expense, foreign audit expense, and investment-related legal expense) incurred by the Fund through its investment in underlying funds were 0.019% and 0.022% of the Fund's average daily net assets, respectively. As of February 28, 2003, greater than 10% of the Fund's shares were held by accounts for which the Manager has investment discretion. The Fund's portion of the fee paid by the Trust to the independent Trustees during the year ended February 28, 2003, was $3,081. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2003, aggregated $50,794,294 and $61,984,747, respectively. 16 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- For the year ended February 28, 2003, the cost of purchases and proceeds from sales of investments exclude the initial transfer of GMO Alpha LIBOR Fund's investments in GMO Short-Duration Collateral Fund of $57,966,912. (See Note 1) At February 28, 2003, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $124,443,518 $3,152,219 $(10,215,861) $(7,063,642)
4. PRINCIPAL SHAREHOLDERS At February 28, 2003, 73.2% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 ------------------------- -------------------------- Shares Amount Shares Amount Class III: ----------- ------------ ------------ ------------ Shares sold 1,695,024 $ 17,095,583 2,426,506 $ 22,049,789 Shares issued to shareholders in reinvestment of distributions 1,459,236 13,731,415 49,148 450,690 Shares repurchased (5,748,110) (58,808,309) (10,077,404) (92,805,696) ----------- ------------ ------------ ------------ Net decrease (2,593,850) $(27,981,311) (7,601,750) $(70,305,217) =========== ============ ============ ============
17 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 28, 2003 is as follows: FORWARD CURRENCY CONTRACTS
Net Unrealized Settlement Appreciation Date Deliver/Receive Units of Currency Value (Depreciation) ---------- --------------- ----------------- ------------ -------------- Buys 3/25/03 AUD 29,500,000 $17,867,978 $ 502,884 4/01/03 CAD 23,000,000 15,419,057 385,663 3/04/03 CHF 42,400,000 31,268,437 578,105 4/29/03 CHF 29,200,000 21,558,944 25,021 4/22/03 EUR 46,700,000 50,247,348 (113,932) 4/15/03 GBP 1,400,000 2,199,156 (53,444) 3/18/03 JPY 5,900,000,000 49,930,400 (188,245) ---------- $1,136,052 ========== Sales 3/25/03 AUD 19,600,000 $11,871,606 $ (381,266) 4/01/03 CAD 14,600,000 9,787,749 (211,335) 3/04/03 CHF 42,400,000 31,268,437 (233,800) 4/15/03 GBP 2,000,000 3,141,652 51,272 3/18/03 JPY 950,000,000 8,039,641 (3,107) ---------- $ (778,236) ==========
FORWARD CROSS CURRENCY CONTRACTS
Settlement Net Unrealized Date Deliver/Units of Currency Receive/In Exchange For Appreciation ---------- ------------------------- ----------------------- -------------- 3/11/03 CHF 20,799,350 EUR 14,300,000 $ 67,668 4/08/03 EUR 23,200,000 SEK 213,412,160 48,947 -------- $116,615 ========
18 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- FUTURES CONTRACTS
Net Unrealized Number of Contract Appreciation Contracts Type Expiration Date Value (Depreciation) --------- ------------------------------------- --------------- ------------ -------------- Buys 40 Canadian Government Bond 10 Yr. June 2003 $ 2,865,888 $ 4,029 25 Euro BOBL March 2003 3,057,180 65,573 21 Euro BOBL June 2003 2,546,982 (363) 21 Euro Bund March 2003 2,640,685 32,812 107 Euro Bund June 2003 13,353,435 (465) 9 Japanese Government Bond 10 Yr. June 2003 10,854,049 11,595 --------- $ 113,181 --------- Sales 10 Australian Government Bond 10 Yr. March 2003 $ 650,749 $ (19,863) 29 Australian Government Bond 3 Yr. March 2003 1,835,335 (20,973) 51 Swiss Government Bond March 2003 4,948,429 (167,841) 4 U.K. Gilt June 2003 765,499 1,045 73 U.S. Treasury Note 5 Yr. June 2003 8,300,328 (27,795) --------- $(235,427) =========
At February 28, 2003, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. 19 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- WRITTEN OPTIONS TRANSACTIONS
Puts Calls ---------------------------- -------------------------------- Principal Amount Principal Amount of Contracts of Contracts (000's omitted) Premiums (000's omitted) Premiums ---------------- ---------- ---------------- -------------- Outstanding, beginning of period -- $ -- -- $ -- Options written -- -- 65,300 2,886,232 Options closed -- -- -- -- Options exercised -- -- (60,900) (2,846,153) Options expired -- -- (4,400) (40,079) Options sold -- -- -- -- --------- ---------- ------------ ----------- Outstanding, end of period -- $ -- -- $ -- ========= ========== ============ ===========
SWAP AGREEMENTS
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) --------------- --------------- --------------------------------------- ------------------------------------------ CREDIT DEFAULT SWAPS 100,117,997 EUR 3/31/03 Agreement with Morgan Guaranty Trust $ (24,843) Company dated 5/4/01 to pay .07% per year times the notional amount. The Fund receives payment only upon a default event in Belgium, the notional amount times the difference between the par value and the then-market value of Kingdom of Belgium, 5.75% due 3/28/08. INTEREST RATE SWAPS 20,000,000 EUR 3/21/05 Agreement with UBS AG dated 3/17/00 to 1,244,286 receive the notional amount multiplied by 5.222% and to pay the notional amount multiplied by the 3 month Floating Rate EURIBOR adjusted by a specified spread.
20 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Notional Expiration Appreciation Amount Date Description (Depreciation) --------------- --------------- --------------------------------------- ------------------------------------------ 7,800,000 SEK 9/25/07 Agreement with Citibank N.A. dated $ 24,292 9/24/02 to receive the notional amount multiplied by 4.79% and to pay the notional amount multiplied by the 3 month Floating Rate Swedish STIBOR adjusted by a specified spread. 10,800,000 SEK 9/25/12 Agreement with Citibank N.A. dated 35,458 9/24/02 to receive the notional amount multiplied by 5.08% and to pay the notional amount multiplied by the 3 month Floating Rate Swedish STIBOR adjusted by a specified spread. 3,109,769 USD 7/28/24 Agreement with JP Morgan Chase Bank (117,245) dated 9/20/02 to pay $10,000,000 at expiration date and to receive at expiration date $3,090,000 plus interest based upon the 3 month Floating Rate LIBOR (compounded quarterly) adjusted by a specified spread. 5,000,000 EUR 3/21/30 Agreement with UBS AG dated 3/17/00 to 998,432 receive the notional amount multiplied by 5.895% and to pay the notional amount multiplied by the 3 month Floating Rate EURIBOR adjusted by a specified spread. TOTAL RETURN SWAPS 52,000,000 USD 7/24/03 Agreement with Morgan Guaranty Trust 111,692 Company dated 7/18/01 to receive (pay) the notional amount multiplied by the return on the JP Morgan Non-U.S. Traded Total Return Government Bond Index and to pay the notional amount multiplied by the 1 month LIBOR adjusted by a specified spread. ---------- $2,272,072 ==========
See Notes to the Schedule of Investments for definitions of currency abbreviations. 21 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO INTERNATIONAL BOND FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO International Bond Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 22 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 23 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the from February Boston, MA 02110 Trust 2002 - October Age: 64 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 24 PRINCIPAL OFFICERS:
Term of Office(4) and Principal Occupation(s) Name, Address, Position(s) Length of During Past and Age Held with Fund Time Served Five Years ------------------------------------ -------------- -------------- -------------------------------------------------- Scott Eston President and President and Chief Financial Officer (1997 - present), Chief c/o GMO Trust Chief Chief Operating Officer (2000 - present) and Member, 40 Rowes Wharf Executive Executive Grantham, Mayo, Van Otterloo & Co. LLC. Boston, MA 02110 Officer of the Officer since Age: 47 Trust October 2002; Vice President from August 1998 - October 2002. Susan Randall Harbert Chief Chief Member, Grantham, Mayo, Van Otterloo & Co. LLC. c/o GMO Trust Financial Financial 40 Rowes Wharf Officer and Officer Since Boston, MA 02110 Treasurer of February 2000; Age: 45 the Trust Treasurer since February 1998. Brent Arvidson Assistant Since Senior Fund Administrator, Grantham, Mayo, Van c/o GMO Trust Treasurer of September Otterloo & Co. LLC. 40 Rowes Wharf the Trust 1998. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President Vice President General Counsel, Anti-Money Laundering Reporting c/o GMO Trust and Clerk of since February Officer (July 2002 - February 2003) and Member, 40 Rowes Wharf the Trust 1997; Clerk Grantham, Mayo, Van Otterloo & Co. LLC. Boston, MA 02110 since March Age: 37 2001; May 1999 - August 1999. Elaine M. Hartnett, Esq. Vice President Vice President Associate General Counsel, Grantham, Mayo, Van c/o GMO Trust and Secretary since August Otterloo & Co. LLC (June 1999 - present); 40 Rowes Wharf of the Trust 1999; Associate/ Junior Partner, Hale and Dorr LLP Boston, MA 02110 Secretary (1991 - 1999). Age: 58 since March 2001. Julie Perniola Vice President Since February Anti-Money Laundering Reporting Officer (February c/o GMO Trust and Anti- 2003. 2003 - present) and Compliance Officer, Grantham, 40 Rowes Wharf Money Mayo, Van Otterloo & Co. LLC. Boston, MA 02110 Laundering Age: 32 Compliance Officer
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 25 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Day-to-day management of the Fund's portfolio is the responsibility of the U.S. Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC. ANALYSIS OF FUND PERFORMANCE Class III shares of GMO Intrinsic Value Fund returned -21.1% for the fiscal year ended February 28, 2003 as compared to -19.3% for the Russell 1000 Value Index and -22.7% for the S&P 500. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in common stocks throughout the period. For the fiscal year, the best performing sectors in the Russell 1000 Value Index were financial services, healthcare, and consumer staples, albeit all still reporting negative absolute returns. Autos and transportation, the weakest performing sector in the index, fell over 31% during the fiscal year. Also posting weak returns were the utilities, technology, and consumer discretionary sectors, falling 27%, 26%, and 23%, respectively. While there was virtually no difference between small cap and large cap performance this fiscal year, value stocks did continue to outpace growth stocks by 6% to 8% across all market capitalizations. The Fund's underperformance of the benchmark for the period is attributable to both sector and stock selection. The Fund's overweight position in healthcare added to relative returns, as did the underweight in utilities and overweight in consumer staples. However, these gains were more than offset by the Fund's overweight position in the weak performing autos and transportation sector and its underweight position in financial services. Together, these cost the Fund over 60 basis points in relative performance. While stock selection was quite strong in both financial and healthcare stocks, overall selection in the Fund was weak this fiscal year. Selection was particularly impaired in the auto and transportation sector and, to a lesser extent, in both the consumer staples and utilities selections. The Fund incorporates three investment disciplines in the portfolio: price to intrinsic value, which has a 50% weight; price to normalized earnings, with a 30% weight; and momentum, with a 20% weight. Both price momentum and price to normalized earnings, our traditional value measure, had positive impacts to return this fiscal year, but price to intrinsic value had a significant negative impact on the relative performance of the Fund. OUTLOOK The portfolio currently maintains overweight positions in healthcare, producer durables, and technology stocks, and underweight positions in integrated oil and materials and processing companies. We believe that our approach of combining value and momentum is well positioned to add value in the current volatile equity market. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO INTRINSIC VALUE FUND CLASS III SHARES AND THE RUSSELL 1000 VALUE INDEX AS OF FEBRUARY 28, 2003 GMO INTRINSIC VALUE FUND RUSSELL 1000 VALUE INDEX 8/2/99 $10,000 $10,000 9/30/99 $9,290 $9,287 12/31/99 $9,933 $9,791 3/31/2000 $9,923 $9,838 6/30/2000 $9,531 $9,377 9/30/2000 $10,469 $10,114 12/31/2000 $10,993 $10,478 3/31/2001 $10,962 $9,865 6/30/2001 $11,759 $10,346 9/30/2001 $10,545 $9,213 12/31/2001 $11,357 $9,893 3/31/2002 $11,814 $10,297 6/30/2002 $10,616 $9,420 9/30/2002 $8,775 $7,652 12/31/2002 $9,568 $8,357 2/28/2003 $9,008 $7,937
AVERAGE ANNUAL TOTAL RETURN SINCE INCEPTION 1 YEAR 8/2/99 Class III -21.05% -2.88%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- COMMON STOCKS -- 97.4% AUTO & TRANSPORTATION -- 4.6% 26,400 AMR Corp* 61,776 4,200 ArvinMeritor Inc 64,176 5,300 Autoliv Inc 109,710 17,100 Burlington Northern Santa Fe Railroad Co 427,500 4,200 Continental Airlines Inc, Class B* 21,420 3,700 Cooper Tire & Rubber Co 51,837 8,600 Dana Corp 73,616 16,900 Delta Air Lines Inc 141,960 47,054 Ford Motor Co 391,489 37,582 General Motors Corp 1,269,144 10,200 Goodyear Tire & Rubber Co 40,800 3,700 Lear Corp* 140,526 2,500 Navistar International Corp* 59,075 ------------- 2,853,029 ------------- CONSUMER DISCRETIONARY -- 8.6% 12,100 Autonation Inc* 160,083 1,900 Belo Corp, Series A 40,945 6,300 Big Lots Inc* 69,615 5,400 Blockbuster Inc 82,620 4,200 Catalina Marketing Corp* 76,020 44,100 Cendant Corp* 542,871 3,500 Clear Channel Communications Inc* 127,785 1,800 Columbia Sportswear Co* 64,350 2,100 Cox Radio Inc, Class A* 44,940 5,400 Dillard's Inc, Class A 75,330 14,600 Eastman Kodak Co 432,160 6,000 Federated Department Stores Inc* 153,000 7,600 Fox Entertainment Group Inc, Class A* 203,148 700 Gannett Co Inc 50,519 3,500 Getty Images Inc* 102,725 4,000 Hasbro Inc 48,440 2,400 Hilton Hotels Corp 26,376 11,400 IKON Office Solutions Inc 79,914 4,400 Jones Apparel Group Inc* 124,784 2,000 Mandalay Resort Group* 50,480 1,500 Manpower Inc 45,555 7,600 May Department Stores Co 149,112
See accompanying notes to the financial statements. 1 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- CONSUMER DISCRETIONARY -- CONTINUED 800 MGM Mirage* 20,496 1,800 Mohawk Industries Inc* 88,884 1,800 New York Times Co, Class A 83,628 4,600 Newell Rubbermaid Inc 129,720 7,700 Penney (JC) Co Inc 152,845 700 Pier 1 Imports Inc 11,179 4,900 R.R. Donnelley and Sons 89,474 10,400 Saks Inc* 79,976 18,600 Sears Roebuck & Co 405,108 24,300 Service Corp International* 74,601 7,600 Toys R Us Inc* 61,408 6,700 Tribune Co 300,495 3,000 VF Corp 101,550 12,000 Viacom Inc, Class A* 446,520 11,400 Viacom Inc, Class B* 423,282 1,400 Waste Connections Inc* 46,592 1,600 Whirlpool Corp 78,816 ------------- 5,345,346 ------------- CONSUMER STAPLES -- 5.1% 42,900 Altria Group Inc 1,658,085 10,500 Coca Cola Enterprises Inc 211,890 7,200 CVS Corp 179,280 1,100 Hormel Foods Corp 23,111 5,400 PepsiAmericas Inc 65,988 12,800 Rite Aid Corp* 30,720 5,300 RJ Reynolds Tobacco Holdings 211,523 17,800 Safeway Inc* 354,042 2,500 Smithfield Foods Inc* 46,325 23,824 Tyson Foods Inc, Class A 219,181 3,900 UST Inc 112,437 4,900 Winn-Dixie Stores Inc 59,780 ------------- 3,172,362 ------------- FINANCIAL SERVICES -- 29.6% 10,000 AFLAC Corp 312,500 4,700 Allmerica Financial Corp* 66,505 15,300 Allstate Corp 483,939 1,800 AMB Property Corp, REIT 50,400
2 See accompanying notes to the financial statements. GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- FINANCIAL SERVICES -- CONTINUED 5,400 American Express Co 181,332 2,300 American Financial Group Inc 45,609 400 American National Insurance Co 31,316 20,900 Bank of America Corp 1,447,116 4,200 Bank of Hawaii Corp 130,620 7,600 Bank One Corp 273,828 5,280 Bear Stearns Cos Inc 330,739 90 Berkshire Hathaway Inc, Class B* 185,850 309 BOK Financial Corp* 10,033 3,676 Charter One Financial Inc 106,273 7,800 Checkfree Corp* 163,644 3,700 Cigna Corp 158,989 16,000 Citigroup Inc 533,440 3,500 CNA Financial Corp* 80,465 6,000 Comerica Inc 245,880 700 Commerce Group Inc 23,814 7,300 Countrywide Financial Corp 389,747 300 Cullen/Frost Bankers Inc 9,348 1,800 Edwards (AG) Inc 48,006 31,600 Fannie Mae 2,025,560 7,000 Fidelity National Financial Inc 229,810 3,600 First American Financial Corp 83,160 20,984 FleetBoston Financial Corp 515,367 21,600 Freddie Mac 1,180,440 1,900 GATX Corp 29,336 2,000 General Growth Properties, REIT 104,540 2,800 Global Payments Inc 78,232 2,500 Golden West Financial Corp 181,000 4,600 Greater Bay Bancorp 73,646 3,500 Greenpoint Financial Corp 148,680 1,900 Hospitality Properties Trust, REIT 58,064 1,000 Host Marriott Corp, REIT* 6,920 4,600 Hudson City Bancorp Inc 87,354 3,200 Huntington Bancshares Inc 61,440 14,180 J.P. Morgan Chase & Co 321,603 3,900 Janus Capital Group Inc 46,137 16,700 KeyCorp 396,291 3,200 Lehman Brothers Holdings Inc 177,184 1,900 Lincoln National Corp 53,827 14,100 Loews Corp 616,311
See accompanying notes to the financial statements. 3 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- FINANCIAL SERVICES -- CONTINUED 900 M & T Bank Corp 71,118 5,400 MGIC Investment Corp 213,084 1,600 Mony Group Inc 34,240 17,600 Morgan Stanley 648,560 11,700 National City Corp 323,154 1,600 National Processing Inc* 22,800 4,900 Nationwide Financial Services, Class A 119,070 1,800 North Fork Bancorp 58,032 4,700 Old Republic International Corp 128,310 5,400 PMI Group Inc 146,340 6,100 PNC Financial Services Group 274,073 600 Popular Inc 20,334 6,700 Principal Financial Group 184,719 2,700 Prologis, REIT 66,906 1,400 Provident Financial Group 40,474 23,600 Providian Financial Corp* 143,960 3,900 Radian Group Inc 135,993 9,700 Regions Financial Corp 314,086 3,200 Ryder System Inc 72,608 3,000 Silicon Valley Bancshares* 52,050 1,900 Simon Property Group Inc, REIT 65,816 3,900 Southtrust Corp 105,261 3,500 Southwest Bancorporation of Texas Inc* 110,670 19,700 Sovereign Bancorp Inc 267,526 700 Student Loan Group 66,010 6,200 Torchmark Corp 225,122 2,600 Union Planters Corp 71,552 3,900 UnionBanCal Corp 162,318 14,600 Unumprovident Corp 189,800 18,100 Wachovia Corp 642,188 13,300 Washington Mutual Inc 459,249 23,900 Wells Fargo & Co 1,083,865 ------------- 18,303,583 ------------- HEALTH CARE -- 9.3% 10,000 Aetna Inc 421,200 2,100 Anthem Inc* 125,181 23,700 Bristol Myers Squibb Co 552,210 2,100 Coventry Health Care Inc* 59,493 8,300 Health Net Inc* 208,413
4 See accompanying notes to the financial statements. GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- HEALTH CARE -- CONTINUED 56,700 Merck & Co Inc 2,990,925 13,600 Pfizer Inc 405,552 53,600 Schering Plough Corp 965,872 ------------- 5,728,846 ------------- INTEGRATED OILS -- 2.9% 1,400 Amerada Hess Corp 62,342 13,409 ConocoPhillips 679,836 16,300 Exxon Mobil Corp 554,526 15,800 Marathon Oil Corp 364,822 3,400 Occidental Petroleum Corp 101,660 ------------- 1,763,186 ------------- MATERIALS & PROCESSING -- 3.5% 1,500 AK Steel Holding Corp* 8,235 6,300 Allegheny Technologies Inc 18,837 1,400 AptarGroup Inc 42,420 4,000 Ashland Inc 111,240 1,500 Avery Dennison Corp 86,100 2,100 Dow Chemical Co 57,330 6,700 Du Pont (E.I.) De Nemours 245,689 2,800 Eastman Chemical Co 90,132 5,000 Energizer Holdings Inc* 132,750 3,700 Engelhard Corp 76,775 14,900 Hercules Inc* 119,647 10,200 IMC Global Inc 89,862 4,400 Lafarge Corp 124,432 2,800 Lubrizol Corp 81,004 7,200 Lyondell Chemical Co 85,752 1,900 Owens Illinois Inc* 17,100 3,900 PPG Industries Inc 180,960 3,600 RPM International Inc 36,000 6,400 Sealed Air Corp* 232,128 1,200 Sigma Aldrich Corp 52,584 4,400 Sonoco Products Co 91,300 11,800 United States Steel Corp 137,116 1,400 Valspar Corp 57,316 ------------- 2,174,709 -------------
See accompanying notes to the financial statements. 5 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- OTHER -- 2.1% 500 3 M Co 62,685 7,000 Brunswick Corp 132,300 1,600 Carlisle Cos Inc 68,176 800 Eaton Corp 56,760 3,000 FMC Corp* 46,590 2,100 Fortune Brands Inc 92,064 20,600 Honeywell International Inc 471,534 1,500 ITT Industries Inc 84,345 1,800 Johnson Controls Inc 140,328 4,000 Textron Inc 144,520 ------------- 1,299,302 ------------- OTHER ENERGY -- 3.1% 3,900 Apache Corp 254,592 3,100 Burlington Resources Inc 143,685 9,900 Chesapeake Energy Corp 80,388 2,500 Cooper Cameron Corp* 130,000 4,400 Devon Energy Corp 212,080 3,900 Ensco International Inc 109,122 8,600 Halliburton Co 174,236 1,600 Helmerich & Payne Inc 44,000 2,400 Nabors Industries Ltd* 95,160 2,500 National-Oilwell Inc* 56,250 4,400 Pioneer Natural Resources Co* 115,060 2,600 Pogo Producing Co 103,350 5,800 Pride International Inc* 84,100 4,600 Rowan Cos Inc 90,298 6,700 Transocean Inc 152,090 1,900 Varco International Inc* 36,024 400 Weatherford International Ltd* 16,016 1,900 XTO Energy Inc 47,899 ------------- 1,944,350 ------------- PRODUCER DURABLES -- 6.0% 11,800 American Power Conversion Corp* 184,552 20,000 Boeing Co 551,200 5,300 Centex Corp 292,984 4,400 Cooper Industries Ltd 166,540 4,200 Crane Co 72,576
6 See accompanying notes to the financial statements. GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- PRODUCER DURABLES -- CONTINUED 2,300 Cummins Inc 55,131 11,800 DR Horton Inc 216,058 4,000 Goodrich (BF) Co 61,480 900 Grainger (WW) Inc 41,427 3,200 Hubbell Inc, Class B 98,432 4,900 KB HOME 229,810 4,600 Lennar Corp 248,354 1,700 Lockheed Martin Corp 77,724 1,860 Northrop Grumman Corp 161,262 3,000 Pitney Bowes Inc 93,120 5,300 Pulte Corp 269,399 1,400 Ryland Group Inc 57,820 2,600 Steelcase Inc 23,946 5,300 Thomas & Betts Corp* 80,189 5,100 Toll Brothers Inc* 98,787 19,000 Tyco International Ltd 281,200 2,100 United Technologies Corp 123,018 26,700 Xerox Corp* 240,300 ------------- 3,725,309 ------------- TECHNOLOGY -- 7.5% 9,800 3 Com Corp* 41,062 4,500 Acxiom Corp* 68,670 4,900 Adaptec Inc* 29,841 9,300 Arrow Electronics Inc* 133,734 2,300 AVX Corp 21,758 8,700 BMC Software Inc* 168,780 12,100 Ceridian Corp* 166,980 22,900 Computer Associates International Inc 305,715 18,100 Comverse Technology Inc* 184,620 21,100 Corning Inc* 103,812 20,000 EMC Corp* 147,800 5,700 Foundry Networks Inc* 50,559 1,200 Harris Corp 35,952 33,387 Hewlett-Packard Co 529,184 2,500 Imation Corp* 90,000 10,700 Ingram Micro Inc, Class A* 110,852 7,400 Keane Inc* 59,274 800 Macromedia Inc* 12,672 123,800 Oracle Corp* 1,480,648
See accompanying notes to the financial statements. 7 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- TECHNOLOGY -- CONTINUED 3,300 Perot Systems Corp* 33,033 5,300 Raytheon Co 143,524 3,000 Reynolds & Reynolds Inc, Class A 73,350 12,300 Rockwell Automation 283,023 43,400 Tellabs Inc* 264,306 8,600 Vishay Intertechnology Inc* 86,860 ------------- 4,626,009 ------------- UTILITIES -- 15.1% 3,500 Ameren Corp 136,465 6,500 American Electric Power Inc 141,570 49,391 AT & T Corp 915,709 38,400 Bellsouth Corp 832,128 14,900 Centerpoint Energy Inc 69,285 10,400 CMS Energy Corp 46,800 7,890 Comcast Corp, Class A* 230,546 5,300 Consolidated Edison Inc 206,700 6,200 Constellation Energy Group Inc 162,564 2,300 DQE Inc 31,050 1,800 DTE Energy Co 74,592 16,800 Edison International* 207,648 600 Energen Corp 18,252 4,400 Energy East Corp 82,808 5,300 Exelon Corp 260,495 4,000 FPL Group Inc 224,040 1,900 Great Plains Energy Inc 43,073 1,600 Keyspan Corp 51,152 1,600 Nicor Inc 48,144 4,200 Pepco Holdings Inc 75,390 24,100 PG & E Corp* 307,275 3,200 Pinnacle West Capital Corp 97,728 5,900 PPL Corp 207,503 6,200 Public Service Enterprise Group Inc 214,706 3,900 Puget Energy Inc 78,936 900 Questar Corp 25,092 22,300 Qwest Communications International Inc* 79,834 69,053 SBC Communications Inc 1,436,303 1,600 SCANA Corp 47,984 5,100 Sempra Energy 118,320 7,900 Southern Co 222,859
8 See accompanying notes to the financial statements. GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- UTILITIES -- CONTINUED 55,600 Sprint Corp (Fon Group) 706,120 8,300 The AES Corp* 27,556 53,052 Verizon Communications Inc 1,834,538 4,100 Wisconsin Energy Corp 93,685 ------------- 9,356,850 ------------- TOTAL COMMON STOCKS (COST $71,166,566) 60,292,881 ------------- RIGHTS AND WARRANTS -- 0.0% TECHNOLOGY -- 0.0% 800 Seagate Technology Inc Rights(a) 8 ------------- TOTAL RIGHTS AND WARRANTS (COST $0) 8 ------------- SHORT-TERM INVESTMENTS -- 6.0% CASH EQUIVALENTS -- 2.4% 632,921 Dreyfus Money Market Fund(b) 632,921 $ 447,248 Harris Trust & Savings Bank Eurodollar Time Deposit, 1.26%, due 3/24/03(b) 447,248 368,980 Merrimac Money Market Fund(b) 368,980 ------------- 1,449,149 ------------- U.S. GOVERNMENT -- 0.1% $ 75,000 U.S. Treasury Bill, 1.14%, due 4/24/03(c) 74,862 -------------
See accompanying notes to the financial statements. 9 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- REPURCHASE AGREEMENT -- 3.5% $ 2,180,775 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/28/02, due 3/03/03, with a maturity value of $2,180,840, and an effective yield of .36%, collateralized by a U.S. Treasury Bond with a rate of 3.625%, maturity date of 3/31/04, and a market value, including accrued interest of $2,346,469. 2,180,775 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $3,704,786) 3,704,786 ------------- TOTAL INVESTMENTS -- 103.4% (Cost $74,871,352) 63,997,675 Other Assets and Liabilities (net) -- (3.4%) (2,074,504) ------------- TOTAL NET ASSETS -- 100.0% $ 61,923,171 ============= NOTES TO THE SCHEDULE OF INVESTMENTS:
REIT -- Real Estate Investment Trust
* Non-income producing security. (a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). (b) Represents investment of security lending collateral (Note 1). (c) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 6). 10 See accompanying notes to the financial statements. GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value, including securities on loan of $1,364,721 (cost $74,871,352) (Note 1) $63,997,675 Receivable for investments sold 1,059,995 Dividends and interest receivable 127,582 Receivable for variation margin on open futures contracts (Notes 1 and 6) 2,700 Receivable for expenses reimbursed by Manager (Note 2) 4,676 ----------- Total assets 65,192,628 ----------- LIABILITIES: Payable for investments purchased 1,762,803 Payable upon return of securities loaned (Note 1) 1,449,149 Payable to affiliate for (Note 2): Management fee 15,787 Shareholder service fee 7,176 Accrued expenses 34,542 ----------- Total liabilities 3,269,457 ----------- NET ASSETS $61,923,171 =========== NET ASSETS CONSIST OF: Paid-in capital $74,454,542 Accumulated undistributed net investment income 171,441 Accumulated net realized loss (1,842,204) Net unrealized depreciation (10,860,608) ----------- $61,923,171 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $61,923,171 =========== SHARES OUTSTANDING: Class III 7,692,756 =========== NET ASSET VALUE PER SHARE: Class III $ 8.05 ===========
See accompanying notes to the financial statements. 11 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends $ 1,041,022 Interest (including securities lending income of $5,154) 19,028 ------------ Total income 1,060,050 ------------ EXPENSES: Management fee (Note 2) 171,478 Audit fees 37,808 Custodian and transfer agent fees 32,110 Legal fees 3,582 Registration fees 3,198 Trustees fees and related expenses (Note 2) 1,910 Miscellaneous 1,832 Fees reimbursed by Manager (Note 2) (78,124) ------------ 173,794 Shareholder service fee (Note 2) - Class III 77,945 ------------ Net expenses 251,739 ------------ Net investment income 808,311 ------------ REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (671,035) Closed futures contracts 124,985 ------------ Net realized loss (546,050) ------------ Change in net unrealized appreciation (depreciation) on: Investments (11,875,844) Open futures contracts 17,655 ------------ Net unrealized loss (11,858,189) ------------ Net realized and unrealized loss (12,404,239) ------------ NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(11,595,928) ============
12 See accompanying notes to the financial statements. GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 808,311 $ 1,572,950 Net realized gain (loss) (546,050) 2,676,637 Change in net unrealized appreciation (depreciation) (11,858,189) (2,302,982) ------------ ----------- Net increase (decrease) in net assets from operations (11,595,928) 1,946,605 ------------ ----------- Distributions to shareholders from: Net investment income Class III (856,517) (1,733,415) ------------ ----------- Total distributions from net investment income (856,517) (1,733,415) ------------ ----------- Net realized gains Class III (1,978,445) (1,287,553) ------------ ----------- Total distributions from net realized gains (1,978,445) (1,287,553) ------------ ----------- (2,834,962) (3,020,968) ------------ ----------- Net share transactions (Note 5): Class III (21,268,403) 47,832,361 ------------ ----------- Increase (decrease) in net assets resulting from net share transactions (21,268,403) 47,832,361 ------------ ----------- Total increase (decrease) in net assets (35,699,293) 46,757,998 NET ASSETS: Beginning of period 97,622,464 50,864,466 ------------ ----------- End of period (including accumulated undistributed net investment income of $171,441 and $238,650, respectively) $ 61,923,171 $97,622,464 ============ ===========
See accompanying notes to the financial statements. 13 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------------------ 2003 2002 2001 2000* ------- ------- ------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.73 $ 10.84 $ 8.79 $ 10.00 ------- ------- ------- ------- Income from investment operations: Net investment income 0.15+ 0.18+ 0.20 0.11+ Net realized and unrealized gain (loss) (2.36) 0.05 2.06 (1.24) ------- ------- ------- ------- Total from investment operations (2.21) 0.23 2.26 (1.13) ------- ------- ------- ------- Less distributions to shareholders: From net investment income (0.15) (0.20) (0.14) (0.08) From net realized gains (0.32) (0.14) (0.07) -- ------- ------- ------- ------- Total distributions (0.47) (0.34) (0.21) (0.08) ------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 8.05 $ 10.73 $ 10.84 $ 8.79 ======= ======= ======= ======= TOTAL RETURN(a) (21.05)% 2.16% 26.00% (11.36)%++ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $61,923 $97,622 $50,864 $38,650 Net expenses to average daily net assets 0.48% 0.48% 0.48% 0.48%** Net investment income to average daily net assets 1.56% 1.67% 2.04% 1.94%** Portfolio turnover rate 114% 61% 89% 26% Fees and expenses reimbursed by the Manager to average daily net assets: 0.15% 0.09% 0.17% 0.25%**
(a) The total return would have been lower had certain expenses not been reimbursed during the periods shown. * Period from August 2, 1999 (commencement of operations) through February 29, 2000. ** Annualized + Computed using average shares outstanding throughout the period. ++ Not annualized. 14 See accompanying notes to the financial statements. GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Intrinsic Value Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 25, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks long-term capital growth through investment in equity securities. The Fund's benchmark is the Russell 1000 Value Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. FUTURES CONTRACTS The Fund may purchase and sell futures contracts to manage its exposure to the financial markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and 15 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- agency obligations in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 28, 2003. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the financial markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the 16 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. At February 28, 2003, the Fund had no open swap contracts. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of collateral, the risk of delay in recovery or loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 2003, the Fund loaned securities having a market value of $1,364,721 collateralized by cash in the amount of $1,449,149 which was invested in short-term instruments. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country's tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. 17 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. For the years ended February 28, 2002 and February 28, 2003, the tax basis of the distributions paid was as follows: ordinary income -- $1,733,415 and $1,451,043, respectively and long-term capital gains -- $1,287,553 and $1,383,919, respectively. As of February 28, 2003, the components of distributable earnings on a tax basis consisted of $171,441 of undistributed ordinary income. The temporary difference between book and tax basis distributable earnings are primarily due to wash sale transactions. The Fund elected to defer to March 1, 2003 post-October losses of $613,388. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus U.S. GAAP. The financial highlights exclude these adjustments.
Accumulated Undistributed Net Accumulated Net Investment Income Realized Loss ----------------- --------------- $(19,003) $19,003
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. 18 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until at least June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent Trustees of the Trust (including legal fees), 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) exceed the management fee. As of February 28, 2003, greater than 10% of the Fund's shares were held by accounts for which the Manager has investment discretion. The Fund's portion of the fee paid by the Trust to the independent Trustees during the year ended February 28, 2003 was $1,631. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2003, aggregated $59,340,991 and $79,680,783, respectively. At February 28, 2003, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $76,087,096 $737,226 $(12,826,647) $(12,089,421)
4. PRINCIPAL SHAREHOLDERS At February 28, 2003, 87.6% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's shares outstanding. Investment activities of these shareholders may have a material effect on the Fund. 19 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 ------------------------ ---------------------- Shares Amount Shares Amount Class III: ---------- ------------ --------- ----------- Shares sold 3,468,670 $ 30,846,300 4,322,392 $46,854,135 Shares issued to shareholders in reinvestment of distributions 213,208 2,062,934 129,480 1,378,226 Shares repurchased (5,090,081) (54,177,637) (41,624) (400,000) ---------- ------------ --------- ----------- Net increase (decrease) (1,408,203) $(21,268,403) 4,410,248 $47,832,361 ========== ============ ========= ===========
6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 28, 2003 is as follows: FUTURES CONTRACTS
Number of Contract Net Unrealized Contracts Type Expiration Date Value Appreciation --------- --------------------------------------------- --------------- --------- -------------- Buys 4 S&P 500 March 2003 $840,900 $13,069 =======
At February 28, 2003 the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. 20 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO INTRINSIC VALUE FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Intrinsic Value Fund (the "Fund") (a series of the GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 21 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- For the fiscal year ended February 28, 2003, all of the Fund's distributions are from investment company taxable income, except that the Fund has designated 48.82% of the distributions as net capital gain dividends. 22 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 23 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the from February Boston, MA 02110 Trust 2002 - October Age: 64 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 24 PRINCIPAL OFFICERS:
Principal Occupation(s) Name, Address, Position(s) Term of Office(4) and Length During Past and Age Held with Fund of Time Served Five Years ------------------------- ------------------------------ ------------------------------ ------------------------------ Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief 40 Rowes Wharf Vice President from August Operating Officer (2000 - Boston, MA 02110 1998 - October 2002. present) and Member, Grantham, Age: 47 Mayo, Van Otterloo & Co. LLC. Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC. 40 Rowes Wharf February 1998. Boston, MA 02110 Age: 45 Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator, c/o GMO Trust Trust Grantham, Mayo, Van 40 Rowes Wharf Otterloo & Co. LLC. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer 40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003) Boston, MA 02110 and Member, Grantham, Mayo, Age: 37 Van Otterloo & Co. LLC. Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel, c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van 40 Rowes Wharf 2001. Otterloo & Co. LLC (June Boston, MA 02110 1999 - present); Associate/ Age: 58 Junior Partner, Hale and Dorr LLP (1991 - 1999). Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering c/o GMO Trust Laundering Compliance Officer Reporting Officer (February 40 Rowes Wharf 2003 - present) and Compliance Boston, MA 02110 Officer, Grantham, Mayo, Van Age: 32 Otterloo & Co. LLC.
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 25 GMO REAL ESTATE FUND (FORMERLY GMO REIT FUND) (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGEMENT Day-to-day management of the Fund's portfolio is the responsibility of the U.S. Active Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Real Estate Fund declined 2.2% during the fiscal year ended February 28, 2003. The Morgan Stanley REIT Index returned +0.8%, while the S&P 500 returned -22.7% during the same period. For the third consecutive year, REITs outperformed the S&P 500 index by more than 20%, as investors continued to seek asset classes with better risk/return characteristics. Although absolute returns lagged the outstanding results delivered in the prior two years, REIT relative performance remained outstanding versus U.S. equities. The continuing resiliency of consumer spending and the beneficial effect of historically low interest rates combined to drive the outperformance of outlet, regional mall, and shopping center shares, as these sectors returned +45.1%, +22.5%, and +19.1%, respectively. In addition, industrial sector performance significantly exceeded the benchmark, delivering +13.5% for the year. On the negative side, hotel shares continued to lag the market due to weak demand, declining 31.0%. Hurt by declining occupancy rates and pricing weakness, central business district office and apartment shares endured continuing weakness, falling 9.1% and 5.8%, respectively. The GMO Real Estate Fund lagged the index due to poor stock selection. Office-CBD stock selection subtracted 1.0%, while hotel selection subtracted 0.5%. The top three contributors to relative returns were General Growth Properties (+0.2%), CBL & Associates (+0.2%), and Developers Diversified Realty (+0.2%), while Trizec Properties (-1.2%), Starwood Hotels & Resorts (-1.0%), and Apartment Investment & Management (-0.3%) were the largest detractors. Sector selection was slightly positive for the year. Cash balances added 1.7%, and our underweightings in apartment and storage shares each added 0.3%. Underweighting shopping mall shares subtracted 1.0% from performance. OUTLOOK Industry earnings will likely be flat year-over-year due to deteriorating fundamentals -- the first time in several years that we expect REIT industry fundamentals to lag the broader market. While valuation levels remain subdued compared to the broader market, increased attention to potential dividend cuts will likely cause wide dispersion in individual security and sector returns. The overall industry yield remains attractive as compared to anemic nominal growth trends. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO REAL ESTATE FUND CLASS III SHARES AND THE MORGAN STANLEY REIT INDEX AS OF FEBRUARY 28, 2003 GMO Real Estate Fund Morgan Stanley REIT Index S&P 500 Index 5/31/96 $10,000 $10,000 $10,000 6/30/96 $10,140 $10,187 $10,038 9/30/96 $10,840 $10,849 $10,348 12/31/96 $12,808 $13,015 $11,211 3/31/97 $12,940 $13,044 $11,512 6/30/97 $13,551 $13,687 $13,521 9/30/97 $15,113 $15,283 $14,534 12/31/97 $15,287 $15,433 $14,951 3/31/98 $15,014 $15,322 $17,037 6/30/98 $14,184 $14,649 $17,600 9/30/98 $11,876 $13,099 $15,849 12/31/98 $11,563 $12,824 $19,224 3/31/99 $11,131 $12,205 $20,182 6/30/99 $12,365 $13,415 $21,605 9/30/99 $11,049 $12,332 $20,256 12/31/99 $11,024 $12,241 $23,269 3/31/2000 $11,297 $12,566 $23,803 6/30/2000 $12,662 $13,869 $23,171 9/30/2000 $13,630 $14,953 $22,946 12/31/2000 $14,202 $15,523 $21,151 3/31/2001 $14,093 $15,448 $18,643 6/30/2001 $15,674 $17,135 $19,734 9/30/2001 $15,023 $16,690 $16,838 12/31/2001 $15,581 $17,515 $18,637 3/31/2002 $16,998 $18,968 $18,688 6/30/2002 $17,699 $19,887 $16,184 9/30/2002 $15,966 $18,119 $13,388 12/31/2002 $15,920 $18,153 $14,518 2/28/2003 $15,637 $17,969 $13,926
AVERAGE ANNUAL TOTAL RETURN Since 1 Year 5 Year Inception 5/31/96 Class III -2.16% 1.26% 6.85%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- REAL ESTATE INVESTMENTS -- 95.4% COMMON STOCKS -- 1.0% LODGING -- 1.0% 59,500 Starwood Hotels and Resorts Worldwide Inc 1,345,295 ------------- TOTAL COMMON STOCKS (COST $1,382,247) 1,345,295 ------------- REAL ESTATE INVESTMENT TRUSTS -- 94.4% APARTMENTS -- 17.3% 25,600 Amli Residential Properties Trust 517,120 46,700 Apartment Investment & Management Co, Class A 1,717,159 207,100 Archstone-Smith Trust 4,566,555 21,300 Associated Estates Realty Corp 120,345 73,000 Avalonbay Communities Inc 2,679,830 59,900 BRE Properties Inc 1,791,010 25,500 Camden Property Trust 813,450 37,300 Cornerstone Realty Income Trust 267,814 245,600 Equity Residential Properties Trust 5,963,168 22,700 Essex Property Trust Inc 1,156,565 22,800 Gables Residential Trust 581,856 22,000 Home Properties of NY Inc 698,500 24,200 Investors Real Estate Trust 229,682 15,200 Mid America Apartment Community 354,312 49,400 Post Properties 1,153,984 36,500 Summit Properties Inc 647,875 19,000 Town & Country Trust 381,900 65,700 United Dominion Realty Trust Inc 1,022,949 ------------- 24,664,074 ------------- DIVERSIFIED -- 6.4% 19,300 Colonial Properties Trust 617,986 8,600 Corrections Corporation of America* 148,608 33,300 Cousins Properties Inc 821,844 62,000 Crescent Real Estate Equities 914,500 22,600 Glenborough Realty Trust Inc 366,120 15,400 Pennsylvania Real Estate 398,860 140,800 Vornado Realty Trust 4,928,000 36,900 Washington Realty Trust 926,559 ------------- 9,122,477 -------------
See accompanying notes to the financial statements. 1 GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- HEALTH CARE -- 4.8% 38,200 Health Care Inc 984,032 51,300 Health Care Property Investors Inc 1,813,455 44,700 Healthcare Realty Trust Inc 1,254,729 58,200 Nationwide Health Properties 754,272 84,400 Senior Housing Properties Trust 973,976 14,200 Universal Health Realty Income 374,312 59,200 Ventas Inc 710,400 ------------- 6,865,176 ------------- HOTELS -- 3.2% 11,700 Boykin Lodging Co 92,430 23,200 Equity Inns Inc 126,440 33,700 Felcor Lodging Trust Inc 231,519 80,300 Hospitality Properties Trust 2,453,968 143,800 Host Marriott Corp* 995,096 25,400 Innkeepers USA Trust 177,546 13,300 Lasalle Hotel Properties 160,930 27,100 Meristar Hospitality Corp 72,357 17,500 RFS Hotel Investors Inc 168,175 10,000 Winston Hotels Inc 71,800 ------------- 4,550,261 ------------- INDUSTRIAL -- 6.7% 68,400 AMB Property Corp 1,915,200 17,300 Centerpoint Properties Corp 976,239 13,200 Eastgroup Properties Inc 336,468 50,100 First Industrial Realty Trust 1,407,810 18,500 Keystone Property Trust 307,100 183,900 Prologis 4,557,042 ------------- 9,499,859 ------------- MANUFACTURED HOUSING -- 1.0% 18,400 Chateau Communities Inc 379,592 18,700 Manufactured Home Communities 543,048 15,500 Sun Communities Inc 542,500 ------------- 1,465,140 -------------
See accompanying notes to the financial statements. 2 GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- OFFICE CENTRAL BUSINESS DISTRICT -- 11.5% 91,900 Boston Properties Inc 3,418,680 489,400 Equity Office Properties Trust 12,004,982 24,100 SL Green Realty Corp 709,745 21,500 Trizec Properties Inc 185,115 ------------- 16,318,522 ------------- OFFICE SUBURBAN -- 13.2% 11,300 Alexandria Real Estate Equity Inc 469,515 50,300 Arden Realty Group Inc 1,116,660 21,200 Bedford Property Investors 538,692 32,200 Brandywine Realty Trust 662,354 35,200 CarrAmerica Realty Corp 859,232 12,200 Corporate Office Properties 171,166 126,700 Duke Realty Investments 3,287,865 19,300 Great Lakes Inc 301,080 55,800 Highwood Properties Inc 1,172,358 140,700 HRPT Properties Trust 1,197,357 24,700 Kilroy Realty Corp 541,918 27,300 Koger Equity Inc 422,604 91,900 Liberty Property Trust 2,869,118 72,700 Mack-Cali Realty Corp 2,101,030 18,600 Mission West Properties 172,980 10,300 Parkway Properties Inc 375,435 45,600 Prentiss Properties Trust 1,195,176 16,900 PS Business Parks Inc 530,660 41,100 Reckson Associates Realty Corp 828,987 ------------- 18,814,187 ------------- OUTLETS -- 1.0% 34,400 Chelsea Property Group Inc 1,216,384 6,800 Tanger Factory Outlet Centers Inc 204,340 ------------- 1,420,724 ------------- REGIONAL MALLS -- 12.3% 46,000 CBL & Associates Properties Inc 1,833,100 19,600 Crown American Realty Trust 187,768 80,000 General Growth Properties 4,181,600 24,200 Glimcher Realty Trust 456,654 40,500 Macerich Co 1,302,075
See accompanying notes to the financial statements. 3 GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- REGIONAL MALLS -- CONTINUED 43,500 Mills Corp 1,273,680 118,000 Simon Property Group Inc 4,087,520 28,500 Taubman Centers Inc 500,175 111,000 The Rouse Co 3,702,960 ------------- 17,525,532 ------------- SHOPPING CENTERS -- 10.9% 13,500 Acadia Realty Trust 105,570 54,500 Developers Diversified Realty Corp 1,269,850 52,100 Equity One Inc 768,475 33,300 Federal Realty Investment Trust 976,023 27,200 JDN Realty Corp 327,216 123,500 Kimco Realty Corp 4,161,950 12,700 Kramont Realty Trust 189,865 22,200 Mid Atlantic Realty Trust 383,394 84,100 New Plan Excel Realty Trust 1,636,586 33,700 Pan Pacific Retail Property Inc 1,267,120 7,100 Ramco-Gershenson Properties 149,597 58,800 Regency Centers Corp 1,891,596 14,300 Saul Centers Inc 321,893 7,300 Urstadt Biddle Properties Inc 80,300 48,900 Weingarten Realty 1,899,765 ------------- 15,429,200 ------------- STORAGE -- 3.0% 83,900 Public Storage Inc 2,768,700 31,900 Shurgard Storage Centers Inc 937,541 18,700 Sovran Self Storage 507,892 ------------- 4,214,133 ------------- TRIPLE NET -- 3.1% 30,600 Capital Automotive 762,858 45,300 Commercial Net Lease Realty 672,705 7,800 Correctional Properties Trust 163,956 22,300 Entertainment Properties Trust 553,040 23,500 Getty Realty Corp 450,025 35,000 Lexington Corporate Properties Trust 577,500 33,500 Realty Income Corp 1,161,110
4 See accompanying notes to the financial statements. GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- TRIPLE NET -- CONTINUED 6,600 U.S. Restaurant Properties Inc 93,258 ------------- 4,434,452 ------------- TOTAL REAL ESTATE INVESTMENT TRUSTS (COST $134,626,541) 134,323,737 ------------- TOTAL REAL ESTATE INVESTMENTS (COST $136,008,788) 135,669,032 ------------- SHORT-TERM INVESTMENTS -- 3.5% CASH EQUIVALENTS -- 2.2% 1,339,503 Dreyfus Money Market Fund(a) 1,339,503 $ 946,548 Harris Trust & Savings Bank Eurodollar Time Deposit, 1.26%, due 3/24/03(a) 946,548 780,903 Merrimac Money Market Fund(a) 780,903 ------------- 3,066,954 ------------- REPURCHASE AGREEMENT -- 1.3% $ 1,920,860 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/28/03, due 3/03/03, with a maturity value of $1,920,918 and an effective yield of 0.36%, collateralized by a U.S. Treasury Bond with a rate of 3.625%, maturity date of 3/31/04 and a market value, including accrued interest of $2,066,806. 1,920,860 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $4,987,814) 4,987,814 ------------- TOTAL INVESTMENTS -- 98.9% (Cost $140,996,602) 140,656,846 Other Assets and Liabilities (net) -- 1.1% 1,599,193 ------------- TOTAL NET ASSETS -- 100.0% $ 142,256,039 ============= NOTES TO THE SCHEDULE OF INVESTMENTS:
* Non-income producing security. (a) Represents investment of security lending collateral (Note 1). See accompanying notes to the financial statements. 5 GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value, including securities on loan of $2,975,212 (cost $140,996,602) (Note 1) $140,656,846 Receivable for investments sold 2,713,190 Receivable for Fund shares sold 3,704,134 Dividends and interest receivable 146,017 Receivable for expenses reimbursed by Manager (Note 2) 9,996 ------------ Total assets 147,230,183 ------------ LIABILITIES: Payable for investments purchased 1,743,438 Payable upon return of securities loaned (Note 1) 3,066,954 Payable for Fund shares repurchased 54,320 Payable to affiliate for (Note 2): Management fee 60,717 Shareholder service fee 16,866 Accrued expenses 31,849 ------------ Total liabilities 4,974,144 ------------ NET ASSETS $142,256,039 ============ NET ASSETS CONSIST OF: Paid-in capital $181,116,741 Accumulated undistributed net investment income 4,999,289 Accumulated net realized loss (43,520,235) Net unrealized depreciation (339,756) ------------ $142,256,039 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $142,256,039 ============ SHARES OUTSTANDING: Class III 13,558,518 ============ NET ASSET VALUE PER SHARE: Class III $ 10.49 ============
6 See accompanying notes to the financial statements. GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $4,917) $11,016,335 Interest (including securities lending income of $16,428) 104,167 ----------- Total income 11,120,502 ----------- EXPENSES: Management fee (Note 2) 1,162,513 Audit fees 38,480 Custodian and transfer agent fees 35,268 Legal fees 11,136 Trustees fees and related expenses (Note 2) 5,877 Registration fees 4,993 Miscellaneous 4,017 Fees reimbursed by Manager (Note 2) (92,965) ----------- 1,169,319 Shareholder service fee (Note 2) -- Class III 322,920 ----------- Net expenses 1,492,239 ----------- Net investment income 9,628,263 ----------- REALIZED AND UNREALIZED LOSS: Net realized loss on investments (15,461,070) ----------- Change in net unrealized appreciation (depreciation) on investments (3,555,069) ----------- Net realized and unrealized loss (19,016,139) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(9,387,876) ===========
See accompanying notes to the financial statements. 7 GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 9,628,263 $ 8,022,803 Net realized loss (15,461,070) (1,508,670) Change in net unrealized appreciation (depreciation) (3,555,069) 14,307,314 ------------ ------------ Net increase (decrease) in net assets from operations (9,387,876) 20,821,447 ------------ ------------ Distributions to shareholders from: Net investment income Class III (9,424,727) (7,471,215) ------------ ------------ Total distributions from net investment income (9,424,727) (7,471,215) ------------ ------------ Net share transactions (Note 5): Class III (31,537,654) 45,835,735 ------------ ------------ Increase (decrease) in net assets resulting from net share transactions (31,537,654) 45,835,735 ------------ ------------ Total increase (decrease) in net assets (50,350,257) 59,185,967 NET ASSETS: Beginning of period 192,606,296 133,420,329 ------------ ------------ End of period (including accumulated undistributed net investment income of $4,999,289 and $6,209,202, respectively) $142,256,039 $192,606,296 ============ ============
8 See accompanying notes to the financial statements. GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------------------------------ 2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- NET ASSET VALUE, BEGINNING OF PERIOD $ 11.17 $ 10.31 $ 8.26 $ 9.13 $ 12.92 -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.50+ 0.56+ 0.60 0.51+ 0.51+ Net realized and unrealized gain (loss) (0.71) 0.84 1.92 (0.87) (3.36) -------- -------- -------- -------- -------- Total from investment operations (0.21) 1.40 2.52 (0.36) (2.85) -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.47) (0.54) (0.47) (0.51) (0.19) From net realized gains -- -- -- -- (0.75) -------- -------- -------- -------- -------- Total distributions (0.47) (0.54) (0.47) (0.51) (0.94) -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 10.49 $ 11.17 $ 10.31 $ 8.26 $ 9.13 ======== ======== ======== ======== ======== TOTAL RETURN(a) (2.16)% 13.73% 30.86% (4.69)% (23.27)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $142,256 $192,606 $133,420 $120,508 $143,129 Net expenses to average daily net assets 0.69% 0.69% 0.69% 0.69% 0.69% Net investment income to average daily net assets 4.47% 5.18% 5.85% 5.64% 4.60% Portfolio turnover rate 61% 6% 11% 13% 59% Fees and expenses reimbursed by the Manager to average daily net assets: 0.04% 0.05% 0.05% 0.06% 0.26%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. + Computed using average shares outstanding throughout the period. See accompanying notes to the financial statements. 9 GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Real Estate Fund (the "Fund") (formerly GMO REIT Fund) is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in publicly traded real estate stocks with market capitalizations greater than $100 million, primarily real estate investment trusts ("REITs"). REITs are managed vehicles that invest in real estate, real estate-related assets and other real-estate related companies. The Fund's benchmark is the Morgan Stanley REIT Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. FUTURES CONTRACTS The Fund may purchase and sell futures contracts to manage its exposure to the financial markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. 10 GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of February 28, 2003, the Fund held no open futures contracts. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 2003, the Fund loaned securities having a market value of $2,975,212, collateralized by cash in the amount of $3,066,954, which was invested in short-term instruments. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute 11 GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country's tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003, the tax basis of distributions paid from ordinary income was $7,471,215 and $9,424,727, respectively. As of February 28, 2003, the components of distributable earnings on a tax basis consisted of $4,999,293 of undistributed ordinary income. At February 28, 2003, the Fund had capital loss carryforwards available to offset future capital gains, if any, to the extent permitted by the Code, of $4,376,897, $15,979,464, $3,875,337 and $323,175 expiring in 2007, 2008, 2009 and 2010, respectively. The Fund elected to defer to March 1, 2003 post-October losses of $16,318,633. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to the classifications of distributions from REIT securities. The financial highlights exclude these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain ----------------- ----------------- $(1,413,449) $1,413,449
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. 12 GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of return of capital is conclusively determined. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. INVESTMENT RISK There are certain additional risks involved in investing in REITs rather than a more diversified portfolio of investments. Since the Fund's investments are concentrated in real-estate related securities, the value of its shares can be expected to change in light of factors affecting the real estate industry, including local or regional economic conditions, changes in zoning laws, changes in real estate value and property taxes, and changes in interest rates. The value of the Fund's shares may fluctuate more widely than the value of shares of a portfolio that invests in a broader range of industries. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .54% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until at least June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent Trustees of the Trust (including legal fees), 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) exceed the management fee. 13 GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- As of February 28, 2003, substantially all of the Fund's shares were held by accounts for which the Manager has investment discretion. The Fund's portion of the fee paid by the Trust to the independent Trustees during the year ended February 28, 2003 was $4,376. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2003, aggregated $120,660,521 and $146,851,426, respectively. At February 28, 2003, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $143,643,331 $5,684,006 $(8,670,491) $(2,986,485)
4. PRINCIPAL SHAREHOLDER At February 28, 2003, 11.2% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 -------------------------- ------------------------ Shares Amount Shares Amount Class III: ----------- ------------- ---------- ------------ Shares sold 8,496,059 $ 98,980,288 5,244,492 $ 56,043,036 Shares issued to shareholders in reinvestment of distributions 608,527 6,861,914 451,024 4,887,978 Shares repurchased (12,782,580) (137,379,856) (1,401,885) (15,095,279) ----------- ------------- ---------- ------------ Net increase (decrease) (3,677,994) $ (31,537,654) 4,293,631 $ 45,835,735 =========== ============= ========== ============
14 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO REAL ESTATE FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Real Estate Fund (the "Fund") (formerly, GMO REIT Fund) (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 15 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 16 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the from February Boston, MA 02110 Trust 2002 - October Age: 64 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 17 PRINCIPAL OFFICERS:
Principal Occupation(s) Name, Address, Position(s) Term of Office(4) and Length During Past and Age Held with Fund of Time Served Five Years ------------------------- ------------------------------ ------------------------------ ------------------------------ Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief 40 Rowes Wharf Vice President from August Operating Officer (2000 - Boston, MA 02110 1998 - October 2002. present) and Member, Grantham, Age: 47 Mayo, Van Otterloo & Co. LLC. Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC. 40 Rowes Wharf February 1998. Boston, MA 02110 Age: 45 Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator, c/o GMO Trust Trust Grantham, Mayo, Van 40 Rowes Wharf Otterloo & Co. LLC. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer 40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003) Boston, MA 02110 and Member, Grantham, Mayo, Age: 37 Van Otterloo & Co. LLC. Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel, c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van 40 Rowes Wharf 2001. Otterloo & Co. LLC (June Boston, MA 02110 1999 - present); Associate/ Age: 58 Junior Partner, Hale and Dorr LLP (1991 - 1999). Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering c/o GMO Trust Laundering Compliance Officer Reporting Officer (February 40 Rowes Wharf 2003 - present) and Compliance Boston, MA 02110 Officer, Grantham, Mayo, Van Age: 32 Otterloo & Co. LLC.
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 18 GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Day-to-day management of the Fund's portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The GMO Short-Term Income Fund returned -4.9% for the fiscal year ended February 28, 2003, as compared with +1.6% for the Salomon Smith Barney 3-Month Treasury Bill Index. The Fund underperformed the benchmark during the fiscal year by 6.5%. Underperformance was attributable primarily to issue selection. The Fund's duration at fiscal year-end was 0.3 years. Issue selection dramatically hurt performance in late 2002. Major factors were the widening of credit-related spreads in the assets underlying the Fund's investment in the GMO Alpha LIBOR Fund (ALF) and the default of certain healthcare receivable asset-backed bonds held by ALF, which were allegedly involved in massive fraud. National Century Financial Enterprises, the sponsor of $3.35 billion of healthcare asset-backed receivables, allegedly violated the terms of the bonds' indentures by, among other things, spending cash collateral, accepting collateral other than permitted receivables, moving receivables between trusts to meet compliance tests, and reimbursing healthcare providers for more than the value of receivables purchases. National Century, its affiliated operations, the trusts, and many healthcare providers have declared bankruptcy. This had a negative effect on the net asset value of ALF, and an indirect effect on GMO Short-Term Income Fund of -7.0% (through February 28, 2003). At fiscal year-end, approximately 44% of the Fund was invested in highly-rated, floating rate, asset-backed securities, 18% in U.S. Treasury notes and cash, 8% in highly-rated corporate bonds, 18% in U.S. Government-backed bonds, and 12% in highly-rated collateralized bonds. The Fund's exposure to these assets is achieved directly, and indirectly through an investment in the GMO Alpha LIBOR Fund and, as of December 2002, the GMO Short-Duration Collateral Fund. OUTLOOK The Fund will continue to focus on high credit quality, but less liquid sectors of the U.S. bond market that offer attractive returns relative to the index. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO SHORT-TERM INCOME FUND AND THE SALOMON SMITH BARNEY 3 MONTH T-BILL INDEX AS OF FEBRUARY 28, 2003 GMO SHORT-TERM SALOMON SMITH BARNEY INCOME FUND 3 MONTH T-BILL INDEX 2/28/93 $10,000 $10,000 3/31/93 $10,040 $10,025 6/30/93 $10,141 $10,100 9/30/93 $10,253 $10,179 12/31/93 $10,334 $10,258 3/31/94 $10,387 $10,338 6/30/94 $10,408 $10,439 9/30/94 $10,495 $10,555 12/31/94 $10,499 $10,693 3/31/95 $10,814 $10,843 6/30/95 $11,100 $11,001 9/30/95 $11,298 $11,156 12/31/95 $11,546 $11,308 3/31/96 $11,653 $11,454 6/30/96 $11,774 $11,598 9/30/96 $11,972 $11,750 12/31/96 $12,169 $11,902 3/31/97 $12,320 $12,052 6/30/97 $12,523 $12,208 9/30/97 $12,728 $12,366 12/31/97 $12,912 $12,527 3/31/98 $13,099 $12,688 6/30/98 $13,258 $12,849 9/30/98 $13,471 $13,012 12/31/98 $13,491 $13,161 3/31/99 $13,661 $13,305 6/30/99 $13,828 $13,455 9/30/99 $14,002 $13,615 12/31/99 $14,178 $13,784 3/31/2000 $14,431 $13,969 6/30/2000 $14,663 $14,169 9/30/2000 $14,928 $14,380 12/31/2000 $15,227 $14,605 3/31/2001 $15,508 $14,809 6/30/2001 $15,740 $14,968 9/30/2001 $15,931 $15,104 12/31/2001 $15,987 $15,202 3/31/2002 $16,088 $15,269 6/30/2002 $16,278 $15,336 9/30/2002 $16,282 $15,402 12/31/2002 $15,248 $15,461 2/28/2003 $15,266 $15,492
AVERAGE ANNUAL TOTAL RETURN
1 YEAR 5 YEAR 10 YEAR Class III -4.91% 3.19% 4.32%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 13.0% U.S. GOVERNMENT -- 5.8% 2,757,850 U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09 3,174,975 ------------- U.S. GOVERNMENT AGENCY -- 7.2% 233,333 Agency for International Development Floater (Support of Botswana), Variable Rate, 6 mo. U.S. Treasury Bill + .40%, 1.60%, due 10/01/12 229,542 1,500,750 Agency for International Development Floater (Support of C.A.B.E.I.), Variable Rate, 6 mo. U.S. Treasury Bill + .40%, 1.60%, due 10/01/12 1,476,363 1,501,933 Agency for International Development Floater (Support of Honduras), Variable Rate, 3 mo. U.S. Treasury Bill x 1.17%, 1.41%, due 10/01/11 1,496,301 68,985 Agency for International Development Floater (Support of Peru), Series A, Variable Rate, 6 mo. U.S. Treasury Bill +.35%, 1.55%, due 05/01/14 68,553 710,104 Small Business Administration Pool #502320, Variable Rate, Prime - 2.18%, 2.06%, due 08/25/18 711,966 ------------- 3,982,725 ------------- TOTAL DEBT OBLIGATIONS (COST $7,039,737) 7,157,700 ------------- MUTUAL FUNDS -- 86.0% 450,459 GMO Alpha LIBOR Fund 10,684,880 1,475,588 GMO Short-Duration Collateral Fund 36,904,449 ------------- TOTAL MUTUAL FUNDS (COST $48,424,977) 47,589,329 ------------- TOTAL INVESTMENTS -- 99.0% (Cost $55,464,714) 54,747,029 Other Assets and Liabilities (net) -- 1.0% 568,568 ------------- TOTAL NET ASSETS -- 100.0% $ 55,315,597 =============
Variable rates - The rates shown on variable rate notes are the current interest rates at February 28, 2003, which are subject to change based on the terms of the security. See accompanying notes to the financial statements. 1 GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $55,464,714) (Note 1) $54,747,029 Cash 549,192 Interest receivable 43,064 Receivable for expenses reimbursed by Manager (Note 2) 5,320 ----------- Total assets 55,344,605 ----------- LIABILITIES: Payable to affiliate for (Note 2): Management fee 2,153 Shareholder service fee 6,459 Accrued expenses 20,396 ----------- Total liabilities 29,008 ----------- NET ASSETS $55,315,597 =========== NET ASSETS CONSIST OF: Paid-in capital $56,339,006 Accumulated net realized loss (305,724) Net unrealized depreciation (717,685) ----------- $55,315,597 =========== SHARES OUTSTANDING 6,373,567 =========== NET ASSET VALUE PER SHARE $ 8.68 ===========
2 See accompanying notes to the financial statements. GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends $ 335,940 Interest 250,518 ----------- Total income 586,458 ----------- EXPENSES: Management fee (Note 2) 27,078 Audit fees 23,467 Custodian and transfer agent fees 9,047 Registration fees 4,984 Legal fees 3,401 Trustees fees and related expenses (Note 2) 2,290 Miscellaneous 1,465 Fees reimbursed by Manager (Note 2) (41,455) ----------- 30,277 Shareholder service fee 81,237 ----------- Net expenses 111,514 ----------- Net investment income 474,944 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (3,634,344) Realized gains distributions from investment company shares 128,674 ----------- Net realized loss (3,505,670) ----------- Change in net unrealized appreciation (depreciation) on investments (405,617) ----------- Net realized and unrealized loss (3,911,287) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(3,436,343) ===========
See accompanying notes to the financial statements. 3 GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 474,944 $ 1,183,337 Net realized gain (loss) (3,505,670) 1,497,617 Change in net unrealized appreciation (depreciation) (405,617) (1,199,696) ------------ ------------ Net increase (decrease) in net assets from operations (3,436,343) 1,481,258 ------------ ------------ Distributions to shareholders from: Net investment income (2,325,404) (1,411,118) Net realized gains (786,056) (1,032,265) ------------ ------------ (3,111,460) (2,443,383) ------------ ------------ Fund share transactions: (Note 5) Proceeds from sale of shares 47,278,043 39,182,645 Net asset value of shares issued to shareholders in payment of distributions declared 3,079,622 2,340,365 Cost of shares repurchased (36,841,075) (32,719,050) ------------ ------------ Net increase in net assets resulting from Fund share transactions 13,516,590 8,803,960 ------------ ------------ Total increase in net assets 6,968,787 7,841,835 NET ASSETS: Beginning of period 48,346,810 40,504,975 ------------ ------------ End of period $ 55,315,597 $ 48,346,810 ============ ============
4 See accompanying notes to the financial statements. GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ----------------------------------------------------------- 2003 2002 2001 2000 1999 ------- ------- ------- ------- ------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.62 $ 9.92 $ 9.62 $ 9.63 $ 9.81 ------- ------- ------- ------- ------- Income from investment operations: Net investment income 0.08(b)+ 0.30(b)+ 0.42(b)+ 0.46(b)+ 0.57 Net realized and unrealized gain (loss) (0.54) 0.07 0.33 0.05 (0.16) ------- ------- ------- ------- ------- Total from investment operations (0.46) 0.37 0.75 0.51 0.41 ------- ------- ------- ------- ------- Less distributions to shareholders: From net investment income (0.33) (0.39) (0.44) (0.52) (0.59) From net realized gains (0.15) (0.28) (0.01) -- -- ------- ------- ------- ------- ------- Total distributions (0.48) (0.67) (0.45) (0.52) (0.59) ------- ------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 8.68 $ 9.62 $ 9.92 $ 9.62 $ 9.63 ======= ======= ======= ======= ======= TOTAL RETURN(a) (4.91)% 3.73% 7.91% 5.42% 4.29% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $55,316 $48,347 $40,505 $43,491 $53,387 Net expenses to average daily net assets 0.21%(c) 0.20%(c) 0.20%(c) 0.20%(c) 0.20% Net investment income to average daily net assets 0.88%(b) 3.04%(b) 4.30%(b) 4.82%(b) 5.50% Portfolio turnover rate 43% 91% 50% 178% 76% Fees and expenses reimbursed by the Manager to average daily net assets: 0.08% 0.12% 0.09% 0.08% 0.32%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) Net investment income for the years ended February 28, 2003, February 28, 2002, February 28, 2001 and February 28, 2000 is affected by the timing of the declaration of dividends by other GMO Funds in which the Fund invests. (c) Net expenses exclude expenses incurred indirectly through investment in underlying funds (See Note 1). + Computed using average shares outstanding throughout the period. See accompanying notes to the financial statements. 5 GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Short-Term Income Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund is not currently accepting purchase orders for Fund shares. The Fund seeks to provide current income to the extent consistent with the preservation of capital and liquidity through investment in a portfolio of high-quality fixed income instruments. The Fund's benchmark is the Salomon Smith Barney 3 Month T-Bill Index. At February 28, 2003, 19.3% of the Fund was invested in the GMO Alpha LIBOR Fund and 66.7% of the Fund was invested in the GMO Short-Duration Collateral Fund, separate funds of GMO Trust managed by GMO. Shares of the GMO Alpha LIBOR Fund and the GMO Short-Duration Collateral Fund are not publicly available for direct purchase. The financial statements of the GMO Alpha LIBOR Fund and the GMO Short-Duration Collateral Fund should be read in conjunction with the Fund's financial statements. The Fund invested a substantial portion of its assets in GMO Alpha LIBOR Fund ("Alpha LIBOR Fund") to obtain the Fund's core portfolio exposure. In November 2002, certain bonds held by Alpha LIBOR Fund ("NPF bonds") defaulted amid allegations of fraud and significant violations of the bonds' indentures. Currently, no market exists for the NPF bonds, and they are being valued at fair value by the trustees of GMO Trust or persons acting at their direction. The devaluation of the NPF bonds had a negative impact on the Fund's net asset value per share. In late November 2002, Alpha LIBOR Fund undertook a reorganization transaction with a new series of GMO Trust, GMO Short-Duration Collateral Fund ("SDCF") and approximately 78% of the Fund's interest in Alpha LIBOR Fund was transferred to SDCF in exchange for SDCF shares. The reorganization was treated as a sale of the Alpha LIBOR Fund shares for financial reporting purposes and a distribution by Alpha LIBOR Fund for tax purposes. Accordingly, for financial reporting purposes, the Fund recognized a loss on the sale of the Alpha LIBOR shares of approximately $3,428,863. In addition, the Fund recognized for tax, but not for financial reporting purposes, ordinary income of $1,852,605 and long-term capital gains of $330,430 from Alpha LIBOR Fund. $5,611,898 was added to the tax cost basis of the Fund's holdings of Alpha LIBOR Fund. 6 GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Shares of underlying funds are valued at their net asset value as reported on each business day. Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost, which approximates fair value. Securities for which quotations are not readily available or whose values the manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. Some fixed income securities are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and at its discretion may override a price supplied by a source (by taking a price supplied by another source). Securities may be valued by independent pricing services which use prices provided by market makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. Certain securities held by the Fund, or an underlying fund in which it invests, were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain 7 GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 2003, the Fund had no securities on loan. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country's tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. 8 GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from accounting principles generally accepted in the United States of America. For the years ended February 28, 2002 and February 28, 2003, the tax basis of distributions paid from ordinary income were $1,688,299 and $2,345,585, respectively. As of February 28, 2002 and February 28, 2003 the tax basis distributions paid from capital long term gains were $755,084 and $765,875, respectively. The Fund elected to defer to March 1, 2003 post-October losses of $104,643. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to the GMO Alpha LIBOR Fund transaction (Note 1). The financial highlights exclude these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain Paid-in Capital ----------------- ----------------- --------------- $1,850,460 $3,379,353 $(5,229,813)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and discounts. Dividend income is recognized on the ex-dividend date. Non cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Interest income on U.S. Treasury inflation indexed securities is accrued daily based upon the inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities adjusted for inflation is recorded as interest income. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. 9 GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .05% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of the Fund at the annual rate of .15%. GMO has entered into a binding agreement effective until at least June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent Trustees of the Trust (including legal fees), 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) exceed the management fee. The Fund incurs fees and expenses indirectly as a shareholder in GMO Alpha LIBOR Fund and GMO Short-Duration Collateral Fund. For the year ended February 28, 2003, indirect operating expenses (excluding investment-related expenses) were 0.004% of the Fund's average daily net assets, and indirect investment-related expenses (including, but not limited to, interest expense, foreign audit expense, and investment-related legal expense) were 0.025% of the Fund's average daily net assets. As of February 28, 2003, greater than 10% of the Fund's shares were held by accounts for which the Manager has investment discretion. The Fund's portion of the fee paid by the Trust to the independent Trustees during the year ended February 28, 2003 was $1,933. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES For the year ended February 28, 2003, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases Sales ----------- ----------- U.S. Government securities $ -- $ 500,183 Investments (non-U.S. Government securities) 35,364,613 22,987,000
10 GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- For the year ended February 28 , 2003, the cost of purchases and proceeds from sales of investments excluded $42,026,098 and $43,142,553, respectively, from the initial transfer of GMO Alpha LIBOR Fund's investments in GMO Short-Duration Collateral Fund. (See Note 1) At February 28, 2003, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $60,894,744 $ -- $(6,147,715) $(6,147,715)
4. PRINCIPAL SHAREHOLDERS At February 28, 2003, 58.8% of the outstanding shares of the Fund were held by four shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 ----------------- ----------------- Shares sold 4,944,849 4,058,239 Shares issued to shareholders in reinvestment of distributions 344,459 240,652 Shares repurchased (3,940,125) (3,358,895) -------------- -------------- Net increase 1,349,183 939,996 Fund shares: Beginning of period 5,024,384 4,084,388 -------------- -------------- End of period 6,373,567 5,024,384 ============== ==============
11 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO SHORT-TERM INCOME FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Short-Term Income Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 12 GMO SHORT-TERM INCOME FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- For the fiscal year ended February 28, 2003, all of the Fund's distributions are from investment company taxable income, except that the Fund has designated 30.90% of the distributions as net capital gain dividends. 13 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 14 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the from February Boston, MA 02110 Trust 2002 - October Age: 64 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 15 PRINCIPAL OFFICERS:
Term of Office(4) and Principal Occupation(s) Name, Address, Position(s) Length of During Past and Age Held with Fund Time Served Five Years ------------------------- ------------------------------ ------------------------------ ------------------------------ Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief 40 Rowes Wharf Vice President from August Operating Officer (2000 - Boston, MA 02110 1998 - October 2002. present) and Member, Grantham, Age: 47 Mayo, Van Otterloo & Co. LLC. Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC. 40 Rowes Wharf February 1998. Boston, MA 02110 Age: 45 Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator, c/o GMO Trust Trust Grantham, Mayo, Van 40 Rowes Wharf Otterloo & Co. LLC. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti-Money c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer 40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003) Boston, MA 02110 and Member, Grantham, Mayo, Age: 37 Van Otterloo & Co. LLC. Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel, c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van 40 Rowes Wharf 2001. Otterloo & Co. LLC (June Boston, MA 02110 1999 - present); Associate/ Age: 58 Junior Partner, Hale and Dorr LLP (1991 - 1999). Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering c/o GMO Trust Laundering Compliance Officer Reporting Officer (February 40 Rowes Wharf 2003 - present) and Compliance Boston, MA 02110 Officer, Grantham, Mayo, Van Age: 32 Otterloo & Co. LLC.
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 16 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Day-to-day management of the Fund's portfolio is the responsibility of the U.S. Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Small Cap Growth Fund returned -18.0% for the fiscal year ended February 28, 2003 as compared to -24.6% for the Russell 2500 Growth Index (the "Index") and -22.7% for the S&P 500 Index. Consistent with the Fund's investment objectives and policies, the Fund was primarily invested in common stocks throughout the period. For the fiscal year, small capitalization growth stocks outperformed large cap growth stocks by 1%, but underperformed small cap value stocks by 8%. Producer durables and technology were the weakest performing sectors in the Index, falling 33% and 35%, respectively, for the period. The top performing sectors in the Russell 2500 Growth Index were energy, consumer staples and financial services. Both stock and sector selection contributed to the Fund's outperformance over the benchmark for the period. The Fund's underweight position in the producer durable sector and overweight position in the consumer discretionary sector added the most value relative to the benchmark. Underweight positions in the weak performing healthcare and technology sectors also contributed to relative performance. Strong stock selection among healthcare, consumer discretionary, producer durables and energy stocks accounted for nearly all of the Fund's value-added over the benchmark. The Fund incorporates three investment disciplines in the portfolio: price momentum and estimate revision momentum, each of which has a 40% weight; and price to intrinsic value, which has a 20% weight. All three of these disciplines added value this year, with the bulk of that coming from estimate revision momentum. OUTLOOK We believe that the portfolio is well positioned to continue to add value relative to the benchmark. Currently, the equities in the Small Cap Growth portfolio are trading at a discount, measured by the price to earnings ratio, relative to the benchmark. The portfolio currently maintains underweight positions in the technology, healthcare, and financial services sectors and an overweight position in the consumer discretionary sector. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO SMALL CAP GROWTH FUND CLASS III SHARES AND THE RUSSELL 2500 GROWTH INDEX AS OF FEBRUARY 28, 2003 GMO SMALL CAP RUSSELL 2500 GROWTH FUND GROWTH INDEX Dec 31, 96 $9,950 $10,000 Mar 31, 97 $9,502 $9,200 Jun 30, 97 $11,207 $10,695 Sep 30, 97 $13,388 $12,474 Dec 31, 97 $12,407 $11,476 Mar 31, 98 $13,983 $12,755 Jun 30, 98 $13,756 $12,132 Sep 30, 98 $10,718 $9,438 Dec 31, 98 $13,125 $11,831 Mar 31, 99 $12,381 $11,707 Jun 30, 99 $13,791 $13,674 Sep 30, 99 $13,477 $13,200 Dec 31, 99 $17,113 $18,395 Mar 31, 2000 $19,543 $21,182 Jun 30, 2000 $18,389 $19,718 Sep 30, 2000 $18,403 $19,139 Dec 31, 2000 $15,340 $15,436 Mar 31, 2001 $12,437 $12,362 Jun 30, 2001 $14,658 $14,995 Sep 30, 2001 $11,049 $10,932 Dec 31, 2001 $13,304 $13,763 Mar 31, 2002 $13,826 $13,357 Jun 30, 2002 $12,338 $11,136 Sep 30, 2002 $10,266 $9,013 Dec 31, 2002 $10,960 $9,759 Feb 28, 2003 $10,479 $9,323
AVERAGE ANNUAL TOTAL RETURN SINCE INCEPTION 1 YEAR 5 YEAR DEC 31, 96 Class III -18.78% -4.83% 0.76%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 50 bp on the purchase and 50 bp on the redemption. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- COMMON STOCKS -- 97.7% AUTO & TRANSPORTATION -- 3.3% 1,600 Airborne Inc 22,464 2,400 American Axle & Manufacturing Holdings Inc* 56,760 4,000 Atlantic Coast Airlines Holdings* 25,200 3,000 Coachmen Industries Inc 32,700 3,600 Egl, Inc* 45,432 3,500 Gentex Corp* 94,080 2,300 JetBlue Airways Corp* 60,628 1,000 Landstar System Inc* 54,190 1,000 Polaris Industries Inc 48,400 1,500 Superior Industries International Inc 58,110 900 Thor Industries Inc 23,121 2,200 Tidewater Inc 67,364 ------------- 588,449 ------------- CONSUMER DISCRETIONARY -- 30.5% 2,200 Abercrombie & Fitch Co, Class A* 60,500 1,600 Action Performance Cos Inc 26,400 4,200 Activision Inc* 62,580 2,500 Advance Auto Parts* 97,550 3,000 American Eagle Outfitters Inc* 43,410 1,000 American Woodmark Corp 39,500 4,050 Applebees International Inc 103,842 2,600 Bally Total Fitness Holdings Corp* 14,820 1,900 Bebe Stores Inc* 26,277 920 Benihana Inc* 10,120 7,500 Big Lots Inc* 82,875 4,100 Blyth Industries Inc 101,885 1,800 Bob Evans Farms Inc 42,120 6,600 Boyd Gaming Corp* 82,566 3,200 Callaway Golf Co 36,736 3,800 Career Education Corp* 176,700 2,800 Catalina Marketing Corp* 50,680 1,500 CDW Computer Centers Inc* 65,490 800 Central Garden and Pet Co* 18,320 5,650 Chicos FAS Inc* 102,095 2,700 Children's Place Retail Stores Inc* 25,569 2,300 Choice Hotels International Inc* 54,280 6,000 Claire's Stores Inc 136,920
See accompanying notes to the financial statements. 1 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- CONSUMER DISCRETIONARY -- CONTINUED 5,900 Coach Inc* 210,807 3,100 Columbia Sportswear Co* 110,825 5,700 Corinthian Colleges Inc* 213,636 2,000 Corrections Corporation of America, REIT* 34,560 2,400 Cost Plus Inc* 55,800 4,000 Dillard's Inc, Class A 55,800 2,000 Dollar Tree Stores Inc* 41,300 3,200 Dover Motorsports Inc 11,520 3,500 Fisher Scientific International Inc* 100,555 3,400 Fossil Inc* 61,132 2,100 Fred's Inc 51,198 1,500 FTI Consulting Inc* 64,500 4,800 G TECH Holdings Corp* 139,680 1,300 Genesco Inc* 17,745 3,400 Getty Images Inc* 99,790 2,600 Gymboree Corp* 33,488 4,500 Hollywood Entertainment Corp* 63,270 3,600 Isle of Capri Casinos Inc* 42,660 3,500 ITT Educational Services Inc* 94,325 2,800 J Jill Group Inc* 28,896 2,300 Jack in the Box Inc* 37,973 600 Jarden Corp* 16,086 1,300 Kenneth Cole Productions, Class A* 29,445 1,200 Maytag Corp 28,920 2,500 Michaels Stores Inc* 58,750 3,100 Movie Gallery Inc* 47,123 8,500 MPS Group Inc* 41,735 3,063 Nautilus Group Inc 44,958 4,400 Oakley Inc* 35,156 1,700 Outback Steakhouse Inc 54,740 2,800 Overture Services Inc* 44,576 4,650 Pacific Sunwear of California* 82,352 1,700 Papa Johns International Inc* 40,409 1,000 Payless ShoeSource Inc* 46,610 7,300 Petsmart Inc* 109,135 5,800 Pier 1 Imports Inc 92,626 2,300 Pixar Inc* 124,177 2,900 QRS Corp* 16,646 2,500 Quiksilver Inc* 62,750 4,000 Reader's Digest Association 43,240
2 See accompanying notes to the financial statements. GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- CONSUMER DISCRETIONARY -- CONTINUED 4,000 Reebok International Ltd* 125,000 3,800 Regis Corp 88,464 3,200 Rent-A-Center Inc* 159,840 6,100 Ross Stores Inc 208,681 4,000 Saks Inc* 30,760 2,700 Sharper Image Corp* 41,580 3,700 Sinclair Broadcast Group, Class A* 32,338 3,700 Skechers U.S.A. Inc* 21,756 2,400 Sonic Automotive Inc* 36,528 1,600 Steven Madden Ltd* 27,120 5,000 Take-Two Interactive Software* 104,550 6,200 TeleTech Holdings Inc* 31,682 2,500 Timberland Co* 96,000 3,700 Topps Inc (The)* 29,859 1,800 Tractor Supply Co* 59,526 7,400 United Online Inc* 105,524 1,900 United Stationers Inc* 39,501 2,200 Urban Outfitters Inc* 41,646 1,700 Waste Connections Inc* 56,576 ------------- 5,387,060 ------------- CONSUMER STAPLES -- 3.0% 2,900 Constellation Brands Inc, Class A* 71,427 1,500 Coors (Adolph) Co, Class B 72,150 2,400 Dole Food Co 78,720 1,700 Natures Sunshine Products Inc 14,333 3,400 NBTY Inc* 60,792 6,100 The Dial Corp 110,959 2,400 Whole Foods Market Inc* 122,568 ------------- 530,949 ------------- FINANCIAL SERVICES -- 10.7% 9,800 Checkfree Corp* 205,604 3,400 Commerce Bancorp Inc 140,488 5,500 CompuCredit Corp* 28,600 4,400 Doral Financial Corp 142,604 4,500 Espeed Inc* 46,440 1,900 Factset Research Systems Inc 48,621 6,000 Fidelity National Financial Inc 196,980
See accompanying notes to the financial statements. 3 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- FINANCIAL SERVICES -- CONTINUED 3,300 First American Financial Corp 76,230 2,200 First Midwest Bancorp Inc 57,464 2,800 General Growth Properties, REIT 146,356 1,500 Greater Bay Bancorp 24,015 1,800 Irwin Financial Corp 32,580 900 McGrath Rentcorp 20,340 3,300 New Century Financial Corp 87,879 4,112 New York Community Bancorp Inc 117,644 1,800 Nuveen Investments Inc 40,086 25,300 Providian Financial Corp* 154,330 2,600 Roslyn Bancorp Inc 51,792 2,100 Sandy Spring Bancorp Inc 67,956 1,000 Silicon Valley Bancshares* 17,350 1,300 Southwest Bancorporation of Texas Inc* 41,106 1,000 Triad Guaranty Inc* 33,410 2,500 UCBH Holdings Inc 105,250 ------------- 1,883,125 ------------- HEALTH CARE -- 17.5% 2,400 Accredo Health Inc* 57,000 2,200 AdvancePCS* 61,446 3,700 Allos Therapeutics Inc* 16,280 2,500 American Medical Systems Holdings Inc* 40,400 4,000 American Pharmaceutical Partners Inc* 73,200 5,800 Amylin Pharmaceuticals Inc* 88,972 2,300 Aspect Medical Systems Inc* 10,511 3,400 AVI BioPharma Inc* 10,744 1,800 Biosite Inc* 56,286 900 Centene Corp* 22,950 2,300 Cerner Corp* 76,406 3,900 Charles River Laboratories International Inc* 116,649 2,300 Chattem Inc* 35,696 2,200 Cooper (The) Companies Inc 63,910 2,800 Covance Inc* 65,940 5,000 Coventry Health Care Inc* 141,650 2,200 Curative Health Services Inc* 36,828 2,200 Cyberonics* 37,400 3,900 DaVita Inc* 80,925 2,600 Hanger Orthopedic Group Inc* 27,118 1,400 Health Net Inc* 35,154
4 See accompanying notes to the financial statements. GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- HEALTH CARE -- CONTINUED 1,700 Henry Schein Inc* 68,000 2,300 Hologic Inc* 16,629 500 ICN Pharmaceuticals Inc 4,810 1,300 Idexx Laboratories Inc* 47,398 2,900 Immucor Inc* 57,217 1,500 LabOne Inc* 29,460 5,900 Lincare Holdings Inc* 176,410 3,800 Mentor Corp 66,044 4,200 MGI Pharma Inc* 42,084 5,000 Mid Atlantic Medical Services Inc* 178,750 1,700 Odyssey HealthCare Inc* 39,287 1,400 Patterson Dental Co* 61,614 1,300 Pediatrix Medical Group Inc* 36,725 3,600 Pharmaceutical Product Development Inc* 112,932 2,800 Pharmaceutical Resources Inc* 104,860 1,400 PolyMedica Corp 40,866 1,200 Renal Care Group Inc* 35,124 2,200 Scios Inc* 96,008 2,500 Stericycle Inc* 88,575 5,900 Steris Corp* 148,975 3,200 United Surgical Partners International Inc* 58,752 3,000 Universal Health Services, Class B* 116,520 4,200 Varian Medical Systems Inc* 212,310 4,500 VitalWorks Inc* 17,280 2,700 Watson Pharmaceutical Inc* 83,511 ------------- 3,095,606 ------------- MATERIALS & PROCESSING -- 2.9% 14,900 Crown Holdings Inc* 85,228 6,600 Energizer Holdings Inc* 175,230 1,000 MeadWestvaco Corp 23,190 3,200 Owens Illinois Inc* 28,800 2,300 Phelps Dodge Corp* 82,708 1,900 Royal Gold Inc 36,955 1,300 Sealed Air Corp* 47,151 800 Trex Company Inc* 26,000 ------------- 505,262 -------------
See accompanying notes to the financial statements. 5 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- OTHER -- 0.5% 1,800 FMC Corp* 27,954 1,700 Lancaster Colony Corp 64,566 ------------- 92,520 ------------- OTHER ENERGY -- 8.3% 6,900 Chesapeake Energy Corp 56,028 1,700 Clayton Williams Energy Inc* 21,573 3,800 Cooper Cameron Corp* 197,600 5,200 Denbury Resources Inc* 59,696 3,300 Helmerich & Payne Inc 90,750 4,000 National-Oilwell Inc* 90,000 1,750 Patina Oil & Gas Corp 58,240 2,900 Patterson-UTI Energy Inc* 96,106 5,000 Pioneer Natural Resources Co* 130,750 4,100 Pogo Producing Co 162,975 6,900 Pride International Inc* 100,050 4,600 Rowan Cos Inc 90,298 1,100 Stone Energy Corp* 37,675 4,800 Varco International Inc* 91,008 3,800 Vintage Petroleum Inc 37,810 6,000 XTO Energy Inc 151,260 ------------- 1,471,819 ------------- PRODUCER DURABLES -- 5.7% 5,800 American Power Conversion Corp* 90,712 2,300 Ametek Inc 75,854 4,300 Asyst Technologies Inc* 27,821 2,100 Cohu Inc 31,395 1,200 Engineered Support Systems 43,332 3,200 Hovnanian Enterprises Inc* 105,056 4,500 Interdigital Communications Corp* 64,710 2,300 KB HOME 107,870 1,300 Manitowoc Co Inc 23,621 1,300 Meritage Corporation* 41,080 500 NVR Inc* 165,975 2,800 Plantronics Inc* 40,348 1,700 Pulte Corp 86,411 2,200 Rayovac Corp.* 26,950 3,500 Somera Communications Inc* 3,780
6 See accompanying notes to the financial statements. GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- PRODUCER DURABLES -- CONTINUED 2,400 Standard Pacific Corp 61,848 4,600 Trident Microsystems Inc* 15,962 ------------- 1,012,725 ------------- TECHNOLOGY -- 13.2% 5,800 Acxiom Corp* 88,508 8,800 Adaptec Inc* 53,592 2,300 Adtran Inc* 74,037 2,500 American Management Systems Inc* 26,500 700 Analogic Corp 31,801 3,000 Autodesk Inc 43,470 3,200 Benchmark Electronics Inc* 111,488 1,400 Black Box Corp 56,924 6,500 Ceridian Corp* 89,700 6,300 Ciber Inc* 34,020 13,000 Ciena Corp* 70,460 7,100 Citrix Systems Inc* 85,200 1,700 Cognizant Technology Solutions Corp* 119,340 6,600 Cray Inc* 56,298 4,900 Cree Inc* 83,398 3,900 Digital River Inc* 35,022 11,900 Foundry Networks Inc* 105,553 3,200 Imation Corp* 115,200 2,100 Invision Technologies Inc* 45,927 2,200 j2 Global Communications Inc* 52,558 3,900 Mercury Interactive Corp* 126,555 5,500 NetScreen Technologies Inc* 107,415 3,300 Newport Corp* 40,425 3,400 Omnivision Technologies* 64,600 8,900 Pinnacle Systems Inc* 86,419 4,500 Quadramed Corp* 1,890 4,400 Rambus Inc* 66,792 6,000 Sandisk Corp* 100,080 6,300 ScanSoft Inc* 28,350 5,600 Silicon Laboratories Inc* 151,872 1,100 Siliconix Inc* 24,641 2,100 SPSS Inc* 22,890 2,000 Supertex Inc* 29,480 4,600 Syntel Inc* 87,170
See accompanying notes to the financial statements. 7 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- TECHNOLOGY -- CONTINUED 7,200 Zomax Inc* 24,264 ------------- 2,341,839 ------------- UTILITIES -- 2.1% 1,600 Commonwealth Telephone Enterprises Inc* 60,416 1,800 Edison International* 22,248 700 Energen Corp 21,294 2,200 IDT Corp* 34,210 37,200 Level 3 Communications Inc* 183,768 1,000 UGI Corp 41,400 ------------- 363,336 ------------- TOTAL COMMON STOCKS (COST $17,562,832) 17,272,690 ------------- RIGHTS AND WARRANTS -- 0.1% CONSUMER DISCRETIONARY -- 0.1% 403 Expedia Inc Warrants, Expires 2/04/09* 14,911 ------------- HEALTH CARE -- 0.0% 2,800 Endo Pharmaceutical Warrants, Expires 3/31/03* 112 ------------- TOTAL RIGHTS AND WARRANTS (COST $16,346) 15,023 ------------- SHORT-TERM INVESTMENTS -- 14.9% CASH EQUIVALENTS -- 12.1% 935,290 Dreyfus Money Market Fund(a) 935,290 $ 660,915 Harris Trust & Savings Bank Eurodollar Time Deposit, 1.26%, due 3/24/03(a) 660,915 545,254 Merrimac Money Market Fund(a) 545,254 ------------- 2,141,459 ------------- U.S. GOVERNMENT -- 0.6% $ 100,000 U.S. Treasury Bill, 1.14%, due 4/24/03(b) 99,816 -------------
See accompanying notes to the financial statements. 8 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- REPURCHASE AGREEMENT -- 2.2% $ 387,035 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/28/03, due 3/3/03, with a maturity value of $387,047 and an effective yield of 0.36%, collateralized by a U.S. Treasury Note with a rate of 3.625%, maturity date of 3/31/04 and a market value, including accrued interest of $416,441. 387,035 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $2,628,310) 2,628,310 ------------- TOTAL INVESTMENTS -- 112.7% (Cost $20,207,488) 19,916,023 Other Assets and Liabilities (net) -- (12.7%) (2,247,250) ------------- TOTAL NET ASSETS -- 100.0% $ 17,668,773 ============= NOTES TO THE SCHEDULE OF INVESTMENTS:
REIT - Real Estate Investment Trust * Non-income producing security. (a) Represents investment of security lending collateral (Note 1). (b) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 6). See accompanying notes to the financial statements. 9 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value, including securities on loan of $2,052,649 (cost $20,207,488) (Note 1) $19,916,023 Receivable for investments sold 1,096,423 Dividends and interest receivable 5,079 Receivable for expenses reimbursed by Manager (Note 2) 4,536 ----------- Total assets 21,022,061 ----------- LIABILITIES: Payable for investments purchased 1,173,742 Payable upon return of securities loaned (Note 1) 2,141,459 Payable to affiliate for (Note 2): Management fee 4,276 Shareholder service fee 1,944 Payable for variation margin on open futures contracts (Notes 1 and 6) 1,261 Accrued expenses 30,606 ----------- Total liabilities 3,353,288 ----------- NET ASSETS $17,668,773 =========== NET ASSETS CONSIST OF: Paid-in capital $23,653,269 Accumulated net realized loss (5,691,770) Net unrealized depreciation (292,726) ----------- $17,668,773 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $17,668,773 =========== SHARES OUTSTANDING: Class III 1,306,561 =========== NET ASSET VALUE PER SHARE: Class III $ 13.52 ===========
10 See accompanying notes to the financial statements. GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $196) $ 54,929 Interest (including securities lending income of $7,573) 12,672 ----------- Total income 67,601 ----------- EXPENSES: Management fee (Note 2) 51,709 Audit fees 33,860 Custodian and transfer agent fees 20,378 Registration fees 1,764 Trustees fees and related expenses (Note 2) 1,164 Legal fees 284 Miscellaneous 1,099 Fees reimbursed by Manager (Note 2) (57,285) ----------- 52,973 Shareholder service fee (Note 2) - Class III 23,504 ----------- Net expenses 76,477 ----------- Net investment loss (8,876) ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized loss on: Investments (1,441,976) Closed futures contracts (36,321) ----------- Net realized loss (1,478,297) ----------- Change in net unrealized appreciation (depreciation) on: Investments (1,391,464) Open futures contracts 11,582 ----------- Net unrealized loss (1,379,882) ----------- Net realized and unrealized loss (2,858,179) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(2,867,055) ===========
See accompanying notes to the financial statements. 11 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income (loss) $ (8,876) $ 13,089 Net realized loss (1,478,297) (4,129,648) Change in net unrealized appreciation (depreciation) (1,379,882) 2,747,114 ----------- ----------- Net decrease in net assets from operations (2,867,055) (1,369,445) ----------- ----------- Distributions to shareholders from: Net investment income Class III -- (12,318) ----------- ----------- Total distributions from net investment income -- (12,318) ----------- ----------- Net realized gains Class III -- (1,633,992) ----------- ----------- Total distributions from net realized gains -- (1,633,992) ----------- ----------- -- (1,646,310) ----------- ----------- Net share transactions (Note 5): Class III 3,486,588 108,455 ----------- ----------- Increase in net assets resulting from net share transactions 3,486,588 108,455 ----------- ----------- Total increase (decrease) in net assets 619,533 (2,907,300) NET ASSETS: Beginning of period 17,049,240 19,956,540 ----------- ----------- End of period $17,668,773 $17,049,240 =========== ===========
12 See accompanying notes to the financial statements. GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ---------------------------------------------------------------- 2003 2002 2001++ 2000++ 1999++ ------- ------- -------------- -------------- -------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 16.48 $ 19.08 $ 168.70 $ 108.80 $ 122.80 ------- ------- -------- -------- -------- Income from investment operations: Net investment income (loss) (0.01)+ 0.01+ (0.04) 0.10 0.30 Net realized and unrealized gain (loss) (2.95) (1.12) (37.26) 70.20 (9.80) ------- ------- -------- -------- -------- Total from investment operations (2.96) (1.11) (37.30) 70.30 (9.50) ------- ------- -------- -------- -------- Less distributions to shareholders: From net investment income -- -- -- (0.30) (0.20) From net realized gains -- (1.49) (112.32) (10.10) (4.30) ------- ------- -------- -------- -------- Total distributions -- (1.49) (112.32) (10.40) (4.50) ------- ------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 13.52 $ 16.48 $ 19.08 $ 168.70 $ 108.80 ======= ======= ======== ======== ======== TOTAL RETURN(a) (17.96)% (6.36)% (33.14)% 67.27% (8.20)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $17,669 $17,049 $ 19,957 $137,290 $129,983 Net expenses to average daily net assets 0.49% 0.48% 0.48% 0.48% 0.48% Net investment income (loss) to average daily net assets (0.06)% 0.07% (0.09)% 0.09% 0.21% Portfolio turnover rate 116% 118% 147% 122% 113% Fees and expenses reimbursed by the Manager to average daily net assets: 0.37% 0.33% 0.19% 0.11% 0.23% Purchase and redemption fees consisted of the following per share amounts:(b) $ 0.03 $ 0.02 $ 0.87 N/A N/A
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. Calculation excludes purchase premiums and redemption fees. (b) Effective March 1, 2000, the Fund adopted the provisions of the revised AICPA Audit and Accounting Guide for Investment Companies which requires the disclosure of the per share effect of purchase and redemption fees. Periods prior to March 1, 2000 have not been restated to reflect this change. Amounts calculated using average shares outstanding throughout the period. + Calculated using average shares outstanding throughout the period. ++ Amounts were adjusted to reflect a 1:10 reverse stock split effective December 11, 2000. See accompanying notes to the financial statements. 13 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Small Cap Growth Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks long-term growth of capital. The Fund's benchmark is the Russell 2500 Growth Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. FUTURES CONTRACTS The Fund may purchase and sell futures contracts to manage its exposure to the financial markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. In 14 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 28, 2003. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the financial markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of February 28, 2003, there were no open swap agreements. 15 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 2003, the Fund loaned securities having a market value of $2,052,649 collateralized by cash in the amount of $2,141,459, which was invested in short-term instruments. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country's tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003, the tax basis of distributions paid was as follows: ordinary income -- $379,334 and $0, respectively and long-term capital gains -- $1,266,976 and $0, respectively. 16 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- At February 28, 2003, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code, of $3,602,582 expiring in 2010 and $1,513,997 expiring in 2011. The Fund elected to defer to March 1, 2003 post-October losses of $511,521. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus U.S. GAAP. The financial highlights exclude these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain Paid-in Capital ----------------- ----------------- --------------- $8,876 $1,062 $(9,938)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases and fee on redemptions of Fund shares is .50% of the amount invested or redeemed. If the Manager determines that any portion of a cash purchase is offset by a corresponding cash redemption occurring on the same day, the purchase premium or redemption fee charged by the Fund will be reduced by 100% with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived if the Manager determines the Fund 17 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- is substantially underweighted/overweighted in cash so that a purchase or redemption will not require a securities transaction. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the years ended February 28, 2002 and February 28, 2003, the Fund received $8,071 and $25,921 in purchase premiums and $15,820 and $8,521 in redemption fees, respectively. There is no premium for reinvested distributions or in-kind transactions. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until at least June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent Trustees of the Trust (including legal fees), 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) exceed the management fee. As of February 28, 2003, substantially all of the Fund's shares were held by accounts for which the Manager has investment discretion. The Fund's portion of the fee paid by the Trust to the independent Trustees during the year ended February 28, 2003 was $1,081. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2003, aggregated $21,726,854 and $17,670,494, respectively. At February 28, 2003, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $20,272,418 $1,366,350 $(1,722,745) $(356,395)
18 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 4. PRINCIPAL SHAREHOLDERS At February 28, 2003, 60.4% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 ----------------------- ----------------------- Shares Amount Shares Amount Class III: -------- ----------- -------- ----------- Shares sold 373,781 $ 5,184,289 99,465 $ 1,677,783 Shares issued to shareholders in reinvestment of distributions -- -- 92,295 1,644,603 Shares repurchased (101,766) (1,697,701) (203,137) (3,213,931) -------- ----------- -------- ----------- Net increase (decrease) 272,015 $ 3,486,588 (11,377) $ 108,455 ======== =========== ======== ===========
6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 28, 2003 is as follows: FINANCIAL FUTURES
Number of Contract Net Unrealized Contracts Type Expiration Date Value Depreciation --------------------- ---------------------- ---------------------- -------- -------------- Buys 1 Russell 2000 March 2003 $180,250 $(1,261) =======
At February 28, 2003, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. 19 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO SMALL CAP GROWTH FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Small Cap Growth Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 20 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 21 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the from February Boston, MA 02110 Trust 2002 - October Age: 64 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 22 PRINCIPAL OFFICERS:
Principal Occupation(s) Name, Address, Position(s) Term of Office(4) and Length During Past and Age Held with Fund of Time Served Five Years ------------------------- ------------------------------ ------------------------------ ------------------------------ Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief 40 Rowes Wharf Vice President from August Operating Officer (2000 - Boston, MA 02110 1998 - October 2002. present) and Member, Grantham, Age: 47 Mayo, Van Otterloo & Co. LLC. Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC. 40 Rowes Wharf February 1998. Boston, MA 02110 Age: 45 Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator, c/o GMO Trust Trust Grantham, Mayo, Van 40 Rowes Wharf Otterloo & Co. LLC. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer 40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003) Boston, MA 02110 and Member, Grantham, Mayo, Age: 37 Van Otterloo & Co. LLC. Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since Associate General Counsel, c/o GMO Trust of the Trust August 1999; Secretary since Grantham, Mayo, Van 40 Rowes Wharf March 2001. Otterloo & Co. LLC Boston, MA 02110 (June 1999 - present); Age: 58 Associate/Junior Partner, Hale and Dorr LLP (1991 - 1999). Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering c/o GMO Trust Laundering Compliance Officer Reporting Officer (February 40 Rowes Wharf 2003 - present) and Compliance Boston, MA 02110 Officer, Grantham, Mayo, Van Age: 32 Otterloo & Co. LLC.
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 23 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Day-to-day management of the Fund's portfolio is the responsibility of the U.S. Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Small Cap Value Fund returned -18.6% for the fiscal year ended February 28, 2003, as compared to -16.6% for the Russell 2500 Value Index and -22.7% for the S&P 500. Consistent with the Fund's investment objectives and policies, the Fund was primarily invested in common stocks throughout the period. For the fiscal year, small capitalization growth stocks outperformed large cap growth stocks by 1%, but underperformed small cap value stocks by 8%. Autos and transportation and technology were the weakest performing sectors in the Index, falling 38% and 30%, respectively, for the period. The top performing sectors in the Russell 2500 Value Index were integrated oils, energy, and financial services. The Fund's underperformance of the benchmark for the period is attributable to sector selection. Hit the hardest were the Fund's overweight positions in the weak performing autos and transportation and consumer discretionary sectors along with an underweight position in the financial services sector. These losses were partially offset by the Fund's underweighting in healthcare and materials and processing sectors. In spite of its weak sector attribution, the Fund gained from good stock selection. Most notable were selections in producer durables, healthcare, and auto and transportation stocks, which added 1.5% over the benchmark. The Fund, however, had weak selection among the technology, financial services, and integrated oils stocks. The Fund incorporates three investment disciplines in the portfolio: price to intrinsic value, which has a 50% weight; price to normalized earnings, with a 30% weight; and momentum, with a 20% weight. The Fund's two value investment disciplines were disappointing for the period, with the bulk of the relative underperformance attributable to intrinsic value. Momentum also detracted, albeit a very small amount. OUTLOOK Over the past year, U.S. small cap value stocks have posted a significant recovery relative to their counterparts in small cap growth stocks. We believe that our process of combining value and momentum disciplines in the Small Cap Value Fund is well suited to the continued choppy market environment that we anticipate. The portfolio currently maintains overweight positions in the producer durables, consumer discretionary, and auto/transportation sectors, and underweight positions in the utilities, healthcare, technology, and financial services sectors. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO SMALL CAP VALUE FUND CLASS III SHARES AND THE RUSSELL 2500 VALUE INDEX AS OF FEBRUARY 28, 2003 GMO SMALL RUSSELL 2500 RUSSELL 2500 CAP VALUE FUND VALUE INDEX VALUE + INDEX* 2/28/93 $9950.00 $10000.00 $10000.00 3/31/93 $10342.35 $10406.51 $10373.98 6/30/93 $10484.48 $10600.75 $10591.49 9/30/93 $11082.88 $11263.04 $11341.84 12/31/93 $11465.22 $11386.54 $11543.91 3/31/94 $11349.41 $11207.07 $11287.94 6/30/94 $10984.55 $11100.17 $10889.22 9/30/94 $11958.62 $11634.78 $11680.27 12/31/94 $11904.83 $11237.77 $11431.81 3/31/95 $12631.84 $11941.66 $12276.40 6/30/95 $13508.38 $13002.89 $13370.97 9/30/95 $14813.83 $14042.18 $14655.61 12/31/95 $15151.89 $14582.08 $15056.08 3/31/96 $16057.83 $15241.28 $15937.37 6/30/96 $16603.69 $15709.00 $16600.92 9/30/96 $17040.00 $16196.16 $16974.90 12/31/96 $18206.24 $17820.11 $17919.51 3/31/97 $18064.74 $17964.62 $18063.78 6/30/97 $20858.43 $20510.83 $20623.43 9/30/97 $23896.22 $23064.24 $23189.53 12/31/97 $23617.91 $23717.64 $23849.08 3/31/98 $26249.78 $25980.94 $26124.92 6/30/98 $25362.45 $25050.72 $25187.28 9/30/98 $20718.44 $20924.84 $21037.46 12/31/98 $23625.46 $23261.57 $23388.79 3/31/99 $21329.05 $21400.16 $21515.40 6/30/99 $25219.78 $24828.46 $24960.64 9/30/99 $22957.66 $22683.17 $22802.09 12/31/99 $24322.58 $23608.80 $23733.08 3/31/2000 $24993.42 $24710.27 $24842.33 6/30/2000 $24831.03 $24563.32 $24693.46 9/30/2000 $26831.79 $26254.63 $26393.28 12/31/2000 $28946.69 $28516.37 $28666.97 3/31/2001 $28464.59 $27953.86 $28099.84 6/30/2001 $31111.71 $30756.00 $30916.61 9/30/2001 $27461.57 $26915.57 $27056.12 12/31/2001 $31815.08 $31293.88 $31457.29 3/31/2002 $34930.31 $33956.61 $34133.93 6/30/2002 $33487.93 $32770.99 $32942.12 9/30/2002 $26887.14 $26749.26 $26888.95 12/31/2002 $28161.96 $28203.63 $28350.91 2/28/2003 $26688.11 $26680.42 $26819.74
AVERAGE ANNUAL TOTAL RETURN 1 YEAR 5 YEAR 10 YEAR Class III -19.39% 1.06% 10.31%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 50 bp on the purchase and 50 bp on the redemption. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. * The Russell 2500 Value + Index is comprised of the Russell 2500 Index from 12/31/91 to 12/31/96 and the Russell 2500 Value Index from 12/31/96 to the present. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- COMMON STOCKS -- 97.3% AUTO & TRANSPORTATION -- 4.7% 18,600 Airborne Inc 261,144 14,525 Arctic Cat Inc 208,448 42,650 ArvinMeritor Inc 651,692 42,400 Atlantic Coast Airlines Holdings* 267,120 29,800 Autoliv Inc 616,860 8,100 Bandag Inc 245,592 10,500 Borg Warner Automotive Inc 548,310 15,500 Celadon Group Inc* 128,650 24,400 Cooper Tire & Rubber Co 341,844 47,900 Dana Corp 410,024 14,800 Dura Automotive Systems Inc* 104,340 12,600 Egl, Inc* 159,012 6,700 Landstar System Inc* 363,073 31,300 Lear Corp* 1,188,774 21,800 Mesa Airline Group Inc* 81,750 4,800 Oglebay Norton Co* 25,920 10,300 Polaris Industries Inc 498,520 21,800 Tenneco Automotive Inc* 51,230 15,600 Tidewater Inc 477,672 11,900 US Freightways Corp 289,289 ------------- 6,919,264 ------------- CONSUMER DISCRETIONARY -- 19.7% 35,400 Abercrombie & Fitch Co, Class A* 973,500 14,800 Amerco* 46,620 46,800 American Eagle Outfitters Inc* 677,196 4,700 American Woodmark Corp 185,650 10,100 Angelica Corp 182,305 25,650 Applebees International Inc 657,666 16,950 Banta Corp 482,905 28,400 Big Lots Inc* 313,820 23,900 Blyth Industries Inc 593,915 29,800 Bombay Co Inc* 143,040 12,000 Bowne and Co Inc 117,600 32,700 Boyd Gaming Corp* 409,077 8,200 Brown Shoe Co Inc 222,548 17,940 Burlington Coat Factory Warehouse 281,658 26,700 Callaway Golf Co 306,516
See accompanying notes to the financial statements. 1 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- CONSUMER DISCRETIONARY -- CONTINUED 20,100 Catalina Marketing Corp* 363,810 11,000 CDI Corp* 250,250 12,700 CDW Computer Centers Inc* 554,482 14,300 Central Garden and Pet Co* 327,470 21,700 Charlotte Russe Holding Inc* 181,195 13,400 Children's Place Retail Stores Inc* 126,898 13,600 Claire's Stores Inc 310,352 11,400 Consolidated Graphics Inc* 275,310 15,900 Cornell Companies Inc* 126,723 10,215 Corrections Corporation of America, REIT* 176,515 10,900 CPI Inc 139,738 16,300 CSK Auto Corp* 142,788 6,100 CSS Industries Inc* 200,385 17,500 Dave and Busters Inc* 144,200 11,600 Dollar Thrifty Automotive Group Inc* 191,980 22,600 Dollar Tree Stores Inc* 466,690 20,500 Dover Motorsports Inc 73,800 30,000 Footstar Inc* 260,400 23,750 Fossil Inc* 427,025 18,000 Furniture Brands International Inc* 327,780 22,900 G TECH Holdings Corp* 666,390 9,400 Getty Images Inc* 275,890 28,600 Goody's Family Clothing Inc* 90,948 11,900 Group 1 Automotive Inc* 277,151 13,900 Ihop Corp* 313,445 66,700 IKON Office Solutions Inc 467,567 21,800 Isle of Capri Casinos Inc* 258,330 25,100 Jack in the Box Inc* 414,401 6,900 Jo-ann Stores Inc, Class A* 138,759 13,900 Kelly Services, Class A 288,008 11,800 Kenneth Cole Productions, Class A* 267,270 18,000 Lone Star Steakhouse and Saloon Inc 365,220 30,900 Luby's Inc* 42,024 15,300 Mandalay Resort Group* 386,172 16,800 Manpower Inc 510,216 13,650 Marcus Corp 182,910 14,000 Maytag Corp 337,400 3,300 McClatchy Co, Class A 178,926 15,800 Mohawk Industries Inc* 780,204 64,600 MPS Group Inc* 317,186
2 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- CONSUMER DISCRETIONARY -- CONTINUED 23,600 Nautilus Group Inc 346,448 16,900 Neiman Marcus Group Inc, Class A* 457,652 8,900 Nelson (Thomas) Inc* 82,503 38,100 Nu Skin Enterprises Inc 400,812 16,000 Outback Steakhouse Inc 515,200 18,800 Papa Johns International Inc* 446,876 15,500 Payless ShoeSource Inc* 722,455 12,000 Pdi Inc* 115,800 31,200 Pier 1 Imports Inc 498,264 20,500 Pinnacle Entertainment Inc* 81,385 18,400 Polo Ralph Lauren Corp* 371,496 30,900 Prime Hospitality Corp* 159,444 20,400 QRS Corp* 117,096 8,100 Quiksilver Inc* 203,310 15,000 Reebok International Ltd* 468,750 20,500 Rent-A-Center Inc* 1,023,975 14,500 Republic Services Inc, Class A* 276,515 23,200 Ross Stores Inc 793,672 10,600 Russell Corp 171,190 33,000 Ryan's Family Steak Houses Inc* 340,890 24,600 Saks Inc* 189,174 15,100 Salton Inc* 152,963 9,400 Sharper Image Corp* 144,760 23,900 Shopko Stores Inc* 261,705 22,900 Sinclair Broadcast Group, Class A* 200,146 14,600 Snap-On Inc 364,854 11,500 Sonic Automotive Inc* 175,030 50,900 Spherion Corp* 308,963 52,500 Spiegel Inc, Class A* 6,825 23,100 Sports Authority Inc* 148,533 16,700 Steven Madden Ltd* 283,065 13,500 Tech Data Corp* 305,370 7,400 Tractor Supply Co* 244,718 39,300 Trans World Entertainment Corp* 94,320 17,200 United Online Inc* 245,272 25,700 United Stationers Inc* 534,303 19,600 Wallace Computer Services 499,604 ------------- 28,973,562 -------------
See accompanying notes to the financial statements. 3 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- CONSUMER STAPLES -- 3.0% 24,600 Chiquita Brands International* 236,898 10,400 Dean Foods Co* 438,568 2,000 Farmer Brothers Co 613,000 20,200 Ingles Markets Inc, Class A 199,980 57,000 PepsiAmericas Inc 696,540 860 Seaboard Corp 197,757 24,400 Smithfield Foods Inc* 452,132 24,600 Supervalu Inc 342,432 15,200 Universal Corp 579,272 50,400 Winn-Dixie Stores Inc 614,880 ------------- 4,371,459 ------------- FINANCIAL SERVICES -- 29.3% 25,100 Allmerica Financial Corp* 355,165 11,300 AMB Property Corp, REIT 316,400 18,800 American Financial Group Inc 372,804 4,100 American National Insurance Co 320,989 19,100 AmerUs Group Co, Class A 500,993 30,200 Annaly Mortgage Management Inc, REIT 546,922 21,100 Anthracite Capital Inc, REIT 238,852 13,200 Anworth Mortgage Asset Corp, REIT 165,000 31,900 Apex Mortgage Capital Inc, REIT 192,357 7,600 Argonaut Group Inc 95,000 14,800 Associated Banc Corp 511,488 22,500 Associated Estates Realty Corp, REIT 127,125 30,500 Astoria Financial Corp 766,160 14,700 Baldwin and Lyons Inc, Class B 366,030 9,500 Bank of Hawaii Corp 295,450 8,400 Bedford Property Investors, REIT 213,444 27,000 Boykin Lodging Co, REIT 213,300 22,300 Capstead Mortgage Corp, REIT 280,980 5,000 CBL & Associates Properties Inc, REIT 199,250 13,800 CCC Information Services Group* 237,222 29,600 Checkfree Corp* 621,008 6,700 City Holding Co 187,935 6,500 Coastal Bancorp Inc 186,095 27,900 Colonial BancGroup Inc 323,361 16,800 Commerce Group Inc 571,536 37,300 Commercial Net Lease Realty Inc, REIT 553,905 10,400 Compass Bankshares Inc 330,928
4 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- FINANCIAL SERVICES -- CONTINUED 8,700 Cullen/Frost Bankers Inc 271,092 11,199 Delphi Financial Group Inc, Class A 412,683 12,600 Doral Financial Corp 408,366 10,600 Downey Financial Corp 425,590 22,500 Electro Rent Corp* 231,750 13,100 Entertainment Properties Trust, REIT 324,880 32,400 Equity Inns Inc, REIT 176,580 23,310 Equity One Inc, REIT 343,823 9,400 Erie Indemnity Co, Class A 342,160 17,000 Factset Research Systems Inc 435,030 14,100 FBR Asset Investment Corp, REIT 452,328 25,064 Felcor Lodging Trust Inc, REIT 172,190 69,000 Fidelity National Financial Inc 2,265,270 42,400 First American Financial Corp 979,440 14,350 First Bancorp Puerto Rico 359,755 4,100 First Citizens Bancshares, Class A 382,571 11,900 First Industrial Realty Trust, REIT 334,390 28,100 Firstmerit Corp 556,352 15,700 Flagstar Bancorp Inc 380,725 40,000 Fremont General Corp 242,800 20,000 Friedman Billings Ramsey, Class A* 177,400 24,400 GATX Corp 376,736 9,700 GBC Bancorp (California) 222,421 11,200 General Growth Properties, REIT 585,424 3,100 Granite State Bankshares Inc 138,852 5,900 Hancock Holding Co 264,910 21,300 Hibernia Corp, Class A 385,956 18,162 Highwood Properties Inc, REIT 381,584 10,900 Hospitality Properties Trust, REIT 333,104 27,800 Host Marriott Corp, REIT* 192,376 131,500 HRPT Properties Trust, REIT 1,119,065 22,400 Hudson City Bancorp Inc 425,376 10,100 Hudson United Bancorp 318,554 25,600 Huntington Bancshares Inc 491,520 20,300 Impac Mortgage Holdings Inc, REIT 242,788 41,100 IndyMac Bancorp Inc, REIT 785,010 20,500 Innkeepers USA Trust, REIT 143,295 23,800 Interpool Inc 380,800 20,625 iStar Financial Inc, REIT 585,750 29,100 JDN Realty Corp, REIT 350,073
See accompanying notes to the financial statements. 5 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- FINANCIAL SERVICES -- CONTINUED 13,700 Kansas City Life Insurance Co 541,287 10,100 Klamath First Bancorp Inc 169,074 11,500 Koger Equity Inc 178,020 88,300 La Quinta Corp, REIT 290,507 13,600 Landamerica Financial Group Inc 512,720 18,600 Lasalle Hotel Properties, REIT 225,060 14,400 Macerich Co, REIT 462,960 19,706 Mack-Cali Realty Corp, REIT 569,503 9,400 MAF Bancorp Inc 319,609 28,900 Meristar Hospitality Corp, REIT 77,163 27,300 National Health Investors, REIT 429,975 25,900 Nationwide Financial Services, Class A 629,370 12,100 Nationwide Health Properties Inc, REIT 156,816 18,800 New Century Financial Corp 500,644 25,989 New Plan Excel Realty Trust, REIT 505,746 8,500 Novastar Financial Inc, REIT 278,800 29,600 Old Republic International Corp 808,080 29,900 Omega Healthcare Investors Inc, REIT* 84,019 29,700 PMI Group Inc 804,870 7,056 Prentiss Properties Trust, REIT 184,938 24,700 Prime Group Realty Trust, REIT* 123,253 30,100 Protective Life Corp 816,312 16,500 Provident Financial Group 477,015 217,200 Providian Financial Corp* 1,324,920 9,000 Public Storage Inc, REIT 297,000 15,600 R & G Financial Corp, Class B 347,100 6,200 RAIT Investment Trust, REIT 133,238 10,400 Redwood Trust Inc, REIT 320,008 24,200 RFS Hotel Investors Inc, REIT 232,562 12,000 Riggs National Corp 167,400 19,100 Senior Housing Properties Trust, REIT 220,414 12,800 Silicon Valley Bancshares* 222,080 45,196 Sovereign Bancorp Inc 613,762 9,100 Sovran Self Storage, REIT 247,156 6,700 Student Loan Group 631,810 5,800 Texas Regional Bancshares, Class A 191,922 13,800 UICI* 138,690 6,956 UMB Financial Corp 256,607 7,900 Value Line Inc 366,402 20,000 Ventas Inc, REIT 240,000
6 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- FINANCIAL SERVICES -- CONTINUED 6,200 W Holding Co Inc 113,088 21,015 Washington Federal Inc 466,533 7,900 Webster Financial Corp 281,240 4,600 Weingarten Realty, REIT 178,710 11,700 WSFS Financial Corp 374,985 ------------- 42,999,836 ------------- HEALTH CARE -- 3.1% 5,500 Aetna Inc 231,660 11,200 American Med Security Group* 144,928 14,300 Amylin Pharmaceuticals Inc* 219,362 10,000 Centene Corp* 255,000 11,400 Chattem Inc* 176,928 16,000 Cooper (The) Companies Inc 464,800 31,210 Health Net Inc* 783,683 29,300 Osteotech Inc* 219,750 28,600 Pacificare Health Systems Inc* 617,760 11,200 PolyMedica Corp 326,928 14,300 PracticeWorks Inc* 116,831 29,000 Prime Medical Service Inc* 224,489 38,700 Res-Care Inc* 110,295 20,900 Sierra Health Services Inc* 252,681 14,000 United Therapeutics Corp* 221,200 8,800 Watson Pharmaceutical Inc* 272,184 ------------- 4,638,479 ------------- INTEGRATED OILS -- 0.2% 14,900 Holly Corp 331,525 ------------- MATERIALS & PROCESSING -- 9.0% 12,800 A. Schulman Inc 184,960 33,400 AK Steel Holding Corp* 183,366 9,200 Albemarle Corp 225,308 29,200 Ashland Inc 812,052 6,500 Barnes Group Inc 124,800 13,400 Carpenter Technology Corp 155,976 11,300 Cleveland Cliffs Inc* 238,204 21,500 Commercial Metals Co 302,505 23,600 CompX International Inc 164,728 55,500 Crown Holdings Inc* 317,460
See accompanying notes to the financial statements. 7 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- MATERIALS & PROCESSING -- CONTINUED 15,500 Culp Inc* 93,000 21,400 Cytec Industries Inc* 619,530 21,400 Dycom Industries Inc* 223,416 23,400 Energizer Holdings Inc* 621,270 11,600 Great Lakes Chemical Corp 244,644 10,700 Greif Brothers Corp 205,440 11,600 Harsco Corp 349,972 16,800 Hercules Inc* 134,904 27,300 Intermet Corp 112,749 29,200 Lafarge Corp 825,776 16,200 Lennox International Inc 216,432 15,500 LNR Property Corp 512,430 12,800 Macdermid Inc 280,832 17,900 Maverick Tube Corp* 312,176 6,800 Mueller Industries Inc* 167,416 85,000 Owens Illinois Inc* 765,000 6,800 Phelps Dodge Corp* 244,528 26,900 Precision Castparts Corp 634,840 10,100 Quanex Corp 319,160 21,300 Rock-Tenn Co, Class A 275,835 25,600 Sealed Air Corp* 928,512 7,500 Sigma Aldrich Corp 328,650 12,700 Sonoco Products Co 263,525 19,700 Southern Peru Copper Corp 306,335 7,600 Standard Register Co 123,348 13,300 Stepan Co 323,323 7,700 Texas Industries Inc 152,845 5,300 Trex Company Inc* 172,250 8,700 Urstadt Biddle Properties Inc, REIT 95,700 33,120 US Industries Inc* 115,920 23,300 York International Corp 498,620 ------------- 13,177,737 ------------- OTHER -- 1.0% 15,800 Brunswick Corp 298,620 26,100 FMC Corp* 405,333 11,200 Kaman Corp, Class A 110,096 14,400 Lancaster Colony Corp 546,912 3,600 Sequa Corp, Class A* 126,900 ------------- 1,487,861 -------------
See accompanying notes to the financial statements. 8 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- OTHER ENERGY -- 4.1% 62,100 Chesapeake Energy Corp 504,252 19,400 Clayton Williams Energy Inc* 246,186 5,200 Cooper Cameron Corp* 270,400 25,600 Denbury Resources Inc* 293,888 6,000 Equitable Resources Inc 217,800 41,900 Harvest Natural Resources Inc* 241,763 11,500 Helmerich & Payne Inc 316,250 28,500 Horizon Offshore Inc* 109,440 18,800 National-Oilwell Inc* 423,000 16,500 Pioneer Natural Resources Co* 431,475 16,200 Pogo Producing Co 643,950 25,500 Pride International Inc* 369,750 17,900 Rowan Cos Inc 351,377 49,300 Tesoro Petroleum Corp* 263,755 16,000 Valero Energy Corp 624,160 15,400 Varco International Inc* 291,984 16,200 XTO Energy Inc 408,402 ------------- 6,007,832 ------------- PRODUCER DURABLES -- 13.4% 5,100 Allied Defense Group Inc/The* 89,097 101,100 American Power Conversion Corp* 1,581,204 12,600 Ametek Inc 415,548 8,200 Beazer Homes USA, Inc* 478,552 7,400 Briggs & Stratton Corp 292,300 28,900 C-cor Electronics Inc* 85,833 28,900 Centex Corp 1,597,592 32,300 Cooper Industries Ltd 1,222,555 19,800 CTS Corp 134,838 3,800 Curtiss Wright Corp 207,480 8,300 Donaldson Co Inc 289,255 59,937 DR Horton Inc 1,097,446 13,600 Esterline Corp* 233,648 42,400 General Cable Corp 164,936 9,300 Goodrich (BF) Co 142,941 12,000 HON Industries Inc 321,720 11,400 Hovnanian Enterprises Inc* 374,262 10,500 Imagistics International Inc* 200,340 36,900 KB HOME 1,730,610 17,600 Kimball International, Class B 238,128
See accompanying notes to the financial statements. 9 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- PRODUCER DURABLES -- CONTINUED 17,100 Lennar Corp 923,229 12,200 M/I Schottenstein Homes Inc 315,980 17,000 MDC Holdings Inc 638,180 48,000 Measurements Specialties Inc* 139,200 7,900 Meritage Corporation* 249,640 20,200 Milacron Inc 94,940 5,100 Mine Safety Appliances Co 182,835 12,600 MTS Systems Inc 143,766 5,000 Nacco Industries Inc, Class A 224,250 3,000 NVR Inc* 995,850 22,600 Plantronics Inc* 325,666 15,428 Pulte Corp 784,205 15,400 Ryland Group Inc 636,020 12,050 Smith (AO) Corp, Class B 310,649 20,000 Standard Pacific Corp 515,400 11,700 Standex International Corp 223,470 12,500 Steel Technologies Inc 133,000 15,800 Steelcase Inc 145,518 8,200 Tecumseh Products Co, Class A 364,900 8,400 Tecumseh Products Co, Class B 354,900 47,000 Toll Brothers Inc* 910,390 16,700 Watts Industries Inc, Class A 250,500 ------------- 19,760,773 ------------- TECHNOLOGY -- 5.1% 80,100 3 Com Corp* 335,619 49,600 Adaptec Inc* 302,064 37,000 American Management Systems Inc* 392,200 6,200 Analogic Corp 281,666 22,700 Avnet Inc* 233,810 22,200 AVX Corp 210,012 8,700 Benchmark Electronics Inc* 303,108 16,000 Black Box Corp 650,560 38,400 Ciber Inc* 207,360 60,500 Citrix Systems Inc* 726,000 9,200 Imation Corp* 331,200 9,100 Inforte Corp* 59,787 15,800 Infospace Inc* 183,280 58,000 Ingram Micro Inc, Class A* 600,880 20,800 Iomega Corp* 208,000
10 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- TECHNOLOGY -- CONTINUED 57,500 Kemet Corp* 458,850 31,900 MEMC Electronic Materials Inc* 294,437 65,500 Nvidia Corp* 826,610 19,600 Pomeroy Computer Resources Inc* 141,120 16,500 Radisys Corp* 111,045 14,100 Sbs Technologies Inc* 119,286 11,500 SCM Microsystems Inc* 33,580 17,600 Sykes Enterprises Inc* 61,248 26,100 Vishay Intertechnology Inc* 263,610 37,700 Zomax Inc* 127,049 ------------- 7,462,381 ------------- UTILITIES -- 4.7% 18,400 Alliant Energy Corp 289,984 20,100 Avista Corp 205,221 20,100 DPL Inc 243,210 8,400 Energen Corp 255,528 25,600 Energy East Corp 481,792 5,400 Hawaiian Electric Industries Inc 214,920 23,800 National Fuel Gas Co 465,052 12,600 NSTAR 509,292 24,000 OGE Energy Corp 416,880 17,400 Oneok Inc 299,802 20,700 Pepco Holdings Inc 371,565 27,400 PNM Resources Inc 577,592 15,900 Puget Energy Inc 321,816 8,400 Questar Corp 234,192 25,800 SCANA Corp 773,742 17,400 Talk America Holdings Inc* 97,440 8,000 UIL Holdings Corp 263,200 19,340 UniSource Energy Corp 324,332 23,800 Wisconsin Energy Corp 543,830 ------------- 6,889,390 ------------- TOTAL COMMON STOCKS (COST $153,653,376) 143,020,099 -------------
See accompanying notes to the financial statements. 11 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- RIGHTS AND WARRANTS -- 0.0% CONSUMER DISCRETIONARY -- 0.0% 6,934 Sunbeam Corporation Warrants, Expires 08/24/03* 1 ------------- TOTAL RIGHTS AND WARRANTS (COST $4,334) 1 ------------- SHORT-TERM INVESTMENTS -- 14.6% CASH EQUIVALENTS -- 9.5% 6,070,887 Dreyfus Money Market Fund(a) 6,070,887 $ 4,289,940 Harris Trust & Savings Bank Eurodollar Time Deposit, 1.26%, due 3/24/03(a) 4,289,940 3,539,201 Merrimac Money Market Fund(a) 3,539,201 ------------- 13,900,028 ------------- U.S. GOVERNMENT -- 0.4% $ 660,000 U.S. Treasury Bill, 1.14%, due 4/24/03(b) 658,787 ------------- REPURCHASE AGREEMENT -- 4.7% $ 6,839,453 Salomon Smith Barney Repurchase Agreement, dated 2/28/03, due 3/03/03, with a maturity value of $6,839,658 and an effective yield of 0.36%, collateralized by a U.S. Treasury Obligation with a rate of 3.625%, maturity date of 3/31/04 and market value, including accrued interest of $7,359,112. 6,839,453 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $21,398,268) 21,398,268 ------------- TOTAL INVESTMENTS -- 111.9% (Cost $175,055,978) 164,418,368 Other Assets and Liabilities (net) -- (11.9%) (17,503,377) ------------- TOTAL NET ASSETS -- 100.0% $ 146,914,991 ============= NOTES TO THE SCHEDULE OF INVESTMENTS:
REIT - Real Estate Investment Trust
* Non-income producing security. (a) Represents investment of security lending collateral (Note 1). (b) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 6). 12 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value, including securities on loan of $13,275,800 (cost $175,055,978) (Note 1) $164,418,368 Receivable for investments sold 5,263,997 Receivable for Fund shares sold 57,116 Dividends, interest receivable and other 232,858 Receivable for expenses reimbursed by Manager (Note 2) 6,692 ------------ Total assets 169,979,031 ------------ LIABILITIES: Payable for investments purchased 6,594,692 Payable upon return of securities loaned (Note 1) 13,900,028 Payable for Fund shares repurchased 2,471,013 Payable to affiliate for (Note 2): Management fee 37,392 Shareholder service fee 16,996 Payable for variation margin on open futures contracts (Notes 1 and 6) 257 Accrued expenses 43,662 ------------ Total liabilities 23,064,040 ------------ NET ASSETS $146,914,991 ============ NET ASSETS CONSIST OF: Paid-in capital $165,981,678 Accumulated undistributed net investment income 592,822 Distributions in excess of net realized gains (8,947,726) Net unrealized depreciation (10,711,783) ------------ $146,914,991 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $146,914,991 ============ SHARES OUTSTANDING: Class III 14,974,852 ============ NET ASSET VALUE PER SHARE: Class III $ 9.81 ============
See accompanying notes to the financial statements. 13 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $778) $ 3,002,476 Interest (including securities lending income of $23,158) 120,228 ------------ Total income 3,122,704 ------------ EXPENSES: Management fee (Note 2) 609,617 Custodian and transfer agent fees 68,111 Audit fees 40,434 Registration fees 20,676 Legal fees 8,559 Trustees fees and related expenses (Note 2) 5,076 Miscellaneous 2,941 Fees reimbursed by Manager (Note 2) (139,504) ------------ 615,910 Shareholder service fee (Note 2) -- Class III 277,099 ------------ Net expenses 893,009 ------------ Net investment income 2,229,695 ------------ REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 23,244,140 Closed futures contracts (1,680,316) ------------ Net realized gain 21,563,824 ------------ Change in net unrealized appreciation (depreciation) on: Investments (48,706,576) Open futures contracts (35,215) ------------ Net unrealized loss (48,741,791) ------------ Net realized and unrealized loss (27,177,967) ------------ NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(24,948,272) ============
14 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 2,229,695 $ 4,830,025 Net realized gain 21,563,824 29,733,253 Change in net unrealized appreciation (depreciation) (48,741,791) 3,505,145 ------------- ------------ Net increase (decrease) in net assets from operations (24,948,272) 38,068,423 ------------- ------------ Distributions to shareholders from: Net investment income Class III (2,143,600) (4,491,724) ------------- ------------ Total distributions from net investment income (2,143,600) (4,491,724) ------------- ------------ Net realized gains Class III (28,451,497) (11,393,594) ------------- ------------ Total distributions from net realized gains (28,451,497) (11,393,594) ------------- ------------ (30,595,097) (15,885,318) ------------- ------------ Net share transactions (Note 5): Class III (111,137,973) (13,764,934) ------------- ------------ Decrease in net assets resulting from net share transactions (111,137,973) (13,764,934) ------------- ------------ Total increase (decrease) in net assets (166,681,342) 8,418,171 NET ASSETS: Beginning of period 313,596,333 305,178,162 ------------- ------------ End of period (including accumulated undistributed net investment income of $592,822 and $558,268, respectively) $ 146,914,991 $313,596,333 ============= ============
See accompanying notes to the financial statements. 15 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ----------------------------------------------------- 2003 2002 2001 2000 1999 --------- --------- --------- --------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 14.91 $ 13.86 $ 12.41 $ 11.69 $ 18.28 --------- --------- --------- --------- --------- Income from investment operations: Net investment income 0.18 0.23 0.23 0.15 0.18 Net realized and unrealized gain (loss) (2.74) 1.58 2.38 1.11 (2.50) --------- --------- --------- --------- --------- Total from investment operations (2.56) 1.81 2.61 1.26 (2.32) --------- --------- --------- --------- --------- Less distributions to shareholders: From net investment income (0.17) (0.21) (0.20) (0.14) (0.19) From net realized gains (2.37) (0.55) (0.96) (0.40) (4.08) --------- --------- --------- --------- --------- Total distributions (2.54) (0.76) (1.16) (0.54) (4.27) --------- --------- --------- --------- --------- NET ASSET VALUE, END OF PERIOD $ 9.81 $ 14.91 $ 13.86 $ 12.41 $ 11.69 ========= ========= ========= ========= ========= TOTAL RETURN(a) (18.58)% 13.39% 22.14% 10.66% (14.74)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 146,915 $ 313,596 $ 305,178 $ 265,778 $ 347,684 Net expenses to average daily net assets 0.48% 0.48% 0.48% 0.48% 0.48% Net investment income to average daily net assets 1.21% 1.60% 1.73% 1.12% 0.99% Portfolio turnover rate 69% 59% 111% 50% 49% Fees and expenses reimbursed by the Manager to average daily net assets: 0.08% 0.04% 0.06% 0.06% 0.21% Purchase and redemption fees consisted of the following per share amounts:(b) $ 0.08 $ 0.01 $ 0.03 N/A N/A
(a) The total returns would have been lower had certain expenses not been reimbursed during the period shown. Calculation excludes purchase premiums and redemption fees. (b) Effective March 1, 2000, the Fund adopted the provisions of the revised AICPA Audit and Accounting Guide for Investment Companies which requires the disclosure of the per share effect of purchase and redemption fees. Periods prior to March 1, 2000 have not been restated to reflect this change. Amounts calculated using average shares outstanding throughout the period. 16 See accompanying notes to the financial statements. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Small Cap Value Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks long-term growth of capital. The Fund's benchmark is Russell 2500 Value Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. FUTURES CONTRACTS The Fund may purchase and sell futures contracts to manage its exposure to the financial markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount 17 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 28, 2003. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the financial markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. At February 28, 2003 the Fund held no open swap contracts. 18 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of collateral, the risk of delay in recovery or loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 2003, the Fund loaned securities having a market value of $13,275,800, collateralized by cash in the amount of $13,900,028, which was invested in short-term instruments. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country's tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. 19 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- During the years ended February 28, 2002 and February 28, 2003, the tax basis of distributions paid from ordinary income were $5,446,644 and $2,434,739, respectively. For the years ended February 28, 2002 and February 28, 2003, the distributions paid from long-term capital gains were $10,438,674 and $28,160,358, respectively. As of February 28, 2003, the components of distributable earnings on a tax basis consisted of $654,424 and $135,167 of undistributable ordinary income and undistributed capital gains, respectively. The temporary differences between book and tax basis distributable earnings are primarily due to losses on wash sale transactions. The Fund elected to defer to March 1, 2003 post-October losses of $7,181,417. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to the classification of distributions from REIT securities. The financial highlights exclude these adjustments.
Accumulated Distributions Undistributed Net in Excess of Investment Income Net Realized Gain ----------------- ----------------- $(51,541) $51,541
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. 20 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases and fee on redemptions of Fund shares is .50% of the amount invested or redeemed. If the Manager determines that any portion of a cash purchase is offset by a corresponding cash redemption occurring on the same day, the purchase premium or redemption fee charged by the Fund will be reduced by 100% with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived if the Manager determines the Fund is either substantially underweight/overweight in cash so that a purchase or redemption will not require a securities transaction. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the years ended February 28, 2002 and February 28, 2003, the Fund received $60,393 and $202,204 in purchase premiums, respectively and $200,901 and $891,984 in redemption fees, respectively. There is no premium for reinvested distributions or in-kind transactions. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until at least June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent Trustees of the Trust (including legal fees), 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) exceed the management fee. As of February 28, 2003, a significant portion of the Fund's shares were held by accounts for which the Manager has investment discretion. The Fund's portion of the fee paid by the Trust to the independent Trustees during the year ended February 28, 2003 was $3,834. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2003, aggregated $124,797,684 and $257,947,860 respectively. 21 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- At February 28, 2003, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $177,093,229 $11,295,052 $(23,969,913) $(12,674,861)
4. PRINCIPAL SHAREHOLDER At February 28, 2003, 28.1% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 -------------------------- ------------------------ Shares Amount Shares Amount Class III: ----------- ------------- ---------- ------------ Shares sold 3,311,518 $ 40,822,521 1,166,998 $ 16,074,205 Shares issued to shareholders in reinvestment of distributions 2,715,424 30,055,774 993,426 14,156,265 Shares repurchased (12,087,686) (182,016,268) (3,149,015) (43,995,404) ----------- ------------- ---------- ------------ Net decrease (6,060,744) $(111,137,973) (988,591) $(13,764,934) =========== ============= ========== ============
22 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 28, 2003 is as follows: FUTURES CONTRACTS
Number of Contract Net Unrealized Contracts Type Expiration Date Value Depreciation --------- --------------- ------------------ ------------ -------------- Buys 16 Russell 2000 March 2003 $2,884,000 $(74,173) ========
At February 28, 2003, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. 23 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO SMALL CAP VALUE FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Small Cap Value Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 24 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) FEDERAL TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- For the fiscal year ended February 28, 2003, all of the Fund's distributions are from investment company taxable income, except that the Fund has designated 92.04% of the distributions as net capital gain dividends. 25 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- --------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of 39 *(2) c/o GMO Trust Trust Business 40 Rowes Wharf Administration Boston, MA 02110 and Senior Age: 61 Associate Dean, Harvard University. Donald W. Glazer, Esq. Trustee of the Since December Advisory 39 None c/o GMO Trust Trust 2000 Counsel, 40 Rowes Wharf Goodwin Procter Boston, MA 02110 LLP; Secretary Age: 58 and Consultant, Provant, Inc. (provider of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 26 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- --------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, 39 None c/o GMO Trust Board of 1985. President Grantham, Mayo, 40 Rowes Wharf Trustees of the from February Van Otterloo & Boston, MA 02110 Trust 2002 - October Co. LLC. Age: 64 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 27 PRINCIPAL OFFICERS:
Principal Occupation(s) Name, Address, Position(s) Term of Office(4) and Length During Past and Age Held with Fund of Time Served Five Years ------------------------- ------------------------------ ------------------------------ ------------------------------ Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief 40 Rowes Wharf Vice President from August Operating Officer (2000 - Boston, MA 02110 1998 - October 2002. present) and Member, Grantham, Age: 47 Mayo, Van Otterloo & Co. LLC. Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC. 40 Rowes Wharf February 1998. Boston, MA 02110 Age: 45 Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator, c/o GMO Trust Trust Grantham, Mayo, Van 40 Rowes Wharf Otterloo & Co. LLC. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti-Money c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer 40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003) Boston, MA 02110 and Member, Grantham, Mayo, Age: 37 Van Otterloo & Co. LLC. Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel, c/o GMO Trust 40 Rowes of the Trust 1999; Secretary since March Grantham, Mayo, Van Wharf Boston, MA 02110 2001. Otterloo & Co. LLC (June Age: 58 1999 - present); Associate/ Junior Partner, Hale and Dorr LLP (1991 - 1999). Julie Perniola Vice President and Anti-Money Since February 2003. Anti-Money Laundering c/o GMO Trust Laundering Compliance Officer Reporting Officer (February 40 Rowes Wharf 2003 - present) and Compliance Boston, MA 02110 Officer, Grantham, Mayo, Van Age: 32 Otterloo & Co. LLC.
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 28 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGEMENT Day-to-day management of the Fund's portfolio is the responsibility of the International Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The GMO Tax-Managed International Equities Fund returned -7.5% for the fiscal year ended February 28, 2003, as compared to -17.5% for the MSCI EAFE benchmark before taxes. On an after-tax basis, the Fund returned -8.3% to the benchmark's - -17.3% for the same period. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in international equity securities throughout the period. International stocks, like the U.S. market, suffered their third straight year of negative returns in 2002. World equity markets were hit by the continued global economic slowdown which came on top of valuation levels that remained high by historical standards. With the addition of corporate governance scandals and a perilous geopolitical situation, these factors combined to produce the worst bear market since 1974. In U.S. dollar terms, foreign stocks fared slightly better than domestic equities. The MSCI EAFE Index outperformed the S&P 500 (which returned -22.7%) solely due to weakness in the dollar. Foreign investors have been slowing their inflows on declining confidence in the U.S. economy. With the continued large U.S. trade deficit and lower U.S. interest rates, this seems to have put an end to the long post 1995 dollar rally. In local currency terms, European markets fell even further than the U.S. Germany led the way down, with that country's DAX index falling a Nasdaq-like - -44% in calendar year 2002. Europe continued to suffer from the unraveling of the "TMT" bubble in the technology, media, and telecommunications sectors. Faith has all but vanished that third generation mobile phone technology will deliver pots of gold to these sectors. The insurance sector suffered from a brutal combination of rising liabilities for natural (and unnatural) disasters with deteriorating asset values as equity holdings declined in value. There were questions about the viability of the Eurozone as a single currency region and the appropriateness of its stability pact, which limits government deficits. Adhering to this pact means, for example, that Germany has neither fiscal policy nor monetary policy (now ceded to the ECB) available to stimulate its economy. In Japan, frustration continued to mount over the lack of reform. GDP growth is stagnant and some economic indicators forecast a return to recession in 2003. The solvency of the financial sector remains a concern, and several big banks have been forced to raise additional capital at the expense of current shareholders. Prime Minister Koizumi appeared to practice business as usual with the appointment of an establishment candidate to head the central bank. Additionally, the strength of the yen against the dollar posed problems for exporters. Despite the fact that the Nikkei 225 index hit a 20-year low, Japan was the best performing major market. The MSCI Japan index fell "only" by 10%, as the decline was at least somewhat anticipated in the prices. Within this difficult environment, GMO's disciplined investment approach produced strong relative performance. The focus on higher quality, reasonably valued stocks helped ease the pain. GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- Generally, the most defensive sectors performed strongest in these times of uncertainty. Utility stocks led the way, and telecommunications stocks and consumer staples also outperformed the benchmark (though all sectors fell in absolute terms). Energy stocks outperformed only slightly despite a run up in oil prices to nearly $40/barrel. The outperformance of the telecommunications sector came after two dismal years, as share prices have fallen enough that the basic revenue from the traditional business is providing some valuation support even as hopes of future growth dissipate. Technology stocks performed the worst of the major sectors. Sector allocation contributed positively to the portfolio for the fiscal year, primarily due to an underweight of information technology stocks and overweight of electric utilities. Country allocation was also a positive. The portfolio benefited both from its 8% allocation to emerging markets, which outperformed the MSCI EAFE Index by 5.8% during the fiscal year, as well as from overweights in some of the smaller markets that performed relatively well. Austria was the most notable of these, as overweighting that market, which managed positive absolute return, added close to a percentage point of relative return. Allocations to Canada and the Pacific region outside Japan were also positive as those regions had relatively strong growth. Within the emerging markets, allocations to Russia and Thailand were the strongest contributors to value added. OUTLOOK The silver lining to the pain of a tough bear market is that the bad news is now out in the open. With lower stock prices, dividend yields are now meaningful and there is a lower hurdle on earnings growth required to deliver capital gains. Also, many CEOs have been replaced by a more prudent generation focused on reducing debt and other more conservative means of enhancing shareholder value. Lower valuations and continued dollar weakness position international equities both to enjoy positive returns and to outperform the U.S. market. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND CLASS III SHARES AND THE MSCI EAFE INDEX AS OF FEBRUARY 28, 2003 GMO Tax-Managed International Equities Fund* MSCI EAFE Index* 7/29/98 $10,000 $10,000 9/30/98 $8,700 $8,513 12/31/98 $10,158 $10,271 3/31/99 $10,118 $10,414 6/30/99 $11,112 $10,679 9/30/99 $11,143 $11,148 12/31/99 $11,707 $13,041 3/31/2000 $11,077 $13,027 6/30/2000 $11,270 $12,511 9/30/2000 $10,800 $11,502 12/31/2000 $11,205 $11,193 3/31/2001 $10,338 $9,659 6/30/2001 $10,854 $9,558 9/30/2001 $9,685 $8,220 12/31/2001 $10,229 $8,793 3/31/2002 $10,879 $8,838 6/30/2002 $11,177 $8,651 9/30/2002 $9,494 $6,944 12/31/2002 $9,991 $7,392 2/28/2003 $9,564 $6,920
AVERAGE ANNUAL TOTAL RETURN* Since 1 Year Inception 7/29/98 Class III -7.47% -0.97%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. * Returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ COMMON STOCKS -- 96.1% ARGENTINA -- 0.1% 5,033 Grupo Financiero Galicia SA ADR* 12,784 11,600 Perez Companc SA ADR* 84,564 10,500 Telecom Argentina SA ADR* 42,210 ------------ 139,558 ------------ AUSTRALIA -- 3.3% 110,100 AMP Diversified Property Trust 173,049 26,905 Australia and New Zealand Banking Group Ltd 268,094 40,507 Boral Ltd 109,143 44,017 CSR Ltd 173,626 146,306 General Property Trust Units 245,937 54,765 National Australia Bank Ltd 960,467 22,203 Orica Ltd 110,890 5,188 Patrick Corp Ltd 35,639 39,504 Qantas Airways Ltd 73,837 49,944 Santos Ltd 177,305 10,407 St. George Bank Ltd 111,153 88,938 Telstra Corp Ltd 215,888 148,269 Westfield Trust Units 291,526 33,533 Woodside Petroleum Ltd 220,792 ------------ 3,167,346 ------------ AUSTRIA -- 3.0% 7,208 Austrian Airlines* 49,720 658 Bau Holdings AG 48,580 2,793 Boehler Uddeholm (Bearer) 139,316 1,166 Brau Union AG 84,200 7,458 Erste Bank Der Oesterreichischen Sparkassen AG 499,174 4,667 Flughafen Wien AG 169,011 190 Generali Holding Vienna AG 31,946 13,703 Immofinanz Immobilien Anlagen AG* 87,433 446 Lenzing AG 42,061 2,444 Mayr-Melnhof Karton AG (Bearer) 191,291 1,661 Oesterreichische Brau Beteiligungs AG 135,789 7,299 OMV AG 788,653 9,588 Telekom Austria AG* 101,066 5,897 VA Technologie AG (Bearer) 92,159 627 Verbund-Oesterreichische Elektrizitaetswirtschafts AG 55,623
See accompanying notes to the financial statements. 1 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ AUSTRIA -- CONTINUED 7,208 Voestalpine AG 172,079 10,046 Wienerberger AG 171,184 ------------ 2,859,285 ------------ BELGIUM -- 2.8% 12,433 AGFA-Gevaert NV 267,872 10,875 Almanij NV 350,109 1,350 Bekaert SA 47,652 800 CMB SA 42,301 3,475 Colruyt SA 206,182 6,400 Delhaize Group 97,537 1,975 Electrabel SA 495,977 26,277 Fortis B 359,681 13,640 KBC Bancassurance Holding 412,221 2,327 Solvay Et Cie 137,942 9,116 UCB SA 208,393 ------------ 2,625,867 ------------ BRAZIL -- 0.2% 10,953,000 Banco do Brasil SA 29,462 4,300 Petroleo Brasileiro SA (Petrobras) 57,602 3,200 Petroleo Brasileiro SA (Petrobras) ADR 42,784 1,400 Vale Do Rio Doce 40,796 ------------ 170,644 ------------ CANADA -- 2.2% 7,300 Bank of Montreal 205,799 12,600 Bank of Nova Scotia 445,288 18,300 EnCana Corp 597,225 4,400 Imperial Oil Ltd 139,992 9,900 National Bank of Canada 215,969 9,500 Royal Bank of Canada 370,486 8,200 TransCanada PipeLines Ltd 122,246 ------------ 2,097,005 ------------ CHINA -- 1.0% 268,000 Brilliance China Automotive Holdings Ltd 62,541 32,000 China International Marine Containers Co Ltd Class B 35,122
2 See accompanying notes to the financial statements. GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ CHINA -- CONTINUED 76,000 China Mobile Ltd* 163,711 502,000 China Petroleum & Chemical Corp 94,619 49,200 China Resources Enterprise Ltd 44,159 80,000 China Unicom* 48,467 78,000 CNOOC Ltd 109,513 68,000 Cosco Pacific Ltd 61,469 138,000 Denway Motors Ltd 53,083 88,000 Huaneng Power International Inc Class H 78,419 124,000 Legend Holdings Ltd 42,531 562,000 PetroChina Co Ltd Class H 117,457 54,000 Zhejiang Southeast Electric Power Co Class B 33,372 ------------ 944,463 ------------ CZECH REPUBLIC -- 0.3% 28,200 CEZ AS 88,029 1,200 Komercni Banka AS 86,115 200 Philip Morris CR AS 74,783 ------------ 248,927 ------------ DENMARK -- 0.0% 1,600 DFDS A/S 34,588 ------------ FINLAND -- 1.2% 28,700 Finnair Class A 112,905 36,800 Fortum Oyj 241,945 12,900 Kemira Oyj 81,753 3,900 Orion-Yhtymae Oyj 60,950 22,600 Rautaruukki Oyj 86,472 39,300 Sampo Oyj 245,674 10,000 Stora Enso Oyj 97,972 6,000 UPM-Kymmene Oyj 172,017 ------------ 1,099,688 ------------ FRANCE -- 4.8% 24,934 Arcelor* 249,658 25,754 BNP Paribas 1,065,894 3,285 Bongrain SA 132,771 8,804 Chargeurs SA 222,990 9,476 Cie de Saint-Gobain 286,277
See accompanying notes to the financial statements. 3 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ FRANCE -- CONTINUED 2,834 Danone 335,382 1,128 Eiffage SA 79,024 786 Elf Gabon 138,933 2,476 Eramet 50,571 2,572 Esso S.A.F. 218,996 14,403 France Telecom SA 319,164 6,543 L'Oreal SA 422,418 5,582 Renault SA 235,958 14,361 Societe Generale Class A 770,819 ------------ 4,528,855 ------------ GERMANY -- 5.1% 61,400 Bankgesellschaft Berlin AG* 94,633 17,650 BASF AG 641,081 12,550 Commerzbank AG 79,129 44,250 DaimlerChrysler AG (Registered) 1,349,702 5,809 Degussa AG 148,384 21,500 Deutsche Telekom 247,021 31,700 E. On AG 1,347,859 10,800 IWKA AG 126,995 4,400 Merck KGaA 106,228 3,900 Sudzucker AG 61,370 24,700 Thyssen Krupp AG 235,335 9,300 Volkswagen AG 372,375 ------------ 4,810,112 ------------ HONG KONG -- 2.0% 124,000 Cathay Pacific Airways 173,302 98,400 CLP Holdings Ltd 403,739 165,000 Hang Lung Development Co Ltd 139,631 30,000 Henderson Land Development Co Ltd 85,010 129,500 Hong Kong Electric Holdings Ltd 493,983 52,000 Hong Kong Land Holdings 63,960 37,700 Jardine Matheson Holdings Ltd 214,890 123,500 Jardine Strategic Holdings Ltd 311,220 ------------ 1,885,735 ------------ HUNGARY -- 0.1% 13,300 OTP Bank Rt 129,661 ------------
See accompanying notes to the financial statements. 4 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ INDIA -- 0.3% 13,100 ICICI Banking Ltd ADR* 93,141 5,000 Ranbaxy Laboratories Ltd GDR 72,000 6,000 State Bank of India GDR 85,200 ------------ 250,341 ------------ INDONESIA -- 0.3% 274,000 Bank Central Asia Tbk 76,338 32,500 Gudang Garam 27,621 743,000 PT Matahari Putra Prima Tbk 32,619 349,000 Telekomunikasi IndonesiaTbk PT Class B 140,449 ------------ 277,027 ------------ IRELAND -- 0.7% 28,801 Allied Irish Banks Plc 365,361 22,104 Bank of Ireland 243,478 16,000 Greencore Group 40,180 ------------ 649,019 ------------ ISRAEL -- 0.1% 1,700 Teva Pharmaceutical Industries ADR 64,226 ------------ ITALY -- 3.1% 119,184 ENI-Ente Nazionale Idrocarburi SPA 1,768,846 10,790 Fiat SPA (Savings Shares) 50,821 28,600 IFIL Finanziaria di Partecipazioni SPA (Savings Shares) 63,962 111,987 Telecom Italia Mobile SPA 504,524 54,363 Telecom Italia SPA 377,921 43,784 Telecom Italia SPA (Savings Shares) 214,716 ------------ 2,980,790 ------------ JAPAN -- 21.1% 4,050 Acom Co Ltd 132,916 47,000 AIOI Insurance Co Ltd 95,014 18,000 Alps Electric Co Ltd 219,852 6,900 Aoki International 28,890 17,000 Banyu Pharmaceutical Co Ltd 200,736 17,000 Bridgestone Corp 191,964 33,000 Brother Industries Ltd 199,019
See accompanying notes to the financial statements. 5 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ JAPAN -- CONTINUED 17,800 Chubu Electric Power Co Inc 326,716 12,700 Chugoku Electric Power Co Inc 194,219 141,000 Cosmo Oil Co Ltd 192,015 23,000 Daiichi Pharmaceuticals Co Ltd 308,158 18,000 Dainippon Printing Co Ltd 181,789 26,000 Daio Paper Corp 188,911 10,000 Daito Trust Construction Co Ltd 194,967 37,000 Daiwa House Industry Co Ltd 210,311 8,000 Denso Corp 119,704 95 East Japan Railway Co 437,936 27,000 Ezaki Glico Co Ltd 137,484 54,000 Fuji Heavy Industries Ltd 208,281 8,000 Fuji Photo Film Co Ltd 253,753 1,800 Hirose Electric Co Ltd 127,435 119,000 Itochu Corp 283,849 41,000 Itoham Foods Inc 116,524 18,000 Izumiya Co Ltd 71,863 37,000 JACCS Co 133,948 35 Japan Tobacco Inc 208,712 26,425 JFE Holdings Inc* 383,774 113,000 Kajima Corp 226,526 43,000 Kamigumi Co Ltd 199,679 41,000 Kandenko Co 126,927 20,600 Kansai Electric Power 312,420 61,000 Kansai Paint Co 172,332 77 KDDI Corp 241,632 34,000 Kirin Brewery Co Ltd 251,639 46,000 Kyudenko Corp 161,472 19,000 Kyushu Electric Power Co Inc 279,315 27,000 Maeda Road Construction 93,178 26,000 Matsushita Electric Industrial Co Ltd 230,696 110,000 Mazda Motor Corp 232,607 33,000 Minolta Co Ltd* 161,895 50,000 Misawa Homes 42,715 21,000 Mitsubishi Corp 140,503 123,000 Mitsubishi Electric Corp* 328,763 17,000 Mitsubishi Estate Co Ltd 117,767 90,000 Mitsubishi Motors* 218,482 72,000 Mitsubishi Paper Mills Ltd* 91,351 101 Mitsubishi Tokyo Finance Group Inc 447,655
6 See accompanying notes to the financial statements. GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ JAPAN -- CONTINUED 24,000 Mitsui Chemicals Inc 92,163 68,000 Mitsui Trust Holding Inc 120,787 300 Mizuho Holding Inc* 266,441 34,000 Mizuno Corp 87,714 10,000 MOS Food Services 75,703 56,000 Nagase & Co 241,100 45,000 Nippon Express Co Ltd 177,754 34,000 Nippon Flour Mills Co Ltd 78,511 46,000 Nippon Hodo Co 213,221 27,000 Nippon Paint Co 68,742 53,000 Nippon Suisan Kaisha Ltd 118,351 140 Nippon Telegraph & Telephone Corp 506,830 27,000 Nipponkoa Insurance Co ltd 93,407 78,000 Nissan Motor Co 585,206 303,000 Nisshin Steel Co Ltd* 205,033 23,000 Nisshinbo Industries Inc 85,794 44,000 NOF Corp 116,118 13,000 Nomura Holdings Inc 152,844 40,000 Okumura Corp 147,854 12,000 Ono Pharmaceutical Co Ltd 376,570 7,600 Promise Co 248,137 2,400 Rohm Co Ltd 275,069 7,000 Ryosan Co 69,334 43,000 Sankyo Co Ltd 573,940 29,000 Seino Transportation Co Ltd 181,518 21,000 Sekisui House Ltd 148,141 71,000 Shimizu Corp 174,760 18,000 Shiseido Co Ltd 208,738 18,600 Sony Corp 706,399 137 Sumitomo Mitsui Financial Group Inc* 319,831 12,000 Suzuki Motor Corp 137,027 24,000 Taisho Pharmaceutical Co Ltd 350,789 17,000 Takeda Chemical Industries Ltd 626,940 7,640 Takefuji Corp 378,688 30,000 TOA Corp 31,973 36,600 Tohoku Electric Power Co Inc 530,309 36,000 TonenGeneral Sekiyu KK 218,634 20,000 Toppan Printing Co Ltd 137,704 160,000 Toshiba Corp* 465,553 45,000 Toyo Ink Manufacturing Co Ltd 130,937
See accompanying notes to the financial statements. 7 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ JAPAN -- CONTINUED 22,900 Toyota Motor Corp 537,513 6,000 Yamanouchi Pharmaceutical Co Ltd 163,417 46,000 Yodogawa Steel Works 128,399 ------------ 19,980,187 ------------ MEXICO -- 0.1% 3,600 Telefonos de Mexico Class L ADR 104,652 ------------ NETHERLANDS -- 4.6% 85,886 ABN Amro Holdings NV 1,365,377 4,187 Boskalis Westminster NV 83,441 4,079 DSM NV 149,696 2,309 Gamma Holdings NV 64,705 33,891 ING Groep NV 458,423 14,632 Koninklijke Philips Electronics NV 244,125 2,003 Koninklijke Ten Cate 57,252 7,193 Koninklijke Wessanen NV 37,368 175,931 Ron KPN NV* 1,166,153 10,322 Unilever NV 585,178 4,088 Van Ommeren Vopak* 46,263 1,872 Wereldhave NV 107,036 ------------ 4,365,017 ------------ NEW ZEALAND -- 0.6% 50,768 Fletcher Building Ltd 100,031 199,828 Telecom Corp of New Zealand 468,254 ------------ 568,285 ------------ NORWAY -- 2.2% 107,586 DNB Holdings Class A 406,917 2,550 Gjensidige NOR ASA 64,061 174,800 Kvaerner ASA* 70,749 16,371 Norsk Hydro AS 627,189 12,318 Norske Skogindustrier AS Class A 157,305 17,064 Orkla ASA 238,156 68,800 Statoil ASA 528,119 ------------ 2,092,496 ------------
See accompanying notes to the financial statements. 8 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ PHILIPPINES -- 0.3% 1,287,000 Ayala Land Inc 109,758 36,000 Equitable Banking Corp* 15,186 51,520 La Tondena Distillers Inc 30,236 8,940 Philippine Long Distance Telephone* 47,959 33,000 San Miguel Corp Class B 40,550 ------------ 243,689 ------------ POLAND -- 0.3% 25,800 Bank Millennium SA* 17,538 3,500 BRE Bank SA 60,822 19,000 KGHM Polska Miedz SA* 60,694 10,200 Polifarb-Cieszyn Wroclaw SA* 19,550 13,300 Polski Koncern Naftowy Orlen 58,291 29,000 Telekomunikacja Polska SA* 86,339 ------------ 303,234 ------------ RUSSIA -- 0.5% 1,790 JSC Mining & Smelting Co ADR* 44,526 2,450 Lukoil Holding Co ADR 146,387 2,600 Sibneft ADR* 55,900 16,700 Yukos Oil 182,447 ------------ 429,260 ------------ SINGAPORE -- 2.2% 15,550 Creative Technology Ltd 98,353 35,000 DBS Group Holdings Ltd 193,198 32,000 Fraser & Neave Ltd 147,198 5,839 Haw Par Corp Ltd 11,617 93,000 Keppel Corp Ltd 221,384 63,100 Singapore Airlines Ltd 342,866 22,000 Singapore Press Holdings Ltd 230,227 413,100 Singapore Telecom 308,789 173,680 Straits Trading Co Ltd 140,809 45,000 United Overseas Bank 269,097 12,478 Van Der Horst Ltd*(a) 5,323 19,000 Venture Corp Ltd 146,393 ------------ 2,115,254 ------------
See accompanying notes to the financial statements. 9 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ SOUTH AFRICA -- 0.8% 16,771 ABSA Group Ltd 69,454 12,000 Gencor Ltd 62,119 1,000 Impala Platinum Holdings Ltd 60,780 20,278 Iscor Ltd 44,629 6,327 Nedcor Ltd 75,311 13,000 Remgro Ltd 94,295 79,900 Sanlam Ltd 70,339 13,000 Sasol Ltd 153,048 19,000 Standard Bank Investment Corp 67,730 7,000 Tiger Brands Ltd 54,940 35,000 Woolworths Holdings Ltd 22,349 ------------ 774,994 ------------ SOUTH KOREA -- 1.3% 4,600 Hyundai Department Store Co Ltd* 38,229 600 Kangwon Land Inc 64,592 6,100 KIA Motors Corp 38,583 1,700 Kookmin Credit Card Co Ltd* 25,351 5,700 Korea Electric Power Corp 85,716 2,100 KT Corp 76,794 5,800 LG Engineering & Construction Ltd 68,513 1,100 POSCO 101,831 2,140 Samsung Electronics 501,093 1,100 Samsung SDI Co Ltd 62,665 6,100 SK Corp 64,391 500 SK Telecom 69,116 ------------ 1,196,874 ------------ SPAIN -- 2.4% 11,103 Altadis SA 263,150 9,053 CIA ESP Petroleos 185,389 28,507 Endesa SA 341,046 13,250 Iberdrola SA 203,074 91,653 Repsol YPF SA 1,284,187 8,620 Tableros Defibras Class B* 32,053 ------------ 2,308,899 ------------ SWEDEN -- 1.7% 10,500 Electrolux AB 182,013
10 See accompanying notes to the financial statements. GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ SWEDEN -- CONTINUED 23,400 Gambro AB Class A 97,901 7,900 Hennes & Mauritz AB 166,653 42,300 Nordea AB 184,432 4,700 SSAB Swedish Steel Class A 57,169 5,700 SSAB Swedish Steel Class B 64,978 5,500 Svenska Handelsbanken Class B 72,717 44,000 Swedish Match AB 330,944 120,383 TeliaSonera AB 404,625 ------------ 1,561,432 ------------ SWITZERLAND -- 5.8% 6,497 Bobst Group AG (Registered)* 162,904 1,973 Centerpulse Ltd* 379,759 6,743 Micronas Semiconductor Hold* 144,209 263 Movenpick Holdings (Bearer)* 109,583 30,927 Novartis AG 1,135,815 4,392 Roche Holding AG (Bearer) 422,681 32,101 Roche Holding AG (Genusschein) 1,928,191 840 SIG Holding AG 70,310 2,793 Swisscom AG 830,073 429 Valora Holding AG 71,025 692 ZKB Finanz Vision AG* 56,391 2,163 Zurich Financial Services AG 183,440 ------------ 5,494,381 ------------ TAIWAN -- 0.9% 103,100 Arima Computer Corp* 31,746 84,000 Cheng Loong Corp* 25,260 203,623 China Development Financial Holding Corp* 76,761 85,000 China Steel Corp 52,835 114,700 Chinatrust Financial Holding Co* 92,090 67,000 Compal Electronics Inc 64,590 98,000 Fubon Financial Holding Co Ltd 76,990 15,200 Hon Hai Precision Industry Co Ltd 48,990 144,000 International Bank of Taipei 62,158 90,200 Inventec Co Ltd 51,914 11,000 MediaTek Inc 81,036 23,000 Micro-Star International Co Ltd 36,072 66,000 Taiwan Semiconductor* 79,770
See accompanying notes to the financial statements. 11 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ TAIWAN -- CONTINUED 213,000 Walsin Lihwa Corp* 62,827 ------------ 843,039 ------------ THAILAND -- 0.5% 68,000 Advanced Info Service Pcl (Foreign Registered) 61,984 174,300 Bangkok Expressway Pcl (Foreign Registered)(a) 61,108 68,000 Electricity Generating Pcl (Foreign Registered) NVDR 63,574 424,100 Land & House Pcl (Foreign Registered) 76,821 22,000 PTT Exploration & Production Pcl (Foreign Registered)(a) 66,332 61,000 PTT Pcl (Foreign Registered)(a) 62,376 3,000 Siam Cement Pcl NVDR 86,385 68,000 Thai Union Frozen Products Pcl (Foreign Registered) 29,244 ------------ 507,824 ------------ TURKEY -- 0.4% 13,950,661 Akbank TAS* 53,303 8,117,000 Aksa Akrilik Kimya Sanayii 78,806 20,232,000 Aksigorta AS 70,967 8,497,000 Arcelik AS 77,173 3,902,000 Eregli Demir ve Celik Fabrikalari TAS* 42,772 2,460,932 Finansbank* 1,480 34,056,000 Is Gayrimenkul Yatirim Ortakligi AS* 18,772 2,201,662 Turkiye Garanti Bankasi* 3,103 26,202,000 Vestel Elektronik Sanayi* 59,904 ------------ 406,280 ------------ UNITED KINGDOM -- 19.8% 82,159 Abbey National Plc 504,694 17,607 Alliance & Leicester Plc 214,929 21,900 Allied Domecq Plc 103,312 28,069 Associated British Food 224,373 8,000 AstraZeneca Plc 258,064 73,003 Aviva Plc 455,061 9,436 AWG Plc* 78,178 30,956 BAA Plc 211,126 64,070 BAE Systems Plc 111,008 125,762 Barclays Plc 726,982 70,499 Boots Group Plc 601,853 23,873 BP Plc 150,409
12 See accompanying notes to the financial statements. GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ UNITED KINGDOM -- CONTINUED 66,675 British American Tobacco 651,123 480,108 BT Group Plc 1,236,417 13,100 De Vere Group Plc 53,699 21,912 Diageo Plc 217,436 30,906 Gallaher Group Plc 303,277 24,063 Great Portland Estates Plc 83,384 57,428 GUS Plc 459,058 37,704 HBOS Plc 393,146 78,250 HSBC Holdings Plc 843,041 61,910 Imperial Chemical Industries Plc 148,222 24,431 Imperial Tobacco Group Plc 381,157 15,679 Inchcape Plc 176,206 168,900 Invensys Plc 42,565 19,548 Kelda Group Plc 126,239 131,625 Kingfisher Plc 474,250 33,901 Laird Group 80,897 22,529 Land Securities Group Plc 264,012 151,429 Lloyds TSB Group Plc 844,346 1 Marks & Spencer Group Plc 5 160,685 National Grid Transco Plc 1,032,627 24,600 Next Plc 309,980 16,819 Northern Rock Plc 178,553 21,482 Reckitt Benckiser Plc 338,701 32,570 Reed Elsevier Plc 237,780 22,450 RMC Group 130,128 222,340 Rolls-Royce 278,415 162,342 Royal & Sun Alliance Insurance Group 182,829 16,913 Royal Bank of Scotland Group 387,074 54,735 Sainsbury (J) 200,014 43,538 Scottish & Newcastle Plc 230,418 38,256 Scottish & Southern Energy Plc 379,619 82,060 Scottish Power Plc 471,126 23,105 Severn Trent Plc 256,205 75,410 Shell Transport & Trading (Registered) 436,807 54,046 Six Continents Plc 526,941 17,243 Standard Chartered Plc 189,301 28,471 Tate & Lyle 124,556 44,813 Taylor Woodrow Plc 127,406 36,252 Thistle Hotels Plc 63,953 31,500 Unilever Plc 280,825
See accompanying notes to the financial statements. 13 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ UNITED KINGDOM -- CONTINUED 25,696 United Utilities 238,795 720,162 Vodafone Group Plc 1,290,297 23,682 Whitbread Plc 194,341 29,032 Wilson (Connolly) Holdings 74,080 26,223 Wolseley 206,932 ------------ 18,786,172 ------------ TOTAL COMMON STOCKS (COST $103,663,952) 91,045,106 ------------ PREFERRED STOCKS -- 1.6% AUSTRALIA -- 0.2% 39,613 News Corporation Ltd 0.93% 205,294 ------------ BRAZIL -- 0.4% 12,164,000 Bombril SA 3.53% 18,745 5,312,710 Gerdau SA 49,465 76,363 Investimentos Itau SA 38,941 896,000 Itaubanco SA (Registered) 39,415 13,181 Petroleo Brasileiro SA (Petrobras) 3.01% 157,662 29,146,000 Tele Centro Oeste Celular SA 6.78% 35,116 ------------ 339,344 ------------ GERMANY -- 0.8% 15,100 Dyckerhoff AG (Non Voting) 11.72% 72,423 3,000 Krones AG 2.00% 129,983 2,168 RWE AG 4.35% 43,929 24,807 Villeroy & Boch AG (Non Voting) 5.78% 213,896 11,714 Volkswagen AG 5.30% 343,409 ------------ 803,640 ------------ ITALY -- 0.1% 13,860 Fiat SPA 4.95% 65,729 ------------ SOUTH KOREA -- 0.1% 700 Samsung Electronics (Non Voting) 4.08% 78,583 ------------ TOTAL PREFERRED STOCKS (COST $2,131,456) 1,492,590 ------------
See accompanying notes to the financial statements. 14 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ INVESTMENT FUNDS -- 0.1% TAIWAN -- 0.1% 10,000 Taiwan Fund* 83,800 ------------ TOTAL INVESTMENT FUNDS (COST $119,490) 83,800 ------------ MUTUAL FUNDS -- 0.1% TAIWAN -- 0.1% 23,000 R.O.C. Taiwan Fund* 84,870 ------------ TOTAL MUTUAL FUNDS (COST $123,970) 84,870 ------------ RIGHTS AND WARRANTS -- 0.0% THAILAND -- 0.0% 75,000 Quality House Co Ltd Warrants, Expires 04/19/03* 456 ------------ TOTAL RIGHTS AND WARRANTS (COST $0) 456 ------------ SHORT-TERM INVESTMENTS -- 0.1% CASH EQUIVALENTS -- 0.1% $ 100,000 Dresdner GC Time Deposit, 1.31%, due 3/03/03 100,000 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $100,000) 100,000 ------------ TOTAL INVESTMENTS -- 98.0% (Cost $106,138,868) 92,806,822 Other Assets and Liabilities (net) -- 2.0% 1,901,920 ------------ TOTAL NET ASSETS -- 100.0% $ 94,708,742 ============ NOTES TO SCHEDULE OF INVESTMENTS:
ADR - American Depositary Receipt GDR - Global Depository Receipt NVDR - Non-Voting Depository Receipt * Non-income producing security. (a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). See accompanying notes to the financial statements. 15 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY (SHOWING PERCENTAGE OF EQUITY INVESTMENTS) FEBRUARY 28, 2003 (UNAUDITED) At February 28, 2003, industry sector diversification of the Fund's equity investments was as follows:
INDUSTRY SECTOR - -------------------------------------------------------------------- Financials 23.5% Consumer Discretionary 12.8 Telecommunication Services 10.1 Energy 10.0 Consumer Staples 8.9 Utilities 8.7 Health Care 7.9 Industrials 7.9 Materials 6.7 Information Technology 3.3 Miscellaneous 0.2 ----- 100.0% =====
16 See accompanying notes to the financial statements. GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $106,138,868) (Note 1) $92,806,822 Cash 25,825 Foreign currency, at value (cost $1,284,738) (Note 1) 1,288,354 Dividends and interest receivable 162,303 Foreign taxes receivable 62,079 Receivable for open forward foreign currency contracts (Notes 1 and 6) 458,365 Receivable for expenses reimbursed by Manager (Note 2) 51,268 ----------- Total assets 94,855,016 ----------- LIABILITIES: Payable for investments purchased 1,479 Payable to affiliate for (Note 2): Management fee 39,715 Shareholder service fee 11,032 Accrued expenses 94,048 ----------- Total liabilities 146,274 ----------- NET ASSETS $94,708,742 =========== NET ASSETS CONSIST OF: Paid-in capital $121,780,575 Accumulated undistributed net investment income 122,674 Accumulated net realized loss (14,338,491) Net unrealized depreciation (12,856,016) ----------- $94,708,742 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $94,708,742 =========== SHARES OUTSTANDING: Class III 10,850,631 =========== NET ASSET VALUE PER SHARE: Class III $ 8.73 ===========
See accompanying notes to the financial statements. 17 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $291,924) $ 2,276,660 Interest 76,343 ----------- Total income 2,353,003 ----------- EXPENSES: Management fee (Note 2) 475,127 Custodian fees 323,594 Audit fees 34,673 Transfer agent fees 27,285 Legal fees 3,740 Registration fees 3,461 Trustees fees and related expenses (Note 2) 2,730 Miscellaneous 1,924 Fees reimbursed by Manager (Note 2) (392,074) ----------- 480,460 Shareholder service fee (Note 2) - Class III 131,980 ----------- Net expenses 612,440 ----------- Net investment income 1,740,563 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (3,693,511) Closed futures contracts (245,611) Foreign currency, forward contracts and foreign currency related transactions 870,280 ----------- Net realized loss (3,068,842) ----------- Change in net unrealized appreciation (depreciation) on: Investments (6,498,637) Foreign currency, forward contracts and foreign currency related transactions 313,981 ----------- Net unrealized loss (6,184,656) ----------- Net realized and unrealized loss (9,253,498) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(7,512,935) ===========
18 See accompanying notes to the financial statements. GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 1,740,563 $ 1,808,064 Net realized loss (3,068,842) (5,585,599) Change in net unrealized appreciation (depreciation) (6,184,656) (1,474,411) ----------- ----------- Net decrease in net assets from operations (7,512,935) (5,251,946) ----------- ----------- Distributions to shareholders from: Net investment income Class III (2,648,333) (2,315,695) ----------- ----------- Total distributions from net investment income (2,648,333) (2,315,695) ----------- ----------- Net share transactions (Note 5): Class III 29,583,367 7,316,648 ----------- ----------- Increase in net assets resulting from net share transactions 29,583,367 7,316,648 ----------- ----------- Total increase (decrease) in net assets 19,422,099 (250,993) NET ASSETS: Beginning of period 75,286,643 75,537,636 ----------- ----------- End of period (including accumulated undistributed net investment income of $122,674 and $76,858, respectively) $94,708,742 $75,286,643 =========== ===========
See accompanying notes to the financial statements. 19 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ----------------------------------------------------------- 2003 2002 2001 2000 1999+ ---------- ---------- ---------- ----------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.70 $ 10.79 $ 10.43 $ 9.71 $ 10.00 ------- ------- ------- -------- ------- Income from investment operations: Net investment income 0.19(b) 0.25(b) 0.23(b) 0.15(b) 0.04 Net realized and unrealized gain (loss) (0.90) (1.03) 0.29 0.70 (0.28) ------- ------- ------- -------- ------- Total from investment operations (0.71) (0.78) 0.52 0.85 (0.24) ------- ------- ------- -------- ------- Less distributions to shareholders: From net investment income (0.26) (0.31) (0.16) (0.13) (0.05) ------- ------- ------- -------- ------- Total distributions (0.26) (0.31) (0.16) (0.13) (0.05) ------- ------- ------- -------- ------- NET ASSET VALUE, END OF PERIOD $ 8.73 $ 9.70 $ 10.79 $ 10.43 $ 9.71 ======= ======= ======= ======== ======= TOTAL RETURN(a) (7.47)% (7.16)% 5.03% 8.65% (2.44)%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $94,709 $75,287 $75,538 $112,623 $18,529 Net expenses to average daily net assets 0.70% 0.69% 0.69% 0.69% 0.69%* Net investment income to average daily net assets 1.98% 2.49% 2.11% 1.36% 0.87%* Portfolio turnover rate 48% 50% 56% 5% 20% Fees and expenses reimbursed by the Manager to average daily net assets: 0.45% 0.41% 0.34% 0.34% 2.34%*
+ Period from July 29, 1998 (commencement of operations) to February 28, 1999. * Annualized. ** Not Annualized. (a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) Computed using average shares outstanding throughout the period. 20 See accompanying notes to the financial statements. GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Tax-Managed International Equities Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high after-tax total return primarily through investment in non-U.S. equity securities. The Fund's benchmark is the MSCI EAFE Index (after-tax). The Fund's benchmark is computed by the Manager by applying a 38.6% tax (credit) on short-term realized capital gains (losses), a 38.6% tax on income, and a 20% tax (credit) on long-term realized capital gains (losses) on the securities comprised in the MSCI EAFE Index, a large capitalization international stock index, which is independently maintained and published by Morgan Stanley Capital International. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Shares of underlying funds and other mutual funds are valued at their net asset value as reported on each business day. Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Securities for which quotations are not readily available, or whose values the Manager has determined to be unreliable, are valued at fair value as determined in good faith by the Trustees or 21 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in foreign currency values that are unfavorable to the Fund. The value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through currency contracts as of February 28, 2003. FUTURES CONTRACTS The Fund may purchase and sell futures contracts to manage its exposure to the financial markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures 22 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. At February 28, 2003, there were no open futures contracts. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 28, 2003, there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future, security or currency 23 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. At February 28, 2003, there were no open purchased option contracts. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the financial markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. At February 28, 2003, there were no open swap agreements. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities 24 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 2003, the Fund had no securities on loan. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryover for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country's tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003, the tax basis of distributions paid were as follows: ordinary income -- $2,315,695 and $2,648,333, respectively. As of February 28, 2003, the components of distributable earnings on a tax basis consisted of $689,274 of undistributed ordinary income. These temporary differences between book and tax basis distributable earnings are primarily due to foreign currency transactions. At February 28, 2003, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code, of $323,163, $1,004,023, $6,951,109 and $4,807,000 expiring in 2008, 2009, 2010 and 2011, respectively. The Fund has elected to defer to March 1, 2003 post-October capital losses of $1,229,777. 25 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to foreign currency transactions. The financial highlights exclude these adjustments.
Accumulated Undistributed Net Accumulated Net Investment Income Realized Loss ----------------- --------------- $953,586 $(953,586)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and discounts. Non cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. 26 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .54% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until at least June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent Trustees of the Trust (including legal fees), brokerage commissions and other investment-related costs, hedging transaction fees, extraordinary, non-recurring and certain unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes) exceed the management fee. The Fund's portion of the fee paid by the Trust to the independent Trustees during the year ended February 28, 2003, was $2,180. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2003, aggregated $67,837,120 and $40,103,188, respectively. At February 28, 2003, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in the value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $106,242,351 $4,439,333 $(17,874,862) $(13,435,529)
4. PRINCIPAL SHAREHOLDERS At February 28, 2003, 46.6% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the outstanding shares of the Fund. Investment activities of these shareholders may have a material effect on the Fund. 27 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 ----------------------- -------------------- Shares Amount Shares Amount ---------- ----------- -------- ---------- Class III: Shares sold 3,123,659 $29,900,170 597,030 $5,719,988 Shares issued to shareholders in reinvestment of distributions 194,117 1,784,356 171,255 1,632,167 Shares repurchased (229,938) (2,101,159) (3,659) (35,507) ---------- ----------- -------- ---------- Net increase 3,087,838 $29,583,367 764,626 $7,316,648 ========== =========== ======== ==========
6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 28, 2003 is as follows: FORWARD CROSS CURRENCY CONTRACTS
Settlement Deliver/Units Receive/in Net Unrealized Date of Currency Exchange for Appreciation ---------- ---------------- ------------------ -------------- 4/17/03 EUR 3,500,000 JPY 390,425,000 $ 458,365
CURRENCY ABBREVIATIONS: EUR - Euro JPY - Japanese Yen
28 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Tax-Managed International Equities Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 29 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) TAX INFORMATION (UNAUDITED) - -------------------------------------------------------------------------------- During the year ended February 28, 2003, the Fund paid foreign taxes of $291,924 and recognized foreign source income of $2,568,584. 30 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- --------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of 39 *(2) c/o GMO Trust Trust Business 40 Rowes Wharf Administration Boston, MA 02110 and Senior Age: 61 Associate Dean, Harvard University. Donald W. Glazer, Esq. Trustee of the Since December Advisory 39 None c/o GMO Trust Trust 2000 Counsel, 40 Rowes Wharf Goodwin Procter Boston, MA 02110 LLP; Secretary Age: 58 and Consultant, Provant, Inc. (provider of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 31 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- --------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, 39 None c/o GMO Trust Board of 1985. President Grantham, Mayo, 40 Rowes Wharf Trustees of the from February Van Otterloo & Boston, MA 02110 Trust 2002 - October Co. LLC. Age: 64 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 32 PRINCIPAL OFFICERS:
Term of Office(4) and Principal Occupation(s) Name, Address, Position(s) Length of During Past and Age Held with Fund Time Served Five Years ------------------------------------ -------------- -------------- -------------------------------------------------- Scott Eston President and President and Chief Financial Officer (1997 - present), Chief c/o GMO Trust Chief Chief Operating Officer (2000 - present) and Member, 40 Rowes Wharf Executive Executive Grantham, Mayo, Van Otterloo & Co. LLC. Boston, MA 02110 Officer of the Officer since Age: 47 Trust October 2002; Vice President from August 1998 - October 2002. Susan Randall Harbert Chief Chief Member, Grantham, Mayo, Van Otterloo & Co. LLC. c/o GMO Trust Financial Financial 40 Rowes Wharf Officer and Officer Since Boston, MA 02110 Treasurer of February 2000; Age: 45 the Trust Treasurer since February 1998. Brent Arvidson Assistant Since Senior Fund Administrator, Grantham, Mayo, Van c/o GMO Trust Treasurer of September Otterloo & Co. LLC. 40 Rowes Wharf the Trust 1998. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President Vice President General Counsel, Anti-Money Laundering Reporting c/o GMO Trust and Clerk of since February Officer (July 2002 - February 2003) and Member, 40 Rowes Wharf the Trust 1997; Clerk Grantham, Mayo, Van Otterloo & Co. LLC. Boston, MA 02110 since March Age: 37 2001; May 1999 - August 1999. Elaine M. Hartnett, Esq. Vice President Vice President Associate General Counsel, Grantham, Mayo, Van c/o GMO Trust and Secretary since August Otterloo & Co. LLC (June 1999 - present); 40 Rowes Wharf of the Trust 1999; Associate/ Junior Partner, Hale and Dorr LLP Boston, MA 02110 Secretary (1991 - 1999). Age: 58 since March 2001. Julie Perniola Vice President Since February Anti-Money Laundering Reporting Officer (February c/o GMO Trust and Anti- 2003. 2003 - present) and Compliance Officer, Grantham, 40 Rowes Wharf Money Mayo, Van Otterloo & Co. LLC. Boston, MA 02110 Laundering Age: 32 Compliance Officer
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 33 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Day-to-day management of the Fund's portfolio is the responsibility of the U.S. Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The GMO Tax-Managed Small Companies Fund returned -17.0% for the fiscal year ended February 28, 2003, as compared to -19.5% for the Russell 2500 Index before taxes. On an after-tax basis, the Fund returned -17.3% to the benchmark's -20.0% for the same period. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in U.S. equity securities throughout the period. U.S. equities were no place to be if one was looking to avoid the downward slide of global equity markets in 2002 or the start of 2003. Across the board, all sectors posted negative absolute returns, and large capitalization stocks fared worst of all. From accounting fraud to war anticipation anxiety, there was no shortage of reasons to worry, and the markets reflected this both in volatility and retrenchment towards companies with tangible products and transparent processes. Value stocks provided a little traction on the downward skid relative to growth stocks, and generally outperformed by 6% to 8% on a relative basis across market capitalization groups. Within the smaller companies universe, integrated oils and other energy stocks posted the strongest returns, reflecting soaring energy costs. REITs were the only bright spot, as REITs remarkably resisted the downward slide, posting flat returns for the period. The strongest relative returns by sector came from financial services stocks, which include REITs, and integrated oils and other energy stocks, which profited from soaring energy costs. The Fund's outperformance of the benchmark for the period is attributed to stock selection, and a continued tilt towards value stocks. The portfolio uses two value-based stock selection strategies and one momentum-based stock selection strategy. Our price-to-normalized earnings strategy, which focuses on traditional value measures, worked especially well in the back-to-basics mentality of the past year. Our intrinsic value stock selection model, which has a strong record of selecting relatively undervalued stocks outside traditional value filters, underperformed for the period. Our momentum-based stock selection strategy had a neutral effect on the portfolio for the year, underperforming in the first half, but adding value in the second. For the year, stock selection was strongest within producer durable and healthcare stocks. Generally strong across most sectors, selection was weakest within materials processing stocks. In combination, stock selection added 2.0% to relative performance for the period. Sector selection, which reflected the Fund's bias towards value stocks, also contributed positively to relative performance. A combined 11% underweight in technology and healthcare stocks contributed over 1.0% to relative performance for the fiscal year. This return was tempered by less productive overweights in automotive and consumer discretionary stocks, which underperformed relative to the benchmark. In combination, sector selection contributed 0.5% to relative performance for the period. GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- OUTLOOK Small capitalization value stocks remain undervalued relative to the broader U.S. equity market. The portfolio is still positioned to take advantage of this valuation spread, but has been slowly reining in its overweight of value relative to the benchmark. The Fund remains underweight in healthcare and technology stocks, but has been slowly increasing its weight in technology. In addition, the Fund is underweight financial services and utilities stocks in favor of consumer discretionary and producer durable stocks THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO TAX-MANAGED SMALL COMPANIES FUND CLASS III SHARES AND THE RUSSELL 2500 INDEX AS OF FEBRUARY 28, 2003 GMO TAX-MANAGED SMALL COMPANIES FUND* RUSSELL 2500 INDEX* 6/1/99 $9,950 $10,000 6/30/99 $10,378 $10,556 9/30/99 $9,594 $9,875 12/31/99 $9,947 $11,818 3/31/2000 $10,128 $13,012 6/30/2000 $9,289 $12,491 9/30/2000 $10,044 $12,791 12/31/2000 $10,722 $12,322 3/31/2001 $10,439 $11,254 6/30/2001 $11,488 $12,800 9/30/2001 $10,254 $10,390 12/31/2001 $11,716 $12,473 3/31/2002 $12,786 $12,939 6/30/2002 $12,512 $11,822 9/30/2002 $10,188 $9,615 12/31/2002 $10,633 $10,253 2/28/2003 $10,041 $9,741
AVERAGE ANNUAL TOTAL RETURN* SINCE INCEPTION 1 YEAR 6/1/99 Class III -17.41% 0.11%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 50 bp on the purchase. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. * Returns are before taxes. GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ COMMON STOCKS -- 99.4% AUTO & TRANSPORTATION -- 5.7% 1,800 American Axle & Manufacturing Holdings Inc* 42,570 4,200 Arctic Cat Inc 60,274 5,425 ArvinMeritor Inc 82,894 4,300 Autoliv Inc 89,010 1,300 Borg Warner Automotive Inc 67,886 2,100 CNF Inc 60,417 4,100 Cooper Tire & Rubber Co 57,441 6,500 Dana Corp 55,640 3,600 Expeditors International Washington Inc 123,084 3,300 Kansas City Southern* 40,095 1,100 Keystone Automotive Industries Inc* 18,260 3,800 Lear Corp* 144,324 3,000 Offshore Logistics Inc* 55,380 800 Oshkosh Truck Corp 48,880 1,200 P.A.M. Transportation Services* 26,820 1,700 Polaris Industries Inc 82,280 1,300 Tidewater Inc 39,806 8,300 Tower Automotive Inc* 27,805 1,700 US Freightways Corp 41,327 2,200 Wabtec Corp 24,200 ------------ 1,188,393 ------------ CONSUMER DISCRETIONARY -- 22.7% 3,700 Abercrombie & Fitch Co, Class A* 101,750 3,400 American Eagle Outfitters Inc* 49,198 4,200 American Greetings Corp* 55,104 3,100 Applebees International Inc 79,484 2,500 Banta Corp 71,225 4,900 Big Lots Inc* 54,145 3,300 Blyth Industries Inc 82,005 1,800 Bob Evans Farms Inc 42,120 3,700 Bowne and Co Inc 36,260 4,800 Boyd Gaming Corp* 60,048 3,300 Burlington Coat Factory Warehouse 51,810 3,700 Callaway Golf Co 42,476 1,500 Career Education Corp* 69,750 2,500 Catalina Marketing Corp* 45,250 1,500 CDW Computer Centers Inc* 65,490
See accompanying notes to the financial statements. 1 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ CONSUMER DISCRETIONARY -- CONTINUED 3,000 Central Garden and Pet Co* 68,700 3,000 CKE Restaurants Inc* 12,510 3,000 Claire's Stores Inc 68,460 4,200 Coach Inc* 150,066 2,900 Consolidated Graphics Inc* 70,035 3,600 Corinthian Colleges Inc* 134,928 1,200 Corrections Corporation of America, REIT* 20,736 3,200 Dillard's Inc, Class A 44,640 7,500 DoubleClick Inc* 48,300 3,500 Dress Barn Inc* 45,220 5,400 Fossil Inc* 97,092 2,100 Furniture Brands International Inc* 38,241 3,400 G TECH Holdings Corp* 98,940 3,100 Getty Images Inc* 90,985 1,600 Global Imaging Systems Inc* 29,616 10,600 IKON Office Solutions Inc 74,306 3,300 infoUSA Inc* 14,949 2,800 Isle of Capri Casinos Inc* 33,180 1,800 Jo-ann Stores Inc, Class A* 36,198 1,900 Kellwood Co 48,640 2,000 Kelly Services, Class A 41,440 3,600 Lone Star Steakhouse and Saloon Inc 73,044 4,000 Magna Entertainment Corp* 19,600 7,300 Mail-Well Inc* 15,622 2,200 Mandalay Resort Group* 55,528 2,300 Manpower Inc 69,851 1,600 Mohawk Industries Inc* 79,008 8,400 MPS Group Inc* 41,244 4,200 Nautilus Group Inc 61,656 2,700 Neiman Marcus Group Inc, Class A* 73,116 2,300 Neoforma Inc* 23,598 6,700 Nu Skin Enterprises Inc 70,484 8,600 OfficeMax Inc* 41,194 2,600 Outback Steakhouse Inc 83,720 4,200 Pacific Sunwear of California* 74,382 2,300 Papa Johns International Inc* 54,671 1,200 Payless ShoeSource Inc* 55,932 2,500 Pegasus Solutions Inc* 24,225 3,600 Pier 1 Imports Inc 57,492 5,600 Pinnacle Entertainment Inc* 22,232
2 See accompanying notes to the financial statements. GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ CONSUMER DISCRETIONARY -- CONTINUED 2,000 Pixar Inc* 107,980 2,000 Pre-Paid Legal Services Inc* 34,300 5,900 Prime Hospitality Corp* 30,444 2,100 Quiksilver Inc* 52,710 2,100 R.R. Donnelley and Sons 38,346 300 Racing Champions Corp* 4,305 3,200 Radio One Inc, Class A* 44,992 2,200 Rent-A-Center Inc* 109,890 3,500 Rex Stores Corp* 35,525 2,900 Ross Stores Inc 99,209 4,400 Ryan's Family Steak Houses Inc* 45,452 3,000 Saks Inc* 23,070 1,500 Sharper Image Corp* 23,100 1,800 Shoe Carnival Inc* 22,718 2,900 Shopko Stores Inc* 31,755 6,500 Sinclair Broadcast Group, Class A* 56,810 1,800 Snap-On Inc 44,982 2,200 Sonic Automotive Inc* 33,484 3,000 Spanish Broadcasting System* 18,270 7,400 Spherion Corp* 44,918 2,500 Station Casinos Inc* 45,375 1,400 Steinway Musical Instruments* 20,874 2,800 Steven Madden Ltd* 47,460 10,500 Stewart Enterprises Inc* 33,495 4,100 Take-Two Interactive Software* 85,731 1,400 Tractor Supply Co* 46,298 1,500 United Automotive Group Inc* 16,695 6,900 United Online Inc* 98,394 2,400 United Stationers Inc* 49,896 2,800 Universal Electronics Inc* 26,880 2,200 Wallace Computer Services 56,078 3,200 Whitehall Jewellers Inc* 26,912 3,400 World Fuel Services Corp 68,000 ------------ 4,694,244 ------------ CONSUMER STAPLES -- 3.5% 1,200 Constellation Brands Inc, Class B* 29,400 1,100 Coors (Adolph) Co, Class B 52,910 2,400 Dean Foods Co* 101,208 1,200 Dole Food Co 39,360
See accompanying notes to the financial statements. 3 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ CONSUMER STAPLES -- CONTINUED 1,000 Dreyers Grand Ice Cream Inc 72,800 3,100 Ingles Markets Inc, Class A 30,690 4,700 Natures Sunshine Products Inc 39,626 6,700 PepsiAmericas Inc 81,874 900 Sanderson Farms Inc 17,317 2,800 Smithfield Foods Inc* 51,884 2,000 Standard Commercial Corp 33,600 3,367 Tyson Foods Inc, Class A 30,976 2,800 Universal Corp 106,708 2,700 Winn-Dixie Stores Inc 32,940 ------------ 721,293 ------------ FINANCIAL SERVICES -- 23.8% 1,900 American Financial Group Inc 37,677 700 American National Insurance Co 54,803 1,800 AmerUs Group Co 47,214 1,200 Associated Banc Corp 41,472 3,000 Astoria Financial Corp 75,360 3,400 BankAtlantic Bancorp Inc 30,838 1,200 Bedford Property Investors, REIT 30,492 1,021 BOK Financial Corp* 33,152 2,500 Capstead Mortgage Corp, REIT 31,500 1,000 CBL & Associates Properties Inc, REIT 39,850 3,700 CCC Information Services Group* 63,603 5,600 Checkfree Corp* 117,488 1,700 Colonial BancGroup Inc 19,703 900 Colonial Properties Trust, REIT 28,818 2,500 Commerce Group Inc 85,050 1,500 Commercial Federal Corp 33,405 4,400 Commercial Net Lease Realty Inc, REIT 65,340 1,100 Community First Bankshares 27,269 1,210 Community Trust Bancorp 30,589 1,500 Compass Bankshares Inc 47,730 2,500 Cullen/Frost Bankers Inc 77,900 1,936 Delphi Financial Group Inc, Class A 71,342 3,150 Doral Financial Corp 102,091 1,000 Downey Financial Corp 40,150 1,400 East West Bancorp Inc 46,550 1,900 Entertainment Properties Trust, REIT 47,120 2,250 Equity One Inc, REIT 33,187
4 See accompanying notes to the financial statements. GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ FINANCIAL SERVICES -- CONTINUED 3,300 Espeed Inc* 34,056 4,300 Felcor Lodging Trust Inc, REIT 29,541 6,205 Fidelity National Financial Inc 203,710 1,900 First American Financial Corp 43,890 2,950 First Bancorp Puerto Rico 73,957 700 First Citizens Bancshares, Class A 65,317 1,300 Firstmerit Corp 25,739 1,300 Flagstar Bancorp Inc 31,525 3,100 General Growth Properties, REIT 162,037 1,785 German American Bancorp 35,057 1,600 Glacier Bancorp Inc 38,592 1,600 Glenborough Realty Trust Inc, REIT 25,920 3,100 Greater Bay Bancorp 49,631 700 Health Care Inc, REIT 18,032 3,200 Hibernia Corp, Class A 57,984 2,400 Highwood Properties Inc, REIT 50,424 1,600 Hospitality Properties Trust, REIT 48,896 8,500 Host Marriott Corp, REIT* 58,820 14,200 HRPT Properties Trust, REIT 120,842 2,600 Hudson City Bancorp Inc 49,374 2,000 Hudson United Bancorp 63,080 3,000 Huntington Bancshares Inc 57,600 6,300 Hypercom Corp* 24,444 5,100 iDine Rewards Network Inc* 35,700 1,500 IndyMac Bancorp Inc, REIT 28,650 2,400 Interpool Inc 38,400 1,700 iStar Financial Inc, REIT 48,280 5,800 JDN Realty Corp, REIT 69,774 900 Kansas City Life Insurance Co 35,559 14,800 La Quinta Corp, REIT 48,692 500 Landamerica Financial Group Inc 18,850 3,800 Lasalle Hotel Properties, REIT 45,980 2,000 Lexington Corporate Properties Trust, REIT 33,000 2,400 Mack-Cali Realty Corp, REIT 69,360 3,400 Meristar Hospitality Corp, REIT 9,078 5,600 National Health Investors, REIT 88,200 3,200 Nationwide Financial Services, Class A 77,760 2,800 New Century Financial Corp 74,564 1,300 New Plan Excel Realty Trust, REIT 25,298 1,200 Novastar Financial Inc, REIT 39,360
See accompanying notes to the financial statements. 5 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ FINANCIAL SERVICES -- CONTINUED 3,000 Old Republic International Corp 81,900 2,300 PMI Group Inc 62,330 1,000 Prentiss Properties Trust, REIT 26,210 2,300 Presidential Life Corp 22,080 2,800 Protective Life Corp 75,936 3,300 Provident Financial Group 95,403 22,700 Providian Financial Corp* 138,470 1,200 PS Business Parks Inc, REIT 37,680 4,200 RFS Hotel Investors Inc, REIT 40,362 3,500 Riggs National Corp 48,825 2,600 Ryder System Inc 58,994 3,100 Seacoast Banking Corp of Florida 59,923 2,100 Silicon Valley Bancshares* 36,435 1,700 Southwest Bancorporation of Texas Inc* 53,754 5,900 Sovereign Bancorp Inc 80,122 1,200 Sovran Self Storage, REIT 32,592 1,200 Student Loan Group 113,160 700 Texas Regional Bancshares, Class A 23,163 700 Trustmark Corp 16,926 1,300 UCBH Holdings Inc 54,730 1,133 UMB Financial Corp 41,796 4,090 Washington Federal Inc 90,798 900 Webster Financial Corp 32,040 2,990 Westcorp 56,780 1,600 WFS Financial Inc* 30,032 ------------ 4,925,107 ------------ HEALTH CARE -- 6.5% 2,100 Accredo Health Inc* 49,875 6,200 Allos Therapeutics Inc* 27,280 1,300 American Med Security Group* 16,822 6,000 Amylin Pharmaceuticals Inc* 92,040 2,400 Biosite Inc* 75,048 2,200 Chattem Inc* 34,144 1,700 Cooper (The) Companies Inc 49,385 2,400 Coventry Health Care Inc* 67,992 2,000 Hanger Orthopedic Group Inc* 20,860 4,300 Health Net Inc* 107,973 1,100 Hologic Inc* 7,953 4,700 Humana Inc* 46,060
6 See accompanying notes to the financial statements. GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ HEALTH CARE -- CONTINUED 3,100 Immucor Inc* 61,163 1,400 Invacare Corp 42,840 3,000 Mid Atlantic Medical Services Inc* 107,250 1,350 Odyssey HealthCare Inc* 31,199 3,500 Pacificare Health Systems Inc* 75,600 1,300 PolyMedica Corp 37,947 3,900 Prime Medical Service Inc* 30,190 7,200 Res-Care Inc* 20,520 2,500 Scios Inc* 109,100 2,800 United Surgical Partners International Inc* 51,408 2,000 Varian Medical Systems Inc* 101,100 5,500 VitalWorks Inc* 21,120 6,900 WebMD Corp* 66,212 ------------ 1,351,081 ------------ INTEGRATED OILS -- 0.4% 3,800 Holly Corp 84,550 ------------ MATERIALS & PROCESSING -- 7.6% 2,600 A. Schulman Inc 37,570 3,700 AK Steel Holding Corp* 20,313 2,600 Albemarle Corp 63,674 3,600 Ashland Inc 100,116 1,400 Barnes Group Inc 26,880 4,700 Caraustar Industries Inc* 35,062 1,400 Cleveland Cliffs Inc* 29,512 3,000 Commercial Metals Co 42,210 11,700 Crown Holdings Inc* 66,924 2,800 Cytec Industries Inc* 81,060 3,500 Energizer Holdings Inc* 92,925 800 Harsco Corp 24,136 3,900 Hercules Inc* 31,317 1,700 IMC Global Inc 14,977 4,400 Imco Recycling Inc* 26,400 2,700 Jones Lang Lasalle Inc* 37,395 1,000 Kaydon Corp 18,000 3,900 Lafarge Corp 110,292 800 LNR Property Corp 26,448 4,100 Material Sciences Corp* 42,066
See accompanying notes to the financial statements. 7 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ MATERIALS & PROCESSING -- CONTINUED 2,600 Olin Corp 42,900 11,800 Owens Illinois Inc* 106,200 1,000 Phelps Dodge Corp* 35,960 2,000 Precision Castparts Corp 47,200 1,100 Quanex Corp 34,760 1,950 Reliance Steel and Aluminum Co 31,883 1,900 Royal Gold Inc 36,955 1,900 Sealed Air Corp* 68,913 800 Silgan Holdings Inc* 16,256 1,800 Sonoco Products Co 37,350 2,400 Standard Register Co 38,952 1,400 Texas Industries Inc 27,790 3,300 Timken Co 52,899 700 Trex Company Inc* 22,750 6,500 Unifi Inc* 33,150 1,000 York International Corp 21,400 ------------ 1,582,595 ------------ OTHER -- 1.3% 2,400 Brunswick Corp 45,360 3,600 FMC Corp* 55,908 3,200 Kaman Corp, Class A 31,456 2,600 Lancaster Colony Corp 98,748 700 Sequa Corp, Class A* 24,675 1,001 Trinity Industries Inc 16,226 ------------ 272,373 ------------ OTHER ENERGY -- 5.5% 9,400 Chesapeake Energy Corp 76,328 2,000 Cooper Cameron Corp* 104,000 5,300 Denbury Resources Inc* 60,844 7,500 Harvest Natural Resources Inc* 43,275 2,000 Helmerich & Payne Inc 55,000 4,000 National-Oilwell Inc* 90,000 2,400 Patina Oil & Gas Corp 79,872 3,100 Patterson-UTI Energy Inc* 102,734 8,900 Petroquest Energy Inc* 17,622 4,500 Pioneer Natural Resources Co* 117,675 3,000 Pogo Producing Co 119,250
8 See accompanying notes to the financial statements. GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ OTHER ENERGY -- CONTINUED 5,200 Pride International Inc* 75,400 4,600 Rowan Cos Inc 90,298 7,300 TransMontaigne Inc* 28,470 4,000 Varco International Inc* 75,840 ------------ 1,136,608 ------------ PRODUCER DURABLES -- 10.4% 700 Actuant Corp* 25,900 8,500 American Power Conversion Corp* 132,940 1,600 Ametek Inc 52,768 1,200 Beazer Homes USA, Inc* 70,032 2,200 Belden Inc 28,380 400 Briggs & Stratton Corp 15,800 3,200 C-cor Electronics Inc* 9,504 4,200 Cable Design Technologies Corp* 23,058 3,500 Centex Corp 193,480 4,000 Columbus McKinnon Corp* 7,000 1,300 Donaldson Co Inc 45,305 5,432 DR Horton Inc 99,460 5,000 General Cable Corp 19,450 1,700 Headwaters Inc* 23,834 1,400 Hovnanian Enterprises Inc* 45,962 3,300 Interdigital Communications Corp* 47,454 3,900 KB HOME 182,910 2,800 Kimball International, Class B 37,884 4,900 Ladish Co Inc* 24,010 1,678 Lennar Corp 90,595 3,128 MDC Holdings Inc 117,425 300 NVR Inc* 99,585 3,200 Plantronics Inc* 46,112 2,800 Pulte Corp 142,324 2,200 Ryland Group Inc 90,860 1,800 Smith (AO) Corp, Class B 46,404 3,400 Standard Pacific Corp 87,618 1,500 Standex International Corp 28,650 1,200 Tecumseh Products Co, Class A 53,400 1,100 Tecumseh Products Co, Class B 46,475 6,700 Toll Brothers Inc* 129,779 2,900 Watts Industries Inc, Class A 43,500
See accompanying notes to the financial statements. 9 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ PRODUCER DURABLES -- CONTINUED 2,000 William Lyon Homes* 46,540 ------------ 2,154,398 ------------ TECHNOLOGY -- 7.5% 8,400 3 Com Corp* 35,196 5,700 Acxiom Corp* 86,982 8,000 Adaptec Inc* 48,720 3,800 American Management Systems Inc* 40,280 6,000 Answerthink Inc* 15,300 3,000 Arrow Electronics Inc* 43,140 1,800 Benchmark Electronics Inc* 62,712 1,900 Black Box Corp 77,254 2,500 Ceridian Corp* 34,500 4,400 Ciber Inc* 23,760 1,300 Cognizant Technology Solutions Corp* 91,260 3,600 Cray Inc* 30,708 3,400 Digital River Inc* 30,532 6,500 Foundry Networks Inc* 57,655 2,200 Gartner Group Inc, Class A* 16,104 5,100 Ingram Micro Inc, Class A* 52,836 2,100 j2 Global Communications Inc* 50,169 6,900 Kemet Corp* 55,062 7,700 Manufacturers Services Ltd* 38,346 1,700 MCSi Inc* 1,088 2,800 Mercury Interactive Corp* 90,860 3,300 Omnivision Technologies* 62,700 5,800 Pegasystems Inc* 24,012 6,900 Pinnacle Systems Inc* 66,999 4,700 Radiant Systems Inc* 36,660 6,800 Red Hat Inc* 40,052 2,900 Siliconix Inc* 64,963 3,900 SPSS Inc* 42,510 1,700 SS&C Technologies Inc* 17,748 2,200 Supertex Inc* 32,428 4,500 Syntel Inc* 85,275 1,200 Systems & Computer Technology Corp* 9,564 3,500 Trikon Technologies Inc* 16,275 7,100 Tyler Technologies Inc* 26,838 5,200 White Electronic Designs Corp* 36,816
10 See accompanying notes to the financial statements. GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ TECHNOLOGY -- CONTINUED 5,100 Zomax Inc* 17,187 ------------ 1,562,491 ------------ UTILITIES -- 4.5% 2,500 Alliant Energy Corp 39,400 4,300 Avista Corp 43,903 1,100 CH Energy Group Inc 45,298 1,900 DPL Inc 22,990 3,100 DQE Inc 41,850 3,900 El Paso Electric Co* 40,170 4,906 Energy East Corp 92,331 800 Great Plains Energy Inc 18,136 900 Hawaiian Electric Industries Inc 35,820 13,000 Level 3 Communications Inc* 64,220 1,600 National Fuel Gas Co 31,264 800 NSTAR 32,336 2,400 OGE Energy Corp 41,688 3,800 Oneok Inc 65,474 3,600 PNM Resources Inc 75,888 8,300 PTEK Holdings Inc* 29,050 2,900 Puget Energy Inc 58,696 2,800 SCANA Corp 83,972 2,800 Wisconsin Energy Corp 63,980 ------------ 926,466 ------------ TOTAL COMMON STOCKS (COST $19,906,745) 20,599,599 ------------ SHORT-TERM INVESTMENTS -- 10.9% CASH EQUIVALENTS -- 10.2% 918,427 Dreyfus Money Market Fund(a) 918,427 $ 648,999 Harris Trust & Savings Bank Eurodollar Time Deposit, 1.26%, due 3/24/03(a) 648,999 535,424 Merrimac Money Market Fund(a) 535,424 ------------ 2,102,850 ------------
See accompanying notes to the financial statements. 11 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ REPURCHASE AGREEMENT -- 0.7% $ 147,213 Salomon Smith Barney Inc. Repurchase Agreement, dated 02/28/03, due 03/03/03, with a maturity value of $147,217, and an effective yield of 0.36%, collateralized by a U.S. Treasury Bond with a rate of 3.625%, maturity date of 03/31/04, and a market value, including accrued interest of $158,397. 147,213 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $2,250,063) 2,250,063 ------------ TOTAL INVESTMENTS -- 110.3% (Cost $22,156,808) 22,849,662 Other Assets and Liabilities (net) -- (10.3%) (2,126,486) ------------ TOTAL NET ASSETS -- 100.0% $ 20,723,176 ============ NOTES TO THE SCHEDULE OF INVESTMENTS:
REIT - Real Estate Investment Trust
* Non-income producing security. (a) Represents investment of security lending collateral (Note 1). 12 See accompanying notes to the financial statements. GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value, including securities on loan of $2,014,215 (cost $22,156,808) (Note 1) $22,849,662 Dividends and interest receivable 18,598 Receivable for expenses reimbursed by Manager (Note 2) 2,632 ----------- Total assets 22,870,892 ----------- LIABILITIES: Payable upon return of securities loaned (Note 1) 2,102,850 Payable to affiliate for (Note 2): Management fee 9,027 Shareholder service fee 2,462 Accrued expenses 33,377 ----------- Total liabilities 2,147,716 ----------- NET ASSETS $20,723,176 =========== NET ASSETS CONSIST OF: Paid-in capital $27,988,560 Accumulated net realized loss (7,958,238) Net unrealized appreciation 692,854 ----------- $20,723,176 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $20,723,176 =========== SHARES OUTSTANDING: Class III 2,145,777 =========== NET ASSET VALUE PER SHARE: Class III $ 9.66 ===========
See accompanying notes to the financial statements. 13 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $230) $ 465,400 Interest (including securities lending income of $5,141) 9,872 ----------- Total income 475,272 ----------- EXPENSES: Management fee (Note 2) 162,753 Audit fees 28,296 Custodian and transfer agent fees 22,030 Trustees fees and related expenses (Note 2) 1,628 Legal fees 1,613 Registration fees 966 Miscellaneous 1,376 Fees reimbursed by Manager (Note 2) (53,737) ----------- 164,925 Shareholder service fee (Note 2) - Class III 44,387 ----------- Net expenses 209,312 ----------- Net investment income 265,960 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain on investments 1,866,002 ----------- Change in net unrealized appreciation (depreciation) on investments (7,054,887) ----------- Net realized and unrealized loss (5,188,885) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(4,922,925) ===========
14 See accompanying notes to the financial statements. GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 265,960 $ 468,124 Net realized gain 1,866,002 2,873,008 Change in net unrealized appreciation (depreciation) (7,054,887) 1,594,048 ------------ ----------- Net increase (decrease) in net assets from operations (4,922,925) 4,935,180 ------------ ----------- Distributions to shareholders from: Net investment income Class III (261,359) (523,894) ------------ ----------- Total distributions from net investment income (261,359) (523,894) ------------ ----------- Net share transactions (Note 5): Class III (11,636,058) (7,909,373) ------------ ----------- Decrease in net assets resulting from net share transactions (11,636,058) (7,909,373) ------------ ----------- Total decrease in net assets (16,820,342) (3,498,087) NET ASSETS: Beginning of period 37,543,518 41,041,605 ------------ ----------- End of period $ 20,723,176 $37,543,518 ============ ===========
See accompanying notes to the financial statements. 15 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------------------------ 2003 2002 2001 2000* --------- --------- --------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 11.76 $ 10.54 $ 9.52 $ 10.00 ------- ------- ------- ------- Income from investment operations: Net investment income 0.11 0.15 0.12 0.08 Net realized and unrealized gain (loss) (2.10) 1.23 1.02 (0.50) ------- ------- ------- ------- Total from investment operations (1.99) 1.38 1.14 (0.42) ------- ------- ------- ------- Less distributions to shareholders: From net investment income (0.11) (0.16) (0.12) (0.06) ------- ------- ------- ------- Total distributions (0.11) (0.16) (0.12) (0.06) ------- ------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 9.66 $ 11.76 $ 10.54 $ 9.52 ======= ======= ======= ======= TOTAL RETURN(a) (17.00)% 13.25% 12.12% (4.25)%++ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $20,723 $37,544 $41,042 $39,000 Net expenses to average daily net assets 0.71% 0.70% 0.70% 0.70%** Net investment income to average daily net assets 0.90% 1.30% 1.25% 1.08%** Portfolio turnover rate 55% 65% 131% 18% Fees and expenses reimbursed by the Manager to average daily net assets: 0.18% 0.20% 0.17% 0.21%** Purchase and redemption fees consisted of the following per share amounts:(b) $ 0.01 --(c) $ 0.01 $ N/A
(a) The total return would have been lower had certain expenses not been reimbursed during the period shown. Calculation excludes purchase premiums. (b) Effective March 1, 2000, the Fund adopted the provisions of the revised AICPA Audit and Accounting Guide for Investment Companies which requires the disclosure of the per share effect of purchase and redemption fees. Periods prior to March 1, 2000 have not been restated to reflect this change. Amounts calculated using average shares outstanding throughout the period. (c) Purchase premiums were less than $0.01 per share. * Period from June 1, 1999 (commencement of operations) through February 29, 2000. ** Annualized. ++ Not annualized. 16 See accompanying notes to the financial statements. GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Tax Managed Small Companies Fund (the "Fund"), is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks to maximize after-tax total return through investment in a portfolio of common stocks of smaller companies principally traded in the U.S. The Fund's benchmark is the GMO Russell 2500 Index (After Tax), which is computed by the Manager by applying a 38.6% tax on income on the securities compromising the Russell 2500 Index, which is independently maintained and published by Frank Russell Company. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. 17 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- FUTURES CONTRACTS The Fund may purchase and sell futures contracts to manage its exposure to the financial markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. At February 28, 2003, the Fund held no open futures contracts. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the financial markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a 18 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of February 28, 2003, the Fund held no open swap agreements. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 2003, the Fund loaned securities having a market value of $2,014,215 collateralized by cash in the amount of $2,102,850, which was invested in short-term investments. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country's tax treaty with the United States. 19 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from US. GAAP. For the years ended February 28, 2002 and February 28, 2003, the tax basis of distributions paid from ordinary income were $523,894 and $261,359, respectively. At February 28, 2003, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code, of $640,309, $5,176,933, $1,587,943 and $393,614 expiring in 2008, 2009, 2010 and 2011, respectively. The Fund elected to defer to March 1, 2003 post-October losses of $159,438. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to differing treatments for redemption in kind transactions. The net gain resulting from redemption in kind transactions were $1,932,388. The financial highlights exclude these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Loss Paid-in Capital ----------------- ----------------- --------------- $(4,601) $(1,919,529) $1,924,130
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. 20 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is .50% of the amount invested. If the Manager determines that any portion of a cash purchase is offset by a corresponding cash redemption occurring on the same day, the purchase premium charged by the Fund will be reduced by 100% with respect to that portion. In addition, the purchase premium charged by the Fund may be waived if the Manager determines the Fund is substantially underweighted in cash so that a purchase will not require a securities transaction. All purchase premiums are paid and recorded by the Fund as paid-in capital. For the years ended February 28, 2002 and February 28, 2003, the fund received $7,812 and $15,074 in purchase premiums, respectively. There is no fee for redemptions, reinvested distributions or in-kind transactions. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .55% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until at least June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent Trustees of the Trust (including legal fees), 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) exceed the management fee. The Fund's portion of the fee paid by the Trust to the independent Trustees during the period ended February 28, 2003 was $1,447. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period ended February 28, 2003, aggregated $15,899,657 and $26,817,803, respectively. 21 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- At February 28, 2003, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Appreciation -------------- ---------------- ---------------- -------------- $22,156,808 $2,770,943 $(2,078,089) $692,854
4. PRINCIPAL SHAREHOLDERS At February 28, 2003, 36.7% of the outstanding shares of the Fund were held by three shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 ------------------------ --------------------- Shares Amount Shares Amount Class III: ---------- ------------ -------- ----------- Shares sold 317,367 $ 3,014,863 141,701 $ 1,562,447 Shares issued to shareholders in reinvestment of distributions 15,201 154,941 8,017 85,606 Shares repurchased (1,378,358) (14,805,862) (853,209) (9,557,426) ---------- ------------ -------- ----------- Net decrease (1,045,790) $(11,636,058) (703,491) $(7,909,373) ========== ============ ======== ===========
22 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO TAX-MANAGED SMALL COMPANIES FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Tax-Managed Small Companies Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 23 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 24 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the from February Boston, MA 02110 Trust 2002 - October Age: 64 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 25 PRINCIPAL OFFICERS:
Term of Office(4) Principal Occupation(s) Name, Address, Position(s) and Length of During Past and Age Held with Fund Time Served Five Years ------------------------- ------------------------------ ------------------------------ ------------------------------ Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief 40 Rowes Wharf Vice President from August Operating Officer (2000 - Boston, MA 02110 1998 - October 2002. present) and Member, Grantham, Age: 47 Mayo, Van Otterloo & Co. LLC. Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC. 40 Rowes Wharf February 1998. Boston, MA 02110 Age: 45 Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator, c/o GMO Trust Trust Grantham, Mayo, Van 40 Rowes Wharf Otterloo & Co. LLC. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer 40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003) Boston, MA 02110 and Member, Grantham, Mayo, Age: 37 Van Otterloo & Co. LLC. Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel, c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van 40 Rowes Wharf 2001. Otterloo & Co. LLC (June Boston, MA 02110 1999 - present); Associate/ Age: 58 Junior Partner, Hale and Dorr LLP (1991 - 1999). Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering c/o GMO Trust Laundering Compliance Officer Reporting Officer (February 40 Rowes Wharf 2003 - present) and Compliance Boston, MA 02110 Officer, Grantham, Mayo, Van Age: 32 Otterloo & Co. LLC.
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 26 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Day-to-day management of the Fund's portfolio is the responsibility of the U.S. Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The GMO Tax-Managed U.S. Equities Fund returned -22.3% for the fiscal year ended February 28, 2002, as compared to -22.7% for the S&P 500 before taxes. On an after-tax basis, the Fund returned -22.7% to the benchmark's -22.9% for the same period. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in U.S. equity securities throughout the period. U.S. equities were no place to be if one were looking to avoid the downward slide of global equity markets in 2002 or the start of 2003. Across the board, all sectors posted negative absolute returns, and large capitalization stocks fared worst of all. From accounting fraud to war anticipation anxiety, there was no shortage of reasons to worry, and the markets reflected this both in volatility and retrenchment towards companies with tangible products and transparent processes. For the period, consumer staples was the strongest sector, but posted a return of -15.3%. Integrated oils, reflecting soaring oil prices, came in close behind at -16.5%. Value stocks provided a little traction on the downward skid relative to growth stocks, and generally outperformed by 6% to 8% on a relative basis across market capitalization groups. The Fund's moderate outperformance of the benchmark for the period is attributed to stock selection. The portfolio uses two value-based stock selection strategies and one momentum-based stock selection strategy. Our price-to-normalized earnings strategy, which focuses on traditional value measures, worked especially well in the back-to-basics mentality of the past year. Our intrinsic value stock selection model, which has a strong record of selecting relatively undervalued stocks outside traditional value filters, underperformed for the period. Our momentum-based stock selection strategy had a neutral effect on the portfolio for the year, underperforming in the first half, but adding value in the second. For the year, stock selection was strongest within financial services, healthcare and technology. Selection was weakest within consumer staples and automotive and transportation stocks. In combination, stock selection added 1.6% to relative performance for the period. Sector selection, however, detracted from relative performance for the fiscal year, primarily due to an underweight in technology during technology's October and November gains. An underweight in integrated oils stocks, and overweight in utilities (primarily telephone stocks) also detracted from performance. For the period, sector selection detracted 1.2% from performance relative to the S&P 500 benchmark. OUTLOOK Our focus continues to be on adding value over the long term with proven investment strategies that have demonstrated effectiveness. We believe that our process of combining value and momentum in varying GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- proportions in each quantitative equity strategy will continue to add value over the long term. The Fund is overweight in utilities stocks, especially telephones, and underweight technology and healthcare stocks. The Fund continues to hold an overweight of value versus growth stocks. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO TAX-MANAGED U.S. EQUITIES FUND CLASS III SHARES AND THE S&P 500 INDEX AS OF FEBRUARY 28, 2003 GMO TAX-MANAGED U.S. EQUITIES FUND* S&P 500 INDEX* 7/23/98 $10,000 $10,000 9/30/98 $9,510 $8,953 12/31/98 $10,960 $10,860 3/31/99 $10,970 $11,401 6/30/99 $11,991 $12,204 9/30/99 $11,069 $11,442 12/31/99 $12,819 $13,145 3/31/2000 $13,675 $13,446 6/30/2000 $13,090 $13,089 9/30/2000 $13,831 $12,962 12/31/2000 $13,230 $11,948 3/31/2001 $11,819 $10,531 6/30/2001 $12,366 $11,148 9/30/2001 $11,026 $9,511 12/31/2001 $11,937 $10,528 3/31/2002 $12,114 $10,557 6/30/2002 $10,608 $9,142 9/30/2002 $8,748 $7,563 12/31/2002 $9,587 $8,201 2/28/2003 $9,101 $7,866
AVERAGE ANNUAL TOTAL RETURN* SINCE INCEPTION 1 YEAR 7/23/98 Class III -22.33% -2.02%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. * Returns are before taxes. GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- COMMON STOCKS -- 99.1% AUTO & TRANSPORTATION -- 4.0% 8,700 AMR Corp* 20,358 7,900 Burlington Northern Santa Fe Railroad Co 197,500 1,900 CSX Corp 51,034 7,100 Delta Air Lines Inc 59,640 2,500 Expeditors International Washington Inc 85,475 1,200 FedEx Corp 61,680 23,169 Ford Motor Co 192,766 13,541 General Motors Corp 457,280 4,400 Goodyear Tire & Rubber Co 17,600 2,200 Harley Davidson Inc 87,098 600 Union Pacific Corp 33,114 6,300 United Parcel Service, Class B 362,502 ------------- 1,626,047 ------------- CONSUMER DISCRETIONARY -- 10.6% 10,700 Amazon.com Inc* 235,507 3,800 Apollo Group Inc, Class A* 176,092 3,000 Autonation Inc* 39,690 2,500 Black and Decker Corp 91,750 2,600 CDW Computer Centers Inc* 113,516 600 ChoicePoint Inc* 20,250 6,400 Circuit City Stores Inc 28,288 3,800 Clear Channel Communications Inc* 138,738 3,400 Dollar Tree Stores Inc* 70,210 8,000 Eastman Kodak Co 236,800 2,700 eBay Inc* 211,734 2,500 Electronic Arts Inc* 132,000 3,900 Federated Department Stores Inc* 99,450 3,100 Fox Entertainment Group Inc, Class A* 82,863 1,200 Gannett Co Inc 86,604 2,400 Harrahs Entertainment Inc* 78,816 3,100 Hilton Hotels Corp 34,069 3,100 Jones Apparel Group Inc* 87,916 700 Liberty Media Corp, Series B* 6,538 6,100 Limited Brands Inc 72,468 1,400 Manpower Inc 42,518 2,500 May Department Stores Co 49,050 2,000 MGM Mirage* 51,240 1,300 Michaels Stores Inc* 30,550 700 Mohawk Industries Inc* 34,566
See accompanying notes to the financial statements. 1 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- CONSUMER DISCRETIONARY -- CONTINUED 2,300 New York Times Co, Class A 106,858 5,300 Newell Rubbermaid Inc 149,460 600 Outback Steakhouse Inc 19,320 2,500 Penney (JC) Co Inc 49,625 1,400 Pixar Inc* 75,586 1,400 R.R. Donnelley and Sons 25,564 2,000 RadioShack Corp 39,280 1,700 Ross Stores Inc 58,157 7,500 Sears Roebuck & Co 163,350 4,700 Starbucks Corp* 110,215 13,700 The Gap Inc 178,648 3,900 Toys R Us Inc* 31,512 4,500 Tribune Co 201,825 800 VF Corp 27,080 3,300 Viacom Inc, Class A* 122,793 13,000 Viacom Inc, Class B* 482,690 2,100 Weight Watchers International Inc* 87,885 1,000 Whirlpool Corp 49,260 2,800 Williams-Sonoma Inc* 65,184 ------------- 4,295,515 ------------- CONSUMER STAPLES -- 8.1% 1,900 Albertsons Inc 35,777 28,000 Altria Group Inc 1,082,200 4,900 Anheuser Busch Cos Inc 227,850 2,100 Campbell Soup Co 43,554 13,800 Coca Cola Co 555,036 9,300 Coca Cola Enterprises Inc 187,674 2,800 Colgate-Palmolive Co 140,868 6,900 CVS Corp 171,810 1,000 Heinz (HJ) Co 30,700 4,300 Pepsi Bottling Group Inc 99,975 8,800 Rite Aid Corp* 21,120 1,900 RJ Reynolds Tobacco Holdings 75,829 10,400 Safeway Inc* 206,856 3,700 Sara Lee Corp 73,260 2,700 Sysco Corp 73,224 1,500 UST Inc 43,245 7,800 Walgreen Co 219,492 ------------- 3,288,470 -------------
See accompanying notes to the financial statements. 2 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- FINANCIAL SERVICES -- 24.8% 8,000 AFLAC Corp 250,000 9,400 Allstate Corp 297,322 250 AMBAC Financial Group 12,212 13,500 American Express Co 453,330 2,400 Automatic Data Processing Inc 78,000 11,800 Bank of America Corp 817,032 3,900 Bank One Corp 140,517 2,200 Bear Stearns Cos Inc 137,808 2,700 Capital One Financial Corp 83,619 2,460 Charter One Financial Inc 71,119 2,600 Cigna Corp 111,722 7,800 Citigroup Inc 260,052 2,200 CNA Financial Corp* 50,578 2,100 Comerica Inc 86,058 2,400 Countrywide Financial Corp 128,136 1,100 Dun & Bradstreet Corp* 39,490 1,100 Edwards (AG) Inc 29,337 1,400 Equifax Inc 26,852 16,700 Fannie Mae 1,070,470 1,700 Fidelity National Financial Inc 55,811 8,010 FleetBoston Financial Corp 196,726 2,900 Franklin Resources Inc 94,743 10,600 Freddie Mac 579,290 2,700 Golden West Financial Corp 195,480 2,200 Greenpoint Financial Corp 93,456 7,700 Household International Inc 215,061 2,800 Hudson City Bancorp Inc 53,172 3,000 Huntington Bancshares Inc 57,600 9,710 J.P. Morgan Chase & Co 220,223 5,500 Janus Capital Group Inc 65,065 7,000 KeyCorp 166,110 1,500 Lehman Brothers Holdings Inc 83,055 1,900 Lincoln National Corp 53,827 5,000 Loews Corp 218,550 1,300 MBIA Inc 49,569 6,400 Merrill Lynch & Co Inc 218,112 4,300 MGIC Investment Corp 169,678 2,100 Moody's Corp 92,610 8,200 Morgan Stanley 302,170 4,800 National City Corp 132,576
See accompanying notes to the financial statements. 3 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- FINANCIAL SERVICES -- CONTINUED 2,100 Old Republic International Corp 57,330 4,100 PMI Group Inc 111,110 1,000 PNC Financial Services Group 44,930 2,000 Principal Financial Group 55,140 2,600 Radian Group Inc 90,662 2,900 Regions Financial Corp 93,902 3,100 Sovereign Bancorp Inc 42,098 1,000 Suntrust Banks Inc 56,250 2,200 Torchmark Corp 79,882 1,800 Union Planters Corp 49,536 700 UnionBanCal Corp 29,134 6,600 Unumprovident Corp 85,800 3,100 US Bancorp 64,852 12,900 Wachovia Corp 457,692 9,900 Washington Mutual Inc 341,847 19,200 Wells Fargo & Co 870,720 ------------- 9,987,423 ------------- HEALTH CARE -- 15.7% 4,900 Aetna Inc* 206,388 1,700 Anthem Inc* 101,337 4,400 Boston Scientific Corp* 194,348 22,300 Bristol Myers Squibb Co 519,590 2,100 Cardinal Health Inc 120,309 4,500 Guidant Corp* 160,920 3,700 HCA - The Healthcare Company 152,588 3,200 Healthsouth Corp* 11,456 4,900 Lincare Holdings Inc* 146,510 1,900 Medtronic Inc 84,930 34,700 Merck & Co Inc 1,830,425 1,800 Oxford Health Plans Inc* 50,400 900 Patterson Dental Co* 39,609 42,150 Pfizer Inc 1,256,913 6,700 Pharmacia Corp 276,844 28,400 Schering Plough Corp 511,768 1,400 Stryker Corp 91,280 2,600 UnitedHealth Group Inc 215,540 1,600 Varian Medical Systems Inc* 80,880 2,500 Wellpoint Health Network Inc* 170,025
4 See accompanying notes to the financial statements. GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- HEALTH CARE -- CONTINUED 2,700 Zimmer Holdings Inc* 119,853 ------------- 6,341,913 ------------- INTEGRATED OILS -- 2.1% 9,383 ConocoPhillips 475,718 10,900 Marathon Oil Corp 251,681 3,400 Occidental Petroleum Corp 101,660 ------------- 829,059 ------------- MATERIALS & PROCESSING -- 1.9% 2,000 Ashland Inc 55,620 1,700 Avery Dennison Corp 97,580 3,200 Du Pont (E.I.) De Nemours 117,344 900 Eastman Chemical Co 28,971 2,400 Ecolab Inc 117,720 1,200 Energizer Holdings Inc* 31,860 1,800 Engelhard Corp 37,350 800 Phelps Dodge Corp* 28,768 1,400 PPG Industries Inc 64,960 3,200 Sealed Air Corp* 116,064 2,600 Sherwin Williams Co 69,420 ------------- 765,657 ------------- OTHER -- 3.1% 3,600 3 M Co 451,332 400 Eaton Corp 28,380 2,800 Fortune Brands Inc 122,752 15,900 Honeywell International Inc 363,951 1,900 ITT Industries Inc 106,837 1,500 Johnson Controls Inc 116,940 1,500 Textron Inc 54,195 ------------- 1,244,387 ------------- OTHER ENERGY -- 3.1% 3,300 Apache Corp 215,424 2,100 BJ Services Co* 72,177 2,900 Burlington Resources Inc 134,415 1,400 Cooper Cameron Corp* 72,800
See accompanying notes to the financial statements. 5 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- OTHER ENERGY -- CONTINUED 3,900 Devon Energy Corp 187,980 2,600 Ensco International Inc 72,748 1,700 EOG Resources Inc 70,210 2,900 Nabors Industries Ltd* 114,985 2,700 Smith International Inc* 94,122 500 Sunoco Inc 17,695 4,100 Transocean Inc 93,070 1,700 Weatherford International Ltd* 68,068 1,600 XTO Energy Inc 40,336 ------------- 1,254,030 ------------- PRODUCER DURABLES -- 5.3% 6,300 American Power Conversion Corp* 98,532 9,000 Applied Materials Inc* 116,820 13,000 Boeing Co 358,280 1,500 Caterpillar Inc 70,500 2,800 Centex Corp 154,784 1,900 Cooper Industries Ltd 71,915 1,000 Deere & Co 41,380 2,300 DR Horton Inc 42,113 1,200 Emerson Electric Co 56,484 2,200 Lennar Corp 118,778 700 Lexmark International Group Inc* 43,687 3,300 Lockheed Martin Corp 150,876 1,560 Northrop Grumman Corp 135,252 200 NVR Inc* 66,390 1,600 Pitney Bowes Inc 49,664 1,100 Pulte Corp 55,913 11,900 Tyco International Ltd 176,120 4,600 United Technologies Corp 269,468 2,100 Waters Corp* 48,657 3,700 Xerox Corp* 33,300 ------------- 2,158,913 ------------- TECHNOLOGY -- 9.1% 2,400 Applera Corp-Applied Biosystems Group 44,040 1,700 AVX Corp 16,082 11,900 BMC Software Inc* 230,860 3,000 Brocade Communications Systems Inc* 12,090
6 See accompanying notes to the financial statements. GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- TECHNOLOGY -- CONTINUED 15,800 Cisco Systems Inc* 220,884 3,000 Computer Associates International Inc 40,050 21,600 Compuware Corp* 79,704 7,800 Corning Inc* 38,376 14,000 Dell Computer Corp* 377,440 15,000 EMC Corp* 110,850 5,300 Gateway Inc* 11,554 13,500 Hewlett-Packard Co 213,975 1,500 IBM Corp 116,925 20,500 Intel Corp 353,830 1,900 Intuit Inc* 90,288 10,600 Microsoft Corp 251,220 72,700 Oracle Corp* 869,492 5,600 Qualcomm Inc* 193,648 3,300 Raytheon Co 89,364 2,400 Rockwell Automation 55,224 2,500 Symantec Co* 101,175 22,900 Tellabs Inc* 139,461 ------------- 3,656,532 ------------- UTILITIES -- 11.3% 1,400 Ameren Corp 54,586 2,300 American Electric Power Inc 50,094 18,880 AT & T Corp 350,035 19,300 Bellsouth Corp 418,231 5,700 Broadwing Inc* 21,432 4,700 Centerpoint Energy Inc 21,855 900 Cinergy Corp 29,007 5,927 Comcast Corp, Class A* 173,187 2,100 Consolidated Edison Inc 81,900 1,700 Constellation Energy Group Inc 44,574 1,200 DTE Energy Co 49,728 7,200 Edison International* 88,992 4,500 Exelon Corp 221,175 1,900 FPL Group Inc 106,419 10,500 PG & E Corp* 133,875 1,600 Pinnacle West Capital Corp 48,864 1,700 PPL Corp 59,789 2,100 Public Service Enterprise Group Inc 72,723 40,126 SBC Communications Inc 834,621
See accompanying notes to the financial statements. 7 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- UTILITIES -- CONTINUED 2,200 Sempra Energy 51,040 4,000 Southern Co 112,840 24,500 Sprint Corp (Fon Group) 311,150 1,500 TXU Corp 23,955 34,242 Verizon Communications Inc 1,184,088 ------------- 4,544,160 ------------- TOTAL COMMON STOCKS (COST $45,662,778) 39,992,106 ------------- SHORT-TERM INVESTMENTS -- 4.3% CASH EQUIVALENTS -- 2.9% 499,864 Dreyfus Money Market Fund(a) 499,864 353,225 Harris Trust & Savings Bank Eurodollar Time Deposit, 1.26%, due 3/24/03(a) 353,225 291,411 Merrimac Money Market Fund(a) 291,411 ------------- 1,144,500 ------------- REPURCHASE AGREEMENT -- 1.4% $ 573,485 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/28/03, due 3/3/03, with a maturity value of $573,503 and an effective yield of 0.36%, collateralized by a U.S. Treasury Bond with a rate of 3.625%, maturity date of 3/31/04 and a market value, including accrued interest of $617,058. 573,485 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $1,717,985) 1,717,985 ------------- TOTAL INVESTMENTS -- 103.4% (Cost $47,380,763) 41,710,091 Other Assets and Liabilities (net) -- (3.4%) (1,362,851) ------------- TOTAL NET ASSETS -- 100.0% $ 40,347,240 ============= NOTES TO THE SCHEDULE OF INVESTMENTS:
* Non-income producing security. (a) Represents investment of security lending collateral (Note 1). 8 See accompanying notes to the financial statements. GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value, including securities on loan of $1,083,169 (cost $47,380,763) (Note 1) $41,710,091 Receivable for investments sold 2,504,465 Dividends and interest receivable 69,425 Receivable for expenses reimbursed by Manager (Note 2) 6,748 ----------- Total assets 44,290,729 ----------- LIABILITIES: Payable for investments purchased 2,755,184 Payable upon return of securities loaned (Note 1) 1,144,500 Payable to affiliate for (Note 2): Management fee 10,237 Shareholder service fee 4,653 Accrued expenses 28,915 ----------- Total liabilities 3,943,489 ----------- NET ASSETS $40,347,240 =========== NET ASSETS CONSIST OF: Paid-in capital $51,337,834 Accumulated undistributed net investment income 104,827 Accumulated net realized loss (5,424,749) Net unrealized depreciation (5,670,672) ----------- $40,347,240 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $40,347,240 =========== SHARES OUTSTANDING: Class III 4,679,955 =========== NET ASSET VALUE PER SHARE: Class III $ 8.62 ===========
See accompanying notes to the financial statements. 9 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends $ 697,799 Interest (including securities lending income of $2,178) 9,683 ----------- Total income 707,482 ----------- EXPENSES: Management fee (Note 2) 123,130 Audit fees 35,938 Custodian and transfer agent fees 21,104 Registration fees 1,934 Trustees fees and related expenses (Note 2) 1,819 Legal fees 1,438 Miscellaneous 1,191 Fees reimbursed by Manager (Note 2) (61,050) ----------- 125,504 Shareholder service fee (Note 2) - Class III 55,968 ----------- Net expenses 181,472 ----------- Net investment income 526,010 ----------- REALIZED AND UNREALIZED LOSS: Net realized loss on: Investments (3,773,602) Closed futures contracts (290,507) ----------- Net realized loss (4,064,109) ----------- Change in net unrealized appreciation (depreciation) on investments (5,886,181) ----------- Net realized and unrealized loss (9,950,290) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(9,424,280) ===========
10 See accompanying notes to the financial statements. GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 526,010 $ 208,046 Net realized loss (4,064,109) (883,849) Change in net unrealized appreciation (depreciation) (5,886,181) (72,583) ----------- ----------- Net decrease in net assets from operations (9,424,280) (748,386) ----------- ----------- Distributions to shareholders from: Net investment income Class III (478,306) (180,097) ----------- ----------- Total distributions from net investment income (478,306) (180,097) ----------- ----------- Net share transactions (Note 5): Class III 22,755,004 17,005,362 ----------- ----------- Increase in net assets resulting from net share transactions 22,755,004 17,005,362 ----------- ----------- Total increase in net assets 12,852,418 16,076,879 NET ASSETS: Beginning of period 27,494,822 11,417,943 ----------- ----------- End of period (including accumulated undistributed net investment income of $104,827 and $57,123, respectively) $40,347,240 $27,494,822 =========== ===========
See accompanying notes to the financial statements. 11 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ----------------------------------------------------------- 2003 2002 2001 2000 1999* --------- --------- --------- --------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 11.24 $ 12.08 $ 12.64 $ 10.67 $ 10.00 ------- ------- ------- ------- ----------- Income from investment operations: Net investment income 0.14+ 0.16+ 0.15+ 0.13 0.09 Net realized and unrealized gain (loss) (2.64) (0.86) (0.57) 1.97 0.65 ------- ------- ------- ------- ----------- Total from investment operations (2.50) (0.70) (0.42) 2.10 0.74 ------- ------- ------- ------- ----------- Less distributions to shareholders: From net investment income (0.12) (0.14) (0.14) (0.13) (0.07) ------- ------- ------- ------- ----------- Total distributions (0.12) (0.14) (0.14) (0.13) (0.07) ------- ------- ------- ------- ----------- NET ASSET VALUE, END OF PERIOD $ 8.62 $ 11.24 $ 12.08 $ 12.64 $ 10.67 ======= ======= ======= ======= =========== TOTAL RETURN(a) (22.33)% (5.78)% (3.44)% 19.83% 7.48%++ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $40,347 $27,495 $11,418 $13,275 $ 8,116 Net expenses to average daily net assets 0.49% 0.48% 0.48% 0.48% 0.48%** Net investment income to average daily net assets 1.41% 1.36% 1.18% 1.11% 1.30%** Portfolio turnover rate 63% 45% 161% 19% 33% Fees and expenses reimbursed by the Manager to average daily net assets: 0.16% 0.36% 0.54% 0.44% 1.47%**
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. * Period from July 23, 1998 (commencement of operations) through February 28, 1999. ** Annualized. + Computed using average shares outstanding throughout the period. ++ Not annualized. 12 See accompanying notes to the financial statements. GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Tax-Managed U.S. Equities Fund (the "Fund"), is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high after-tax total return primarily through investment in U.S. equity securities. The Fund's benchmark is the S&P 500 (After Tax), which is computed by the Manager by applying a 38.6% tax (credit) on short-term realized capital gains (losses), a 38.6% tax on income, and a 20% tax (credit) on long-term realized capital gains (losses) on the securities comprising the S&P 500 Stock Index, a U.S. large capitalization stock index, independently maintained and published by Standard & Poor's Corporation. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. 13 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- FUTURES CONTRACTS The Fund may purchase and sell futures contracts to manage its exposure to the financial markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of February 28, 2003, the Fund held no open futures contracts. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the financial markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a 14 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of February 28, 2003, the Fund held no open swap agreements. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 2003, the Fund loaned securities having a market value of $1,083,169 collateralized by cash in the amount of $1,144,500, which was invested in short-term investments. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country's tax treaty with the United States. 15 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003, the tax basis of distributions paid from ordinary income were $180,097 and $478,306, respectively. As of February 28, 2003, the components of distributable earnings on a tax basis consisted of $103,176 of undistributed ordinary income. At February 28, 2003, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code, of $24,242, $1,030,107 and $3,063,585 expiring in 2008, 2010 and 2011, respectively. The Fund elected to defer to March 1, 2003 post-October losses of $306,815. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder 16 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of .15% for Class III shares. GMO has entered into a binding agreement effective until at least June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent Trustees of the Trust (including legal fees), 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) exceed the management fee. As of February 28, 2003, greater than 10% of the Fund's shares were held by accounts for which the Manager has investment discretion. The Fund's portion of the fee paid by the Trust to the independent Trustees during the year ended February 28, 2003 was $1,537. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2003, aggregated $45,335,369 and $22,855,118, respectively. At February 28, 2003, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $47,379,112 $922,159 $(6,591,180) $(5,669,021)
4. PRINCIPAL SHAREHOLDERS At February 28, 2003, 65.3% of the outstanding shares of the Fund were held by four shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. 17 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 ---------------------- ---------------------- Shares Amount Shares Amount Class III: --------- ----------- --------- ----------- Shares sold 2,413,324 $24,569,187 1,498,911 $16,997,564 Shares issued to shareholders in reinvestment of distributions 2,643 24,973 694 7,798 Shares repurchased (181,198) (1,839,156) -- -- --------- ----------- --------- ----------- Net increase 2,234,769 $22,755,004 1,499,605 $17,005,362 ========= =========== ========= ===========
18 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO TAX-MANAGED U.S. EQUITIES FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Tax-Managed U.S. Equities Fund (the "Fund") (a series of GMO Trust) at February 28, 2003 and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 19 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 20 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the from February Boston, MA 02110 Trust 2002 - October Age: 64 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 21 PRINCIPAL OFFICERS:
Term of Office(4) Principal Occupation(s) Name, Address, Position(s) and Length of During Past and Age Held with Fund Time Served Five Years ------------------------- ------------------------------ ------------------------------ ------------------------------ Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief 40 Rowes Wharf Vice President from August Operating Officer (2000 - Boston, MA 02110 1998 - October 2002. present) and Member, Grantham, Age: 47 Mayo, Van Otterloo & Co. LLC. Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC. 40 Rowes Wharf February 1998. Boston, MA 02110 Age: 45 Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator, c/o GMO Trust Trust Grantham, Mayo, Van 40 Rowes Wharf Otterloo & Co. LLC. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer 40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003) Boston, MA 02110 and Member, Grantham, Mayo, Age: 37 Van Otterloo & Co. LLC. Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel, c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van 40 Rowes Wharf 2001. Otterloo & Co. LLC (June Boston, MA 02110 1999 - present); Associate/ Age: 58 Junior Partner, Hale and Dorr LLP (1991 - 1999). Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering c/o GMO Trust Laundering Compliance Officer Reporting Officer (February 40 Rowes Wharf 2003 - present) and Compliance Boston, MA 02110 Officer, Grantham, Mayo, Van Age: 32 Otterloo & Co. LLC.
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 22 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Day-to-day management of the Fund's portfolio is the responsibility of the U.S. Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Tobacco-Free Core Fund returned -21.7% for the fiscal year ended February 28, 2003, as compared to -22.7% for the S&P 500. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in common stocks throughout the period. For the fiscal year, every sector in the S&P 500 posted losses, providing little haven for U.S. equity investors. Financial services, healthcare, consumer staples, integrated oils, and materials and processing all posted returns that were in excess of the benchmark, but still under water. Trailing the S&P 500 Index returns were technology, utilities, consumer discretionary, autos and transportation, producer durables, and energy. Autos and transportation and utilities were the weakest performing sectors, falling 29.9% and 29.1%, respectively. Value stocks across all market capitalization sectors continued to outperform growth stocks, while there was virtually no difference between large cap and small cap returns. The Fund's outperformance of the benchmark for the period is attributable to stock selection, as sector selection impact was negative for the period. This was due in large part to the Fund's near-benchmark weighting in the weak-performing technology sector and its overweight positions in the even weaker performing utilities and autos and transportation sectors. Our continued underweighting of healthcare throughout the year was beneficial, as was the Fund's underweighting in the energy sector. Good stock selection contributed significantly to the Fund's outperformance for the fiscal year. Selection was particularly strong among financial services, healthcare and technology, while selection among consumer staples, utilities, and autos and transportation was weak. The Fund incorporates three investment disciplines in the portfolio: price to intrinsic value, which has a 40% weight; price to normalized earnings, with a 20% weight; and momentum, with a 40% weight. For the fiscal year, the strongest contributor to returns was price to normalized earnings, our more traditional valuation metric. Momentum was also a positive contributor, while price to intrinsic value detracted from relative returns. OUTLOOK The portfolio is conservatively positioned, with a lower price to book, lower price to earnings, and a higher dividend yield than the S&P 500. We believe that our process of combining value and momentum disciplines in the GMO Tobacco-Free Core Fund is well suited to the continued choppy market environment that we anticipate. The portfolio currently maintains overweight positions in the telephone utilities and financial services sectors, and underweight positions in integrated oils, healthcare, and technology. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO TOBACCO-FREE CORE FUND CLASS III SHARES AND THE S&P 500 INDEX AS OF FEBRUARY 28, 2003 GMO TOBACCO-FREE S&P 500 CORE FUND INDEX 2/28/93 $10,000 $10,000 3/31/93 $10,264 $10,211 6/30/93 $10,522 $10,261 9/30/93 $11,082 $10,526 12/31/93 $11,268 $10,770 3/31/94 $10,958 $10,361 6/30/94 $10,991 $10,405 9/30/94 $11,409 $10,914 12/31/94 $11,538 $10,912 3/31/95 $12,608 $11,974 6/30/95 $13,973 $13,118 9/30/95 $15,462 $14,160 12/31/95 $16,500 $15,012 3/31/96 $17,104 $15,818 6/30/96 $17,690 $16,528 9/30/96 $18,207 $17,039 12/31/96 $19,519 $18,459 3/31/97 $20,017 $18,954 6/30/97 $23,294 $22,263 9/30/97 $26,129 $23,931 12/31/97 $26,468 $24,618 3/31/98 $30,089 $28,052 6/30/98 $30,823 $28,978 9/30/98 $27,739 $26,096 12/31/98 $33,138 $31,654 3/31/99 $34,849 $33,231 6/30/99 $37,313 $35,573 9/30/99 $34,847 $33,351 12/31/99 $40,180 $38,314 3/31/2000 $41,842 $39,192 6/30/2000 $40,193 $38,151 9/30/2000 $42,032 $37,782 12/31/2000 $39,820 $34,826 3/31/2001 $36,468 $30,697 6/30/2001 $38,121 $32,493 9/30/2001 $33,391 $27,724 12/31/2001 $36,308 $30,686 3/31/2002 $36,559 $30,771 6/30/2002 $32,044 $26,648 9/30/2002 $26,509 $22,045 12/31/2002 $28,955 $23,905 2/28/2003 $27,620 $22,929
AVERAGE ANNUAL TOTAL RETURN SINCE 1 YEAR 5 YEAR 10 YEAR INCEPTION Class III -21.69% -0.79% 10.69% n/a 7/2/2001 Class IV -21.65% n/a n/a -17.90%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Performance for Class IV shares may vary due to different shareholder servicing fees. Past performance is not indicative of future performance. Information is unaudited. GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ COMMON STOCKS -- 98.8% AUTO & TRANSPORTATION -- 3.8% 82,400 AMR Corp* 192,816 89,800 Burlington Northern Santa Fe Railroad Co 2,245,000 23,300 CSX Corp 625,838 61,100 Delta Air Lines Inc 513,240 30,400 Expeditors International Washington Inc 1,039,376 210,593 Ford Motor Co 1,752,134 161,013 General Motors Corp 5,437,409 8,900 Genuine Parts Co 256,320 34,000 Goodyear Tire & Rubber Co 136,000 24,100 Harley Davidson Inc 954,119 9,000 Union Pacific Corp 496,710 77,500 United Parcel Service, Class B 4,459,350 ------------ 18,108,312 ------------ CONSUMER DISCRETIONARY -- 10.3% 111,000 Amazon.com Inc* 2,443,110 46,600 Apollo Group Inc, Class A* 2,159,444 56,600 Autonation Inc* 748,818 23,200 Black and Decker Corp 851,440 27,000 CDW Computer Centers Inc* 1,178,820 600 ChoicePoint Inc* 20,250 66,600 Circuit City Stores Inc 294,372 50,500 Clear Channel Communications Inc* 1,843,755 16,800 Coach Inc* 600,264 37,100 Dollar Tree Stores Inc* 766,115 67,800 Eastman Kodak Co 2,006,880 28,200 eBay Inc* 2,211,444 30,800 Electronic Arts Inc* 1,626,240 18,800 Estee Lauder Cos Inc 527,340 42,000 Federated Department Stores Inc* 1,071,000 29,800 Fox Entertainment Group Inc, Class A* 796,554 16,600 Gannett Co Inc 1,198,022 8,300 Harrahs Entertainment Inc* 272,572 7,900 Hilton Hotels Corp 86,821 36,600 Jones Apparel Group Inc* 1,037,976 43,500 Limited Brands Inc 516,780 3,700 Manpower Inc 112,369 53,300 May Department Stores Co 1,045,746
See accompanying notes to the financial statements. 1 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ CONSUMER DISCRETIONARY -- CONTINUED 11,900 Maytag Corp 286,790 8,500 MGM Mirage* 217,770 9,200 Mohawk Industries Inc* 454,296 26,200 New York Times Co, Class A 1,217,252 63,300 Newell Rubbermaid Inc 1,785,060 25,600 Penney (JC) Co Inc 508,160 11,400 Pixar Inc* 615,486 14,000 R.R. Donnelley and Sons 255,640 13,500 Ross Stores Inc 461,835 91,700 Sears Roebuck & Co 1,997,226 72,800 Starbucks Corp* 1,707,160 145,700 The Gap Inc 1,899,928 56,900 Toys R Us Inc* 459,752 52,000 Tribune Co 2,332,200 9,200 VF Corp 311,420 33,400 Viacom Inc, Class A* 1,242,814 155,900 Viacom Inc, Class B* 5,788,567 38,000 Wal Mart Stores Inc 1,826,280 100 Washington Post Co, Class B 71,350 18,400 Weight Watchers International Inc* 770,040 12,300 Whirlpool Corp 605,898 11,400 Williams-Sonoma Inc* 265,392 ------------ 48,496,448 ------------ CONSUMER STAPLES -- 7.0% 34,376 Albertsons Inc 647,300 53,300 Anheuser Busch Cos Inc 2,478,450 30,600 Campbell Soup Co 634,644 246,900 Coca Cola Co 9,930,318 116,900 Coca Cola Enterprises Inc 2,359,042 18,300 Colgate-Palmolive Co 920,673 74,100 CVS Corp 1,845,090 14,900 Heinz (HJ) Co 457,430 32,100 Kroger Co* 424,362 80,400 Pepsi Bottling Group Inc 1,869,300 18,400 PepsiCo Inc 705,088 34,900 Procter and Gamble Co 2,856,914 95,900 Rite Aid Corp* 230,160 137,800 Safeway Inc* 2,740,842 53,500 Sara Lee Corp 1,059,300
2 See accompanying notes to the financial statements. GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ CONSUMER STAPLES -- CONTINUED 21,200 Supervalu Inc 295,104 30,600 Sysco Corp 829,872 95,300 Walgreen Co 2,681,742 ------------ 32,965,631 ------------ FINANCIAL SERVICES -- 25.2% 117,400 AFLAC Corp 3,668,750 123,200 Allstate Corp 3,896,816 167,000 American Express Co 5,607,860 23,200 Amsouth Bancorp 477,920 15,700 Automatic Data Processing Inc 510,250 122,664 Bank of America Corp 8,493,255 51,800 Bank One Corp 1,866,354 24,100 BB&T Corp 791,203 32,221 Bear Stearns Cos Inc 2,018,323 22,900 Capital One Financial Corp 709,213 26,203 Charter One Financial Inc 757,529 26,300 Cigna Corp 1,130,111 93,700 Citigroup Inc 3,123,958 13,700 CNA Financial Corp* 314,963 27,100 Comerica Inc 1,110,558 50,600 Countrywide Financial Corp 2,701,534 10,700 Dun & Bradstreet Corp* 384,130 6,800 Edwards (AG) Inc 181,356 23,900 Equifax Inc 458,402 201,300 Fannie Mae 12,903,330 28,500 Fidelity National Financial Inc 935,655 89,146 FleetBoston Financial Corp 2,189,426 18,200 Franklin Resources Inc 594,594 130,900 Freddie Mac 7,153,685 27,400 Golden West Financial Corp 1,983,760 18,400 Greenpoint Financial Corp 781,632 89,000 Household International Inc 2,485,770 37,800 Hudson City Bancorp Inc 717,822 32,900 Huntington Bancshares Inc 631,680 91,140 J.P. Morgan Chase & Co 2,067,055 56,900 Janus Capital Group Inc 673,127 85,200 KeyCorp 2,021,796 17,200 Lehman Brothers Holdings Inc 952,364 13,400 Lincoln National Corp 379,622
See accompanying notes to the financial statements. 3 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ FINANCIAL SERVICES -- CONTINUED 25,300 MBIA Inc 964,689 70,800 Merrill Lynch & Co Inc 2,412,864 30,900 Metlife Inc 808,653 45,500 MGIC Investment Corp 1,795,430 23,400 Moody's Corp 1,031,940 133,600 Morgan Stanley 4,923,160 47,400 National City Corp 1,309,188 18,900 Old Republic International Corp 515,970 48,600 PMI Group Inc 1,317,060 24,600 PNC Financial Services Group 1,105,278 44,400 Principal Financial Group 1,224,108 36,800 Radian Group Inc 1,283,216 34,300 Regions Financial Corp 1,110,634 24,100 Sovereign Bancorp Inc 327,278 16,000 Suntrust Banks Inc 900,000 23,700 Torchmark Corp 860,547 19,500 Union Planters Corp 536,640 84,900 Unumprovident Corp 1,103,700 26,300 US Bancorp 550,196 124,700 Wachovia Corp 4,424,356 143,700 Washington Mutual Inc 4,961,961 229,900 Wells Fargo & Co 10,425,965 ------------ 118,566,636 ------------ HEALTH CARE -- 15.2% 23,800 Abbott Laboratories 847,756 52,000 Aetna Inc 2,190,240 9,500 Amgen Inc* 519,080 12,900 Anthem Inc* 768,969 53,400 Boston Scientific Corp* 2,358,678 215,800 Bristol Myers Squibb Co 5,028,140 16,100 Cardinal Health Inc 922,369 50,200 Guidant Corp* 1,795,152 35,400 HCA - The Healthcare Company 1,459,896 500 Health Net Inc* 12,555 53,520 Johnson & Johnson 2,807,124 12,200 Lilly (Eli) & Co 690,032 33,500 Lincare Holdings Inc* 1,001,650 18,300 Medtronic Inc 818,010 417,900 Merck & Co Inc 22,044,225
4 See accompanying notes to the financial statements. GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ HEALTH CARE -- CONTINUED 12,300 Oxford Health Plans Inc* 344,400 7,800 Patterson Dental Co* 343,278 463,750 Pfizer Inc 13,829,025 55,600 Pharmacia Corp 2,297,392 285,900 Schering Plough Corp 5,151,918 13,400 Stryker Corp 873,680 21,000 UnitedHealth Group Inc 1,740,900 19,300 Varian Medical Systems Inc* 975,615 15,600 Wellpoint Health Network Inc* 1,060,956 34,200 Zimmer Holdings Inc* 1,518,138 ------------ 71,399,178 ------------ INTEGRATED OILS -- 2.3% 12,200 Amerada Hess Corp 543,266 116,933 ConocoPhillips 5,928,503 30,554 Exxon Mobil Corp 1,039,447 107,600 Marathon Oil Corp 2,484,484 32,800 Occidental Petroleum Corp 980,720 ------------ 10,976,420 ------------ MATERIALS & PROCESSING -- 1.8% 20,800 Ashland Inc 578,448 18,800 Avery Dennison Corp 1,079,120 27,400 Du Pont (E.I.) De Nemours 1,004,758 9,300 Eastman Chemical Co 299,367 39,900 Ecolab Inc 1,957,095 13,500 Energizer Holdings Inc* 358,425 17,700 PPG Industries Inc 821,280 42,600 Sealed Air Corp* 1,545,102 35,000 Sherwin Williams Co 934,500 ------------ 8,578,095 ------------ OTHER -- 3.9% 46,200 3 M Co 5,792,094 7,900 Eaton Corp 560,505 18,800 Fortune Brands Inc 824,192 126,700 General Electric Co 3,047,135 180,200 Honeywell International Inc 4,124,778 24,400 ITT Industries Inc 1,372,012
See accompanying notes to the financial statements. 5 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ OTHER -- CONTINUED 20,400 Johnson Controls Inc 1,590,384 28,900 Textron Inc 1,044,157 ------------ 18,355,257 ------------ OTHER ENERGY -- 3.8% 42,600 Apache Corp 2,780,928 43,200 Burlington Resources Inc 2,002,320 31,400 Cooper Cameron Corp* 1,632,800 48,200 Devon Energy Corp 2,323,240 34,600 Ensco International Inc 968,108 19,600 EOG Resources Inc 809,480 114,100 Halliburton Co 2,311,666 34,500 Nabors Industries Ltd* 1,367,925 5,100 Noble Corp* 185,130 11,200 Pioneer Natural Resources Co* 292,880 22,900 Smith International Inc* 798,294 42,800 Transocean Inc 971,560 12,600 Weatherford International Ltd* 504,504 34,400 XTO Energy Inc 867,224 ------------ 17,816,059 ------------ PRODUCER DURABLES -- 4.9% 27,700 American Power Conversion Corp* 433,228 158,900 Boeing Co 4,379,284 16,700 Caterpillar Inc 784,900 19,800 Centex Corp 1,094,544 20,800 Cooper Industries Ltd 787,280 17,000 Deere & Co 703,460 21,300 DR Horton Inc 390,003 10,800 Emerson Electric Co 508,356 20,200 Lennar Corp 1,090,598 18,100 Lexmark International Group Inc* 1,129,621 27,300 Lockheed Martin Corp 1,248,156 20,456 Northrop Grumman Corp 1,773,535 46,200 Novellus System Inc* 1,346,730 1,100 NVR Inc* 365,145 6,700 Pitney Bowes Inc 207,968 12,400 Pulte Corp 630,292 66,800 Tyco International Ltd 988,640
6 See accompanying notes to the financial statements. GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ PRODUCER DURABLES -- CONTINUED 59,900 United Technologies Corp 3,508,942 23,300 Waters Corp* 539,861 149,700 Xerox Corp* 1,347,300 ------------ 23,257,843 ------------ TECHNOLOGY -- 10.4% 21,700 Applera Corp-Applied Biosystems Group 398,195 136,900 BMC Software Inc* 2,655,860 76,900 Brocade Communications Systems Inc* 309,907 21,000 Ceridian Corp* 289,800 372,300 Cisco Systems Inc* 5,204,754 210,600 Computer Associates International Inc 2,811,510 95,100 Compuware Corp* 350,919 90,900 Corning Inc* 447,228 168,500 Dell Computer Corp* 4,542,760 172,200 EMC Corp* 1,272,558 140,400 Gateway Inc* 306,072 174,900 Hewlett-Packard Co 2,772,165 25,700 IBM Corp 2,003,315 242,400 Intel Corp 4,183,824 35,900 Intuit Inc* 1,705,968 98,900 Lucent Technologies Inc* 162,196 237,800 Microsoft Corp 5,635,860 719,200 Oracle Corp* 8,601,632 59,800 Qualcomm Inc* 2,067,884 29,300 Raytheon Co 793,444 23,100 Rockwell Automation 531,531 13,600 Symantec Co* 550,392 241,900 Tellabs Inc* 1,473,171 ------------ 49,070,945 ------------ UTILITIES -- 10.2% 14,400 Ameren Corp 561,456 36,300 American Electric Power Inc 790,614 177,106 AT & T Corp 3,283,545 144,700 Bellsouth Corp 3,135,649 24,700 Centerpoint Energy Inc 114,855 16,900 Cinergy Corp 544,687 19,700 Consolidated Edison Inc 768,300
See accompanying notes to the financial statements. 7 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ UTILITIES -- CONTINUED 20,300 Constellation Energy Group Inc 532,266 17,200 DTE Energy Co 712,768 27,900 Duke Power Co 376,929 75,300 Edison International* 930,708 7,600 Entergy Corp 346,180 50,700 Exelon Corp 2,491,905 8,957 Firstenergy Corp 264,232 26,400 FPL Group Inc 1,478,664 105,100 PG & E Corp* 1,340,025 13,900 Pinnacle West Capital Corp 424,506 18,300 PPL Corp 643,611 27,100 Public Service Enterprise Group Inc 938,473 162,200 Qwest Communications International Inc* 580,676 460,014 SBC Communications Inc 9,568,291 24,100 Sempra Energy 559,120 57,900 Southern Co 1,633,359 188,600 Sprint Corp (Fon Group) 2,395,220 14,900 Teco Energy Inc 165,092 17,700 TXU Corp 282,669 375,684 Verizon Communications Inc 12,991,153 ------------ 47,854,953 ------------ TOTAL COMMON STOCKS (COST $560,767,853) 465,445,777 ------------ SHORT-TERM INVESTMENTS -- 5.4% CASH EQUIVALENTS -- 2.3% 4,853,359 Dreyfus Money Market Fund(a) 4,853,359 $ 3,429,585 Harris Trust & Savings Bank Eurodollar Time Deposit, 1.26%, due 3/24/03(a) 3,429,585 2,829,408 Merrimac Money Market Fund(a) 2,829,408 ------------ 11,112,352 ------------ U.S. GOVERNMENT -- 0.4% $ 1,700,000 U.S. Treasury Bill, 1.14%, due 4/24/03 1,696,876 ------------
See accompanying notes to the financial statements. 8 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------ REPURCHASE AGREEMENT -- 2.7% $ 12,727,710 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/28/03, due 3/3/03, with a maturity value of $12,728,092 and an effective yield of 0.36%, collaterized by a U.S. Treasury Note with a rate of 3.625%, maturity date of 3/31/04 and market value, including accrued interest of $13,694,755. 12,727,710 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $25,536,938) 25,536,938 ------------ TOTAL INVESTMENTS -- 104.2% (Cost $586,304,791) 490,982,715 Other Assets and Liabilities (net) -- (4.2%) (19,956,840) ------------ TOTAL NET ASSETS -- 100.0% $471,025,875 ============ NOTES TO THE SCHEDULE OF INVESTMENTS:
* Non-income producing security. (a) Represents investment of security lending collateral (Note 1). See accompanying notes to the financial statements. 9 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value, including securities on loan of $10,542,002 (cost $586,304,791) (Note 1) $490,982,715 Receivable for investments sold 8,258,490 Dividends and interest receivable 850,850 Receivable for expenses reimbursed by Manager (Note 2) 20,496 ------------ Total assets 500,112,551 ------------ LIABILITIES: Payable for investments purchased 17,766,091 Payable upon return of securities loaned (Note 1) 11,112,352 Payable to affiliate for (Note 2): Management fee 119,865 Shareholder service fee 43,791 Accrued expenses 44,577 ------------ Total liabilities 29,086,676 ------------ NET ASSETS $471,025,875 ============ NET ASSETS CONSIST OF: Paid-in capital $643,244,967 Accumulated undistributed net investment income 1,329,115 Accumulated net realized loss (78,226,131) Net unrealized depreciation (95,322,076) ------------ $471,025,875 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $163,025,363 ============ Class IV shares $308,000,512 ============ SHARES OUTSTANDING: Class III 18,757,289 ============ Class IV 35,447,255 ============ NET ASSET VALUE PER SHARE: Class III $ 8.69 ============ Class IV $ 8.69 ============
10 See accompanying notes to the financial statements. GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends $ 8,100,424 Interest (including securities lending income of $21,950) 176,938 ------------- Total income 8,277,362 ------------- EXPENSES: Management fee (Note 2) 1,539,653 Custodian and transfer agent fees 104,111 Audit fees 35,500 Legal fees 22,708 Trustees fees and related expenses (Note 2) 10,854 Registration fees 9,202 Miscellaneous 9,015 Fees reimbursed by Manager (Note 2) (178,855) ------------- 1,552,188 Shareholder service fee (Note 2) - Class III 263,500 Shareholder service fee (Note 2) - Class IV 305,439 ------------- Net expenses 2,121,127 ------------- Net investment income 6,156,235 ------------- REALIZED AND UNREALIZED LOSS: Net realized loss on: Investments (44,513,462) Closed futures contracts (3,080,259) ------------- Net realized loss (47,593,721) ------------- Change in net unrealized appreciation (depreciation) on: Investments (74,643,435) Open futures contracts (40,476) ------------- Net unrealized loss (74,683,911) ------------- Net realized and unrealized loss (122,277,632) ------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(116,121,397) =============
See accompanying notes to the financial statements. 11 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 6,156,235 $ 4,400,065 Net realized loss (47,593,721) (25,790,130) Change in net unrealized appreciation (depreciation) (74,683,911) (7,702,275) ------------- ------------- Net decrease in net assets from operations (116,121,397) (29,092,340) ------------- ------------- Distributions to shareholders from: Net investment income Class III (2,003,854) (2,265,734) Class IV (3,699,871) (1,907,569) ------------- ------------- Total distributions from net investment income (5,703,725) (4,173,303) ------------- ------------- (5,703,725) (4,173,303) ------------- ------------- Net share transactions (Note 5): Class III 80,376,925 (111,901,886) Class IV 131,175,397 266,034,460 ------------- ------------- Increase in net assets resulting from net share transactions 211,552,322 154,132,574 ------------- ------------- Total increase in net assets 89,727,200 120,866,931 NET ASSETS: Beginning of period 381,298,675 260,431,744 ------------- ------------- End of period (including accumulated undistributed net investment income of $1,329,115 and $876,605, respectively) $ 471,025,875 $ 381,298,675 ============= =============
12 See accompanying notes to the financial statements. GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------------------------------------------------ 2003 2002 2001 2000 1999 ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 11.23 $ 12.29 $ 14.35 $ 14.26 $ 14.05 -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.12+ 0.15+ 0.17+ 0.20 0.18 Net realized and unrealized gain (loss) (2.55) (1.07) (0.20) 1.94 1.99 -------- -------- -------- -------- -------- Total from investment operations (2.43) (0.92) (0.03)++ 2.14 2.17 -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.11) (0.14) (0.19) (0.19) (0.19) From net realized gains -- -- (1.84) (1.86) (1.77) -------- -------- -------- -------- -------- Total distributions (0.11) (0.14) (2.03) (2.05) (1.96) -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 8.69 $ 11.23 $ 12.29 $ 14.35 $ 14.26 ======== ======== ======== ======== ======== TOTAL RETURN(a) (21.69)% (7.53)% (0.83)% 15.10% 16.29% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $163,025 $133,203 $260,432 $321,786 $227,158 Net expenses to average daily net assets 0.48% 0.48% 0.48% 0.48% 0.48% Net investment income to average daily net assets 1.26% 1.24% 1.20% 1.34% 1.35% Portfolio turnover rate 62% 85% 82% 108% 77% Fees and expenses reimbursed by the Manager to average daily net assets: 0.04% 0.03% 0.05% 0.05% 0.25%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. + Computed using average shares outstanding throughout the period. ++ The amount shown for a share outstanding does not correspond with the net increase in net assets from operations due to the timing of purchases and redemptions of Fund shares in relation to the fluctuating market values of the Fund. See accompanying notes to the financial statements. 13 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------ 2003 2002(1) ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 11.23 $ 12.32 -------- -------- Income from investment operations: Net investment income 0.13+ 0.10+ Net realized and unrealized loss (2.55) (1.08) -------- -------- Total from investment operations (2.42) (0.98) -------- -------- Less distributions to shareholders: From net investment income (0.12) (0.11) -------- -------- Total distributions (0.12) (0.11) -------- -------- NET ASSET VALUE, END OF PERIOD $ 8.69 $ 11.23 ======== ======== TOTAL RETURN(a) (21.65)% (8.00)%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $308,001 $248,095 Net expenses to average daily net assets 0.44% 0.44%* Net investment income to average daily net assets 1.35% 1.37%* Portfolio turnover rate 62% 85% Fees and expenses reimbursed by the Manager to average daily net assets: 0.04% 0.04%*
(1) Period from July 2, 2001 (commencement of operations) through February 28, 2002. (a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. 14 See accompanying notes to the financial statements. GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Tobacco-Free Core Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in U.S. equity securities. The Fund's benchmark is the S&P 500 Index. Throughout the fiscal year ended February 28, 2003, the Fund offered two classes of shares: Class III and Class IV. The principal economic difference between the classes of shares is the level of shareholder fees borne by the classes. Eligibility for and automatic conversion among the various classes of shares is generally based on the total amount of assets invested in a particular fund or with GMO, as more fully outlined in the Trust's prospectus. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of foreign market that would materially affect that security's value. 15 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- FUTURES CONTRACTS The Fund may purchase and sell futures contracts to manage its exposure to the financial markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of February 28, 2003, there were no outstanding future contracts. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the financial markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a 16 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of February 28, 2003 the Fund held no open swap agreements. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 2003, the Fund loaned securities having a market value of $10,542,002 collateralized by cash in the amount of $11,112,352, which was invested in short-term instruments. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country's tax treaty with the United States. 17 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. During the year ended February 28, 2002 and February 28, 2003, the tax basis of distributions paid from ordinary income were $4,173,303 and $5,703,725, respectively. As of February 28, 2003, the components of distributable earnings on a tax basis consisted of $1,286,770 of undistributed ordinary income. At February 28, 2003, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code, of $24,719,851 and $28,414,910 expiring in 2010 and 2011, respectively. The Fund elected to defer to March 1, 2003 post-October losses of $19,614,026. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. ALLOCATION OF OPERATING ACTIVITY The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro-rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class' operations. 18 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .15% for Class III shares and .105% for Class IV shares. GMO has entered into a binding agreement effective until at least June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, fees and expenses of the independent Trustees of the Trust (including legal fees), 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) exceed the management fee. The Fund's portion of the fee paid by the Trust to the independent Trustees during the year ended February 28, 2003 was $7,593. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2003, aggregated $497,082,072 and $277,805,530, respectively. At February 28, 2003, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $591,739,793 $42,342 $(100,799,420) $(100,757,078)
4. PRINCIPAL SHAREHOLDERS At February 28, 2003, 56.0% of the outstanding shares of the Fund were held by four shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. 19 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 -------------------------- -------------------------- Shares Amount Shares Amount Class III: ----------- ------------- ----------- ------------- Shares sold 19,145,833 $ 202,448,347 9,762,326 $ 118,497,001 Shares issued to shareholders in reinvestment of distributions 139,964 1,343,482 146,377 1,687,074 Shares repurchased (12,384,896) (123,414,904) (19,237,964) (232,085,961) ----------- ------------- ----------- ------------- Net increase (decrease) 6,900,901 $ 80,376,925 (9,329,261) $(111,901,886) =========== ============= =========== =============
Period from July 2, 2001 (commencement of Year Ended operations) through February 28, 2003 February 28, 2002 ------------------------ -------------------------- Shares Amount Shares Amount Class IV: ---------- ------------ ----------- ------------- Shares sold 12,955,575 $127,475,526 22,613,569 $272,126,891 Shares issued to shareholders in reinvestment of distributions 398,388 3,699,871 169,378 1,907,569 Shares repurchased -- -- (689,655) (8,000,000) ---------- ------------ ---------- ------------ Net increase 13,353,963 $131,175,397 22,093,292 $266,034,460 ========== ============ ========== ============
The Fund's Class IV was started with an initial transfer of paid in capital of $100,653,595 from Class III. This transfer is included in the transaction amounts above. 20 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO TOBACCO-FREE CORE FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Tobacco-Free Core Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 21 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 22 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the from February Boston, MA 02110 Trust 2002 - October Age: 64 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 23 PRINCIPAL OFFICERS:
Term of Office(4) Principal Occupation(s) Name, Address, Position(s) and Length of During Past and Age Held with Fund Time Served Five Years ------------------------- ------------------------------ ------------------------------ ------------------------------ Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer (1997 c/o GMO Trust Officer of the Trust Officer since October 2002; - present), Chief Operating 40 Rowes Wharf Vice President from August Officer (2000 - present) and Boston, MA 02110 1998 - October 2002. Member, Grantham, Mayo, Van Age: 47 Otterloo & Co. LLC. Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC. 40 Rowes Wharf February 1998. Boston, MA 02110 Age: 45 Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator, c/o GMO Trust Trust Grantham, Mayo, Van 40 Rowes Wharf Otterloo & Co. LLC. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer 40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003) Boston, MA 02110 and Member, Grantham, Mayo, Age: 37 Van Otterloo & Co. LLC. Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel, c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van 40 Rowes Wharf 2001. Otterloo & Co. LLC (June Boston, MA 02110 1999 - present); Associate/ Age: 58 Junior Partner, Hale and Dorr LLP (1991 - 1999). Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering c/o GMO Trust Laundering Compliance Officer Reporting Officer (February 40 Rowes Wharf 2003 - present) and Compliance Boston, MA 02110 Officer, Grantham, Mayo, Van Age: 32 Otterloo & Co. LLC.
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 24 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGERS Day-to-day management of the Fund's portfolio is the responsibility of the U.S. Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO U.S. Core Fund returned -21.6% for the fiscal year ended February 28, 2003, as compared to -22.7% for the S&P 500 Index. Consistent with the Fund's investment objectives and policies, the Fund was invested substantially in common stocks throughout the period. For the fiscal year, every sector in the S&P 500 posted losses, providing nowhere for U.S. equity investors to hide. Financial services, healthcare, consumer staples, integrated oils, and materials and processing all posted returns that were in excess of the benchmark, but still underwater. Trailing the S&P 500 Index returns were technology, utilities, consumer discretionary, autos and transportation, producer durables, energy, and other. Autos and transportation and utilities were the weakest performing sectors, falling 29.9% and 29.1%, respectively. Value stocks across all market capitalization sectors continued to outperform growth stocks, while there was virtually no difference between large cap and small cap returns. The Fund's outperformance of the benchmark for the period is attributable to stock selection, as sector selection impact was negative for the period. This was due in large part to the Fund's near-benchmark weighting in the weak-performing technology sector and its overweight position in the even weaker performing utilities sector. Our continued underweighting of healthcare throughout the year was beneficial, as was the Fund's underweighting in the energy sector. Good stock selection contributed significantly to the Fund's outperformance for the fiscal year. Selection was particularly strong among financial services, healthcare and technology, while selection among consumer staples, utilities and autos and transportation was weak. The Fund incorporates three investment disciplines in the portfolio: price to intrinsic value, which has a 40% weight; price to normalized earnings, with a 20% weight; and momentum, with a 40% weight. For the fiscal year, the strongest contributor to returns was price to normalized earnings, our more traditional valuation metric. Momentum was also a positive contributor, while price to intrinsic value had a negative impact on performance. OUTLOOK The portfolio is conservatively positioned, with a lower price to book, lower price to earnings, and a higher dividend yield than the S&P 500. We believe that our process of combining value and momentum disciplines in the GMO U.S. Core Fund is well suited to the continued choppy market environment that we anticipate. The portfolio currently maintains overweight positions in the telephone utilities and financial services sectors and an underweight position in both healthcare and technology. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO U.S. CORE FUND CLASS III SHARES AND THE S&P 500 INDEX AS OF FEBRUARY 28, 2003 GMO U.S. CORE FUND S&P 500 INDEX 2/28/93 $10,000 $10,000 3/31/93 $10,267 $10,211 6/30/93 $10,497 $10,261 9/30/93 $11,021 $10,526 12/31/93 $11,214 $10,770 3/31/94 $10,869 $10,361 6/30/94 $10,892 $10,405 9/30/94 $11,359 $10,914 12/31/94 $11,479 $10,912 3/31/95 $12,528 $11,974 6/30/95 $13,899 $13,118 9/30/95 $15,408 $14,160 12/31/95 $16,444 $15,012 3/31/96 $17,036 $15,818 6/30/96 $17,608 $16,528 9/30/96 $18,098 $17,039 12/31/96 $19,341 $18,459 3/31/97 $19,813 $18,954 6/30/97 $23,032 $22,263 9/30/97 $25,735 $23,931 12/31/97 $26,128 $24,618 3/31/98 $29,550 $28,052 6/30/98 $30,158 $28,978 9/30/98 $27,265 $26,096 12/31/98 $32,579 $31,654 3/31/99 $33,768 $33,231 6/30/99 $36,290 $35,573 9/30/99 $33,811 $33,351 12/31/99 $38,637 $38,314 3/31/2000 $40,170 $39,192 6/30/2000 $38,733 $38,151 9/30/2000 $40,574 $37,782 12/31/2000 $38,752 $34,826 3/31/2001 $35,681 $30,697 6/30/2001 $37,387 $32,493 9/30/2001 $32,977 $27,724 12/31/2001 $35,774 $30,686 3/31/2002 $36,180 $30,771 6/30/2002 $31,722 $26,648 9/30/2002 $26,285 $22,045 12/31/2002 $28,738 $23,905 2/28/2003 $27,393 $22,929
AVERAGE ANNUAL TOTAL RETURN SINCE INCEPTION 1 YEAR 5 YEAR 10 YEAR 6/7/96 Class II* -21.63% -0.67% n/a 6.73% Class III -21.59% -0.62% 10.60% n/a 1/9/98 Class IV -21.55% -0.57% n/a 1.89% 7/2/2001 Class V -21.55% n/a n/a -17.28% 4/15/2002 Class M n/a n/a n/a -22.03%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Performance for Classes II, IV, V and M may vary due to different fees. Past performance is not indicative of future performance. Information is unaudited. * Class II performance includes Class III performance for the period November 17,1997 to January 9, 1998, during which no Class II shares were outstanding. GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- COMMON STOCKS -- 98.3% AUTO & TRANSPORTATION -- 3.8% 331,100 AMR Corp* 774,774 456,300 Burlington Northern Santa Fe Railroad Co 11,407,500 126,400 CSX Corp 3,395,104 265,200 Delta Air Lines Inc 2,227,680 150,600 Expeditors International Washington Inc 5,149,014 3,000 FedEx Corp 154,200 974,311 Ford Motor Co 8,106,268 773,716 General Motors Corp 26,128,389 59,200 Genuine Parts Co 1,704,960 195,500 Goodyear Tire & Rubber Co 782,000 128,700 Harley Davidson Inc 5,095,233 41,800 Union Pacific Corp 2,306,942 383,500 United Parcel Service, Class B 22,066,590 -------------- 89,298,654 -------------- CONSUMER DISCRETIONARY -- 10.6% 38,800 Abercrombie & Fitch Co, Class A* 1,067,000 546,900 Amazon.com Inc* 12,037,269 268,700 Apollo Group Inc, Class A* 12,451,558 241,200 Autonation Inc* 3,191,076 132,300 Black and Decker Corp 4,855,410 165,500 CDW Computer Centers Inc* 7,225,730 396,100 Circuit City Stores Inc 1,750,762 257,200 Clear Channel Communications Inc* 9,390,372 82,100 Coach Inc* 2,933,433 255,200 Dollar Tree Stores Inc* 5,269,880 375,400 Eastman Kodak Co 11,111,840 131,400 eBay Inc* 10,304,388 107,400 Electronic Arts Inc* 5,670,720 61,800 Estee Lauder Cos Inc 1,733,490 158,500 Federated Department Stores Inc* 4,041,750 73,700 Gannett Co Inc 5,318,929 57,800 Harrahs Entertainment Inc* 1,898,152 125,700 Hilton Hotels Corp 1,381,443 211,600 Jones Apparel Group Inc* 6,000,976 181,600 Limited Brands Inc 2,157,408 32,800 Manpower Inc 996,136 259,200 May Department Stores Co 5,085,504
See accompanying notes to the financial statements. 1 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- CONSUMER DISCRETIONARY -- CONTINUED 54,200 MGM Mirage* 1,388,604 51,800 Mohawk Industries Inc* 2,557,884 160,600 New York Times Co, Class A 7,461,476 322,800 Newell Rubbermaid Inc 9,102,960 160,300 Penney (JC) Co Inc 3,181,955 40,700 Pixar Inc* 2,197,393 63,400 R.R. Donnelley and Sons 1,157,684 71,300 Ross Stores Inc 2,439,173 485,400 Sears Roebuck & Co 10,572,012 447,200 Starbucks Corp* 10,486,840 824,000 The Gap Inc 10,744,960 129,500 Toys R Us Inc* 1,046,360 269,800 Tribune Co 12,100,530 58,200 VF Corp 1,970,070 231,300 Viacom Inc, Class A* 8,606,673 778,000 Viacom Inc, Class B* 28,887,140 196,800 Wal Mart Stores Inc 9,458,208 100 Washington Post Co, Class B 71,350 116,300 Weight Watchers International Inc* 4,867,155 39,400 Whirlpool Corp 1,940,844 62,800 Williams-Sonoma Inc* 1,461,984 -------------- 247,574,481 -------------- CONSUMER STAPLES -- 8.8% 124,752 Albertsons Inc 2,349,080 1,438,200 Altria Group Inc 55,586,430 249,800 Anheuser Busch Cos Inc 11,615,700 133,100 Campbell Soup Co 2,760,494 1,044,600 Coca Cola Co 42,013,812 602,800 Coca Cola Enterprises Inc 12,164,504 116,300 Colgate-Palmolive Co 5,851,053 406,900 CVS Corp 10,131,810 25,545 Del Monte Foods Co* 208,958 57,900 Heinz (HJ) Co 1,777,530 140,500 Kroger Co* 1,857,410 319,400 Pepsi Bottling Group Inc 7,426,050 94,900 Procter and Gamble Co 7,768,514 378,100 Rite Aid Corp* 907,440 85,200 RJ Reynolds Tobacco Holdings 3,400,332 722,100 Safeway Inc* 14,362,569
2 See accompanying notes to the financial statements. GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- CONSUMER STAPLES -- CONTINUED 236,700 Sara Lee Corp 4,686,660 183,900 Sysco Corp 4,987,368 128,600 UST Inc 3,707,538 446,300 Walgreen Co 12,558,882 -------------- 206,122,134 -------------- FINANCIAL SERVICES -- 24.0% 508,800 AFLAC Corp 15,900,000 500,400 Allstate Corp 15,827,652 809,300 American Express Co 27,176,294 112,700 Amsouth Bancorp 2,321,620 508,209 Bank of America Corp 35,188,391 237,500 Bank One Corp 8,557,125 100,600 BB&T Corp 3,302,698 148,379 Bear Stearns Cos Inc 9,294,461 198,800 Capital One Financial Corp 6,156,836 38,303 Charter One Financial Inc 1,107,340 190,500 Cigna Corp 8,185,785 439,200 Citigroup Inc 14,642,928 87,500 CNA Financial Corp* 2,011,625 98,100 Comerica Inc 4,020,138 695,300 Conseco Inc* 28,507 196,800 Countrywide Financial Corp 10,507,152 28,800 Dun & Bradstreet Corp* 1,033,920 92,200 Equifax Inc 1,768,396 927,600 Fannie Mae 59,459,160 114,600 Fidelity National Financial Inc 3,762,318 418,388 FleetBoston Financial Corp 10,275,609 134,400 Franklin Resources Inc 4,390,848 637,100 Freddie Mac 34,817,515 120,900 Golden West Financial Corp 8,753,160 91,700 Greenpoint Financial Corp 3,895,416 306,500 Household International Inc 8,560,545 186,000 Hudson City Bancorp Inc 3,532,140 139,000 Huntington Bancshares Inc 2,668,800 618,580 J.P. Morgan Chase & Co 14,029,394 267,700 Janus Capital Group Inc 3,166,891 342,100 KeyCorp 8,118,033 77,700 Lehman Brothers Holdings Inc 4,302,249 66,800 Lincoln National Corp 1,892,444
See accompanying notes to the financial statements. 3 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- FINANCIAL SERVICES -- CONTINUED 240,700 Loews Corp 10,520,997 123,750 MBIA Inc 4,718,587 358,500 Merrill Lynch & Co Inc 12,217,680 212,300 Metlife Inc 5,555,891 225,400 MGIC Investment Corp 8,894,284 112,000 Moody's Corp 4,939,200 572,000 Morgan Stanley 21,078,200 265,100 National City Corp 7,322,062 241,400 PMI Group Inc 6,541,940 126,100 PNC Financial Services Group 5,665,673 217,200 Principal Financial Group 5,988,204 151,400 Radian Group Inc 5,279,318 136,300 Regions Financial Corp 4,413,394 23,500 Sovereign Bancorp Inc 319,130 84,500 Suntrust Banks Inc 4,753,125 119,700 Torchmark Corp 4,346,307 93,300 Union Planters Corp 2,567,616 343,400 Unumprovident Corp 4,464,200 133,700 US Bancorp 2,797,004 687,200 Wachovia Corp 24,381,856 606,950 Washington Mutual Inc 20,957,984 1,177,800 Wells Fargo & Co 53,413,230 -------------- 559,791,272 -------------- HEALTH CARE -- 15.0% 93,500 Abbott Laboratories 3,330,470 287,000 Aetna Inc 12,088,440 95,000 Anthem Inc* 5,662,950 251,100 Boston Scientific Corp* 11,091,087 1,179,900 Bristol Myers Squibb Co 27,491,670 76,300 Cardinal Health Inc 4,371,227 14,200 Forest Laboratories Inc* 707,160 318,000 Guidant Corp* 11,371,680 206,400 HCA - The Healthcare Company 8,511,936 64,500 Health Net Inc* 1,619,595 193,000 Lincare Holdings Inc* 5,770,700 52,300 Medtronic Inc 2,337,810 2,051,700 Merck & Co Inc 108,227,175 52,400 Oxford Health Plans Inc* 1,467,200 42,800 Patterson Dental Co* 1,883,628
4 See accompanying notes to the financial statements. GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- HEALTH CARE -- CONTINUED 2,228,900 Pfizer Inc 66,465,798 305,200 Pharmacia Corp 12,610,864 1,536,500 Schering Plough Corp 27,687,730 68,700 Stryker Corp 4,479,240 118,400 UnitedHealth Group Inc 9,815,360 58,400 Universal Health Services, Class B* 2,268,256 117,700 Varian Medical Systems Inc* 5,949,735 103,400 Wellpoint Health Network Inc* 7,032,234 167,300 Zimmer Holdings Inc* 7,426,447 -------------- 349,668,392 -------------- INTEGRATED OILS -- 2.5% 59,500 Amerada Hess Corp 2,649,535 556,115 ConocoPhillips 28,195,031 223,510 Exxon Mobil Corp 7,603,810 536,500 Marathon Oil Corp 12,387,785 207,600 Occidental Petroleum Corp 6,207,240 -------------- 57,043,401 -------------- MATERIALS & PROCESSING -- 1.8% 102,700 Ashland Inc 2,856,087 107,700 Avery Dennison Corp 6,181,980 126,000 Du Pont (E.I.) De Nemours 4,620,420 167,200 Ecolab Inc 8,201,160 66,100 Energizer Holdings Inc* 1,754,955 77,600 PPG Industries Inc 3,600,640 244,000 Sealed Air Corp* 8,849,880 221,300 Sherwin Williams Co 5,908,710 3,600 Sigma Aldrich Corp 157,752 -------------- 42,131,584 -------------- OTHER -- 3.3% 216,800 3 M Co 27,180,216 38,500 Eaton Corp 2,731,575 123,700 Fortune Brands Inc 5,423,008 953,600 Honeywell International Inc 21,827,904 92,000 ITT Industries Inc 5,173,160 102,100 Johnson Controls Inc 7,959,716
See accompanying notes to the financial statements. 5 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- OTHER -- CONTINUED 148,000 Textron Inc 5,347,240 -------------- 75,642,819 -------------- OTHER ENERGY -- 3.7% 233,600 Apache Corp 15,249,408 67,100 BJ Services Co* 2,306,227 212,500 Burlington Resources Inc 9,849,375 83,700 Cooper Cameron Corp* 4,352,400 187,800 Devon Energy Corp 9,051,960 189,800 Ensco International Inc 5,310,604 100,200 EOG Resources Inc 4,138,260 560,300 Halliburton Co 11,351,678 153,900 Nabors Industries Ltd* 6,102,135 37,400 Noble Corp* 1,357,620 54,700 Pioneer Natural Resources Co* 1,430,405 123,865 Reliant Resources Inc.* 501,653 123,100 Smith International Inc* 4,291,266 189,200 Transocean Inc 4,294,840 63,600 Weatherford International Ltd* 2,546,544 157,000 XTO Energy Inc 3,957,970 -------------- 86,092,345 -------------- PRODUCER DURABLES -- 4.5% 176,800 American Power Conversion Corp* 2,765,152 750,100 Boeing Co 20,672,756 63,900 Caterpillar Inc 3,003,300 96,500 Centex Corp 5,334,520 65,700 Cooper Industries Ltd 2,486,745 9,700 Danaher Corp 630,694 84,100 Deere & Co 3,480,058 98,800 DR Horton Inc 1,809,028 109,700 Emerson Electric Co 5,163,579 73,700 Lennar Corp 3,979,063 59,500 Lexmark International Group Inc* 3,713,395 136,500 Lockheed Martin Corp 6,240,780 93,546 Northrop Grumman Corp 8,110,438 131,800 Novellus System Inc* 3,841,970 11,000 NVR Inc* 3,651,450 59,000 Pulte Corp 2,998,970
6 See accompanying notes to the financial statements. GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- PRODUCER DURABLES -- CONTINUED 279,500 Tyco International Ltd 4,136,600 252,300 United Technologies Corp 14,779,734 126,900 Waters Corp* 2,940,273 642,100 Xerox Corp* 5,778,900 -------------- 105,517,405 -------------- TECHNOLOGY -- 10.2% 156,200 Applera Corp-Applied Biosystems Group 2,866,270 660,000 BMC Software Inc* 12,804,000 175,200 Brocade Communications Systems Inc* 706,056 132,300 Ceridian Corp* 1,825,740 1,580,700 Cisco Systems Inc* 22,098,186 1,019,700 Computer Associates International Inc 13,612,995 608,200 Compuware Corp* 2,244,258 655,900 Corning Inc* 3,227,028 803,500 Dell Computer Corp* 21,662,360 1,488,900 EMC Corp* 11,002,971 944,400 Gateway Inc* 2,058,792 1,012,700 Hewlett-Packard Co 16,051,295 106,500 IBM Corp 8,301,675 1,144,900 Intel Corp 19,760,974 186,300 Intuit Inc* 8,852,976 853,200 Lucent Technologies Inc* 1,399,248 922,800 Microsoft Corp 21,870,360 3,380,700 Oracle Corp* 40,433,172 307,200 Qualcomm Inc* 10,622,976 111,700 Rockwell Automation 2,570,217 150,700 Symantec Co* 6,098,829 1,371,700 Tellabs Inc* 8,353,653 -------------- 238,424,031 -------------- UTILITIES -- 10.1% 70,400 Ameren Corp 2,744,896 165,800 American Electric Power Inc 3,611,124 902,071 AT & T Corp 16,724,396 851,200 Bellsouth Corp 18,445,504 158,900 Centerpoint Energy Inc 738,885 83,100 Cinergy Corp 2,678,313 126,100 Consolidated Edison Inc 4,917,900
See accompanying notes to the financial statements. 7 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- UTILITIES -- CONTINUED 67,900 Constellation Energy Group Inc 1,780,338 85,000 DTE Energy Co 3,522,400 372,100 Edison International* 4,599,156 267,700 Exelon Corp 13,157,455 35,931 Firstenergy Corp 1,059,965 77,700 FPL Group Inc 4,351,977 77,100 Keyspan Corp 2,464,887 528,400 PG & E Corp* 6,737,100 63,300 Pinnacle West Capital Corp 1,933,182 149,100 PPL Corp 5,243,847 129,300 Public Service Enterprise Group Inc 4,477,659 768,700 Qwest Communications International Inc* 2,751,946 2,231,382 SBC Communications Inc 46,412,746 152,400 Sempra Energy 3,535,680 272,900 Southern Co 7,698,509 1,053,900 Sprint Corp (Fon Group) 13,384,530 32,400 Teco Energy Inc 358,992 111,900 TXU Corp 1,787,043 1,773,522 Verizon Communications Inc 61,328,391 -------------- 236,446,821 -------------- TOTAL COMMON STOCKS (COST $2,720,323,950) 2,293,753,339 -------------- SHORT-TERM INVESTMENTS -- 8.1% CASH EQUIVALENTS -- 3.7% 37,307,868 Dreyfus Money Market Fund(a) 37,307,868 $ 26,363,286 Harris Trust & Savings Bank Eurodollar Time Deposit, 1.26%, due 3/24/03(a) 26,363,286 21,749,711 Merrimac Money Market Fund(a) 21,749,711 -------------- 85,420,865 -------------- U.S. GOVERNMENT -- 0.4% $ 10,335,000 U.S. Treasury Bill, 1.14%, due 4/24/03(b) 10,316,010 --------------
See accompanying notes to the financial statements. 8 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE ($) DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- REPURCHASE AGREEMENT -- 4.0% $ 92,078,552 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/28/03, due 3/03/03, with a maturity value of $92,081,314, and an effective yield of 0.36%, collateralized by U.S. Treasury Note with a rate of 3.625%, maturity date of 3/31/04, and market value, including accrued interest of $99,074,642. 92,078,552 -------------- TOTAL SHORT-TERM INVESTMENTS (COST $187,815,427) 187,815,427 -------------- TOTAL INVESTMENTS -- 106.4% (Cost $2,908,139,377) 2,481,568,766 Other Assets and Liabilities (net) -- (6.4%) (148,214,690) -------------- TOTAL NET ASSETS -- 100.0% $2,333,354,076 ============== NOTES TO THE SCHEDULE OF INVESTMENTS:
* Non-income producing security. (a) Represents investment of security lending collateral (Note 1). (b) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 6). See accompanying notes to the financial statements. 9 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value, including securities on loan of $81,620,895 (cost $2,908,139,377) (Note 1) $2,481,568,766 Receivable for investments sold 40,314,367 Receivable for Fund shares sold 3,051,662 Dividends and interest receivable 3,843,617 Receivable for variation margin on open futures contracts (Notes 1 and 6) 127,575 Receivable for expenses reimbursed by Manager (Note 2) 64,736 -------------- Total assets 2,528,970,723 -------------- LIABILITIES: Payable for investments purchased 98,451,808 Payable upon return of securities loaned (Note 1) 85,420,865 Payable for Fund shares repurchased 10,775,376 Payable to affiliate for (Note 2): Management fee 594,807 Shareholder service fee 239,303 12b-1 fee - Class M 24,800 Administration fee - Class M 9,326 Accrued expenses 100,362 -------------- Total liabilities 195,616,647 -------------- NET ASSETS $2,333,354,076 ============== NET ASSETS CONSIST OF: Paid-in capital $3,242,281,504 Accumulated undistributed net investment income 11,451,349 Accumulated net realized loss (493,878,942) Net unrealized depreciation (426,499,835) -------------- $2,333,354,076 ============== NET ASSETS ATTRIBUTABLE TO: Class II shares $ 241,430,806 ============== Class III shares $1,141,724,817 ============== Class IV shares $ 463,253,730 ============== Class V shares $ 426,703,118 ============== Class M shares $ 60,241,605 ============== SHARES OUTSTANDING: Class II 24,222,943 ============== Class III 114,365,861 ============== Class IV 46,463,874 ============== Class V 42,826,818 ============== Class M 6,049,202 ============== NET ASSET VALUE PER SHARE: Class II $ 9.97 ============== Class III $ 9.98 ============== Class IV $ 9.97 ============== Class V $ 9.96 ============== Class M $ 9.96 ==============
10 See accompanying notes to the financial statements. GMO U.S. CORE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends $ 46,286,252 Interest (including securities lending income of $118,957) 974,270 ------------- Total income 47,260,522 ------------- EXPENSES: Management fee (Note 2) 8,520,974 Custodian and transfer agent fees 398,398 Legal fees 142,635 Registration fees 56,510 Trustees fees and related expenses (Note 2) 55,165 Audit fees 49,504 Miscellaneous 49,362 Fees reimbursed by Manager (Note 2) (684,970) ------------- 8,587,578 Shareholder service fee (Note 2) - Class II 447,524 Shareholder service fee (Note 2) - Class III 1,876,518 Shareholder service fee (Note 2) - Class IV 705,267 Shareholder service fee (Note 2) - Class V 352,503 ------------- 12b-1 fee (Note 2) - Class M 103,221 ------------- Administration fee (Note 2) - Class M 82,577 ------------- Net expenses 12,155,188 ------------- Net investment income 35,105,334 ------------- REALIZED AND UNREALIZED LOSS: Net realized loss on: Investments (295,003,418) Closed futures contracts (7,564,879) ------------- Net realized loss (302,568,297) ------------- Change in net unrealized appreciation (depreciation) on: Investments (338,074,313) Open futures contracts (508,208) ------------- Net unrealized loss (338,582,521) ------------- Net realized and unrealized loss (641,150,818) ------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(606,045,484) =============
See accompanying notes to the financial statements. 11 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 35,105,334 $ 37,068,955 Net realized loss (302,568,297) (164,915,777) Change in net unrealized appreciation (depreciation) (338,582,521) (28,658,516) -------------- -------------- Net decrease in net assets from operations (606,045,484) (156,505,338) -------------- -------------- Distributions to shareholders from: Net investment income Class II (2,561,727) (1,721,073) Class III (16,337,118) (17,730,889) Class IV (9,588,920) (12,297,927) Class V (5,745,428) (4,546,353) Class M (370,335) -- -------------- -------------- Total distributions from net investment income (34,603,528) (36,296,242) -------------- -------------- Net realized gains Class II -- (109,969) Class III -- (1,128,842) Class IV -- (648,375) Class V -- (350,905) -------------- -------------- Total distributions from net realized gains -- (2,238,091) -------------- -------------- (34,603,528) (38,534,333) -------------- -------------- Net share transactions (Note 5): Class II 115,982,471 71,357,721 Class III 143,190,844 (104,317,667) Class IV (126,130,617) (495,915,214) Class V 84,738,772 478,135,957 Class M 67,581,135 -- -------------- -------------- Increase (decrease) in net assets resulting from net share transactions 285,362,605 (50,739,203) -------------- -------------- Total decrease in net assets (355,286,407) (245,778,874) NET ASSETS: Beginning of period 2,688,640,483 2,934,419,357 -------------- -------------- End of period (including accumulated undistributed net investment income of $11,451,349 and $11,088,227, respectively) $2,333,354,076 $2,688,640,483 ============== ==============
12 See accompanying notes to the financial statements. GMO U.S. CORE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS II SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ----------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 12.89 $ 13.94 $ 16.62 $ 18.57 $ 19.98 -------- -------- -------- ------- ------- Income from investment operations: Net investment income 0.14+ 0.17+ 0.20+ 0.23+ 0.25+ Net realized and unrealized gain (loss) (2.91) (1.04) 0.03* 2.29 2.55 -------- -------- -------- ------- ------- Total from investment operations (2.77) (0.87) 0.23 2.52 2.80 -------- -------- -------- ------- ------- Less distributions to shareholders: From net investment income (0.15) (0.17) (0.18) (0.24) (0.29) From net realized gains -- (0.01) (2.73) (4.23) (3.92) -------- -------- -------- ------- ------- Total distributions (0.15) (0.18) (2.91) (4.47) (4.21) -------- -------- -------- ------- ------- NET ASSET VALUE, END OF PERIOD $ 9.97 $ 12.89 $ 13.94 $ 16.62 $ 18.57 ======== ======== ======== ======= ======= TOTAL RETURN(a) (21.63)% (6.29)% 0.75% 13.61% 14.99% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $241,431 $176,456 $114,454 $95,041 $41,684 Net expenses to average daily net assets 0.55% 0.55% 0.55% 0.55% 0.55% Net investment income to average daily net assets 1.30% 1.27% 1.21% 1.21% 1.29% Portfolio turnover rate 74% 69% 81% 90% 71% Fees and expenses reimbursed by the Manager to average daily net assets: 0.03% 0.02% 0.02% 0.02% 0.22%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. * The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain/ loss for the period due to the timing of purchases and redemptions of Fund shares in relation to the fluctuating market values of the Fund. + Computed using average shares outstanding throughout the period. See accompanying notes to the financial statements. 13 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ----------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ------------- ------------- ------------- ------------- ------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 12.90 $ 13.95 $ 16.63 $ 18.59 $ 19.99 ---------- ---------- ---------- ---------- ---------- Income from investment operations: Net investment income 0.15+ 0.18+ 0.20+ 0.24+ 0.26+ Net realized and unrealized gain (loss) (2.92) (1.05) 0.04* 2.28 2.55 ---------- ---------- ---------- ---------- ---------- Total from investment operations (2.77) (0.87) 0.24 2.52 2.81 ---------- ---------- ---------- ---------- ---------- Less distributions to shareholders: From net investment income (0.15) (0.17) (0.19) (0.25) (0.29) From net realized gains -- (0.01) (2.73) (4.23) (3.92) ---------- ---------- ---------- ---------- ---------- Total distributions (0.15) (0.18) (2.92) (4.48) (4.21) ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 9.98 $ 12.90 $ 13.95 $ 16.63 $ 18.59 ========== ========== ========== ========== ========== TOTAL RETURN(a) (21.59)% (6.23)% 0.83% 13.66% 15.02% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $1,141,725 $1,321,634 $1,532,124 $1,623,734 $1,780,011 Net expenses to average daily net assets 0.48% 0.48% 0.48% 0.48% 0.48% Net investment income to average daily net assets 1.34% 1.33% 1.27% 1.27% 1.36% Portfolio turnover rate 74% 69% 81% 90% 71% Fees and expenses reimbursed by the Manager to average daily net assets: 0.03% 0.02% 0.02% 0.02% 0.22%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. * The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain/ loss for the period due to the timing of purchases and redemptions of Fund shares in relation to the fluctuating market values of the Fund. + Computed using average shares outstanding throughout the period. 14 See accompanying notes to the financial statements. GMO U.S. CORE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ------------- ------------- ------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 12.89 $ 13.94 $ 16.62 $ 18.58 $ 19.99 -------- -------- ---------- ---------- ---------- Income from investment operations: Net investment income 0.16+ 0.18+ 0.21+ 0.25+ 0.27+ Net realized and unrealized gain (loss) (2.92) (1.04) 0.04* 2.28 2.55 -------- -------- ---------- ---------- ---------- Total from investment operations (2.76) (0.86) 0.25 2.53 2.82 -------- -------- ---------- ---------- ---------- Less distributions to shareholders: From net investment income (0.16) (0.18) (0.20) (0.26) (0.31) From net realized gains -- (0.01) (2.73) (4.23) (3.92) -------- -------- ---------- ---------- ---------- Total distributions (0.16) (0.19) (2.93) (4.49) (4.23) -------- -------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 9.97 $ 12.89 $ 13.94 $ 16.62 $ 18.58 ======== ======== ========== ========== ========== TOTAL RETURN(a) (21.55)% (6.20)% 0.92% 13.74% 15.07% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $463,254 $744,813 $1,287,842 $1,343,460 $1,543,655 Net expenses to average daily net assets 0.44% 0.44% 0.44% 0.44% 0.44% Net investment income to average daily net assets 1.39% 1.36% 1.31% 1.32% 1.41% Portfolio turnover rate 74% 69% 81% 90% 71% Fees and expenses reimbursed by the Manager to average daily net assets: 0.03% 0.02% 0.02% 0.02% 0.22%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. * The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain/ loss for the period due to the timing of purchases and redemptions of Fund shares in relation to the fluctuating market values of the Fund. + Computed using average shares outstanding throughout the period. See accompanying notes to the financial statements. 15 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS V SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ------------------------- 2003 2002(1) ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 12.88 $ 14.00 -------- -------- Income from investment operations: Net investment income 0.16+ 0.13+ Net realized and unrealized loss (2.92) (1.10) -------- -------- Total from investment operations (2.76) (0.97) -------- -------- Less distributions to shareholders: From net investment income (0.16) (0.14) From net realized gains -- (0.01) -------- -------- Total distributions (0.16) (0.15) -------- -------- NET ASSET VALUE, END OF PERIOD $ 9.96 $ 12.88 ======== ======== TOTAL RETURN(a) (21.55)% (6.96)%++ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $426,703 $445,738 Net expenses to average daily net assets 0.42% 0.42%* Net investment income to average daily net assets 1.41% 1.46%* Portfolio turnover rate 74% 69% Fees and expenses reimbursed by the Manager to average daily net assets: 0.03% 0.02%*
(1) Period from July 2, 2001(commencement of operations) through February 28, 2002. (a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. * Annualized. + Computed using average shares outstanding throughout the period. ++ Not Annualized. 16 See accompanying notes to the financial statements. GMO U.S. CORE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS M SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM APRIL 15, 2002 (COMMENCEMENT OF OPERATIONS) THROUGH FEBRUARY 28, 2003 ---------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 12.89 ------- Income from investment operations: Net investment income 0.11+ Net realized and unrealized loss (2.94) ------- Total from investment operations (2.83) ------- Less distributions to shareholders: From net investment income (0.10) ------- Total distributions (0.10) ------- NET ASSET VALUE, END OF PERIOD $ 9.96 ======= TOTAL RETURN(a) (22.03)%++ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $60,242 Net expenses to average daily net assets 0.78%* Net investment income to average daily net assets 1.18%* Portfolio turnover rate 74% Fees and expenses reimbursed by the Manager to average daily net assets: 0.03%*
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. * Annualized. + Computed using average shares outstanding throughout the period. ++ Not Annualized. See accompanying notes to the financial statements. 17 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO U.S. Core Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in U.S. equity securities. The Fund's benchmark is the S&P 500 Index. Throughout the year ended February 28, 2003, the Fund had four classes of shares outstanding: Class II, Class III, Class IV, and Class V. Effective April 15, 2002, the Fund began to offer Class M shares. Class M shares bear an administrative fee and a 12b-1 fee. (See Note 2) The principal economic difference among the classes of shares is the level of fees borne by the classes. Eligibility for and automatic conversion between the various classes of shares is generally based on the total amount of assets invested in a particular fund or with GMO, as more fully outlined in the Trust's prospectus. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. 18 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- FUTURES CONTRACTS The Fund may purchase and sell futures contracts to manage its exposure to the financial markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See Note 6 for all open futures contracts as of February 28, 2003. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the financial markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a 19 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of February 28, 2003 the Fund held no open swap agreements. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 2003, the Fund loaned securities having a market value of $81,620,895, collateralized by cash in the amount of $85,420,865, which was invested in short-term instruments. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country's tax treaty with the United States. 20 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003, the tax basis of distributions paid from ordinary income were $38,534,333 and $34,603,528, respectively. As of February 28, 2003, the components of distributable earnings on a tax basis consists of $11,312,029 of undistributed ordinary income. The temporary differences between book and tax basis distributable earnings are primarily due to losses on wash sales. At February 28, 2003, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code, of $170,940,887 expiring in 2010 and $190,371,968 expiring in 2011. The Fund elected to defer to March 1, 2003 post-October losses of $104,178,933. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This reclassification has no impact on net investent income, realized gain/loss or the net asset value of the Fund and is primarily attributable to differing treatments for the sale of partnership holdings and redemptions in kind transactions. Net losses resulting from redemption in kind transactions were $46,047.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain Paid-in Capital ----------------- ----------------- --------------- $(138,684) $324,862 $(186,178)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on 21 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- securities sold, the cost of securities is determined on the identified cost basis. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. ALLOCATION OF OPERATING ACTIVITY The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro-rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service, 12b-1, and administration fees, which are directly attributable to a class of shares, are charged to that class' operations. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of .22% for Class II shares, .15% for Class III shares, .105% for Class IV shares and .085% for Class V shares. The Fund pays GMO an administrative fee monthly at the annual rate of .20% of the average daily Class M net assets for support services provided to Class M shareholders. Fund Distributors, Inc. (the "Distributor") serves as the Fund's distributor. Pursuant to a Rule 12b-1 distribution plan adopted by the Fund, Class M shares of the Fund pay a fee, at the annual rate of .25% of average daily Class M net assets for any activities or expenses primarily intended to result in the sale of Class M shares of the Fund. This fee may be spent by the Distributor on personal services rendered to Class M shareholders of the Fund and/or maintenance of Class M shareholder accounts. GMO has entered into a binding agreement effective until at least June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees (Class II, Class III, Class IV and Class V only), administrative fee (Class M only), 12b-1 fee (Class M only), fees and expenses of the independent Trustees of the Trust (including legal fees), 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) exceed the management fee. 22 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- As of February 28, 2003, greater than 10% of the Fund's shares were held by accounts for which the Manager has investment discretion. The Fund's portion of the fee paid by the Trust to the independent Trustees during the year ended February 28, 2003 was $37,314. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2003, aggregated $2,268,582,982 and $1,821,217,648 respectively. At February 28, 2003, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $2,936,316,435 $53,823,431 $(508,571,100) $(454,747,669)
4. PRINCIPAL SHAREHOLDER At February 28, 2003, 14.0% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder may have a material effect on the Fund. 23 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 -------------------------- -------------------------- Shares Amount Shares Amount Class II: ----------- ------------- ----------- ------------- Shares sold 13,418,875 $ 146,502,245 5,999,733 $ 78,192,785 Shares issued to shareholders in reinvestment of distributions 158,481 1,717,067 84,554 1,110,236 Shares repurchased (3,048,932) (32,236,841) (600,687) (7,945,300) ----------- ------------- ----------- ------------- Net increase 10,528,424 $ 115,982,471 5,483,600 $ 71,357,721 =========== ============= =========== =============
Year Ended Year Ended February 28, 2003 February 28, 2002 -------------------------- -------------------------- Shares Amount Shares Amount Class III: ----------- ------------- ----------- ------------- Shares sold 38,472,240 $ 437,495,310 14,080,984 $ 183,397,230 Shares issued to shareholders in reinvestment of distributions 1,078,206 11,858,975 1,022,084 13,448,177 Shares repurchased (27,621,256) (306,163,441) (22,459,839) (301,163,074) ----------- ------------- ----------- ------------- Net increase (decrease) 11,929,190 $ 143,190,844 (7,356,771) $(104,317,667) =========== ============= =========== =============
Year Ended Year Ended February 28, 2003 February 28, 2002 -------------------------- -------------------------- Shares Amount Shares Amount Class IV: ----------- ------------- ----------- ------------- Shares sold 30,894,720 $ 334,668,818 12,510,519 $ 150,062,926 Shares issued to shareholders in reinvestment of distributions 634,377 7,001,006 951,389 12,473,256 Shares repurchased (42,856,570) (467,800,441) (48,070,262) (658,451,396) ----------- ------------- ----------- ------------- Net decrease (11,327,473) $(126,130,617) (34,608,354) $(495,915,214) =========== ============= =========== =============
24 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - --------------------------------------------------------------------------------
Period from July 2, 2001 (commencement of Year Ended operations) February 28, 2003 through February 28, 2002 ------------------------ ------------------------- Shares Amount Shares Amount Class V: ----------- ----------- ----------- ------------ Shares sold 8,112,537 $84,103,316 34,374,438 $475,050,242 Shares issued to shareholders in reinvestment of distributions 519,722 5,681,255 371,986 4,873,176 Shares repurchased (416,143) (5,045,799) (135,722) (1,787,461) ----------- ----------- ----------- ------------ Net increase 8,216,116 $84,738,772 34,610,702 $478,135,957 =========== =========== =========== ============
Period from April 15, 2002 (commencement of operations) through February 28, 2003 ---------------------------- Shares Amount Class M: ------------ ------------- Shares sold 14,124,184 $150,489,047 Shares issued to shareholders in reinvestment of distributions 35,653 370,335 Shares repurchased (8,110,635) (83,278,247) ----------- ------------ Net increase 6,049,202 $ 67,581,135 =========== ============
6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 28, 2003 is as follows. FUTURES CONTRACTS
Number of Contract Net Unrealized Contracts Type Expiration Date Value Appreciation --------- ------------------------------------- --------------- ------------ -------------- Buys 61 S&P 500 March 2003 $12,823,725 $70,776 =======
At February 28, 2003 the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. 25 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO U.S. CORE FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO U.S. Core Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 26 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 27 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the from February Boston, MA 02110 Trust 2002 - October Age: 64 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 28 PRINCIPAL OFFICERS:
Principal Occupation(s) Name, Address, Position(s) Term of Office(4) and Length During Past and Age Held with Fund of Time Served Five Years ------------------------- ------------------------------ ------------------------------ ------------------------------ Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief 40 Rowes Wharf Vice President from August Operating Officer (2000 - Boston, MA 02110 1998 - October 2002. present) and Member, Grantham, Age: 47 Mayo, Van Otterloo & Co. LLC. Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC. 40 Rowes Wharf February 1998. Boston, MA 02110 Age: 45 Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator, c/o GMO Trust Trust Grantham, Mayo, Van 40 Rowes Wharf Otterloo & Co. LLC. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer 40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003) Boston, MA 02110 and Member, Grantham, Mayo, Age: 37 Van Otterloo & Co. LLC. Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel, c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van 40 Rowes Wharf 2001. Otterloo & Co. LLC (June Boston, MA 02110 1999 - present); Associate/ Age: 58 Junior Partner, Hale and Dorr LLP (1991 - 1999). Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering c/o GMO Trust Laundering Compliance Officer Reporting Officer (February 40 Rowes Wharf 2003 - present) and Compliance Boston, MA 02110 Officer, Grantham, Mayo, Van Age: 32 Otterloo & Co. LLC.
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 29 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGEMENT Day-to-day management of the Fund's portfolio is the responsibility of the Asset Allocation team at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO U.S. Sector Fund returned -16.8% for the fiscal year ended February 28, 2003, as compared to -22.7% for its S&P 500 benchmark, and -22.2% as compared to the Russell 3000 Index. The GMO U.S. Sector Fund currently invests in the GMO U.S. Core Fund, the GMO Small Cap Value Fund and the GMO Real Estate Fund. The Fund's outperformance relative to the S&P 500 for the fiscal year was due to allocation in favor of small cap value stocks and Real Estate Investment Trusts (REITs). In another down year, both small cap value stocks and REITs again dominated all other market segments. The benchmark for the Small Cap Value Fund, the Russell 2500 Value Index, outperformed the S&P 500 by 6.1%. The positive impact of the decision to overweight Small Cap Value was augmented by the overweight in REITs, whose Morgan Stanley REIT Index benchmark had a positive return of 0.8% for the fiscal year, outperforming the S&P 500 by 23.5%. Implementation within the Fund also added to performance as the U.S. Core Fund outperformed its benchmark by 1.1%. This outperformance was partly offset by the Real Estate Fund underperforming its benchmark by 3.0%. OUTLOOK Small cap value stocks remain attractively valued relative to the still over-priced S&P 500 and Russell 3000 Indexes. In the face of increased risk and somewhat less attractive valuations we have reduced the Fund's overweight to REITs. We expect the Fund to benefit from an ongoing recovery in the Small cap value and REIT sectors. Our style, which combines value and momentum disciplines, is well suited to the continued choppy, but value-driven market environment we anticipate. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO U.S. SECTOR FUND CLASS III SHARES AND THE S&P 500 INDEX AS OF FEBRUARY 28, 2003 GMO U.S. SECTOR FUND S&P 500 INDEX 2/28/93 $10,000 $10,000 3/31/93 $10,260 $10,211 6/30/93 $10,503 $10,261 9/30/93 $11,051 $10,526 12/31/93 $11,261 $10,770 3/31/94 $11,037 $10,361 6/30/94 $11,017 $10,405 9/30/94 $11,506 $10,914 12/31/94 $11,629 $10,912 3/31/95 $12,688 $11,974 6/30/95 $14,084 $13,118 9/30/95 $15,611 $14,160 12/31/95 $16,650 $15,012 3/31/96 $17,228 $15,818 6/30/96 $17,816 $16,528 9/30/96 $18,311 $17,039 12/31/96 $19,686 $18,459 3/31/97 $20,131 $18,954 6/30/97 $22,588 $22,263 9/30/97 $25,238 $23,931 12/31/97 $25,324 $24,618 3/31/98 $27,966 $28,052 6/30/98 $27,841 $28,978 9/30/98 $24,354 $26,096 12/31/98 $28,272 $31,654 3/31/99 $28,332 $33,231 6/30/99 $31,022 $35,573 9/30/99 $28,750 $33,351 12/31/99 $32,318 $38,314 3/31/2000 $33,768 $39,192 6/30/2000 $33,120 $38,151 9/30/2000 $35,160 $37,782 12/31/2000 $35,498 $34,826 3/31/2001 $34,213 $30,697 6/30/2001 $37,459 $32,493 9/30/2001 $34,110 $27,724 12/31/2001 $38,078 $30,686 3/31/2002 $39,748 $30,771 6/30/2002 $37,242 $26,648 9/30/2002 $31,084 $22,045 12/31/2002 $33,036 $23,905 2/28/2003 $31,572 $22,929
AVERAGE ANNUAL TOTAL RETURN 1 YEAR 5 YEARS 10 YEARS Class III -16.79% 3.31% 12.18%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- MUTUAL FUNDS -- 100.0% 128,973 GMO Real Estate Fund, Class III 1,352,922 358,038 GMO Small Cap Value Fund, Class III 3,512,349 829,874 GMO U.S. Core Fund, Class III 8,282,138 ------------- TOTAL MUTUAL FUNDS (COST $15,428,803) 13,147,409 ------------- SHORT-TERM INVESTMENTS -- 0.1% REPURCHASE AGREEMENT -- 0.1% $ 7,840 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/28/03, due 3/03/03, with a maturity value of $7,840 and an effective yield of 0.36%, collateralized by a U.S. Treasury Obligation with a rate of 3.625%, maturity date of 3/31/04 and market value, including accrued interest of $8,434. 7,840 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $7,840) 7,840 ------------- TOTAL INVESTMENTS -- 100.1% (Cost $15,436,643) 13,155,249 Other Assets and Liabilities (net) -- (0.1%) (10,917) ------------- TOTAL NET ASSETS -- 100.0% $ 13,144,332 =============
See accompanying notes to the financial statements. 1 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $15,436,643) (Note 1) $13,155,249 Receivable for expenses reimbursed by Manager (Note 2) 8,739 ----------- Total assets 13,163,988 ----------- LIABILITIES: Payable to affiliate for (Note 2): Management fee 3,332 Shareholder service fee 1,515 Accrued expenses 14,809 ----------- Total liabilities 19,656 ----------- NET ASSETS $13,144,332 =========== NET ASSETS CONSIST OF: Paid-in capital $14,937,408 Accumulated undistributed net investment income 133,406 Accumulated net realized gain 354,912 Net unrealized depreciation (2,281,394) ----------- $13,144,332 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $13,144,332 =========== SHARES OUTSTANDING: Class III 2,903,487 =========== NET ASSET VALUE PER SHARE: Class III $ 4.53 ===========
2 See accompanying notes to the financial statements. GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from investment company shares $ 127,119 Interest 1,228 ----------- Total income 128,347 ----------- EXPENSES: Management fee (Note 2) 21,756 Audit fees 19,031 Registration fees 4,466 Custodian and transfer agent fees 2,107 Trustees fees and related expenses (Note 2) 1,106 Legal fees 22 Miscellaneous 824 Fees reimbursed by Manager (Note 2) (26,428) ----------- 22,884 Indirectly incurred fees waived or borne by Manager (Note 2) (21,754) ----------- 1,130 ----------- Shareholder service fee (Note 2) -- Class III 9,889 Shareholder service fee waived (Note 2) -- Class III (9,882) ----------- 7 ----------- Net expenses 1,137 ----------- Net investment income 127,210 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (67,992) Realized gains distributions from investment company shares 599,610 ----------- Net realized gain on investments 531,618 ----------- Change in net unrealized appreciation (depreciation) on investments (2,256,923) ----------- Net realized and unrealized loss (1,725,305) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(1,598,095) ===========
See accompanying notes to the financial statements. 3 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 127,210 $ 5,225 Net realized gain 531,618 18,064 Change in net unrealized appreciation (depreciation) (2,256,923) 1,196 ----------- -------- Net increase (decrease) in net assets from operations (1,598,095) 24,485 ----------- -------- Distributions to shareholders from: Net investment income Class III (6,056) (7,677) ----------- -------- Total distributions from net investment income (6,056) (7,677) ----------- -------- Net share transactions (Note 5): Class III 14,478,433 -- ----------- -------- Increase in net assets resulting from net share transactions 14,478,433 -- ----------- -------- Total increase in net assets 12,874,282 16,808 NET ASSETS: Beginning of period 270,050 253,242 ----------- -------- End of period (including accumulated undistributed net investment income of $133,406 and $5,527, respectively) $13,144,332 $270,050 =========== ========
4 See accompanying notes to the financial statements. GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, -------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ---------- -------- -------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 5.45 $ 5.11 $ 4.84 $ 4.63 $ 8.53 ------- ------ ------ ------ ------- Income from investment operations: Net investment income(a)+ 0.09 0.11 0.14 0.09 0.10 Net realized and unrealized gain (loss) (1.00) 0.39 0.35 0.54 0.27 ------- ------ ------ ------ ------- Total from investment operations (0.91) 0.50 0.49 0.63 0.37 ------- ------ ------ ------ ------- Less distributions to shareholders: From net investment income (0.01) (0.16) (0.17) (0.23) (0.25) From net realized gains -- -- (0.05) (0.19) (4.02) ------- ------ ------ ------ ------- Total distributions (0.01) (0.16) (0.22) (0.42) (4.27) ------- ------ ------ ------ ------- NET ASSET VALUE, END OF PERIOD $ 4.53 $ 5.45 $ 5.11 $ 4.84 $ 4.63 ======= ====== ====== ====== ======= TOTAL RETURN(b) (16.79)% 9.80% 10.14% 13.35% 3.13% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $13,144 $ 270 $ 253 $1,602 $16,830 Net expenses to average daily net assets 0.02%(d) 0.00%(c) 0.00% 0.00% 0.00% Net investment income to average daily net assets(a) 1.93% 1.99% 2.71% 1.85% 1.51% Portfolio turnover rate 24% 2% 35% 22% 16% Fees and expenses reimbursed by the Manager to average daily net assets: 0.88% 8.97% 3.05% 0.52% 0.57%
(a) Recognition of net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests. (b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (c) Net expenses were less than 0.01%. (d) Net expenses exclude expenses incurred indirectly through investments in underlying funds. (See Note 1) + Computed using average shares outstanding throughout the period. See accompanying notes to the financial statements. 5 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO U.S. Sector Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund operates as a "fund-of-funds" in that, pursuant to management provided by the Manager, it makes investments in other funds of the Trust ("underlying funds"). The Fund seeks total return greater than that of the S&P 500 Index through investment in common stocks, either directly or through investment in Class III shares of other Funds of the Trust. The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Shares of underlying funds are valued at their net asset value as reported on each business day. Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last quoted sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes 6 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country's tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. For the years ended February 28, 2002 and February 28, 2003, the tax basis of distributions paid from ordinary income were $7,677 and $6,056, respectively. As of February 28, 2003, the components of distributable earnings on a tax basis consisted of $133,406 and $553,465 of undistributed ordinary income and undistributed long-term capital gains, respectively. The temporary differences between book and tax basis distributable earnings are primarily due to losses on wash sale transactions. At February 28, 2003, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code, of $55,779 and $97,318 expiring in 2009 and 2011, respectively. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of 7 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus U.S. GAAP. The financial highlights exclude these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain ----------------- ----------------- $6,725 $(6,725)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Income dividends and capital gain distributions from underlying funds are recorded on the ex-dividend date. Dividend income is recorded on the ex-dividend date. Non cash dividends, if any, are recorded at the fair market value of the securities received. Interest income is recorded on the accrual basis. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Dividends representing a return of capital are reflected as a reduction of cost. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund will also incur certain fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have varied expense and fee levels and the Fund may own different proportions of underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary. (See Note 2.) 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of .15% for Class III shares. The Fund will invest in Class III shares of each underlying fund being offered. Like the management fee (as described below), the shareholder service fee will be waived (but not below zero) to the extent of the indirect shareholder service fees 8 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- paid in connection with the Fund's investment in shares of underlying Funds. For the year ended February 28, 2003, the shareholder service fees incurred indirectly by the Fund were .15% of the Fund's average daily net assets. GMO has entered into a binding agreement effective until June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, and the following expenses: fees and expenses of the independent trustees of the Trust (including legal fees), 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 expenses and transfer taxes ("fund expenses")) plus the amount of fees and expenses, excluding shareholder service fees, and fund expenses (as defined above), incurred indirectly by the Fund through investment in underlying Funds exceed the management fee. Because GMO will not reimburse expenses incurred indirectly to the extent they exceed .33%, and because the amount of fees and expenses incurred indirectly by the Fund will vary, the operating expenses (excluding shareholder service fees and fund expenses) and investment-related expenses incurred indirectly by the Fund through investment in underlying Funds may exceed .33% of the Fund's average daily net assets. For the year ended February 28, 2003, operating expenses (excluding shareholder service fees) incurred indirectly by the Fund were .37% of the Fund's average daily net assets, and indirect investment-related expenses (including, but not limited to, interest expense, foreign audit expense, and investment-related legal expense) incurred by the fund were less than .001% of the Fund's average daily net assets. The Fund's portion of the fee paid by the Trust to the unaffiliated Trustees during the year ended February 28, 2003 was $1,106. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2003, aggregated $16,817,761 and $1,577,341, respectively. At February 28, 2003, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $15,482,099 $-- $(2,326,850) $(2,326,850)
9 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 4. PRINCIPAL SHAREHOLDER At February 28, 2003, 98.3% of the outstanding shares of the Fund were held by four shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 ----------------------- ------------------- Shares Amount Shares Amount Class III: ---------- ----------- ----------- ------ Shares sold 2,852,744 $14,472,377 -- $-- Shares issued to shareholders in reinvestment of distributions 1,214 6,056 -- -- Shares repurchased -- -- -- -- ---------- ----------- ----------- --- Net increase 2,853,958 $14,478,433 -- $-- ========== =========== =========== ===
6. SUBSEQUENT EVENT Effective the close of business on February 28, 2003, the Fund's benchmark changed from the S&P 500 Index to the Russell 3000 Index. 10 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO U.S. SECTOR FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO U.S. Sector Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 11 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 12 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the from February Boston, MA 02110 Trust 2002 - October Age: 64 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 13 PRINCIPAL OFFICERS:
Term of Office(4) Principal Occupation(s) Name, Address, Position(s) and Length of During Past and Age Held with Fund Time Served Five Years ------------------------- ------------------------------ ------------------------------ ------------------------------ Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer (1997 c/o GMO Trust Officer of the Trust Officer since October 2002; - present), Chief Operating 40 Rowes Wharf Vice President from August Officer (2000 - present) and Boston, MA 02110 1998 - October 2002. Member, Grantham, Mayo, Van Age: 47 Otterloo & Co. LLC. Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC. 40 Rowes Wharf February 1998. Boston, MA 02110 Age: 45 Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator, c/o GMO Trust Trust Grantham, Mayo, Van 40 Rowes Wharf Otterloo & Co. LLC. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer 40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003) Boston, MA 02110 and Member, Grantham, Mayo, Age: 37 Van Otterloo & Co. LLC. Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel, c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van 40 Rowes Wharf 2001. Otterloo & Co. LLC (June Boston, MA 02110 1999 - present); Associate/ Age: 58 Junior Partner, Hale and Dorr LLP (1991 - 1999). Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering c/o GMO Trust Laundering Compliance Officer Reporting Officer (February 40 Rowes Wharf 2003 - present) and Compliance Boston, MA 02110 Officer, Grantham, Mayo, Van Age: 32 Otterloo & Co. LLC.
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 14 GMO VALUE FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO VALUE FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGEMENT Day-to-day management of the Fund's portfolio is the responsibility of the U.S. Active Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The Class III shares of the GMO Value Fund returned -22.3% for the fiscal year ending February 28, 2003, trailing the Russell 1000 Value Index return of - -19.3%. The Value Fund outperformed the S&P 500 return of -22.7% during the period. The Fund utilizes fundamental investment principals and quantitative models to identify an attractively valued universe of investable companies. For the period, the Fund's models produced an investment universe with uncharacteristically poor returns, lagging the Russell 1000 Value Index return by 8.7%. While our fundamental decisions significantly added to the models' base return, we were unable to compensate for the negative alpha generated by the models. Sector selection added 2.2% to returns. Our underweight positions in the auto and transportation, consumer discretionary, and utilities sectors all added value, as did our overweight positions in consumer staples, financial services, and healthcare. The only sector weighting to detract from returns was our slight overweight in technology shares. Stock selection subtracted 5.2% from total returns. In particular, our stock selection within the utility sector negatively impacted returns by 4.6%. Our three worst relative contributors -- TXU Corp., Qwest Communications, and Xcel Energy -- came from the sector. Rapidly deteriorating fundamentals, liquidity concerns, and corporate governance issues afflicted all three companies during the year. On the positive side, Occidental Petroleum benefited from rising commodity prices and growing recognition of its transformation into a pure exploration and production energy company. Sealed Air inked a deal to limit its asbestos exposure, causing the stock to more than double in the second half of the year. Our third best performing stock was Fox Entertainment, which delivered strong results in both filmed entertainment and network operations. OUTLOOK The U.S. market faces an intimidating gauntlet of hazards, both real and perceived. Excessive valuations do not present the same headwind for the market as in the recent past, but despite three years of contraction, the market's overall valuation can only be charitably described as "fair" when placed in historical context. Anemic economic growth with continuing disinflation has spawned ominous comparisons to the economic fate of Japan; neither of these two factors engenders much confidence in the outlook for corporate profits. New revelations in the corporate crime wave seem to have abated somewhat, but the damage to investor confidence remains unrepaired. Add to the mix a geopolitical landscape riddled with uncertainty, and the market's proverbial wall of worry seems convincingly insurmountable. GMO VALUE FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- Perhaps therein lies the opportunity; in our minds, the more likely outcome is not at the extremes but somewhere in the middle. The market is obsessed with negative outcomes, and while we certainly do not discount the potential impact of any one of these threats, we do discount the probability that all of them occur. After three grinding years of negative returns, the market is far more pessimistic than it was when the decline began, and the contrarian in us finds this reversal intriguing and potentially investable. The tug-of-war regarding the overall market's prospects is interesting, but more importantly, we are increasingly confident about our portfolio. The high volatility we have witnessed over the past few years, not just in broader averages but also individual issues, has enabled us to assemble a portfolio of high-quality, franchise names selling at significant discounts to fair value. As we survey the investable universe and the broader market as a whole, we are increasingly confident we have an "all-weather" portfolio that can prosper in any environment, rain or shine. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO VALUE FUND CLASS III SHARES AND THE RUSSELL 1000 VALUE INDEX AS OF FEBRUARY 28, 2003 GMO VALUE FUND RUSSELL 1000 VALUE INDEX 2/28/93 $10,000 $10,000 3/31/93 $10,170 $10,295 6/30/93 $10,506 $10,597 9/30/93 $10,869 $11,120 12/31/93 $11,235 $11,087 3/31/94 $10,799 $10,698 6/30/94 $10,749 $10,765 9/30/94 $11,275 $11,041 12/31/94 $11,304 $10,868 3/31/95 $12,436 $11,902 6/30/95 $13,607 $12,968 9/30/95 $14,754 $14,101 12/31/95 $15,620 $15,037 3/31/96 $16,562 $15,888 6/30/96 $17,027 $16,162 9/30/96 $17,126 $16,632 12/31/96 $18,858 $18,291 3/31/97 $18,978 $18,760 6/30/97 $21,773 $21,525 9/30/97 $24,193 $23,669 12/31/97 $24,594 $24,727 3/31/98 $27,345 $27,609 6/30/98 $27,330 $27,733 9/30/98 $24,353 $24,520 12/31/98 $27,461 $28,591 3/31/99 $27,333 $29,001 6/30/99 $30,644 $32,271 9/30/99 $27,493 $29,110 12/31/99 $28,201 $30,692 3/31/2000 $27,436 $30,838 6/30/2000 $27,390 $29,393 9/30/2000 $29,135 $31,705 12/31/2000 $31,209 $32,845 3/31/2001 $31,616 $30,921 6/30/2001 $33,027 $32,430 9/30/2001 $30,651 $28,880 12/31/2001 $32,099 $31,009 3/31/2002 $31,992 $32,277 6/30/2002 $29,179 $29,528 9/30/2002 $23,523 $23,985 12/31/2002 $25,473 $26,195 2/28/2003 $24,282 $24,880
AVERAGE ANNUAL TOTAL RETURN SINCE 1 YEAR 5 YEAR 10 YEAR INCEPTION Class III -22.29% -1.44% 9.28% n/a 1/10/2002 Class M -22.56% n/a n/a -22.05%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Performance for Class M shares may vary due to different fees. Past performance is not indicative of future performance. Information is unaudited. GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- COMMON STOCKS -- 97.3% AUTO & TRANSPORTATION -- 1.7% 36,900 General Motors Corp 1,246,113 29,300 Union Pacific Corp 1,617,067 ------------- 2,863,180 ------------- CONSUMER DISCRETIONARY -- 5.3% 38,800 Carnival Corp 891,236 40,500 Cendant Corp* 498,555 99,600 Federated Department Stores Inc* 2,539,800 64,600 Fox Entertainment Group Inc, Class A* 1,726,758 20,200 Home Depot Inc 473,690 27,100 Jones Apparel Group Inc* 768,556 14,500 Omnicom Group 768,210 38,600 Viacom Inc, Class B* 1,433,218 ------------- 9,100,023 ------------- CONSUMER STAPLES -- 8.5% 139,100 Altria Group Inc 5,376,215 20,300 Constellation Brands Inc, Class A* 499,989 123,000 CVS Corp 3,062,700 13,700 Dean Foods Co* 577,729 85,700 Kraft Foods Inc 2,537,577 33,300 Kroger Co* 440,226 63,600 PepsiAmericas Inc 777,192 43,100 Safeway Inc* 857,259 41,900 Tyson Foods Inc, Class A 385,480 ------------- 14,514,367 ------------- FINANCIAL SERVICES -- 33.6% 90,200 ACE Ltd 2,499,442 117,800 Allstate Corp 3,726,014 57,400 Bank of America Corp 3,974,376 23,100 Bear Stearns Cos Inc 1,446,984 105,800 Citigroup Inc 3,527,372 25,200 Compass Bankshares Inc 801,864 54,900 Equity Office Properties Trust 1,346,697 53,600 Equity Residential Properties Trust 1,301,408 87,500 Fannie Mae 5,608,750
See accompanying notes to the financial statements. 1 GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- FINANCIAL SERVICES -- CONTINUED 103,900 FleetBoston Financial Corp 2,551,784 45,300 Freddie Mac 2,475,645 20,000 Greenpoint Financial Corp 849,600 136,900 J.P. Morgan Chase & Co 3,104,892 57,900 Merrill Lynch & Co Inc 1,973,232 54,200 Morgan Stanley 1,997,270 39,500 Simon Property Group Inc, REIT 1,368,280 230,400 Sovereign Bancorp Inc 3,128,832 245,652 Travelers Property Casualty Corp, Class A 3,844,454 70,200 US Bancorp 1,468,584 89,200 Wachovia Corp 3,164,816 74,650 Washington Mutual Inc 2,577,664 136,500 Willis Group Holdings Ltd* 3,419,325 31,200 Wilmington Trust Corp 886,080 ------------- 57,043,365 ------------- HEALTH CARE -- 11.0% 34,497 Aetna Inc 1,453,014 31,200 Anthem Inc* 1,859,832 146,600 Bristol Myers Squibb Co 3,415,780 51,700 Merck & Co Inc 2,727,175 237,100 Pfizer Inc 7,070,322 118,100 Schering Plough Corp 2,128,162 ------------- 18,654,285 ------------- INTEGRATED OILS -- 8.3% 127,615 ConocoPhillips 6,470,081 12,500 Exxon Mobil Corp 425,250 238,800 Occidental Petroleum Corp 7,140,120 ------------- 14,035,451 ------------- MATERIALS & PROCESSING -- 4.5% 72,000 Cabot Corp 1,576,800 64,900 Engelhard Corp 1,346,675 99,900 Hercules Inc* 802,197 135,600 Olin Corp 2,237,400 48,600 Sealed Air Corp* 1,762,722 ------------- 7,725,794 -------------
See accompanying notes to the financial statements. 2 GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- OTHER -- 1.5% 110,300 Honeywell International Inc 2,524,767 ------------- OTHER ENERGY -- 3.1% 50,600 Anadarko Petroleum Corp 2,331,648 73,400 Valero Energy Corp 2,863,334 ------------- 5,194,982 ------------- PRODUCER DURABLES -- 3.2% 58,100 Centex Corp 3,211,768 44,450 DR Horton Inc 813,879 15,400 Lennar Corp 831,446 16,900 Pitney Bowes Inc 524,576 ------------- 5,381,669 ------------- TECHNOLOGY -- 5.8% 122,800 Hewlett-Packard Co 1,946,380 53,400 Intel Corp 921,684 302,200 Oracle Corp* 3,614,312 127,400 Raytheon Co 3,449,992 ------------- 9,932,368 ------------- UTILITIES -- 10.8% 225,200 Bellsouth Corp 4,880,084 91,200 NiSource Inc 1,544,928 47,900 Questar Corp 1,335,452 251,100 Qwest Communications International Inc* 898,938 131,500 SBC Communications Inc 2,735,200 199,100 Verizon Communications Inc 6,884,878 ------------- 18,279,480 ------------- TOTAL COMMON STOCKS (COST $176,795,923) 165,249,731 ------------- SHORT-TERM INVESTMENTS -- 2.5% CASH EQUIVALENTS -- 0.0% 16,597 Dreyfus Money Market Fund(a) 16,597 $ 11,728 Harris Trust & Savings Bank Eurodollar Time Deposit, 1.26%, due 3/24/03(a) 11,728
See accompanying notes to the financial statements. 3 GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- CASH EQUIVALENTS -- CONTINUED 9,675 Merrimac Money Market Fund(a) 9,675 ------------- 38,000 ------------- REPURCHASE AGREEMENT -- 2.5% $ 4,273,247 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/28/03, due 3/03/03, with a maturity value of $4,273,375, and an effective yield of 0.36%, collateralized by a U.S. Treasury Bond with a rate of 3.625%, maturity date of 3/31/04, and a market value, including accrued interest of $4,597,925. 4,273,247 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $4,311,247) 4,311,247 ------------- TOTAL INVESTMENTS -- 99.8% (Cost $181,107,170) 169,560,978 Other Assets and Liabilities (net) -- 0.2% 346,242 ------------- TOTAL NET ASSETS -- 100.0% $ 169,907,220 ============= NOTES TO THE SCHEDULE OF INVESTMENTS:
REIT - Real Estate Investment Trust
* Non-income producing security. (a) Represents investment of security lending collateral (Note 1). 4 See accompanying notes to the financial statements. GMO VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value, including securities on loan of $36,300 (cost $181,107,170) (Note 1) $169,560,978 Receivable for investments sold 2,724,033 Receivable for Fund shares sold 2,311 Dividends and interest receivable 255,815 Receivable for expenses reimbursed by Manager (Note 2) 17,192 ------------ Total assets 172,560,329 ------------ LIABILITIES: Payable for investments purchased 1,240,623 Payable upon return of securities loaned (Note 1) 38,000 Payable for Fund shares repurchased 1,253,322 Payable to affiliate for (Note 2): Management fee 61,198 Shareholder service fee 19,217 12b-1 Distribution fee - Class M 2,840 Administration fee - Class M 985 Accrued expenses 36,924 ------------ Total liabilities 2,653,109 ------------ NET ASSETS $169,907,220 ============ NET ASSETS CONSIST OF: Paid-in capital $230,634,275 Accumulated undistributed net investment income 49,492 Accumulated net realized loss (49,230,355) Net unrealized depreciation (11,546,192) ------------ $169,907,220 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $163,462,983 ============ Class M shares $ 6,444,237 ============ SHARES OUTSTANDING: Class III 24,284,175 ============ Class M 958,941 ============ NET ASSET VALUE PER SHARE: Class III $ 6.73 ============ Class M $ 6.72 ============
See accompanying notes to the financial statements. 5 GMO VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $1,644) $ 4,667,968 Interest (including securities lending income of $11,918) 66,840 ------------ Total income 4,734,808 ------------ EXPENSES: Management fee (Note 2) 908,459 Custodian and transfer agent fees 61,653 Audit fees 40,144 Legal fees 16,093 Registration fees 13,757 Trustees fees and related expenses (Note 2) 5,014 Miscellaneous 8,161 Fees reimbursed by Manager (Note 2) (138,784) ------------ 914,497 Shareholder service fee (Note 2) - Class III 288,995 12B-1 Distribution fee (Note 2) - Class M 12,070 Administration fee (Note 2) - Class M 9,656 ------------ Net expenses 1,225,218 ------------ Net investment income 3,509,590 ------------ REALIZED AND UNREALIZED LOSS: Net realized loss on investments (37,323,839) ------------ Change in net unrealized appreciation (depreciation) on investments (15,408,843) ------------ Net realized and unrealized loss (52,732,682) ------------ NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(49,223,092) ============
6 See accompanying notes to the financial statements. GMO VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 3,509,590 $ 4,628,541 Net realized loss (37,323,839) (5,947,538) Change in net unrealized appreciation (depreciation) (15,408,843) (7,858,916) ------------ ------------ Net decrease in net assets from operations (49,223,092) (9,177,913) ------------ ------------ Distributions to shareholders from: Net investment income Class III (3,347,011) (4,387,005) Class M (69,858) -- ------------ ------------ Total distributions from net investment income (3,416,869) (4,387,005) ------------ ------------ Net realized gains Class III -- (6,580,353) ------------ ------------ Total distributions from net realized gains -- (6,580,353) ------------ ------------ (3,416,869) (10,967,358) ------------ ------------ Net share transactions (Note 5): Class III (17,609,557) 4,470,782 Class M 7,381,915 478,524 ------------ ------------ Increase (decrease) in net assets resulting from net share transactions (10,227,642) 4,949,306 ------------ ------------ Total decrease in net assets (62,867,603) (15,195,965) NET ASSETS: Beginning of period 232,774,823 247,970,788 ------------ ------------ End of period (including accumulated undistributed net investment income of $49,492 and $81,674, respectively) $169,907,220 $232,774,823 ============ ============
See accompanying notes to the financial statements. 7 GMO VALUE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ---------------------------------------------------------- 2003 2002 2001 2000 1999 ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 8.82 $ 9.57 $ 7.98 $ 10.40 $ 14.33 -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.14 0.18 0.18 0.21 0.26 Net realized and unrealized gain (loss) (2.10) (0.51) 2.32 (0.83) 0.13 -------- -------- -------- -------- -------- Total from investment operations (1.96) (0.33) 2.50 (0.62) 0.39 -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.13) (0.17) (0.18) (0.23) (0.27) From net realized gains -- (0.25) (0.73) (1.57) (4.05) -------- -------- -------- -------- -------- Total distributions (0.13) (0.42) (0.91) (1.80) (4.32) -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 6.73 $ 8.82 $ 9.57 $ 7.98 $ 10.40 ======== ======== ======== ======== ======== TOTAL RETURN(a) (22.29)% (3.64)% 32.72% (8.45)% 2.24% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $163,463 $232,289 $247,971 $178,329 $202,842 Net expenses to average daily net assets 0.61% 0.61% 0.61% 0.61% 0.61% Net investment income to average daily net assets 1.79% 1.89% 1.99% 2.06% 1.82% Portfolio turnover rate 100% 95% 102% 104% 37% Fees and expenses reimbursed by the Manager to average daily net assets: 0.07% 0.06% 0.05% 0.05% 0.30%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. 8 See accompanying notes to the financial statements. GMO VALUE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS M SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM JANUARY 10, 2002 (COMMENCEMENT YEAR ENDED OF OPERATIONS) THROUGH FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ---------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 8.82 $ 9.06 ------- ------ Income from investment operations: Net investment income 0.12 0.01 Net realized and unrealized loss (2.10) (0.25) ------- ------ Total from investment operations (1.98) (0.24) ------- ------ Less distributions to shareholders: From net investment income (0.12) -- ------- ------ Total distributions (0.12) -- ------- ------ NET ASSET VALUE, END OF PERIOD $ 6.72 $ 8.82 ======= ====== TOTAL RETURN(a) (22.56)% (2.65)%+ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 6,444 $ 486 Net expenses to average daily net assets 0.92% 0.91%* Net investment income to average daily net assets 1.46% 1.52%* Portfolio turnover rate 100% 95% Fees and expenses reimbursed by the Manager to average daily net assets: 0.07% 0.06%*
(a) The total returns would have been lower had certain expenses not been reimbursed during the period shown. * Annualized. + Not annualized. See accompanying notes to the financial statements. 9 GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Value Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks long-term capital growth primarily through investment in equity securities. The Fund's benchmark is the Russell 1000 Value Index. Throughout the year ended February 28, 2003, the Fund had two classes of shares outstanding: Class III and Class M. Class M shares bear an administrative fee and a 12b-1 fee, while Class III shares bear a shareholder service fee. (See Note 2) The principal economic difference between the classes of shares is the level of fees borne by the classes. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of foreign market that would materially affect that security's value. 10 GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- FUTURES CONTRACTS The Fund may purchase and sell futures contracts to manage its exposure to the financial markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of February 28, 2003, the Fund held no open futures contracts. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the financial markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a 11 GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. As of February 28, 2003, the Fund held no open swap agreements. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 2003, the Fund loaned securities having a market value of $36,300 collateralized by cash in the amount of $38,000, which was invested in short-term instruments. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country's tax treaty with the United States. 12 GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003, the tax basis of distributions paid from ordinary income were $10,895,734 and $3,416,869, respectively. For the years ended February 28, 2002 and February 28, 2003, the distributions paid from long-term capital gains were $71,624 and $0, respectively. As of February 28, 2003, the components of distributable earnings on a tax basis consisted of $49,492, of undistributed ordinary income. At February 28, 2003, the Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Code of $394,435 and $27,296,081 expiring in 2010 and 2011, respectively. The Fund elected to defer to March 1, 2003 post-October losses of $14,250,861. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to certain differences in the computation of distributable income and capital gains under U.S. federal tax rules versus U.S. GAAP. The financial highlights exclude these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain ----------------- ----------------- $(124,903) $124,903
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable foreign withholding taxes, is recorded on the ex-dividend date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and of discounts. Non-cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Dividends representing a return of capital are reflected as a reduction of cost. 13 GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ALLOCATION OF OPERATING ACTIVITY The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. Investment income, common expenses and realized and unrealized gains and losses are allocated pro-rata among the classes of shares of the Fund based on the relative net assets of each class. Shareholder service, 12b-1, and administration fees, which are directly attributable to a class of shares, are charged to that class' operations. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .46% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. The Fund pays GMO an administrative fee monthly at the annual rate of .20% of the average daily Class M net assets for support services provided to Class M shareholders. Fund Distributors, Inc. (the "Distributor") serves as the Fund's distributor. Pursuant to a Rule 12b-1 distribution plan adopted by the Fund, Class M shares of the Fund pay a fee, at the annual rate of .25% of average daily Class M net assets for any activities or expenses primarily intended to result in the sale of Class M shares of the Fund. This fee may be spent by the Distributor on personal services rendered to Class M shareholders of the Fund and/or maintenance of Class M shareholder accounts. GMO has entered into a binding agreement effective until at least June 30, 2003 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees (Class III only), administrative fees (Class M only), 12b-1 fees (Class M only), fees and expenses of the independent Trustees of the Trust (including legal fees), 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) exceed the management fee. The Fund's portion of the fee paid by the Trust to the independent Trustees during the year ended February 28, 2003 was $3,651. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 14 GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2003, aggregated $189,149,114 and $188,592,549, respectively. At February 28, 2003, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $188,396,149 $5,613,952 $(24,449,123) $(18,835,171)
4. PRINCIPAL SHAREHOLDER At February 28, 2003, 71.5% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder may have a material effect on the Fund. 15 GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 -------------------------- -------------------------- Shares Amount Shares Amount Class III: ---------- ------------ ---------- ------------ Shares sold 4,918,036 $ 36,956,368 1,292,173 $ 12,230,667 Shares issued to shareholders in reinvestment of distributions 96,123 700,606 820,723 7,601,535 Shares repurchased (7,055,458) (55,266,531) (1,699,329) (15,361,420) ---------- ------------ ---------- ------------ Net increase (decrease) (2,041,299) $(17,609,557) 413,567 $ 4,470,782 ========== ============ ========== ============
Period from January 10, 2002 (commencement of Year Ended operations) through February 28, 2003 February 28, 2002 -------------------------- -------------------------- Shares Amount Shares Amount Class M: ---------- ------------ ---------- ------------ Shares sold 999,258 $ 8,085,093 55,099 $ 478,524 Shares issued to shareholders in reinvestment of distributions 10,104 69,858 -- -- Shares repurchased (105,520) (773,036) -- -- ---------- ------------ ---------- ------------ Net increase 903,842 $ 7,381,915 55,099 $ 478,524 ========== ============ ========== ============
6. SUBSEQUENT EVENT Subsequent to February 28, 2003, the shareholder as disclosed in Note 4, redeemed out of the Fund at a value of $115,101,119, or 71.6% of the Fund. 16 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO VALUE FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Value Fund (the "Fund") (a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 17 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 18 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the from February Boston, MA 02110 Trust 2002 - October Age: 64 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 19 PRINCIPAL OFFICERS:
Term of Office(4) and Principal Occupation(s) Name, Address, Position(s) Length of During Past and Age Held with Fund Time Served Five Years ------------------------- ------------------------------ ------------------------------ ------------------------------ Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief 40 Rowes Wharf Vice President from August Operating Officer (2000 - Boston, MA 02110 1998 - October 2002. present) and Member, Grantham, Age: 47 Mayo, Van Otterloo & Co. LLC. Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC. 40 Rowes Wharf February 1998. Boston, MA 02110 Age: 45 Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator, c/o GMO Trust Trust Grantham, Mayo, Van 40 Rowes Wharf Otterloo & Co. LLC. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer 40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003) Boston, MA 02110 and Member, Grantham, Mayo, Age: 37 Van Otterloo & Co. LLC. Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel, c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van 40 Rowes Wharf 2001. Otterloo & Co. LLC (June Boston, MA 02110 1999 - present); Associate/ Age: 58 Junior Partner, Hale and Dorr LLP (1991 - 1999). Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering c/o GMO Trust Laundering Compliance Officer Reporting Officer (February 40 Rowes Wharf 2003 - present) and Compliance Boston, MA 02110 Officer, Grantham, Mayo, Van Age: 32 Otterloo & Co. LLC.
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 20 GMO WORLD BALANCED ALLOCATION FUND (FORMERLY GMO WORLD EQUITY ALLOCATION FUND) (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO WORLD BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGEMENT Day-to-day management of the Fund's portfolio is the responsibility of the Asset Allocation Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE On June 30, 2002, the Fund changed its benchmark from the MSCI ACWI Free Index to the GMO World Balanced Index to reflect its current practice of providing broad exposure to both global equity and fixed income securities. PERFORMANCE FROM FEBRUARY 28, 2002 THROUGH JUNE 30, 2002 During this period, Class III shares returned 4.4% and the benchmark, the MSCI ACWI Free Index returned -5.0%. Both asset allocation and portfolio implementation added to performance. Relative to the benchmark, the Fund was underweight in U.S. stocks by 22% and developed international stocks by 9%. Balancing this, the Fund was overweight emerging equities by 22% and fixed income by 9%. Within U.S. stocks, the portfolio was tilted towards the most attractively valued sectors including small cap value stocks and REITs, where we had 8% overweight positions in both sectors. Within international stocks the portfolio was successfully tilted towards the small cap sector. The value bias of the GMO International Intrinsic Value Fund and the GMO U.S. Core Fund again ensured their outperformance in a down market. The GMO International Intrinsic Value Fund outperformed its SSB PMI EPAC Value benchmark by 5.7%, while the GMO U.S. Core Fund outperformed its S&P 500 benchmark by 0.9% over the period. Relative to the benchmark, the Fund's 9% overweight to fixed income was allocated to inflation indexed bonds, international fixed income, and emerging bonds. The last two funds added value relative to their benchmarks. PERFORMANCE FROM JUNE 30, 2002 THROUGH FEBRUARY 28, 2003 During this period, Class III shares returned -5.3% and the benchmark, the GMO World Balanced Index returned -7.3%. Asset allocation added substantially to performance while portfolio implementation detracted marginal value. Relative to the benchmark, the Fund was underweight in U.S. stocks by 18%. It was overweight developed international stocks by 2.9%, emerging markets by 9.2%, and fixed income (including global hedged equity) by 5.7%. Within U.S. stocks, the portfolio was tilted towards the most attractively valued sectors including small cap value stocks and REITs, where we were overweight 4.7% and 6.8%, respectively. The allocation to REITs added value, as they outperformed the S&P 500 by 4.3%. GMO WORLD BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- The GMO U.S. Core Fund outperformed its S&P 500 benchmark during a difficult period by 0.4%, while the GMO International Intrinsic Value Fund strongly outperformed its SSB PMI EPAC Value benchmark by 6.1%. Both the GMO Real Estate Fund and the GMO Small Cap Value Fund underperformed their benchmarks by 2.0% and 1.3%, respectively. Most of the fixed income funds underperformed their benchmarks due largely to exposure to certain asset-backed securities that defaulted during the period. Implementation was strong within the GMO Emerging Country Debt Fund, which outperformed its J.P. Morgan EMBI Global benchmark over the period by 2.4%. OUTLOOK With U.S. equities remaining stubbornly overpriced relative to economic fundamentals we continue to maintain a sizeable underweight to the S&P 500. However, many of the Fund's bets now differ substantially from those of a year ago. We have decreased our position in REITs in the face of increased risk and somewhat less attractive valuations. A modest allocation to large developed international equities, both value and growth, reflects our view that the asset class is fairly valued. With help from a depreciating dollar, this and overweights to the still cheap sectors of international small and emerging markets are expected to add value. With yields at near record lows, the Fund now has a relatively neutral weight in fixed income. Within fixed income we favor the short end of the curve and the still attractively priced emerging country debt asset class. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO WORLD BALANCED ALLOCATION FUND CLASS III SHARES AND THE GMO WORLD BALANCED INDEX* AS OF FEBRUARY 28, 2003 GMO WORLD BALANCED 50% S&P 500 / 50% GMO WORLD ALLOCATION FUND LEHMAN AGGREGATE BALANCED INDEX* 6/28/96 $10,000 $10,000 $10,000 9/30/96 $9,950 $10,252 $10,213 12/31/96 $10,476 $10,834 $10,763 3/31/97 $10,631 $10,953 $10,885 6/30/97 $11,691 $12,095 $12,170 9/30/97 $12,365 $12,757 $12,743 12/31/97 $11,548 $13,135 $12,874 3/31/98 $12,921 $14,142 $14,096 6/30/98 $12,223 $14,544 $14,406 9/30/98 $10,379 $14,145 $13,576 12/31/98 $11,864 $15,630 $15,414 3/31/99 $11,945 $15,980 $15,822 6/30/99 $13,628 $16,470 $16,437 9/30/99 $13,218 $16,006 $16,059 12/31/99 $14,645 $17,162 $17,666 3/31/2000 $14,771 $17,569 $18,043 6/30/2000 $14,551 $17,487 $17,800 9/30/2000 $14,440 $17,676 $17,670 12/31/2000 $14,554 $17,346 $17,123 3/31/2001 $13,902 $16,564 $15,930 6/30/2001 $14,673 $17,105 $16,417 9/30/2001 $13,224 $16,192 $15,069 12/31/2001 $14,332 $17,056 $16,070 3/31/2002 $15,525 $17,096 $16,148 6/30/2002 $15,378 $16,229 $15,199 9/30/2002 $14,275 $15,144 $13,635 12/31/2002 $14,784 $15,929 $14,442 2/28/2003 $14,569 $15,718 $14,097 COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO WORLD BALANCED ALLOCATION FUND CLASS III SHARES AND THE GMO WORLD BALANCED INDEX* AS OF FEBRUARY 28, 2003 GMO WORLD BALANCED INDEX +** 6/28/96 $10,000 9/30/96 $10,105 12/31/96 $10,533 3/31/97 $10,639 6/30/97 $12,231 9/30/97 $12,521 12/31/97 $12,113 3/31/98 $13,790 6/30/98 $13,902 9/30/98 $12,196 12/31/98 $14,773 3/31/99 $15,357 6/30/99 $16,224 9/30/99 $15,964 12/31/99 $18,735 3/31/2000 $18,953 6/30/2000 $18,231 9/30/2000 $17,244 12/31/2000 $16,124 3/31/2001 $14,112 6/30/2001 $14,493 9/30/2001 $12,356 12/31/2001 $13,511 3/31/2002 $13,622 6/30/2002 $12,385 9/30/2002 $11,110 12/31/2002 $11,768 2/28/2003 $11,487
AVERAGE ANNUAL TOTAL RETURN SINCE INCEPTION 1 YEAR 5 YEAR 6/28/96 Class III -1.06% 3.45% 5.80%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. * GMO World Balanced Index: 48.75% S&P 500, 16.25% MSCI ACWI Free ex-U.S. and 35% Lehman Brothers U.S. Aggregate Bond Index. ** GMO World Balanced Index +: MSCI ACWI (All Country World Index) Free Index prior to 7/02 and GMO World Balanced Index thereafter. GMO WORLD BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------- MUTUAL FUNDS -- 100.0% 1,915,066 GMO Core Plus Bond Fund, Class III 19,054,904 1,860,527 GMO Currency Hedged International Bond Fund, Class III 16,465,664 2,550,630 GMO Currency Hedged International Equity Fund, Class III 14,130,488 2,959,051 GMO Domestic Bond Fund, Class III 29,827,229 589,381 GMO Emerging Countries Fund, Class III 5,033,310 1,145,952 GMO Emerging Country Debt Fund, Class IV 10,920,921 2,602,902 GMO Emerging Markets Fund, Class IV 22,931,562 1,376,071 GMO Inflation Indexed Bond Fund, Class III 16,127,548 606,430 GMO International Bond Fund, Class III 6,027,916 6,797,748 GMO U.S. Core Fund, Class V 67,705,567 198,453 GMO Value Fund, Class III 1,335,590 1,251,770 GMO Global Hedged Equity Fund, Class III 12,054,545 350,285 GMO Short-Term Income Fund, Class III 3,040,470 892,185 GMO International Growth Fund, Class III 15,015,474 2,397,041 GMO International Small Companies Fund, Class III 22,771,889 1,013,946 GMO Real Estate Fund, Class III 10,636,290 1,096,141 GMO Small Cap Value Fund, Class III 10,753,146 1,258,448 GMO International Intrinsic Value Fund, Class IV 20,286,189 ------------- TOTAL MUTUAL FUNDS (COST $323,042,597) 304,118,702 ------------- SHORT-TERM INVESTMENTS -- 0.0% REPURCHASE AGREEMENT -- 0.0% $ 29,884 Salomon Smith Barney Inc. Repurchase Agreement, dated 2/28/03, due 3/03/03, with a maturity value of $29,885 and an effective yield of 0.36%, collateralized by U.S. Treasury Bond with a rate of 3.625%, maturity date 3/31/04 and a market value of $32,164. 29,884 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $29,884) 29,884 ------------- TOTAL INVESTMENTS -- 100.0% (Cost $323,072,481) 304,148,586 Other Assets and Liabilities (net) -- (0.0%) (3,947) ------------- TOTAL NET ASSETS -- 100.0% $ 304,144,639 =============
See accompanying notes to the financial statements. 1 GMO WORLD BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $323,072,481) (Note 1) $304,148,586 Receivable for expenses reimbursed by Manager (Note 2) 18,452 ------------ Total assets 304,167,038 ------------ LIABILITIES: Accrued expenses 22,399 ------------ Total liabilities 22,399 ------------ NET ASSETS $304,144,639 ============ NET ASSETS CONSIST OF: Paid-in capital $324,492,699 Accumulated undistributed net investment income 1,569,088 Accumulated net realized loss (2,993,253) Net unrealized depreciation (18,923,895) ------------ $304,144,639 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $304,144,639 ============ SHARES OUTSTANDING: Class III 37,422,584 ============ NET ASSET VALUE PER SHARE: Class III $ 8.13 ============
2 See accompanying notes to the financial statements. GMO WORLD BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- YEAR ENDED FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends from investment company shares $ 4,006,025 Interest 8,103 ----------- Total income 4,014,128 ----------- EXPENSES: Audit fees 21,301 Custodian and transfer agent fees 18,814 Registration fees 11,553 Trustees fees and related expenses (Note 2) 3,087 Legal fees 2,281 Miscellaneous 823 Fees reimbursed by Manager (Note 2) (54,685) ----------- 3,174 ----------- Net expenses 3,174 ----------- Net investment income 4,010,954 ----------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (265,873) Realized gains distributions from investment company shares 2,847,343 ----------- Net realized gain on investments 2,581,470 ----------- Change in net unrealized appreciation (depreciation) on investments (13,162,505) ----------- Net realized and unrealized loss (10,581,035) ----------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(6,570,081) ===========
See accompanying notes to the financial statements. 3 GMO WORLD BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED FEBRUARY 28, 2003 FEBRUARY 28, 2002 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 4,010,954 $ 199,434 Net realized gain (loss) 2,581,470 (514,358) Change in net unrealized appreciation (depreciation) (13,162,505) 249,596 ------------ ----------- Net decrease in net assets from operations (6,570,081) (65,328) ------------ ----------- Distributions to shareholders from: Net investment income Class III (4,040,341) (463,488) ------------ ----------- Total distributions from net investment income (4,040,341) (463,488) ------------ ----------- Net share transactions (Note 5): Class III 307,437,159 (3,173,880) ------------ ----------- Increase (decrease) in net assets resulting from net share transactions 307,437,159 (3,173,880) ------------ ----------- Total increase (decrease) in net assets 296,826,737 (3,702,696) NET ASSETS: Beginning of period 7,317,902 11,020,598 ------------ ----------- End of period (including accumulated undistributed net investment income of $1,569,088 and $198,476, respectively) $304,144,639 $ 7,317,902 ============ ===========
4 See accompanying notes to the financial statements. GMO WORLD BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 28/29, ---------------------------------------------------------------------- 2003 2002 2001 2000 1999 ---------- --------- --------- --------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 8.64 $ 8.99 $ 8.96 $ 8.52 $ 10.39 --------- -------- -------- -------- -------- Income from investment operations: Net investment income(a) 0.20 0.23 0.21 0.20+ 0.18+ Net realized and unrealized gain (loss) (0.28) (0.20) 0.18 1.69 (0.82) --------- -------- -------- -------- -------- Total from investment operations (0.08) 0.03 0.39 1.89 (0.64) --------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.43) (0.38) (0.36) -- (0.51) From net realized gains -- -- -- (1.45) (0.72) --------- -------- -------- -------- -------- Total distributions (0.43) (0.38) (0.36) (1.45) (1.23) --------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 8.13 $ 8.64 $ 8.99 $ 8.96 $ 8.52 ========= ======== ======== ======== ======== TOTAL RETURN(b) (1.06)% 0.49% 4.29% 22.45% (6.67)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 304,145 $ 7,318 $ 11,021 $ 10,834 $ 29,582 Net expenses to average daily net assets(d) 0.00% 0.00% 0.00% 0.00% 0.00% Net investment income to average daily net assets(a) 4.01% 2.66% 2.31% 2.24% 1.91% Portfolio turnover rate 61% 25% 12% 12% 17% Fees and expenses reimbursed by the Manager to average daily net assets: 0.05% 0.31% 0.20% 0.19% 0.06%
(a) Recognition of net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the fund invests. (b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (c) Net expenses exclude expenses incurred indirectly through investment in underlying funds. See Note 2. (d) Net expenses to average daily net assets was less than 0.01%. + Computed using average shares outstanding throughout the period. See accompanying notes to the financial statements. 5 GMO WORLD BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO World Balanced Allocation Fund (the "Fund") (formerly GMO World Equity Allocation Fund) is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. In August 2002, substantially all of the shareholders of GMO Global Balanced Allocation Fund (GBAL) exchanged their shares for a total of 17,040,209 shares of the Fund valued at $146,529,743, and these amounts are included in "shares sold" in Note 5. The exchange transaction included an in-kind redemption from GBAL followed by a purchase in-kind of Fund shares. For U.S. federal income tax purposes, this transaction is considered a tax-free reorganization of the Fund. On June 30, 2002, the Fund changed its benchmark from the MSCI ACWI (All Country World Index) Free Index to the GMO World Balanced Index to reflect its current practice of providing broad exposure to both global equity and fixed income securities. The GMO World Balanced Index is a composite benchmark computed by GMO consisting of (i) the S&P 500 Index (a U.S. large capitalization stock index, independently maintained and published by Standard & Poor's Corporation); (ii) the MSCI ACWI Free ex-U.S. Index (an international (excluding U.S. and including emerging) equity index, independently maintained and published by Morgan Stanley Capital International): (iii) the Lehman Brothers U.S. Aggregate Bond Index (an independently maintained and published index comprised of U.S. fixed rate debt issues, having a maturity of at least one year, rated investment grade or higher by Moody's Investors Service, Standard & Poor's or Fitch IBCA, Inc.) in the following proportions: 48.75% (S&P 500), 16.25% (MSCI ACWI), and 35% (Lehman Brothers). The GMO World Balanced Index reflects investment of all applicable dividends, capital gains, and interest. The Fund operates as a "fund-of-funds" in that, pursuant to management provided by the Manager, it makes investments in other funds of the Trust ("underlying funds"). The Fund seeks total return greater than the return of the GMO World Balanced Index through investment to varying extents in the underlying funds. The Fund will pursue its objective by investing in the least expensive actively invested class of underlying domestic equity, international equity, and fixed income funds of the Trust. The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and 6 GMO WORLD BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Shares of underlying funds are valued at their net asset value as reported on each business day. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost, which approximates fair value. Securities for which quotations are not readily available, or whose values the Manager has determined to be unreliable, are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. Securities may be valued by independent pricing services which use prices provided by market makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. Certain investments in securities held by the underlying funds were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, 7 GMO WORLD BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend income are withheld in accordance with the applicable country's tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income quarterly, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003, the tax basis of distributions paid from income were $463,488 and $4,040,341, respectively. As of February 28, 2003, the components of distributable earnings on a tax basis consisted of $1,569,088 and $809,087 of undistributed ordinary income and undistributed long-term capital gains, respectively. The temporary differences between book and tax distributable earnings are primarily due to losses on wash sale transactions. At February 28, 2003, the Fund had a capital loss carryforward available of $5,001,056. However, restrictions on annual utilization of this carryforward under the Code resulting from significant shareholder activity are expected to limit maximum utilization to offset future capital gains prior to expiration to approximately $4,466 of which $3,190 expires in 2008 and $1,276 expires in 2010. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to wash sale transactions from Global Balanced Allocation Fund, limitations of capital loss carryovers, and differing treatment for redemption in kind transactions. The net loss resulting from redemption in kind transactions was $93,101. The financial highlights exclude these adjustments.
Accumulated Accumulated Undistributed Net Net Investment Income Realized Loss Paid-in Capital ----------------- ----------------- --------------- $1,399,999 $31,270 $(1,431,269)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. 8 GMO WORLD BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Income dividends and capital gain distributions from underlying funds are recorded on the ex-dividend date. Interest income is recorded on the accrual basis. Non-cash dividends, if any, are recorded at fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. In addition, the Fund will also incur certain fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have varied expense and fee levels and the Fund may own different proportions of underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary. INVESTMENT RISK The Fund is subject to the investment risk associated with an investment in the underlying funds, some of which may invest in foreign securities. There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. Additionally, the investment risk associated with an investment in the underlying funds may be more pronounced to the extent that the underlying funds engage in derivative transactions. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES The Manager determines the allocation of the assets of the Fund among designated underlying funds. The Manager does not directly charge an advisory fee or shareholder service fee, but receives advisory and shareholder service fees from the underlying funds in which the Fund invests. GMO has entered into a binding agreement effective until at least June 30, 2003 to reimburse the Fund for its total annual operating expenses (excluding fees and expenses of the independent 9 GMO WORLD BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- Trustees of the Trust (including legal fees), 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). The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the year ended February 28, 2003, shareholder service fees incurred indirectly by the Fund were 0.13% of the Fund's average daily net assets, indirect operating expenses (excluding shareholder service fees and investment-related expenses) were 0.436% of the Fund's average daily net assets, and indirect investment-related expenses (including, but not limited to, interest expense, foreign audit expense, and investment-related legal expense) were 0.017% of the Fund's average daily net assets. The Fund's portion of the fee paid by the Trust to the independent Trustees during the year ended February 28, 2003 was $2,445. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the year ended February 28, 2003, aggregated $228,739,286 and $64,716,842, respectively. For the year ended February 28, 2003, the cost of purchases exclude the transfer of GMO Global Balanced Allocation Fund's investments in underlying funds of $146,529,743. At February 28, 2003, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $326,870,355 $2,991,380 $(25,713,149) $(22,721,769)
4. PRINCIPAL SHAREHOLDER At February 28, 2003, 45.7% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder may have a material effect on the Fund. 10 GMO WORLD BALANCED ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Year Ended Year Ended February 28, 2003 February 28, 2002 ------------------------- ---------------------- Shares Amount Shares Amount Class III: ----------- ------------ --------- ----------- Shares sold 37,840,597 $318,274,774* 90,177 $ 763,787 Shares issued to shareholders in reinvestment of distributions 443,693 3,651,607 19,848 164,333 Shares repurchased (1,708,667) (14,489,222) (489,222) (4,102,000) ----------- ------------ --------- ----------- Net increase (decrease) 36,575,623 $307,437,159 (379,197) $(3,173,880) =========== ============ ========= ===========
* Includes a tax-free contribution of securities in-kind, which had a market value of $146,529,743, including unrealized loss of $5,545,507, on the date of contribution. 11 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO WORLD BALANCED ALLOCATION FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO World Balanced Allocation Fund (the "Fund") (formerly World Equity Allocation Fund, a series of GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 12 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- --------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of 39 *(2) c/o GMO Trust Trust Business 40 Rowes Wharf Administration Boston, MA 02110 and Senior Age: 61 Associate Dean, Harvard University. Donald W. Glazer, Esq. Trustee of the Since December Advisory 39 None c/o GMO Trust Trust 2000 Counsel, 40 Rowes Wharf Goodwin Procter Boston, MA 02110 LLP; Secretary Age: 58 and Consultant, Provant, Inc. (provider of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 13 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- --------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, 39 None c/o GMO Trust Board of 1985. President Grantham, Mayo, 40 Rowes Wharf Trustees of the from February Van Otterloo & Boston, MA 02110 Trust 2002 - October Co. LLC. Age: 64 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 14 PRINCIPAL OFFICERS:
Term of Office(4) and Principal Occupation(s) Name, Address, Position(s) Length of During Past and Age Held with Fund Time Served Five Years ------------------------- ------------------------------ ------------------------------ ------------------------------ Scott Eston President and Chief Executive President and Chief Executive Chief Financial Officer c/o GMO Trust Officer of the Trust Officer since October 2002; (1997 - present), Chief 40 Rowes Wharf Vice President from August Operating Officer (2000 - Boston, MA 02110 1998 - October 2002. present) and Member, Grantham, Age: 47 Mayo, Van Otterloo & Co. LLC. Susan Randall Harbert Chief Financial Officer and Chief Financial Officer Since Member, Grantham, Mayo, Van c/o GMO Trust Treasurer of the Trust February 2000; Treasurer since Otterloo & Co. LLC. 40 Rowes Wharf February 1998. Boston, MA 02110 Age: 45 Brent Arvidson Assistant Treasurer of the Since September 1998. Senior Fund Administrator, c/o GMO Trust Trust Grantham, Mayo, Van 40 Rowes Wharf Otterloo & Co. LLC. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President and Clerk of Vice President since February General Counsel, Anti- Money c/o GMO Trust the Trust 1997; Clerk since March 2001; Laundering Reporting Officer 40 Rowes Wharf May 1999 - August 1999. (July 2002 - February 2003) Boston, MA 02110 and Member, Grantham, Mayo, Age: 37 Van Otterloo & Co. LLC. Elaine M. Hartnett, Esq. Vice President and Secretary Vice President since August Associate General Counsel, c/o GMO Trust of the Trust 1999; Secretary since March Grantham, Mayo, Van 40 Rowes Wharf 2001. Otterloo & Co. LLC (June Boston, MA 02110 1999 - present); Associate/ Age: 58 Junior Partner, Hale and Dorr LLP (1991 - 1999). Julie Perniola Vice President and Anti- Money Since February 2003. Anti-Money Laundering c/o GMO Trust Laundering Compliance Officer Reporting Officer (February 40 Rowes Wharf 2003 - present) and Compliance Boston, MA 02110 Officer, Grantham, Mayo, Van Age: 32 Otterloo & Co. LLC.
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 15 GMO TAIWAN FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO TAIWAN FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGEMENT Day-to-day management of the Fund's portfolio is the responsibility of the Emerging Markets Quantitative Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE The GMO Taiwan Fund was launched in October 2002 to give emerging market equity separate account clients exposure to the market without having to register individually locally in Taiwan. During the period from October 4, 2002 (commencement of operations) through February 28, 2003, Class III shares of the GMO Taiwan Fund returned 1.4%. The Fund's benchmark, MSCI Taiwan Index, returned 9.2% during the same period. The underperformance is so pronounced due to the fact that the Taiwan market rose 15% during the period from October 4, 2002 through October 31, 2002 (as measured by MSCI) and the GMO Taiwan Fund was largely invested in cash as we slowly built our positions in the market. From October 31, 2002 until February 28, 2002 the GMO Taiwan Fund fell 5.2% while the MSCI Taiwan declined 5.4%. OUTLOOK While we have moved to an underweight position of Taiwan in our global emerging market equity portfolios, it remains a significant part of the benchmark and therefore an important part of all global portfolios. We will continue to use this fund as a way to give clients access to this market. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO TAIWAN FUND CLASS III SHARES AND THE MSCI TAIWAN INDEX AS OF FEBRUARY 28, 2003 GMO TAIWAN FUND MSCI TAIWAN INDEX 10/4/2002 $9,985 $10,000 12/31/2002 $10,000 $11,075 2/28/2003 $10,079 $10,924
AVERAGE ANNUAL TOTAL RETURN SINCE INCEPTION 10/4/2002 Class III 0.79%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Each performance figure assumes purchase at the beginning and redemption at the end of the stated period and reflects a transaction fee of 15 bp on the purchase and 45 bp on the redemption. Transaction fees are retained by the Fund to cover trading costs. Past performance is not indicative of future performance. Information is unaudited. GMO TAIWAN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------- COMMON STOCKS -- 100.3% TAIWAN -- 100.3% 365,000 Ambit Microsystems Corp 1,123,885 3,008,000 Asustek Computer Inc 5,107,108 2,553,000 Cheng Loong Corp* 767,737 3,940,000 China Bills Finance Corp* 1,009,093 18,208,000 China Development Financial Holding Corp* 6,864,023 1,232,000 China Manmade Fibers* 528,253 6,037,000 China Petrochemical Development Corp* 764,397 4,999,000 China Steel Corp 3,107,292 858,000 Chung Shing Textile Co Ltd* 66,171 1,486,000 Compal Electronics Inc 1,432,547 1,215,000 Compeq Manufacturing Co Ltd* 587,396 489,600 Delta Electronics Inc 512,847 274,000 Far Eastern Department Stores Ltd 64,656 1,880,000 First Financial Holding Co Ltd* 1,173,986 193,000 Formosa Plastics Corp 242,708 691,000 Fubon Financial Holding Co Ltd 542,858 440,000 GigaByte Technology Co Ltd 595,108 756,000 Goldsun Development & Construction Co Ltd* 88,762 53,000 Hon Hai Precision Industry Co Ltd 170,820 2,746,000 Hsinchu International Bank* 1,110,253 5,644,000 Inventec Co Ltd 3,248,345 2,000 Mitac International Corp 708 222,600 Nan Ya Plastic Corp 220,358 3,970,571 Orient Semiconductor Electronics Ltd* 611,297 13,875,000 Pacific Electric Wire & Cable Co Ltd* 1,297,662 1,834,000 Picvue Electronics Ltd* 635,963 728,000 Quanta Computer Inc 1,256,978 3,129,000 Ritek Corp 1,476,708 849,000 Synnex Technology International Corp 1,187,378 5,528,000 Taiwan Cement Corp* 1,948,719 630,000 Taiwan Tea Corp* 76,144 641,000 United Microelectronics* 363,387 6,596,000 Walsin Lihwa Corp* 1,945,583 1,394,000 Winbond Electronics Corp* 561,611 484,000 Yang Ming Marine Transport* 254,883 241,000 Yieh Loong Co Ltd* 98,134
See accompanying notes to the financial statements. 1 GMO TAIWAN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------- TAIWAN -- CONTINUED 205,600 Yulon Motor Co 243,170 ---------- 41,286,928 ---------- TOTAL COMMON STOCKS (COST $41,306,566) 41,286,928 ---------- TOTAL INVESTMENTS -- 100.3% (Cost $41,306,566) 41,286,928 Other Assets and Liabilities (net) -- (0.3%) (119,571) ---------- TOTAL NET ASSETS -- 100.0% $41,167,357 ==========
NOTES TO SCHEDULE OF INVESTMENTS:
* Non-income producing security. 2 See accompanying notes to the financial statements. GMO TAIWAN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY (SHOWING PERCENTAGE OF EQUITY INVESTMENTS) FEBRUARY 28, 2003 (UNAUDITED) At February 28, 2003, industry sector diversification of the Fund's equity investments was as follows:
INDUSTRY SECTOR - -------------------------------------------------------------------- Information Technology 45.7% Financials 25.9 Materials 18.8 Industrials 8.5 Consumer Discretionary 0.9 Consumer Staples 0.2 ----- 100.0% =====
See accompanying notes to the financial statements. 3 GMO TAIWAN FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $41,306,566) (Note 1) $41,286,928 Cash 10,607 Foreign currency, at value (cost $1,571) (Note 1) 1,574 ----------- Total assets 41,299,109 ----------- LIABILITIES: Payable to affiliate for (Note 2): Management fee 27,768 Shareholder service fee 5,142 Accrued expenses 98,842 ----------- Total liabilities 131,752 ----------- NET ASSETS $41,167,357 =========== NET ASSETS CONSIST OF: Paid-in capital $40,165,284 Accumulated net realized gain 1,021,708 Net unrealized depreciation (19,635) ----------- $41,167,357 =========== NET ASSETS ATTRIBUTABLE TO: Class III shares $41,167,357 =========== SHARES OUTSTANDING: Class III 2,030,383 =========== NET ASSET VALUE PER SHARE: Class III $ 20.28 ===========
4 See accompanying notes to the financial statements. GMO TAIWAN FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- PERIOD FROM OCTOBER 4, 2002 (COMMENCEMENT OF OPERATIONS) THROUGH FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Dividends (net of withholding taxes of $7,713) $ 31,159 Interest 30,677 ---------- Total income 61,836 ---------- EXPENSES: Management fee (Note 2) 154,861 Custodian fees 89,350 Audit fees 42,528 Transfer agent fees 11,754 Legal fees 5,120 Trustees fees and related expenses (Note 2) 454 Miscellaneous 3,104 ---------- 307,171 Shareholder service fee (Note 2) - Class III 28,678 Net expenses 335,849 ---------- Net investment loss (274,013) ---------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 1,413,866 Foreign currency, forward contracts and foreign currency related transactions (118,145) ---------- Net realized gain 1,295,721 ---------- Change in net unrealized appreciation (depreciation) on: Investments (19,638) Foreign currency, forward contracts and foreign currency related transactions 3 ---------- Net unrealized loss (19,635) ---------- Net realized and unrealized gain 1,276,086 ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,002,073 ==========
See accompanying notes to the financial statements. 5 GMO TAIWAN FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
PERIOD FROM OCTOBER 4, 2002 (COMMENCEMENT OF OPERATIONS) THROUGH FEBRUARY 28, 2003 ---------------------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment loss $ (274,013) Net realized gain 1,295,721 Change in net unrealized appreciation (depreciation) (19,635) ----------- Net increase in net assets from operations 1,002,073 ----------- Net share transactions (Note 5): Class III 40,165,284 ----------- Increase in net assets resulting from net share transactions 40,165,284 ----------- Total increase in net assets 41,167,357 NET ASSETS: Beginning of period -- ----------- End of period $41,167,357 ===========
6 See accompanying notes to the financial statements. GMO TAIWAN FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM OCTOBER 4, 2002 (COMMENCEMENT OF OPERATIONS) THROUGH FEBRUARY 28, 2003 ---------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 20.00 ------- Income from investment operations: Net investment loss (0.12)(a) Net realized and unrealized gain 0.40 ------- Total from investment operations 0.28 ------- NET ASSET VALUE, END OF PERIOD $ 20.28 ======= TOTAL RETURN 1.40%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $41,167 Net expenses to average daily net assets 1.76%* Net investment income to average daily net assets (1.43)%* Portfolio turnover rate 50% Purchase and redemption fees consisted of the following per share amounts: $ 0.01
* Annualized. ** Not annualized. (a) Computed using average shares outstanding throughout the period. See accompanying notes to the financial statements. 7 GMO TAIWAN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Taiwan Fund (the "Fund"), which commenced operations on October 4, 2002, is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in equity securities traded in the Taiwan securities markets. The Fund's benchmark is the MSCI Taiwan Index. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Securities which are primarily traded on foreign exchanges are generally valued at the preceding closing values of such securities on their respective exchanges, and those values are then translated into U.S. dollars at the current exchange rate. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on 8 GMO TAIWAN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in foreign currency values that are unfavorable to the Fund. There were no forward foreign currency contracts outstanding as of February 28, 2003. FUTURES CONTRACTS The Fund may purchase and sell futures contracts to manage its exposure to the financial markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are 9 GMO TAIWAN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. As of February 28, 2003, there were no outstanding futures contracts. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 28, 2003, there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future, security or currency transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. At February 28, 2003, there were no open purchased option contracts. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed 10 GMO TAIWAN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the financial markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into total return swap agreements, which involve a commitment by one party in the agreement to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. The Fund may also enter into contracts for differences in which the Fund agrees with the counterparty that its return will be based on the relative performance of two different groups or "baskets" of securities, adjusted by an interest rate payment. To the extent that the relative performance of the two baskets of securities exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in the price of the security or index underlying these transactions. At February 28, 2003, there were no outstanding swap contracts. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the 11 GMO TAIWAN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- investment of the collateral, the risk of delay in recovery or loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 2003, the Fund did not have any securities on loan. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryover for U.S. federal income tax purposes. Therefore, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign interest and dividend income are withheld in accordance with the applicable country's tax treaty with the United States. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. The Fund is currently subject to Taiwan security transaction tax of 0.3% on equities and 0.1% on corporate bonds and mutual fund shares of the transaction amount. Income dividends and capital gain distrbutions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. As of February 28, 2003, the components of distributable earnings on a tax basis consisted of $1,038,055 of undistributed ordinary income. The temporary differences between book and tax basis distributable earnings are primarily due to losses on wash sale transactions. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This 12 GMO TAIWAN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to foreign currency transactions and the net operating loss. The financial highlights exclude these adjustments.
Accumulated Accumulated Undistributed Net Undistributed Net Investment Income Realized Gain ----------------- ----------------- $274,013 $(274,013)
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date, or when the Fund is informed of the ex-dividend date, if later. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and discounts. Non cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Taiwanese companies typically declare dividends in the Fund's first fiscal quarter of each year. As a result, the Fund receives substantially less dividend income in the second half of its year. Interest income, which includes accretion of original discount, is accrued as earned. Dividend and interest income generated in Taiwan is subject to a 20% withholding tax. Stock dividends received (except those which have resulted from capitalization of capital surplus) are taxable at 20% of the par value of the stock dividends received. EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is .15% of the amount invested. In the case of cash redemptions, the fee is .45% of the amount redeemed. If the Manager determines that any portion of a cash purchase or redemption fee is offset by a corresponding cash redemption or purchase occurring on the same day, the purchase premium or redemption fee charged by the Fund will be reduced by 100% with respect to that portion. In addition, the purchase premium or redemption fee 13 GMO TAIWAN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- charged by the Fund may be waived if the Manager determines the Fund is either substantially overweighted or underweighted in cash so that a redemption or purchase will not require a securities transaction. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the period ended February 28, 2003, the Fund received $74,686 in purchase premiums and $43,358 in redemption fees. There was no premium for reinvested distributions. INVESTMENT RISK Investments in emerging countries present certain risks that are not inherent in many other securities. Many emerging countries present elements of political and/or economic instability. The securities markets of emerging countries are generally smaller and less developed than the securities markets of the U.S. and developed foreign markets. Further, countries may impose various types of foreign currency regulations or controls which may impede the Fund's ability to repatriate amounts it receives. The Fund may acquire interests in securities in anticipation of improving conditions in the related countries. These factors may result in significant volatility in the values of its holdings. The markets for emerging countries are relatively illiquid. Accordingly, the Fund may not be able to realize in an actual sale amounts approximating those used to value its holdings. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of .81% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of .15% for Class III shares. The Fund's portion of the fee paid by the Trust to the independent Trustees during the period ended February 28, 2003, was $274. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES Cost of purchase and proceeds from sales of securities, excluding short-term investments, for the period ended February 28, 2003, aggregated $59,600,002 and $19,707,301, respectively. 14 GMO TAIWAN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- At February 28, 2003, the cost for Federal income tax purposes and gross unrealized appreciation and depreciation in the value of investments held were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Depreciation -------------- ---------------- ---------------- -------------- $41,322,913 $3,282,500 $(3,318,485) $(35,985)
4. PRINCIPAL SHAREHOLDER At February 28, 2003, 90.6% of the outstanding shares of the Fund were held by one shareholder. Investment activities of this shareholder may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Period from October 4, 2002 (commencement of operations) through February 28, 2003 --------------------------- Shares Amount Class III: ------------ ------------- Shares sold 2,471,225 $49,791,166 Shares issued to shareholders in reinvestment of distributions -- -- Shares repurchased (440,842) (9,625,882) ---------- ----------- Net increase 2,030,383 $40,165,284 ========== ===========
15 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO TAIWAN FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Taiwan Fund (the "Fund") (a series of the GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the period from October 4, 2002 (commencement of operations) to February 28, 2003, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of securities at February 28, 2003 by correspondence with the custodian, provides a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 16 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA 02110 University. Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA 02110 Provant, Inc. (provider Age: 58 of performance improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 17 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------ --------------- --------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the from February Boston, MA 02110 Trust 2002 - October Age: 64 2002.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 18 PRINCIPAL OFFICERS:
Term of Office(4) Principal Occupation(s) Name, Address, Position(s) and Length of During Past and Age Held with Fund Time Served Five Years --------------------------------- -------------- ----------------- -------------------------------------------------- Scott Eston President and President and Chief Financial Officer (1997 - present), Chief c/o GMO Trust Chief Chief Executive Operating Officer (2000 - present) and Member, 40 Rowes Wharf Executive Officer since Grantham, Mayo, Van Otterloo & Co. LLC. Boston, MA 02110 Officer of the October 2002; Age: 47 Trust Vice President from August 1998 - October 2002. Susan Randall Harbert Chief Chief Financial Member, Grantham, Mayo, Van Otterloo & Co. LLC. c/o GMO Trust Financial Officer Since 40 Rowes Wharf Officer and February 2000; Boston, MA 02110 Treasurer of Treasurer since Age: 45 the Trust February 1998. Brent Arvidson Assistant Since September Senior Fund Administrator, Grantham, Mayo, Van c/o GMO Trust Treasurer of 1998. Otterloo & Co. LLC. 40 Rowes Wharf the Trust Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President Vice President General Counsel, Anti- Money Laundering Reporting c/o GMO Trust and Clerk of since February Officer (July 2002 - February 2003) and Member, 40 Rowes Wharf the Trust 1997; Clerk since Grantham, Mayo, Van Otterloo & Co. LLC. Boston, MA 02110 March 2001; May Age: 37 1999 - August 1999. Elaine M. Hartnett, Esq. Vice President Vice President Associate General Counsel, Grantham, Mayo, Van c/o GMO Trust and Secretary since August Otterloo & Co. LLC (June 1999 - present); 40 Rowes Wharf of the Trust 1999; Secretary Associate/ Junior Partner, Hale and Dorr LLP Boston, MA 02110 since March 2001. (1991 - 1999). Age: 58 Julie Perniola Vice President Since February Anti-Money Laundering Reporting Officer (February c/o GMO Trust and Anti- 2003. 2003 - present) and Compliance Officer, Grantham, 40 Rowes Wharf Money Mayo, Van Otterloo & Co. LLC. Boston, MA 02110 Laundering Age: 32 Compliance Officer
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 19 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) ANNUAL REPORT FEBRUARY 28, 2003 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) - -------------------------------------------------------------------------------- PORTFOLIO MANAGEMENT Day-to-day management of the Fund's portfolio is the responsibility of the Fixed Income Division at Grantham, Mayo, Van Otterloo & Co. LLC. MANAGEMENT DISCUSSION AND ANALYSIS OF FUND PERFORMANCE From its November 26, 2002 inception, shares of the GMO Short-Duration Collateral Fund (SDCF) returned +0.2% for the fiscal year ended February 28, 2003, as compared with the 0.4% return of the J.P. Morgan US 3-Month Cash Index. The Fund underperformed the benchmark during the period by 14 basis points. Gains from narrower swap spreads were more than offset by losses due to deterioration in credit quality. At fiscal year-end, approximately 87% of the portfolio was AAA-rated, 3% AA-rated and the remaining 10% A-rated. Approximately 56% of the Fund was invested in highly-rated, asset-backed securities. These included issues backed by auto, truck, credit card, and healthcare receivables. Approximately 18% of the Fund was invested in US government agency issues that offer higher yields than similar maturity US Treasury securities. The remainder of the Fund was split between collateralized bond obligations (14%) and corporate bonds (3%). OUTLOOK The Fund focuses on high credit quality and low-volatility, but less-liquid sectors of the US bond market that offer attractive returns relative to the index. THE VIEWS EXPRESSED HEREIN ARE EXCLUSIVELY THOSE OF GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC MANAGEMENT AS OF THE DATE OF THIS REPORT AND ARE SUBJECT TO CHANGE. THEY ARE NOT MEANT AS INVESTMENT ADVICE. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN GMO SHORT-DURATION COLLATERAL FUND AND THE J.P. MORGAN U.S. 3 MONTH CASH INDEX AS OF FEBRUARY 28, 2003 GMO SHORT-DURATION COLLATERAL FUND J.P. MORGAN U.S. 3 MONTH CASH INDEX 11/26/2002 $10,000 $10,000 12/31/2002 $9,992 $10,015 2/28/2003 $10,024 $10,038
TOTAL RETURN SINCE INCEPTION 11/26/2002 Class III 0.24%
Performance shown is net of all fees after reimbursement from the manager. Returns and net asset values of fund investments will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The total returns would have been lower had certain expenses not been reimbursed during the periods shown and do not include the effect of taxes on distributions and redemptions. Past performance is not indicative of future performance. Information is unaudited. GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE ($) DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 91.9% ASSET-BACKED SECURITIES -- 70.1% AIRLINES -- 2.6% 37,600,000 Aircraft Finance Trust Series 99-1A Class A1, Variable Rate, 1 mo. LIBOR + .48%, 1.82%, due 05/15/24 29,328,000 -------------- AUTOMOTIVE -- 5.6% 15,000,000 Americredit Automobile Receivables Trust Series 00-B Class A4, Variable Rate, 1 mo. LIBOR + .20%, 1.54%, due 04/05/07 14,990,625 15,000,000 Capital Auto Receivables Asset Trust (GMAC) Series 03-1 Class A3A, 2.75%, due 04/16/07 15,168,750 14,500,000 Ford Credit Auto Owner Trust Series 03-A Class A4A, 2.70%, due 06/15/07 14,536,250 20,000,000 Volkswagen Credit Auto Master Trust Series 00-1 Class A, Variable Rate, 1 mo. LIBOR +.16%, 1.50%, due 08/20/07 20,022,000 -------------- 64,717,625 -------------- BANKING -- 2.2% 25,000,000 Aesop Funding II LLC Series 03-2A Class A1, 2.74%, due 06/20/07 24,999,727 -------------- COMMERCIAL MORTGAGE BACKED SECURITY -- 1.5% 16,448,000 Morgan Stanley Dean Witter Capital I Series 03-TOP9 Class A1, 3.98%, due 11/13/36 16,728,130 -------------- EMERGING MARKETS COLLATERALIZED DEBT OBLIGATIONS -- 4.7% 22,531,292 Anfield Road I Ltd Series 1 Class A, Variable Rate, 6 mo. LIBOR + .25%, 1.60%, due 11/06/06 21,844,088 9,539,822 Augusta Funding Ltd Series 96-AX, Variable Rate, 1 mo. LIBOR + .25%, 1.43%, due 10/21/08 9,432,499 4,906,989 Augusta Funding Ltd Series 97-B Class A, MBIA, Variable Rate, 6 mo. LIBOR + .19%, 1.90%, due 04/10/10 4,821,116 18,514,784 Starvest Emerging Markets CBO-I Series 1A, Class A, Variable Rate, 6 mo. LIBOR + .19%, 1.53%, due 07/30/11 17,993,223 -------------- 54,090,926 --------------
See accompanying notes to the financial statements. 1 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE ($) DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- EQUIPMENT LEASES -- 0.2% 2,522,403 Xerox Equipment Lease Owner Trust Series 01-1 Class A, 144A, Variable Rate, 1 mo. LIBOR + 2.00%, 3.34%, due 02/15/08 2,523,979 -------------- HEALTH CARE EQUIPMENT RECEIVABLES -- 0.4% 5,571,895 DVI Business Credit Receivables Corp III Series 98-1A Class A, Variable Rate, 1 mo. LIBOR + .35%, 1.69%, due 01/15/04(a) 5,014,705 -------------- HIGH YIELD COLLATERALIZED DEBT OBLIGATIONS -- 6.2% 3,180,886 Cigna CBO Ltd Series 96-1 Class A2, 144A, Step Up, 6.46%, due 11/15/08 3,261,457 22,338,462 Great Point CBO Ltd Series 98-1A Class A1, 144A, Variable Rate, 6 mo. LIBOR + .30%, 2.02%, due 10/15/10 21,498,759 8,000,000 Nomura CBO Ltd Series 97-2 Class A2, 144A, Step Up, 6.26%, due 10/30/09 7,902,480 22,555,435 Northstar CBO Ltd. Series 97-2 Class A2, 144A, Variable Rate, Step Up, 6.62%, due 07/15/09 18,946,565 4,267,647 Pacific Life CBO Series 98-1A Class A2A, 144A, Step Up, 6.56%, due 02/15/10 4,263,934 14,800,000 Rhyno CBO Delaware Corp Series 97-1 Class A-2, 144A, Step Up, 6.33%, due 09/15/09 15,250,512 -------------- 71,123,707 -------------- INSURANCE -- 8.9% 8,021,762 Clydesdale CBO 1 Ltd Series 1A Class A2 144A, 6.83%, due 03/25/11 8,122,034 7,050,737 DLJ CBO Ltd Series 1A Class A2 144A, 6.68%, due 04/15/11 7,050,737 29,200,000 Meridian Funding Co LLC, MBIA, 144A, Variable Rate, 1 mo. LIBOR + .38%, 1.71%, due 06/22/11 28,944,500 10,765,094 Northstar CBO Ltd. Series 97-2I Class A2, 144A, Variable Rate, Step Up, 4.12%, due 07/15/09 10,716,866 28,650,000 Pemex Finance Ltd Series 1A1, AMBAC 144A, 6.30%, due 05/15/10 31,845,621 12,000,000 PFS Financing Corp Series 01-FA Class A, MBIA, 144A, Variable Rate, 1 mo. LIBOR + .33%, 1.67%, due 06/15/08 11,955,000 3,066,664 Polaris Funding Company, Series EMTN, Variable Rate, 1 mo. LIBOR + .45%, 1.79%, due 01/07/05 3,062,831 -------------- 101,697,589 --------------
See accompanying notes to the financial statements. 2 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE ($) DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- OTHER CREDIT CARDS -- 23.6% 15,000,000 American Express Credit Account Master Trust Series 01-6 Class A, Variable Rate, 1 mo. LIBOR + .12%, 1.46%, due 12/15/08 15,009,375 15,000,000 American Express Credit Account Master Trust Series 02-6 Class A, Variable Rate, 1 mo. LIBOR + .14%, 1.48%, due 03/15/10 15,009,961 16,000,000 Bank One Issuance Trust Series 02-A5 Class A5, 1.46%, due 06/15/10 16,010,000 20,000,000 Capital One Master Trust Series 00-4 Class A, Variable Rate, 1 mo. LIBOR + .14%, 1.48%, due 08/15/08 19,890,000 20,000,000 Chase Credit Card Master Trust Series 01-6 Class A, Variable Rate, 1 mo. LIBOR + .13%, 1.47%, due 03/16/09 20,022,000 15,650,000 Chase Credit Card Master Trust Series 02-1 Class A, Variable Rate, 1 mo. LIBOR + .10%, 1.44%, due 06/15/09 15,637,773 15,200,000 Citibank Credit Card Issuance Trust Series 00-B2 Class B2, Variable Rate, 3 mo. LIBOR + .25%, 1.63%, due 10/15/07 15,149,840 18,400,000 Discover Card Master Trust I Series 00-5 Class A, Variable Rate, 1 mo. LIBOR + .18%, 1.52%, due 11/15/07 18,444,562 10,000,000 Discover Card Master Trust I Series 02-3 Class A, Variable Rate, 1 mo. LIBOR + .11%, 1.45%, due 11/17/09 9,989,844 GBP 20,000,000 Earls Five Ltd Series EMTN, 3 mo. GBP LIBOR + .14%, 3.82%, due 02/27/08 31,243,684 20,000,000 Gracechurch Card Funding Plc Series 2 Class A, 1.46%, due 10/15/09 19,995,312 30,000,000 MBNA Credit Card Master Trust Series 02-A4 Class A4, Variable Rate, 1 mo. LIBOR + .11%, 1.45%, due 08/17/09 29,982,422 20,000,000 MBNA Credit Card Master Trust Series 02-B4 Class B4, 1.84%, due 03/15/09 19,955,469 8,000,000 Neiman Marcus Group Credit Card Master Trust Series 00-1 Class A, 144A, Variable Rate, 1 mo. LIBOR + .27%, 1.61%, due 04/15/08 8,001,875 16,000,000 Providian Gateway Master Trust Series 00-C Class A, 144A, Variable Rate, 1 mo. LIBOR + .22%, 1.56%, due 03/15/07 15,953,600 -------------- 270,295,717 -------------- PERPETUAL LOANS COLLATERALIZED DEBT OBLIGATIONS -- 2.6% 2,906,540 Augusta Funding Ltd Series 10A Class A-1 144A, 6.65%, due 06/30/04 2,979,204
See accompanying notes to the financial statements. 3 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE ($) DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- PERPETUAL LOANS COLLATERALIZED DEBT OBLIGATIONS -- CONTINUED 28,000,000 Augusta Funding Ltd Series 10A Class F-1 144A, Variable Rate, 3 mo. LIBOR + .25%, 1.65%, due 06/30/17 27,020,000 -------------- 29,999,204 -------------- RATE REDUCTION BONDS -- 3.8% 26,913,600 California Infrastructure PG&E Series 97-1 Class A7, 6.42%, due 09/25/08 29,274,848 13,735,403 California Infrastructure SCE Series 97-1 Class A5, 6.28%, due 09/25/05 13,933,923 -------------- 43,208,771 -------------- SMALL BUSINESS LOANS -- 0.9% 10,995,690 The Money Store Business Loan Backed Trust Series 99-1 Class AN, Variable Rate, 1 mo. LIBOR +.50%, 1.84%, due 09/15/17 10,930,403 -------------- STUDENT LOANS -- 4.9% 2,502,868 Banc One Student Loan Trust Series 94-A Class A2, Variable Rate, 1 mo. LIBOR + .30%, 1.64%, due 10/25/16 2,506,966 9,600,000 Keycorp Student Loan Trust Series 94-B Certificates, Variable Rate, 1 mo. LIBOR + .73%, 2.07%, due 11/25/21 9,595,875 8,000,000 Keycorp Student Loan Trust Series 95-A Class B, Variable Rate, 1 mo. LIBOR + .75%, 2.09%, due 10/27/21 7,998,750 4,772,800 SMS Student Loan Trust Series 94-A Certificates, Variable Rate, 1 mo. LIBOR + .70%, 2.05%, due 07/26/21 4,777,573 4,205,600 SMS Student Loan Trust Series 94-B Certificates, Variable Rate, 1 mo. LIBOR + .75%, 2.09%, due 10/25/23 4,214,432 1,475,631 SMS Student Loan Trust Series 94-B Class A2, Variable Rate, 1 mo. LIBOR + .30%, 1.64%, due 04/25/16 1,479,320 3,945,600 SMS Student Loan Trust Series 95-A Certificates, Variable Rate, 1 mo. LIBOR + .65%, 1.99%, due 04/25/25 3,950,729 14,191,602 SMS Student Loan Trust Series 97-A Class A, Variable Rate, 3 mo. U.S. Treasury Bill + .60%, 1.87%, due 10/27/25 14,170,314 4,006,400 Society Student Loan Trust Series 93-A Class B, Variable Rate, 1 mo. LIBOR + .75%, 2.10%, due 07/25/03 4,010,567 3,350,767 Student Loan Marketing Association Series 96-4 Class A2, Variable Rate, 3 mo. U.S. Treasury Bill + .64%, 1.82%, due 07/25/09 3,334,014 -------------- 56,038,540 --------------
See accompanying notes to the financial statements. 4 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE ($) DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- TRANSPORTATION -- 2.0% 20,500,000 Westralia Airports Corp, MBIA, 144A, 6.48%, due 04/01/10 23,454,050 -------------- TOTAL ASSET BACKED SECURITIES 804,151,073 -------------- CORPORATE DEBT -- 3.4% 11,750,000 Banco Santander Series MBIA, 6.50%, due 11/01/05 12,838,144 10,452,610 Continental Airlines Series 99-1A, 6.55%, due 02/02/19 8,780,192 16,000,000 General Motors Acceptance Corp, 7.50%, due 07/15/05 17,129,600 -------------- 38,747,936 -------------- U.S. GOVERNMENT -- 9.0% 2,239,660 U.S. Treasury Inflation Indexed Note, 3.63%, due 01/15/08 2,530,116 100,000,000 U.S. Treasury Note, 2.00%, due 11/30/04 100,984,380 -------------- 103,514,496 -------------- U.S. GOVERNMENT AGENCY -- 9.4% 1,100,000 Agency for International Development Floater (Support of Belize), Variable Rate, 6 mo. U.S. Treasury Bill + .50%, 1.70%, due 01/01/14 1,084,875 4,168,750 Agency for International Development Floater (Support of C.A.B.E.I.), Variable Rate, 6 mo. U.S. Treasury Bill + .40%, 1.60%, due 10/01/12 4,101,008 1,802,424 Agency for International Development Floater (Support of Honduras), Variable Rate, 3 mo. U.S. Treasury Bill x 1.17%, 1.41%, due 10/01/11 1,795,664 15,000,000 Agency for International Development Floater (Support of India), Variable Rate, 3 mo. LIBOR + .10%, 1.48%, due 02/01/27 14,820,000 5,188,152 Agency for International Development Floater (Support of Jamaica), Variable Rate, 6 mo. U.S. Treasury Bill + .75%, 1.95%, due 03/30/19 5,158,943 20,000,000 Agency for International Development Floater (Support of Morocco), Variable Rate, 6 mo. LIBOR - .015%, 1.33%, due 02/01/25 19,535,000 15,000,000 Agency for International Development Floater (Support of Morocco), Variable Rate, 6 mo. LIBOR + .15%, 1.49%, due 10/29/26 14,962,500 1,344,960 Agency for International Development Floater (Support of Morocco), Variable Rate, 6 mo. U.S. Treasury Bill + .45%, 1.65%, due 11/15/14 1,318,061 2,511,836 Agency for International Development Floater (Support of Peru), Series A, Variable Rate, 6 mo. U.S. Treasury Bill +.35%, 1.55%, due 05/01/14 2,496,137
See accompanying notes to the financial statements. 5 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003
PAR VALUE ($) DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- U.S. GOVERNMENT AGENCY -- CONTINUED 22,500,000 Agency for International Development Floater (Support of Portugal), Variable Rate, 6 mo. LIBOR, 1.34%, due 01/01/21 22,455,000 14,100,000 Agency for International Development Floater (Support of Tunisia), Variable Rate, 6 mo. LIBOR, 1.34%, due 07/01/23 13,853,250 1,500,001 Agency for International Development Floater (Support of Zimbabwe), Variable Rate, 3 mo. U.S. Treasury Bill x 115%, 2.60%, due 01/01/12 1,481,251 2,700,000 Federal Home Loan Bank, Variable Rate, 3 mo. LIBOR + .25%, 1.60%, due 11/05/03 2,696,760 1,490,551 Small Business Administration Series 95-10C, Class 1, 6.88%, due 09/01/05 1,595,489 -------------- 107,353,938 -------------- TOTAL DEBT OBLIGATIONS (COST $1,053,660,704) 1,053,767,443 -------------- SHORT-TERM INVESTMENTS -- 10.9% CASH EQUIVALENTS -- 5.0% 56,815,625 Merrimac Cash Fund 56,815,625 -------------- COMMERCIAL PAPER -- 5.9% $ 34,000,000 Koch Industries, 1.33%, due 03/03/03 33,997,488 $ 34,000,000 UBS Finance (Delaware) Inc, 1.34%, due 03/03/03 33,997,469 -------------- 67,994,957 -------------- TOTAL SHORT-TERM INVESTMENTS (COST $124,810,582) 124,810,582 -------------- TOTAL INVESTMENTS -- 102.8% (Cost $1,178,471,286) 1,178,578,025 Other Assets and Liabilities (net) -- (2.8%) (31,624,336) -------------- TOTAL NET ASSETS -- 100.0% $1,146,953,689 ==============
See accompanying notes to the financial statements. 6 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) FEBRUARY 28, 2003 NOTES TO THE SCHEDULE OF INVESTMENTS: 144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. AMBAC - Insured as to the payment of principal and interest by AMBAC Assurance Corporation CBO - Collateralized Bond Obligation EMTN - Euromarket Medium Term Note GBP - British Pound MBIA - Insured as to the payment of principal and interest by MBIA Insurance Corp USD - United States Dollar Variable and step up rates - The rates shown on variable and step up rate notes are the current interest rates at February 28, 2003, which are subject to change based on the terms of the security, including varying reset dates.
(a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 1). See accompanying notes to the financial statements. 7 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (cost $1,178,471,286) (Note 1) $1,178,578,025 Cash 14,041,353 Foreign currency, at value (cost $329,697) (Note 1) 328,924 Receivable for Fund shares sold 20,000,000 Interest receivable 3,606,529 Receivable for open forward foreign currency contracts (Notes 1 and 6) 763,484 Receivable for expenses reimbursed by Manager (Note 2) 78,918 -------------- Total assets 1,217,397,233 -------------- LIABILITIES: Payable for investments purchased 47,523,742 Payable for Fund shares repurchased 8,100,000 Net payable for open swap contracts (Notes 1 and 6) 14,696,082 Accrued expenses 123,720 -------------- Total liabilities 70,443,544 -------------- NET ASSETS $1,146,953,689 ============== NET ASSETS CONSIST OF: Paid-in capital $1,146,247,867 Accumulated undistributed net investment income 3,103,842 Accumulated net realized loss (3,903) Net unrealized depreciation (2,394,117) -------------- $1,146,953,689 ============== NET ASSETS ATTRIBUTABLE TO: Class III shares $1,146,953,689 ============== SHARES OUTSTANDING: Class III 45,851,656 ============== NET ASSET VALUE PER SHARE: Class III $ 25.01 ==============
8 See accompanying notes to the financial statements. GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- PERIOD FROM NOVEMBER 26, 2002 (COMMENCEMENT OF OPERATIONS) THROUGH FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- INVESTMENT INCOME: Interest $6,543,509 ---------- Total income 6,543,509 ---------- EXPENSES: Audit fees 67,346 Custodian and transfer agent fees 36,004 Tax expense 20,258 Legal fees 17,841 Trustees fees and related expenses (Note 2) 6,582 Miscellaneous 6,863 Fees reimbursed by Manager (Note 2) (141,750) ---------- 13,144 ---------- Net expenses 13,144 ---------- Net investment income 6,530,365 ---------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 88,853 Closed swap contracts 211,751 Foreign currency, forward contracts and foreign currency related transactions (1,521,283) ---------- Net realized loss (1,220,679) ---------- Change in net unrealized appreciation (depreciation) on: Investments 106,739 Open swap contracts (3,256,731) Foreign currency, forward contracts and foreign currency related transactions 755,875 ---------- Net unrealized loss (2,394,117) ---------- Net realized and unrealized loss (3,614,796) ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,915,569 ==========
See accompanying notes to the financial statements. 9 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
PERIOD FROM NOVEMBER 26, 2002 (COMMENCEMENT OF OPERATIONS) THROUGH FEBRUARY 28, 2003 ----------------------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 6,530,365 Net realized loss (1,220,679) Change in net unrealized appreciation (depreciation) (2,394,117) -------------- Net increase in net assets from operations 2,915,569 -------------- Distributions to shareholders from: Net investment income Class III (2,209,747) -------------- Total distributions from net investment income (2,209,747) -------------- Net share transactions: (Note 5) Class III 1,146,247,867 -------------- Increase in net assets resulting from net share transactions 1,146,247,867 -------------- Total increase in net assets 1,146,953,689 NET ASSETS: Beginning of period -- -------------- End of period (including accumulated undistributed net investment income of $3,103,842) $1,146,953,689 ==============
10 See accompanying notes to the financial statements. GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT THE PERIOD) - --------------------------------------------------------------------------------
PERIOD FROM NOVEMBER 26, 2002 (COMMENCEMENT OF OPERATIONS) THROUGH FEBRUARY 28, 2003 ---------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 25.00 ---------- Income from investment operations: Net investment income 0.15 Net realized and unrealized loss (0.09) ---------- Total from investment operations 0.06 ---------- Less distributions to shareholders: From net investment income (0.05) ---------- Total distributions (0.05) ---------- NET ASSET VALUE, END OF PERIOD $ 25.01 ========== TOTAL RETURN(a) 0.24%+ RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $1,146,954 Net expenses to average daily net assets 0.00%* Net investment income to average daily net assets 2.34%* Portfolio turnover rate 15% Fees and expenses reimbursed by the Manager to average daily net assets: 0.05%*
(a) The total returns would have been lower had certain expenses not been reimbursed during the period shown. * Annualized. + Not Annualized. See accompanying notes to the financial statements. 11 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES GMO Short-Duration Collateral Fund (the "Fund"), which commenced operations on November 26, 2002, is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts Business Trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return comparable to the 3-month London Inter-Bank Offer Rate ("LIBOR"). The Fund seeks to achieve its objective by investing primarily in relatively high quality, low volatility fixed income instruments. The Fund's benchmark index is the J.P. Morgan U.S. 3-Month Cash Index. Shares of the Fund are only offered to other Funds of the Trust and other GMO separately managed accounts. The following is a summary of significant accounting policies which are in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") and which are consistently followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. PORTFOLIO VALUATION Portfolio securities listed on a securities exchange for which market quotations are readily available are valued at the last sale price or official closing price on each business day, or if there is no such reported sale or official closing price, at the most recent quoted bid price. Unlisted securities for which market quotations are readily available are valued at the most recent quoted bid price. Short-term investments with a remaining maturity of sixty days or less are valued at amortized cost which approximates fair value. Shares of mutual funds are valued at their net asset value as reported on each business day. Securities for which quotations are not readily available or whose values the Manager has determined to be unreliable are valued at fair value as determined in good faith by the Trustees or other persons acting at their direction. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events occurring after the close of a foreign market that would materially affect that security's value. 12 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- Some fixed income securities are valued at the closing bid for such securities as supplied by a primary pricing source chosen by the Manager. The Manager evaluates such primary pricing sources on an ongoing basis, and may change a pricing source should it deem it appropriate. The Manager is informed of erratic or unusual movements (including unusual inactivity) in the prices supplied for a security and at its discretion may override a price supplied by a source (by taking a price supplied by another source). Securities may be valued by independent pricing services which use prices provided by market makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. At February 28, 2003, the total value of these securities represented 33% of net assets. Certain securities held by the Fund, or an underlying fund in which it invests, were valued on the basis of a price provided by a principal market maker. The prices provided by the principal market makers may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. FORWARD CURRENCY CONTRACTS The Fund may enter into forward currency contracts and forward cross currency contracts in connection with settling planned purchases or sales of securities or to hedge the currency exposure associated with some or all of the Fund's portfolio securities. A forward currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward currency contract fluctuates with changes in forward currency exchange rates. Forward currency contracts are marked to market daily and the change in value is recorded by the Fund as an unrealized gain or loss. Realized gains or losses equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed are recorded 13 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- upon delivery or receipt of the currency or, if a forward currency contract is offset by entering into another forward currency contract with the same broker, upon settlement of the net gain or loss. These contracts may involve market risk in excess of the unrealized gain or loss reflected in the Fund's Statement of Assets and Liabilities. In addition, the Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if there are movements in foreign currency values that are unfavorable to the Fund. The value of the currencies the Fund has committed to buy or sell is shown under Note 6 and represents the currency exposure the Fund has acquired or hedged through forward currency contracts as of February 28, 2003. FUTURES CONTRACTS The Fund may purchase and sell futures contracts to manage its exposure to the financial markets. Buying futures tends to increase the Fund's exposure to the underlying instrument. Selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other Fund instruments. Upon entering into a futures contract, the Fund is required to deposit with its custodian, in a segregated account in the name of the futures broker, an amount of cash or U.S. government and agency obligations in accordance with the initial margin requirements of the broker or exchange. In addition, the Fund maintains cash or securities in an amount that at least equals the net amount payable in the event the Fund must deliver the full amount of the contracts. Futures contracts are marked to market daily and an appropriate payable or receivable for the change in value ("variation margin") is recorded by the Fund. The payable or receivable is liquidated on the following business day. Gains or losses are recognized but not considered realized until the contracts expire or are closed. Futures contracts involve, to varying degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Losses may arise from the changes in the value of the underlying instrument, if there is an illiquid secondary market for the contracts, or if counterparties do not perform under the contract terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. At February 28, 2003, the Fund held no open futures contracts. OPTIONS The Fund may write call and put options on futures, securities or currencies it owns or in which it may invest. Writing put options tends to increase the Fund's exposure to the underlying instrument. Writing call options tends to decrease the Fund's exposure to the underlying instrument. When the Fund writes a call or put option, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against the amounts paid on the underlying future, security or currency transaction to determine the realized gain or loss. The Fund as a writer of an option has no control over whether the underlying future, security or currency may be sold (call) or purchased (put) and as a result bears the market risk of an 14 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- unfavorable change in the price of the future, security or currency underlying the written option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At February 28, 2003, there were no open written option contracts. The Fund may also purchase put and call options. Purchasing call options tends to increase the Fund's exposure to the underlying instrument. Purchasing put options tends to decrease the Fund's exposure to the underlying instrument. The Fund pays a premium which is included in the Fund's Statement of Assets and Liabilities as an investment and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying future, security or currency transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. At February 28, 2003, there were no open purchased option contracts. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by a primary pricing source chosen by the Manager. LOAN AGREEMENTS The Fund may invest in direct debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates. The Fund's investments in loans may be in the form of participations in loans or assignments of all or a portion of loans from third parties. A loan is often administered by a bank or other financial institution (the "lender") that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. When investing in a loan participation, the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the loan agreement and only upon receipt by the lender of payments from the borrower. The Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, the Fund may be subject to the credit risk of both the borrower and the lender that is selling the loan agreement. When the Fund purchases assignments from lenders it acquires direct rights against the borrower on the loan. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. 15 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS The Fund may enter into swap agreements to manage its exposure to the financial markets. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate, total return, forward swap spread lock and credit default swap agreements to manage its exposure to interest rates and credit risk. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Total return swap agreements involve commitments to pay interest in exchange for a market linked return, both based on notional amounts. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. Forward swap spread lock swap agreements involve commitments to pay or receive a settlement amount calculated as the difference between the swap spread and a fixed spread, multiplied by the notional amount times the duration of the swap rate. The swap spread is the difference between the benchmark swap rate (market rate) and the specific treasury rate. In a credit default swap, one party makes a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party on its obligation. The Fund may use credit default swaps to provide a measure of protection against defaults of sovereign or corporate issuers (i.e., to reduce risk where the Fund owns or has exposure to the issuer) or to take an active long or short position with respect to the likelihood of a particular issuer's default. In connection with these agreements, cash or securities may be set aside as collateral by the Fund's custodian in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements are included as part of interest income. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and the differences could be material. Entering into these agreements involves, to varying degrees, elements of credit, legal, market, and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements, or that there may be unfavorable changes in interest rates. See Note 6 for a summary of open swap agreements as of February 28, 2003. 16 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- REPURCHASE AGREEMENTS The Fund may enter into repurchase agreements with certain banks and broker/dealers whereby the Fund acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The Fund, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked to market daily to ensure that the market value of the underlying assets remains sufficient to protect the Fund in the event of default by the seller. Collateral for certain tri-party repurchase agreements is held at the counterparty's custodian in a segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults and the value of the collateral declines or if the seller enters insolvency proceedings, recovery of cash by the Fund may be delayed or limited. REVERSE REPURCHASE AGREEMENTS The Fund may enter into reverse repurchase agreements with certain banks and broker/dealers whereby the Fund sells portfolio assets concurrent with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. In connection with these agreements, the Fund establishes segregated accounts with its custodian in which the Fund maintains cash, U.S. Government securities or other liquid high grade debt obligations in the name of the counterparty equal in value to its obligations in respect of reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the securities the Fund sold may decline below the price at which it is obligated to repurchase them under the agreement. At February 28, 2003, the Fund held no open reverse repurchase agreements. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of loss with respect to the investment of the collateral, the risk of delay in recovery or loss of rights in the collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At February 28, 2003, there were no securities on loan. TAXES AND DISTRIBUTIONS The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund intends to distribute substantially all of its net investment income and net realized short-term and long-term capital gains, if any, after giving effect to any available capital loss carryovers for U.S. federal income tax purposes. Generally, no provision for U.S. federal income or excise tax is necessary. Taxes on foreign dividend and interest income are withheld in accordance with the applicable country's tax treaty with the United States. 17 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions will be paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. During the years ended February 28, 2002 and February 28, 2003, the tax basis of distributions paid from ordinary income was $0 and $2,209,747, respectively. As of February 28, 2003, the components of distributable earnings on a tax basis consisted of $4,618,852 of undistributed ordinary income. The temporary differences between book and tax basis distributable earnings are primarily due to differing treatments for amortization of payments for certain swap agreements and foreign currency transactions. The following reclassification represents the amount necessary to report the stated components of net assets on a tax basis, excluding certain temporary differences, as of February 28, 2003. This reclassification has no impact on net investment income, realized gain/loss or the net asset value of the Fund and is primarily attributable to foreign currency transactions. The financial highlights exclude these adjustments.
Accumulated Undistributed Net Accumulated Net Investment Income Realized Loss ----------------- --------------- $(1,216,776) $1,216,776
Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Interest income is recorded on the accrual basis and is adjusted for the amortization of premiums and discounts. Dividend income is recognized on the ex-dividend date. Non cash dividends, if any, are recorded at the fair market value of the securities received. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. Interest income on U.S. Treasury inflation indexed securities is accrued daily based upon the inflation adjusted principal. Additionally, any increase in the principal or face amount of the securities adjusted for inflation is recorded as interest income. 18 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- EXPENSES The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated taking into consideration, among other things, the nature and type of expense and the relative size of the funds. 2. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO does not charge the Fund any management or service fees for its services. In addition, GMO has contractually agreed to reimburse all of the Fund's expenses (excluding brokerage commissions and other investment-related costs, hedging transaction fees, fees and expenses of the independent Trustees of the Trust (including legal fees), extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes). The Fund's portion of the fee paid by the Trust to the independent Trustees during the year ended February 28, 2003 was $4,514. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 3. PURCHASES AND SALES OF SECURITIES For the year ended February 28, 2003, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
Purchases Sales -------------- ------------ U.S. Government securities $ 102,688,650 $ -- Investments (non-U.S. Government securities) 1,095,287,151 147,376,660
For the year ended February 28, 2003, the cost of purchases includes the initial transfer of GMO Alpha LIBOR Fund's investments in the Fund of $1,024,462,382. At February 28, 2003, the cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
Gross Unrealized Gross Unrealized Net Unrealized Aggregate Cost Appreciation Depreciation Appreciation -------------- ---------------- ---------------- -------------- $1,178,475,189 $6,889,508 $(6,786,672) $102,836
19 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- 4. PRINCIPAL SHAREHOLDERS At February 28, 2003, 77.6% of the outstanding shares of the Fund were held by five shareholders, each holding in excess of 10% of the Fund's outstanding shares. Two of the shareholders are other funds of GMO Trust. Investment activities of these shareholders may have a material effect on the Fund. 5. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
Period from November 26, 2002 (commencement of operations) through February 28, 2003 ------------------------------ Shares Amount ------------ ---------------- Shares sold 52,023,171 $1,300,562,382 Shares issued to shareholders in reinvestment of distributions 88,709 2,209,747 Shares repurchased (6,260,224) (156,524,262) ---------- -------------- Net increase 45,851,656 $1,146,247,867 ========== ==============
The Fund was formed with an initial taxable contribution of securities (including derivative instruments) in-kind, which had a market value of $1,024,462,382 on the date of contribution. 6. FINANCIAL INSTRUMENTS A summary of outstanding financial instruments at February 28, 2003 is as follows: FORWARD CURRENCY CONTRACTS
Settlement Net Unrealized Date Deliver Units of Currency Value Appreciation ---------- -------- ----------------- ------------- -------------- Sales 4/15/03 GBP 20,000,000 $31,416,516 $763,484
20 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS
Net Unrealized Expiration Appreciation Notional Amount Date Description (Depreciation)* --------------- ---------- -------------------------------------------------- --------------- FORWARD SWAP SPREAD LOCK SWAPS 250,000,000 USD 3/10/03 Agreement with Bear Stearns Bank Plc dated 3/06/01 $ 696,791 to pay (receive) the notional amount multiplied by the difference between the 2 year swap spread and a fixed spread times the duration of the 2 year swap rate. INTEREST RATE SWAPS 100,000,000 USD 1/18/06 Agreement with Goldman Sachs International dated (1,485,337) 1/16/01 to pay the notional amount multiplied by 5.82% and to receive the notional amount multiplied by the 3 month Floating Rate LIBOR adjusted by a specified spread. 50,000,000 USD 1/09/08 Agreement with JP Morgan Chase Bank dated 1/07/03 (975,692) to pay the notional amount multiplied by 3.43375% and to receive the notional amount multiplied by the 3 month Floating Rate LIBOR adjusted by a specified spread. 35,000,000 USD 3/04/08 Agreement with JP Morgan Chase Bank dated 2/28/03 -- to pay the notional amount multiplied by 3.096% and to receive the notional amount multiplied by the 3 month Floating Rate LIBOR adjusted by a specified spread. 40,000,000 USD 1/24/11 Agreement with Goldman Sachs International dated (1,502,440) 1/19/01 to pay the notional amount multiplied by 6.0675% and to receive the notional amount multiplied by the 3 month Floating Rate LIBOR adjusted by a specified spread.
21 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FEBRUARY 28, 2003 - -------------------------------------------------------------------------------- SWAP AGREEMENTS -- CONTINUED
Net Unrealized Expiration Appreciation Notional Amount Date Description (Depreciation)* --------------- ---------- -------------------------------------------------- --------------- 26,700,000 USD 2/25/13 Agreement with Bank of America dated 2/20/03 to $ (320,472) pay the notional amount multiplied by 4.25% and to receive the notional amount multiplied by the 3 month Floating Rate LIBOR adjusted by a specified spread. TOTAL RETURN SWAPS 35,000,000 USD 4/22/03 Agreement with Bank of America dated 2/20/03 to 330,419 receive (pay) the notional amount multiplied by the return on the Bank of America AAA 10 year CMBS Index and to pay the notional amount multiplied by 0.92%. 35,000,000 USD 9/1/03 Agreement with Lehman Brothers Special Financing -- Inc. dated 2/25/03 to receive (pay) the notional amount multiplied by the return on the Lehman Brothers AAA CMBS Index and to pay the notional amount multiplied by 1 month Floating Rate LIBOR adjusted by a specified spread. ----------- $(3,256,731) ===========
* Includes unrealized gain (loss) of $11,439,351 incurred by GMO Alpha LIBOR Fund prior conversion to the Fund on November 27, 2002. See Notes to the Schedule of Investments for definitions of currency abbreviations. 22 REPORT OF INDEPENDENT ACCOUNTANTS TO THE TRUSTEES OF GMO TRUST AND THE SHAREHOLDERS OF GMO SHORT-DURATION COLLATERAL FUND In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of GMO Short-Duration Collateral Fund (the "Fund") (a series of the GMO Trust) at February 28, 2003, and the results of its operations, the changes in its net assets and the financial highlights for the period from November 26, 2002 (commencement of operations) to February 28, 2003, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of securities at February 28, 2003 by correspondence with the custodian and brokers, provides a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts April 15, 2003 23 TRUSTEES AND OFFICERS (UNAUDITED) The following tables list the Trust's Trustees and officers; their address and age; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; and other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing GMO, c/o GMO Trust, 40 Rowes Wharf, Boston, MA 02110. INDEPENDENT TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------- --------------- --------------- ------------------------- --------------- --------------- Jay O. Light Trustee of the Since May 1996 Professor of Business 39 *(2) c/o GMO Trust Trust Administration and Senior 40 Rowes Wharf Associate Dean, Harvard Boston, MA University. 02110 Age: 61 Donald W. Glazer, Esq. Trustee of the Since December Advisory Counsel, Goodwin 39 None c/o GMO Trust Trust 2000 Procter LLP; Secretary 40 Rowes Wharf and Consultant, Boston, MA Provant, Inc. (provider 02110 of performance Age: 58 improvement training services and products) (1998 - present); Consultant -- Business and Law.
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 2 Mr. Light is a director of Harvard Management Company, Inc. and Security Capital European Realty. Neither of these companies has a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the requirements of Section 15(d) of the Act and neither of these companies is a registered investment company. 24 INTERESTED TRUSTEES:
Number of Portfolios in Term of Principal Fund Office(1) and Occupation(s) Complex Other Name, Address, Position(s) Length of During Past Overseen Directorships and Age Held with Fund Time Served Five Years by Trustee Held by Trustee ------------------------- --------------- --------------- ------------------------- --------------- --------------- R. Jeremy Grantham(3) Chairman of the Since September Member, Grantham, Mayo, 39 None c/o GMO Trust Board of 1985. President Van Otterloo & Co. LLC. 40 Rowes Wharf Trustees of the from February Boston, MA Trust 2002 - October 02110 2002. Age: 64
1 Each Trustee is elected to serve until the next meeting held for the purpose of electing Trustees and until his successor is elected and qualified. 3 Trustee is deemed to be an "interested person" of the Trust and Grantham, Mayo, Van Otterloo & Co. LLC, as defined by the 1940 Act. 25 PRINCIPAL OFFICERS:
Term of Office(4) and Principal Occupation(s) Name, Address, Position(s) Length of During Past and Age Held with Fund Time Served Five Years -------------------------- -------------- -------------- --------------------------------------------- Scott Eston President and President and Chief Financial Officer (1997 - present), c/o GMO Trust Chief Chief Chief Operating Officer (2000 - present) and 40 Rowes Wharf Executive Executive Member, Grantham, Mayo, Van Otterloo & Co. Boston, MA Officer of the Officer since LLC. 02110 Trust October 2002; Age: 47 Vice President from August 1998 - October 2002. Susan Randall Harbert Chief Chief Member, Grantham, Mayo, Van Otterloo & Co. c/o GMO Trust Financial Financial LLC. 40 Rowes Wharf Officer and Officer Since Boston, MA Treasurer of February 2000; 02110 the Trust Treasurer Age: 45 since February 1998. Brent Arvidson Assistant Since Senior Fund Administrator, Grantham, Mayo, c/o GMO Trust Treasurer of September Van Otterloo & Co. LLC. 40 Rowes Wharf the Trust 1998. Boston, MA 02110 Age: 33 William R. Royer, Esq. Vice President Vice President General Counsel, Anti- Money Laundering c/o GMO Trust and Clerk of since February Reporting Officer (July 2002 - February 2003) 40 Rowes Wharf the Trust 1997; Clerk and Member, Grantham, Mayo, Van Otterloo & Boston, MA since March Co. LLC. 02110 2001; May Age: 37 1999 - August 1999. Elaine M. Hartnett, Esq. Vice President Vice President Associate General Counsel, Grantham, Mayo, c/o GMO Trust and Secretary since August Van Otterloo & Co. LLC (June 1999 - 40 Rowes Wharf of the Trust 1999; present); Associate/ Junior Partner, Hale and Boston, MA Secretary Dorr LLP (1991 - 1999). 02110 since March Age: 58 2001. Julie Perniola Vice President Since February Anti-Money Laundering Reporting Officer c/o GMO Trust and Anti- 2003. (February 2003 - present) and Compliance 40 Rowes Wharf Money Officer, Grantham, Mayo, Van Otterloo & Co. Boston, MA Laundering LLC. 02110 Compliance Age: 32 Officer
4 Officers are elected to hold such office until their successor is elected and qualified to carry out the duties and responsibilities of their office, or until he or she resigns or is removed from office. 26 EX-99.CERT 3 a2105575zex-99_certa.txt EXHIBIT 99.CERTIFICATION EX-99.CERT CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002: I, Scott Eston, Chief Executive Officer of the registrant, certify that: 1. I have reviewed this report on Form N-CSR of GMO Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; and 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report. Date: May 9, 2003 --------------------------- /s/ Scott Eston ------------------------------------- Scott Eston, Chief Executive Officer EX-99.CERT 4 a2105575zex-99_certb.txt EXHIBIT 99.CERTIFICATION EX-99.CERT CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002: I, Susan Randall Harbert, Chief Financial Officer of the registrant, certify that: 1. I have reviewed this report on Form N-CSR of GMO Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; and 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report. Date: May 9, 2003 ---------------------- /s/ Susan Randall Harbert ---------------------------------------------- Susan Randall Harbert, Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----