-----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, VqVPAdWO2ymif3zpp2AysDg4eHzsD9o9LvkMyvs5ChtOReHM1WrGV/b16WomiIqE Nc4wiV/CIgXJoe82wj5rHw== 0001047469-04-033380.txt : 20041108 0001047469-04-033380.hdr.sgml : 20041108 20041108144239 ACCESSION NUMBER: 0001047469-04-033380 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040831 FILED AS OF DATE: 20041108 DATE AS OF CHANGE: 20041108 EFFECTIVENESS DATE: 20041108 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GMO TRUST CENTRAL INDEX KEY: 0000772129 IRS NUMBER: 000000000 STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-04347 FILM NUMBER: 041125333 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-CSRS 1 a2145256zn-csrs.txt N-CSRS 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: 617-346-7646 ----------------------------- Date of fiscal year end: 02/28/2005 ---------------------- Date of reporting period: 08/31/2004 ------------------ ITEM 1. REPORTS TO STOCKHOLDERS. GMO BENCHMARK-FREE ALLOCATION FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO BENCHMARK-FREE ALLOCATION FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
CLASSIFICATION % OF NET ASSETS - ---------------------------------------------------------------------------------- Mutual Funds 100.0% Short-Term Investments and Other Assets and Liabilities (net) 0.0 --------------- 100.0% ===============
See accompanying notes to the financial statements. 1 GMO BENCHMARK-FREE ALLOCATION FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE ($)/ SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------ MUTUAL FUNDS -- 100.0% AFFILIATED ISSUERS -- 100.0% 21,672,623 GMO Currency Hedged International Bond Fund, Class III 200,255,039 16,004,581 GMO Emerging Country Debt Fund, Class IV 173,809,745 11,981,890 GMO Emerging Markets Fund, Class VI 176,732,884 18,978,456 GMO Inflation Indexed Bond Fund, Class III 227,361,902 509,497 GMO International Growth Fund, Class III 11,657,296 472,270 GMO International Intrinsic Value Fund, Class IV 11,641,464 8,473,284 GMO International Small Companies Fund, Class III 137,690,867 -------------- TOTAL MUTUAL FUNDS (COST $928,897,994) 939,149,197 -------------- SHORT-TERM INVESTMENT -- 0.0% REPURCHASE AGREEMENT -- 0.0% 9,801 Citigroup Global Markets Repurchase Agreement, dated 08/31/04, due 09/01/04, with a maturity value of $9,801, and an effective yield of 1.10%, collateralized by a U.S. Treasury Note with a rate of 2.75%, maturity date of 07/31/06, and a market value, including accrued interest of $10,000. 9,801 -------------- TOTAL SHORT-TERM INVESTMENT (COST $9,801) 9,801 -------------- TOTAL INVESTMENTS -- 100.0% (Cost $928,907,795) 939,158,998 Other Assets and Liabilities (net) -- 0.0% 5,235 -------------- TOTAL NET ASSETS -- 100.0% $ 939,164,233 ==============
At August 31, 2004, the approximate 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 ----------------- ----------------- ----------------- ----------------- $ 929,098,357 $ 17,327,467 $ (7,266,826) $ 10,060,641
See accompanying notes to the financial statements. 2 GMO BENCHMARK-FREE ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments in affiliated issuers, at value (cost $928,897,994) (Notes 2 and 7) $ 939,149,197 Investments in unaffiliated issuers, at value (cost $9,801) (Note 2) 9,801 Cash 72,000 Receivable for Fund shares sold 19,868,464 Receivable for expenses reimbursed by Manager (Note 3) 7,688 -------------- Total assets 959,107,150 -------------- LIABILITIES: Payable for investments purchased 19,920,000 Payable to affiliate for (Note 3): Trustees fee 633 Accrued expenses 22,284 -------------- Total liabilities 19,942,917 -------------- NET ASSETS $ 939,164,233 ============== NET ASSETS CONSIST OF: Paid-in capital $ 899,412,024 Accumulated undistributed net investment income 4,595,094 Accumulated net realized gain 24,905,912 Net unrealized appreciation 10,251,203 -------------- $ 939,164,233 ============== NET ASSETS ATTRIBUTABLE TO: Class III shares $ 939,164,233 ============== SHARES OUTSTANDING: Class III 38,260,125 ============== NET ASSET VALUE PER SHARE: Class III $ 24.55 ==============
See accompanying notes to the financial statements. 3 GMO BENCHMARK-FREE ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends from affiliated issuers (Note 7) $ 4,573,643 Interest 24,076 -------------- Total income 4,597,719 -------------- EXPENSES: Custodian and transfer agent fees 17,572 Audit and tax fees 9,752 Legal fees 5,612 Trustees fees and related expenses (Note 3) 2,625 Registration fees 4,416 Miscellaneous 2,116 -------------- Total expenses 42,093 Fees and expenses reimbursed by Manager (Note 3) (39,468) -------------- Net expenses 2,625 -------------- Net investment income 4,595,094 -------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain on: Investments in affiliated issuers 16,052,341 Realized gains distributions from affiliated issuers (Note 7) 8,904,899 -------------- Net realized gain on investments 24,957,240 -------------- Change in net unrealized appreciation (depreciation) on investments (14,613,396) -------------- Net realized and unrealized gain 10,343,844 -------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 14,938,938 ==============
See accompanying notes to the financial statements. 4 GMO BENCHMARK-FREE ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
PERIOD FROM JULY 23, 2003 SIX MONTHS ENDED (COMMENCEMENT OF AUGUST 31, 2004 OPERATIONS) THROUGH (UNAUDITED) FEBRUARY 29, 2004 ------------------ ------------------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 4,595,094 $ 4,873,924 Net realized gain 24,957,240 5,041,858 Change in net unrealized appreciation (depreciation) (14,613,396) 24,864,599 --------------- --------------- Net increase in net assets from operations 14,938,938 34,780,381 --------------- --------------- Distributions to shareholders from: Net investment income Class III -- (6,471,134) Net realized gains Class III (2,514,456) (981,520) --------------- --------------- (2,514,456) (7,452,654) --------------- --------------- Net share transactions (Note 6): Class III 637,167,258 259,225,489 Purchase premiums and redemption fees (Notes 2 and 6): Class III 2,082,133 937,144 --------------- --------------- Total increase in net assets resulting from net share transactions and net purchase premiums and redemption fees 639,249,391 260,162,633 --------------- --------------- Total increase in net assets 651,673,873 287,490,360 NET ASSETS: Beginning of period 287,490,360 -- --------------- --------------- End of period (including accumulated undistributed net investment income of $4,595,094 and $0, respectively) $ 939,164,233 $ 287,490,360 =============== ===============
See accompanying notes to the financial statements. 5 GMO BENCHMARK-FREE ALLOCATION FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PERIOD FROM JULY 23, 2003 SIX MONTHS ENDED (COMMENCEMENT AUGUST 31, 2004 OF OPERATIONS) THROUGH (UNAUDITED) FEBRUARY 29, 2004 --------------- ---------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 24.28 $ 20.00 --------------- --------------- Income from investment operations: Net investment income (a) 0.12 0.61 Net realized and unrealized gain 0.23 4.53 --------------- --------------- Total from investment operations 0.35 5.14 --------------- --------------- Less distributions to shareholders: From net investment income -- (0.75) From net realized gains (0.08) (0.11) --------------- --------------- Total distributions (0.08) (0.86) --------------- --------------- NET ASSET VALUE, END OF PERIOD $ 24.55 $ 24.28 =============== =============== TOTAL RETURN (b)** 1.47% 25.92% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 939,164 $ 287,490 Net expenses to average daily net assets (c)(d)* 0.00% 0.00% Net investment income to average daily net assets (a)* 1.58% 5.05% Portfolio turnover rate ** 31% 24% Fees and expenses reimbursed by the Manager to average daily net assets: * 0.01% 0.07% Purchase premiums and redemption fees consisted of the following per share amounts: + $ 0.09 $ 0.13
(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. Calculation excludes purchase premiums and redemption fees which are borne by the shareholders. (c) Net expenses exclude expenses incurred indirectly through investment in underlying funds. (See Note 3). (d) Net expenses to average daily net assets was less than 0.01%. + Computed using average shares outstanding throughout the period * Annualized. ** Not annualized. See accompanying notes to the financial statements. 6 GMO BENCHMARK-FREE ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION GMO Benchmark-Free 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" and makes investments in other funds of the Trust ("underlying funds"). The Fund seeks positive return regardless of market direction. The Fund will not seek to control risk relative to a particular securities market index or benchmark. The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request by calling (617) 346-7646 or by visiting GMO's website at www.gmo.com. 2. SIGNIFICANT ACCOUNTING POLICIES 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. Foreign equity securities held by certain underlying funds in which the Fund invests are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair prices are available. 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 of the underlying funds. 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. 7 GMO BENCHMARK-FREE ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 of the underlying funds. 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 or enters insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. See Schedule of Investments for the open repurchase agreement as of August 31, 2004. 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. 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. 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. 8 GMO BENCHMARK-FREE ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 3) PURCHASE AND REDEMPTION OF FUND SHARES The premium on cash purchases of Fund shares is 0.36% of the amount invested. The fee on redemptions of Fund shares is 0.32% of the amount redeemed. The Fund's purchase premium and redemption fee are approximately equal to the weighted average of the purchase premiums and redemptions fees, if any, of the underlying funds in which the Fund was invested. The level of purchase premium and redemption fee for the Fund will be adjusted approximately annually to account for changes in the Fund's investments (i.e., changes in the percentage of Fund assets allocated to each underlying fund). If the Manager determines that any portion of a cash purchase or redemption is offset by a corresponding cash redemption or purchase occurring on the same day, it will waive the purchase premium or redemption fee with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived in extraordinary circumstances if the Fund will not incur transaction costs. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the six months ended August 31, 2004 and the period ended February 29, 2004, the Fund received $2,081,380 and $937,144 in purchase premiums and $753 and $0 in redemption fees, respectively. There is no premium for reinvested distributions or in-kind transactions. INVESTMENT RISK The Fund is subject to the investment risk associated with an investment in the underlying funds, some of which may invest in foreign securities. There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. 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. 3. 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. 9 GMO BENCHMARK-FREE ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) GMO has entered into a binding agreement, effective until at least June 30, 2005 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, transfer taxes and expenses indirectly incurred by investments in the underlying funds). The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the six months ended August 31, 2004, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
INDIRECT OPERATING INDIRECT INVESTMENT-RELATED EXPENSES (EXCLUDING EXPENSES (INCLUDING, BUT NOT MANAGEMENT FEES, LIMITED TO, INTEREST EXPENSE, SHAREHOLDER SERVICE FEES INDIRECT FOREIGN AUDIT EXPENSE, AND TOTAL INDIRECT NET AND INVESTMENT-RELATED SHAREHOLDER INVESTMENT-RELATED LEGAL INDIRECT MANAGEMENT FEES EXPENSES) SERVICE FEES EXPENSE) EXPENSES ----------------------------------------------------------------------------------------------------------- 0.376% 0.083% 0.124% 0.028% 0.611%
The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004, was $1,797. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004, aggregated $818,039,820 and $167,817,175, respectively. 5. PRINCIPAL SHAREHOLDER AND RELATED PARTIES At August 31, 2004, 13.6% of the outstanding shares of the Fund was held by one shareholder. Investment activities of this shareholder may have a material effect on the Fund. At August 31, 2004, 1.0% of the Fund was held by eleven related parties comprised of certain GMO employee accounts. As of August 31, 2004, substantially all of the Fund's shares were held by accounts for which the Manager has investment discretion. 10 GMO BENCHMARK-FREE ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 6. 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:
SIX MONTHS ENDED PERIOD FROM JULY 23, 2003 AUGUST 31, 2004 (COMMENCEMENT OF OPERATIONS) (UNAUDITED) THROUGH FEBRUARY 29, 2004 -------------------------- ---------------------------- SHARES AMOUNT SHARES AMOUNT ----------- ------------- ----------- --------------- Class III: Shares sold 26,699,215 $ 643,910,428 11,543,302 $ 252,344,944 Shares issued to shareholders in reinvestment of distributions 101,863 2,432,519 298,765 6,880,545 Shares repurchased (383,020) (9,175,689) -- -- Purchase premiums and redemption fees -- 2,082,133 -- 937,144 ----------- ------------- ----------- --------------- Net increase 26,418,058 $ 639,249,391 11,842,067 $ 260,162,633 =========== ============= =========== ===============
11 GMO BENCHMARK-FREE ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 7. INVESTMENTS IN AFFILIATED ISSUERS A summary of the Fund's transactions in the shares of these issuers during the six months ended August 31, 2004, is set forth below:
VALUE, REALIZED BEGINNING OF SALES DIVIDEND GAINS VALUE, END AFFILIATE PERIOD PURCHASES PROCEEDS INCOME DISTRIBUTIONS OF PERIOD ------------------------------------------------------------------------------------------------------------------ GMO Currency Hedged International Bond Fund, Class III $ 30,211,567 $ 171,015,649 $ 3,500,000 $ 235,155 $ -- $ 200,255,039 GMO Emerging Country Debt Fund, Class IV 42,883,100 124,971,738 -- 2,957,261 838,626 173,809,745 GMO Emerging Markets Fund, Class VI 48,102,097 130,784,501 -- 671,437 9,198 176,732,884 GMO Inflation Indexed Bond Fund, Class III 59,927,259 178,273,626 12,500,000 14,743 3,567,875 227,361,902 GMO International Growth Fund, Class III -- 11,500,000 -- -- -- 11,657,296 GMO International Intrinsic Value Fund, Class IV 16,784,562 26,018,966 30,490,554 -- -- 11,641,464 GMO International Small Companies Fund, Class III 89,579,023 134,266,285 75,867,000 424,237 4,489,200 137,690,867 GMO Real Estate Fund, Class III -- 41,209,055 45,459,621 270,810 -- -- ------------- ------------- ------------- ------------- ------------- ------------- Totals $ 287,487,608 $ 818,039,820 $ 167,817,175 $ 4,573,643 $ 8,904,899 $ 939,149,197 ============= ============= ============= ============= ============= =============
8. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 12 GMO BENCHMARK-FREE ALLOCATION FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as custodian and transfer agent fees, audit and tax fees, other expenses and indirect expenses incurred due to its investment in underlying funds. The following table, assuming a $1,000 investment in a class of shares, discloses the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the class's actual return and actual expenses, and (2) a hypothetical annualized 5% return and the class's actual expenses: Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * ---------------------------------------------------------------------- 1) Actual $ 1,000.00 $ 1,014.70 $ 3.10 2) Hypothetical 1,000.00 1,022.13 3.11
*Expenses are calculated using the Class III annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2004, of 0.61%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004, on your investment in a particular class of shares by dividing your investment value at August 31, 2004, by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 13 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
CLASSIFICATION % OF NET ASSETS - ---------------------------------------------------------------------------------- Mutual Funds 99.5% Short-Term Investments and Other Assets and Liabilities (net) 0.5 --------------- 100.0% ===============
See accompanying notes to the financial statements. 1 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------ MUTUAL FUND -- 99.5% AFFILIATED ISSUER -- 99.5% 10,036,408 GMO Emerging Country Debt Fund, Class III (Cost $97,914,313) 108,895,029 -------------- TOTAL INVESTMENTS -- 99.5% (Cost $97,914,313) 108,895,029 Other Assets and Liabilities (net) -- 0.5% 555,938 -------------- TOTAL NET ASSETS -- 100.0% $ 109,450,967 ==============
At August 31, 2004, the approximate 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 -------------------- --------------------- --------------------- -------------------- $ 98,656,370 $ 10,238,659 $ -- $ 10,238,659
See accompanying notes to the financial statements. 2 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments in affiliated issuers, at value (cost $97,914,313) (Notes 2 and 7) $ 108,895,029 Cash 469,371 Receivable for Fund shares sold 91,443 Interest receivable 257 Receivable for expenses reimbursed by Manager (Note 3) 3,441 -------------- Total assets 109,459,541 -------------- LIABILITIES: Payable to affiliate for (Note 3): Trustees fee 328 Accrued expenses 8,246 -------------- Total liabilities 8,574 -------------- NET ASSETS $ 109,450,967 ============== NET ASSETS CONSIST OF: Paid-in capital $ 95,365,944 Accumulated undistributed net investment income 2,542,127 Accumulated net realized gain 562,180 Net unrealized appreciation 10,980,716 -------------- $ 109,450,967 ============== NET ASSETS ATTRIBUTABLE TO: Class III shares $ 109,450,967 ============== SHARES OUTSTANDING: Class III 10,297,408 ============== NET ASSET VALUE PER SHARE: Class III $ 10.63 ==============
See accompanying notes to the financial statements. 3 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends from affiliated issuers (Note 7) $ 2,549,458 Interest 1,174 -------------- Total income 2,550,632 -------------- EXPENSES: Custodian and transfer agent fees 7,728 Audit and tax fees 6,072 Legal fees 1,380 Trustees fees and related expenses (Note 3) 728 Registration fees 6,992 Miscellaneous 552 -------------- Total expenses 23,452 Fees and expenses reimbursed by Manager (Note 3) (22,724) -------------- Net expenses 728 -------------- Net investment income 2,549,904 -------------- REALIZED AND UNREALIZED GAIN: Net realized gain on: Investments in affiliated issuers 584,328 Realized gains distributions from affiliated issuers (Note 7) 725,689 -------------- Net realized gain on investments 1,310,017 -------------- Change in net unrealized appreciation (depreciation) on investments 2,825,442 -------------- Net realized and unrealized gain 4,135,459 -------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 6,685,363 ==============
See accompanying notes to the financial statements. 4 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------- ------------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 2,549,904 $ 8,758,654 Net realized gain 1,310,017 10,715,339 Change in net unrealized appreciation (depreciation) 2,825,442 1,900,796 ---------------- --------------- Net increase in net assets from operations 6,685,363 21,374,789 ---------------- --------------- Distributions to shareholders from: Net investment income Class III (10,050) (14,886,042) Net realized gains Class III (803,996) (3,919,639) ---------------- --------------- (814,046) (18,805,681) ---------------- --------------- Net share transactions (Note 6): Class III 2,636,974 32,233,513 ---------------- --------------- Total increase in net assets 8,508,291 34,802,621 NET ASSETS: Beginning of period 100,942,676 66,140,055 ---------------- --------------- End of period (including accumulated undistributed net investment income of $2,542,127 and $2,273, respectively) $ 109,450,967 $ 100,942,676 ================ ================
See accompanying notes to the financial statements. 5 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ---------------------------------------------------------------------- (UNAUDITED) 2004 2003 2002 2001 2000 ---------------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.05 $ 9.56 $ 9.25 $ 8.90 $ 8.70 $ 6.84 ---------- ---------- ---------- ---------- ---------- ---------- Income from investment operations: Net investment income (a) 0.25+ 1.10+ 0.83+ 1.03+ 1.33+ 1.10 Net realized and unrealized gain 0.41 1.73 0.57 0.51 0.23 1.97 ---------- ---------- ---------- ---------- ---------- ---------- Total from investment operations 0.66 2.83 1.40 1.54 1.56 3.07 ---------- ---------- ---------- ---------- ---------- ---------- Less distributions to shareholders: From net investment income (0.00)(b) (1.85) (1.09) (1.19) (1.36) (1.20) From net realized gains (0.08) (0.49) -- -- -- (0.01) ---------- ---------- ---------- ---------- ---------- ---------- Total distributions (0.08) (2.34) (1.09) (1.19) (1.36) (1.21) ---------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 10.63 $ 10.05 $ 9.56 $ 9.25 $ 8.90 $ 8.70 ========== ========== ========== ========== ========== ========== TOTAL RETURN (c) 6.63%** 29.91% 15.81% 18.47% 18.71% 46.71% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 109,451 $ 100,943 $ 66,140 $ 89,952 $ 102,481 $ 86,280 Net expenses to average daily net assets (d) 0.00%(e)* 0.00%(e) 0.00%(e) 0.00%(e) 0.00% 0.00% Net investment income to average daily net assets (a) 5.01%* 10.06% 8.88% 11.43% 14.39% 14.22% Portfolio turnover rate 4%** 20% 30% 14% 0% 0% Fees and expenses reimbursed by the Manager to average daily net assets: 0.04%* 0.08% 0.08% 0.06% 0.03% 0.04%
(a) Recognition of net investment income is affected by the timing of the declaration of dividends by GMO Emerging Country Debt Fund ("ECDF"). (b) Distributions from net investment income were less than $0.01. (c) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (d) Net expenses exclude expenses incurred indirectly through investment in ECDF. (See Note 3). (e) The ratio of net expenses to average daily net assets was less than 0.01%. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 6 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION 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 objective 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 (EMBIG). The financial statements of ECDF should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 or by visiting GMO's website at www.gmo.com. 2. SIGNIFICANT ACCOUNTING POLICIES 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. 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. 7 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 of the underlying funds. As of August 31, 2004, the total value of these securities represented 21.0% of net assets. 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. 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. 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 3). PURCHASES AND REDEMPTIONS OF FUND SHARES The Fund does not charge any purchase premium or redemption fee in connection with the purchase and sale of Fund shares. As a shareholder in ECDF, the Fund will indirectly bear ECDF's purchase premium and redemption fees which are 0.50% and 0.25%, respectively. ECDF's redemption fee is reduced by 50% for in-kind redemptions. These fees are paid to and retained by ECDF. If the Manager determines 8 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) that any portion of a cash purchase or redemption is offset by a corresponding cash redemption or purchase occurring on the same day, it will waive the purchase premium or redemption fee with respect to that portion. In addition, the purchase premium or redemption fee charged by ECDF may be waived in extraordinary circumstances if ECDF will not incur transaction costs. 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 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. ECDF 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 ECDF, or on obligations issued by those countries generally. ECDF 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 ECDF might experience in the case of default on bonds issued by such countries; however ECDF as of August 31, 2004 has sold more of such default protection than it has purchased. 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 ECDF'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 ECDF incurs substantial losses due to weakening of the credit or virtual default by the countries. 3. 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 0.35% of ECDF's average daily net assets. Additionally, Class III shares of ECDF bear a shareholder service fee at the annual rate of 0.15% of ECDF Class III shares' average daily net assets. GMO has entered into a binding agreement effective until at least June 30, 2005 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). 9 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) The Fund incurs fees and expenses indirectly as a shareholder in ECDF. For the six months ended August 31, 2004, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
INDIRECT OPERATING INDIRECT INVESTMENT-RELATED EXPENSES (EXCLUDING EXPENSES (INCLUDING, BUT MANAGEMENT FEES, NOT LIMITED TO, INTEREST INDIRECT NET SHAREHOLDER SERVICE FEES INDIRECT EXPENSE, FOREIGN AUDIT MANAGEMENT AND INVESTMENT-RELATED SHAREHOLDER EXPENSE, AND INVESTMENT- TOTAL INDIRECT FEES EXPENSES) SERVICE FEES RELATED LEGAL EXPENSE) EXPENSES ------------------------------------------------------------------------------------------------------------- 0.348% 0.058% 0.149% 0.032% 0.587%
The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $452. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004, aggregated $9,125,147 and $3,850,000, respectively. 5. PRINCIPAL SHAREHOLDERS At August 31, 2004, 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. 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ------------------------- ---------------------------- SHARES AMOUNT SHARES AMOUNT ---------- ------------ ------------ ------------- Class III: Shares sold 767,445 $ 7,742,026 3,088,019 $ 33,734,749 Shares issued to shareholders in reinvestment of distributions 81,896 814,046 1,896,128 18,805,681 Shares repurchased (598,762) (5,919,098) (1,852,245) (20,306,917) ---------- ------------ ------------ ------------- Net increase 250,579 $ 2,636,974 3,131,902 $ 32,233,513 ========== ============ ============ =============
10 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 7. INVESTMENTS IN AFFILIATED ISSUER A summary of the Fund's transactions in the shares of this issuer during the six months ended August 31, 2004, is set forth below:
VALUE, REALIZED BEGINNING SALES DIVIDEND GAIN VALUE, END AFFILIATE OF PERIOD PURCHASES PROCEEDS INCOME DISTRIBUTIONS OF PERIOD ---------------------- -------------- ------------- ------------- ------------- ------------- ------------- GMO Emerging Country Debt Fund, Class III $ 100,210,111 $ 9,125,147 $ 3,850,000 $ 2,549,458 $ 725,689 $ 108,895,029 ============== ============= ============= ============= ============= =============
8. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 11 GMO EMERGING COUNTRY DEBT SHARE FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as custodian and transfer agent fees, audit and tax fees, other expenses and indirect expenses incurred due to the Fund's investment in ECDF. The following table, assuming a $1,000 investment in a class of shares, discloses the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the class's actual return and actual expenses, and (2) a hypothetical annualized 5% return and the class's actual expenses: Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * --------------------------------------------------------------- 1) Actual $ 1,000.00 $ 1,066.30 $ 3.08 2) Hypothetical 1,000.00 1,022.23 3.01
*Expenses are calculated using the Class III annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2004 of 0.59%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 12 GMO GROWTH FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
CLASSIFICATION % OF NET ASSETS - ---------------------------------------------------------------------------------- Automotive 1.6% Construction 0.3 Consumer Goods 10.8 Financial 8.2 Food & Beverage 2.3 Health Care 23.7 Machinery 0.8 Manufacturing 4.0 Oil & Gas 3.1 Primary Process Industry 0.1 Retail Stores 13.0 Services 5.4 Technology 20.9 Transportation 0.0 Utility 1.1 Mutual Funds 0.8 Futures 0.0 Short-Term Investments and Other Assets and Liabilities (net) 3.9 --------------- 100.0% ===============
See accompanying notes to the financial statements. 1 GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------------- COMMON STOCKS -- 95.3% AUTOMOTIVE -- 1.6% 160,000 Harley-Davidson, Inc. 9,763,200 16,100 Navistar International Corp. * 576,058 5,000 Oshkosh Truck Corp. 254,800 18,750 Paccar, Inc. 1,128,562 -------------- 11,722,620 -------------- CONSTRUCTION -- 0.3% 52,050 D.R. Horton, Inc. 1,610,427 1,900 Georgia-Pacific Corp. 64,562 400 NVR, Inc. * 200,900 -------------- 1,875,889 -------------- CONSUMER GOODS -- 10.8% 201,784 Altria Group, Inc. 9,877,327 109,800 Avon Products, Inc. 4,850,964 13,200 Black & Decker Corp. 909,876 63,700 Coach, Inc. * 2,684,955 4,700 Columbia Sportswear Co. * 256,338 14,600 Estee Lauder Cos., Inc (The) - Class A 641,670 20,200 Fortune Brands, Inc. 1,477,630 7,500 Fossil, Inc. * 215,325 197,800 Gillette Co. (The) 8,406,500 28,700 GTECH Holdings Corp. 674,450 51,800 Harman International Industries, Inc. 5,008,542 18,800 Hasbro, Inc. 348,364 7,600 Herman Miller, Inc 191,444 177,200 Kimberly Clark Corp. 11,819,240 19,600 Mohawk Industries, Inc. *(a) 1,507,632 33,700 Nike, Inc.-Class B 2,537,947 11,500 Plantronics, Inc. 446,775 441,100 Procter & Gamble Co. 24,688,367 4,100 Whirlpool Corp. 250,674 -------------- 76,794,020 --------------
See accompanying notes to the financial statements. 2 GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------------- FINANCIAL -- 8.2% 31,600 Aflac, Inc. 1,267,160 15,300 Allstate Corp. (The) 722,313 12,300 AMBAC Financial Group, Inc. 928,650 274,000 American International Group, Inc. 19,519,760 3,700 AmeriCredit Corp. * 77,367 10,600 CIT Group, Inc. 378,844 236,995 Fannie Mae 17,644,278 26,600 Freddie Mac 1,785,392 19,900 Hartford Financial Services Group, Inc. 1,217,084 8,200 Legg Mason, Inc. 661,576 35,900 Marsh & McLennan Cos., Inc. 1,604,371 437,400 MBNA Corp. 10,558,836 11,900 Progressive Corp. (The) 955,570 50,000 Providian Financial Corp. *(a) 722,000 9,500 SEI Investments Co. 310,460 -------------- 58,353,661 -------------- FOOD & BEVERAGE -- 2.3% 54,300 Coca Cola Enterprises, Inc. 1,121,295 121,600 Coca-Cola Co. (The) 5,436,736 28,000 ConAgra Foods, Inc. 733,600 8,700 JM Smucker Co. (The) 400,026 23,400 NBTY, Inc. * 559,962 24,300 Pepsi Bottling Group, Inc. 650,997 92,300 PepsiCo, Inc. 4,615,000 134,400 Sara Lee Corp. 2,974,272 -------------- 16,491,888 -------------- HEALTH CARE -- 23.7% 29,900 Abbott Laboratories 1,246,531 48,200 Aetna, Inc. 4,465,730 71,600 AmerisourceBergen Corp. 3,873,560 24,000 Amgen, Inc. * 1,422,960
See accompanying notes to the financial statements. 3 GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------------- HEALTH CARE -- CONTINUED 45,500 Andrx Group * 917,280 13,400 Anthem, Inc. *(a) 1,088,616 29,600 Bard (C.R.), Inc. 1,660,560 18,800 Bausch & Lomb, Inc. 1,239,860 114,700 Baxter International, Inc. 3,502,938 37,000 Becton, Dickinson & Co. 1,780,440 73,500 Biomet, Inc. 3,355,275 20,906 Boston Scientific Corp. * 746,971 68,602 Cardinal Health, Inc. 3,100,810 4,300 Cooper Cos., Inc. 249,185 46,300 Coventry Health Care, Inc. *(a) 2,351,114 26,000 Eon Labs, Inc. * 654,160 53,600 Forest Laboratories, Inc. * 2,457,560 51,200 Genentech, Inc. * 2,497,536 137,100 Guidant Corp. 8,198,580 16,400 HCA, Inc. 636,484 93,400 Health Management Associates, Inc.-Class A 1,785,808 66,500 Health Net, Inc. * 1,725,010 20,600 Henry Schein, Inc. * 1,282,968 4,800 Idexx Laboratories, Inc. * 233,808 17,400 Inamed Corp. * 924,636 39,425 Ivax Corp. * 763,268 415,064 Johnson & Johnson 24,115,218 74,500 Lincare Holdings, Inc. * 2,394,430 22,700 McKesson Corp. 702,565 15,200 Medco Health Solutions, Inc. * 474,696 36,200 Medtronic, Inc. 1,800,950 711,100 Merck & Co., Inc. 31,978,167 21,900 Pacificare Health Systems, Inc. * 714,159 22,200 Patterson Cos., Inc. * 1,625,706 799,076 Pfizer, Inc. 26,105,813 12,700 Quest Diagnostics, Inc. (a) 1,087,120 21,700 Renal Care Group, Inc. * 687,239 241,500 Schering-Plough Corp. 4,458,090
See accompanying notes to the financial statements. 4 GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------------- HEALTH CARE -- CONTINUED 63,200 Stryker Corp. 2,862,960 128,600 Tenet Healthcare Corp. * 1,340,012 177,550 UnitedHealth Group, Inc. 11,741,381 2,500 Universal Health Services, Inc.-Class B 112,625 34,400 Valeant Pharmaceuticals International 807,024 43,800 Varian Medical Systems, Inc. * 1,451,970 13,300 WellPoint Health Networks * 1,305,794 16,800 Zimmer Holdings, Inc. * 1,197,840 -------------- 169,125,407 -------------- MACHINERY -- 0.8% 33,300 BJ Services Co * 1,600,065 18,600 Caterpillar, Inc. 1,352,220 2,900 Cummins, Inc. 195,141 8,600 MSC Industrial Direct Co. - Class A 267,202 36,300 Smith International, Inc. *(a) 2,068,374 -------------- 5,483,002 -------------- MANUFACTURING -- 4.0% 79,800 3M Co. 6,572,328 137,200 American Standard Cos., Inc. * 5,160,092 45,700 Danaher Corp. 2,349,894 82,100 General Electric Co. 2,692,059 16,700 Honeywell International, Inc. 600,866 92,557 Illinois Tool Works, Inc. 8,449,529 1,500 Precision Castparts Corp. 82,635 11,800 Textron, Inc. 749,182 15,900 United Technologies Corp. 1,493,169 -------------- 28,149,754 -------------- OIL & GAS -- 3.1% 20,600 ChevronTexaco Corp. 2,008,500 400 ConocoPhillips 29,772 425,700 Exxon Mobil Corp. 19,624,770 16,800 XTO Energy, Inc. 471,072 -------------- 22,134,114 --------------
See accompanying notes to the financial statements. 5 GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------------- PRIMARY PROCESS INDUSTRY -- 0.1% 9,100 Monsanto Co. 333,060 16,500 Sherwin-Williams Co. (The) 681,450 -------------- 1,014,510 -------------- RETAIL STORES -- 13.0% 65,300 Abercrombie & Fitch Co.-Class A 1,828,400 44,700 Advance Auto Parts * 1,656,582 25,950 AnnTaylor Stores Corp. * 627,212 113,700 Bed Bath & Beyond, Inc. * 4,254,654 27,000 Best Buy Co., Inc. 1,256,040 34,200 CDW Corp. 2,000,700 32,200 Chico's FAS, Inc. *(a) 1,316,980 36,700 Claire's Stores, Inc. 893,278 46,500 CVS Corp. 1,860,000 73,600 Dollar General Corp. 1,449,920 84,800 Dollar Tree Stores, Inc. * 1,993,648 39,200 eBay, Inc. * 3,392,368 45,900 Fastenal Co. 2,881,602 5,000 Federated Department Stores 217,000 14,700 Foot Locker, Inc. 328,839 86,600 Gap (The), Inc. 1,622,884 923,200 Home Depot, Inc. 33,752,192 119,900 Kroger Co. * 1,981,947 68,034 Lowe's Cos., Inc. 3,381,290 28,500 May Department Stores Co. (The) 698,535 58,200 Nordstrom, Inc. 2,160,966 7,700 O'Reilly Automotive, Inc. * 303,457 33,750 Pacific Sunwear of California, Inc. * 646,650 49,500 Pier 1 Imports, Inc. 858,825 56,800 Rent-A-Center, Inc. * 1,709,680 59,100 Ross Stores, Inc. 1,249,965 20,300 Sears Roebuck & Co. 777,084 15,400 Supervalu, Inc. 405,944 30,500 Target Corp. 1,359,690 31,800 Tiffany & Co. (a) 984,210
See accompanying notes to the financial statements. 6 GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------------- RETAIL STORES -- CONTINUED 136,260 TJX Cos., Inc. 2,883,262 32,200 Urban Outfitters, Inc. * 977,270 88,300 Walgreen Co. 3,218,535 89,100 Wal-Mart Stores, Inc. 4,692,897 40,800 Whole Foods Market, Inc. (a) 3,171,384 -------------- 92,793,890 -------------- SERVICES -- 5.4% 22,100 Apollo Group, Inc.-Class A * 1,723,800 92,900 Applebee's International, Inc. 2,236,103 21,400 Brinker International, Inc. * 651,630 17,400 CBRL Group, Inc. 554,712 214,200 Cendant Corp. 4,633,146 6,000 Cheesecake Factory (The) * 248,280 2,000 Factset Research Systems, Inc. 89,060 30,500 Harrah's Entertainment, Inc. 1,469,795 13,400 Interpublic Group of Cos., Inc. * 141,370 32,500 ITT Educational Services, Inc. * 1,123,525 22,500 Mandalay Resort Group 1,526,400 3,900 Marriott International, Inc. - Class A 185,055 178,000 McDonald's Corp. 4,809,560 5,700 Moody's Corp. 390,792 55,700 Outback Steakhouse, Inc. 2,180,098 4,000 Regis Corp. 163,720 12,200 Robert Half International, Inc. 298,900 198,800 Starbucks Corp. * 8,596,112 137,100 Sysco Corp. 4,406,394 21,000 Walt Disney Co. 471,450 47,300 Wendy's International, Inc. 1,625,701 30,700 Yum! Brands, Inc. 1,219,097 -------------- 38,744,700 -------------- TECHNOLOGY -- 20.9% 46,700 Adobe Systems, Inc. 2,142,129 13,700 Agilent Technologies, Inc. * 280,850
See accompanying notes to the financial statements. 7 GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------------- TECHNOLOGY -- CONTINUED 57,900 Amkor Technology, Inc. * 220,020 4,100 Applied Materials, Inc. * 65,149 89,800 Atmel Corp. * 313,402 111,702 Autodesk, Inc. 4,960,686 2,700 Avery Dennison Corp. 167,805 203,900 Boeing Co. (The) 10,647,658 25,300 Broadcom Corp.-Class A * 686,642 299,900 Cisco Systems, Inc. * 5,626,124 1,300 Computer Associates International, Inc. 31,486 56,200 Convergys Corp. * 781,180 49,600 Cypress Semiconductor Corp. * 484,096 669,700 Dell, Inc. * 23,332,348 12,000 Electronic Arts, Inc. * 597,360 242,900 First Data Corp. 10,262,525 11,900 General Dynamics Corp. 1,161,916 595,508 Intel Corp. 12,678,365 16,400 International Rectifier Corp. * 538,904 53,300 Lexmark International, Inc. * 4,714,385 43,100 Maxim Integrated Products, Inc. 1,871,833 359,700 Microsoft Corp. 9,819,810 404,800 Motorola, Inc. 6,537,520 17,100 National Instruments Corp. 445,797 37,000 National Semiconductor Corp. * 493,210 11,600 NCR Corp. * 512,372 207,200 Oracle Corp. * 2,065,784 17,400 PerkinElmer, Inc. 304,152 2,200 ProcureNet, Inc. *(b) 0 772,800 Qualcomm, Inc. 29,405,040 156,100 Symantec Corp. * 7,486,556 22,000 Tech Data Corp. * 828,520 339,500 Texas Instruments, Inc. 6,633,830 3,700 Total System Services, Inc. 82,288 14,300 United Defense Industries, Inc. * 546,689 31,900 Waters Corp. * 1,381,589 45,400 Yahoo!, Inc. * 1,294,354 -------------- 149,402,374 --------------
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) AUGUST 31, 2004 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------------- TRANSPORTATION -- 0.0% 3,200 FedEx Corp. 262,368 -------------- UTILITY -- 1.1% 128,100 AES Corp. (The) * 1,292,529 27,800 Duke Energy Corp. 615,492 19,700 Edison International 529,536 35,500 NII Holdings, Inc.-Class B *(a) 1,301,075 11,700 UGI Corp. 399,672 66,100 Verizon Communications, Inc. 2,594,425 41,400 Xcel Energy, Inc. (a) 730,710 -------------- 7,463,439 -------------- TOTAL COMMON STOCKS (COST $674,292,893) 679,811,636 -------------- MUTUAL FUNDS -- 0.8% 3,997,745 Dreyfus Cash Management Plus Fund (c) 3,997,745 1,705,125 Merrimac Cash Series, Premium Class (c) 1,705,125 -------------- TOTAL MUTUAL FUNDS (COST $5,702,870) 5,702,870 -------------- SHORT-TERM INVESTMENTS -- 10.1% CASH EQUIVALENTS -- 0.9% 6,730,755 Harris Trust & Savings Bank Eurodollar Time Deposit, 1.51%, due 9/16/04 (c) 6,730,755 -------------- U.S. GOVERNMENT -- 0.2% 1,700,000 U.S. Treasury Bill, 1.04%, due 9/23/04 (d)(e) 1,698,889 --------------
See accompanying notes to the financial statements. 9 GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------------- REPURCHASE AGREEMENTS -- 9.0% 28,388,298 Citigroup Global Markets Repurchase Agreement, dated 8/31/04, due 9/01/04, with a maturity value of $28,389,165, and an effective yield of 1.10%, collateralized by a U.S. Treasury Bond with a rate of 8.75%, maturity date of 8/15/20, and a market value, including accrued interest of $28,990,466. 28,388,298 35,465,442 Morgan Stanley Repurchase Agreement, dated 8/31/04, due 9/01/04, with a maturity value of $35,466,527, and an effective yield of 1.10%, collateralized by a U.S. Treasury Note with a rate of 2.75%, maturity date of 7/31/06, and a market value, including accrued interest of $36,350,148. 35,465,442 -------------- 63,853,740 -------------- TOTAL SHORT-TERM INVESTMENTS (COST $72,283,384) 72,283,384 -------------- TOTAL INVESTMENTS -- 106.2% (Cost $752,279,147) 757,797,890 Other Assets and Liabilities (net) -- (6.2%) (44,345,931) -------------- TOTAL NET ASSETS -- 100.0% $ 713,451,959 ==============
NOTES TO THE SCHEDULE OF INVESTMENTS: * Non-income producing security. (a) All or a portion of this security is out on loan (Note 2). (b) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 2). (c) Investment of security lending collateral (Note 2). (d) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 2). (e) Rate shown represents yield to maturity. See accompanying notes to the financial statements. 10 GMO GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) At August 31, 2004, the approximate 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 ------------------- ------------------- ------------------ ------------------- $ 754,742,234 $ 30,394,561 $ (27,338,905) $ 3,055,656
At February 29, 2004, GMO Growth Fund had capital loss carryforwards available to offset future capital gains, if any, to the extent permitted by the Internal Revenue Code, of $29,677,991, $10,843,791 and $782,016, expiring in 2010, 2011 and 2012, respectively. Utilization of the capital loss carryforwards above could be subject to limitations imposed by the Internal Revenue Code related to share ownership activity. A summary of outstanding financial instruments at August 31, 2004 is as follows: FUTURES CONTRACTS
NUMBER OF CONTRACT NET UNREALIZED CONTRACTS TYPE EXPIRATION DATE VALUE APPRECIATION ------------- -------------- --------------- ------------- -------------- Buys 77 S&P 500 September 2004 $ 21,253,925 $ 118,420 ==============
At August 31, 2004, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. See accompanying notes to the financial statements. 11 GMO GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments, at value, including securities on loan of $12,039,366 (cost $752,279,147) (Note 2) $ 757,797,890 Receivable for investments sold 18,635,883 Receivable for Fund shares sold 116,087 Dividends and interest receivable 848,823 Receivable for variation margin on open futures contracts (Note 2) 1,670,365 Receivable for expenses reimbursed by Manager (Note 3) 16,895 -------------- Total assets 779,085,943 -------------- LIABILITIES: Payable for investments purchased 52,728,542 Payable upon return of securities loaned (Note 2) 12,433,625 Payable for Fund shares repurchased 22,064 Payable to affiliate for (Note 3): Management fee 189,581 Shareholder service fee 48,346 Administration fee - Class M 50,437 Trustees fee 1,173 Payable for 12b-1 fee - Class M 122,814 Accrued expenses 37,402 -------------- Total liabilities 65,633,984 -------------- NET ASSETS $ 713,451,959 ============== NET ASSETS CONSIST OF: Paid-in capital $ 730,462,125 Accumulated undistributed net investment income 520,170 Distributions in excess of net realized loss (23,167,499) Net unrealized appreciation 5,637,163 -------------- $ 713,451,959 ============== NET ASSETS ATTRIBUTABLE TO: Class III shares $ 396,640,143 ============== Class M shares $ 316,811,816 ============== SHARES OUTSTANDING: Class III 23,216,411 ============== Class M 18,614,511 ============== NET ASSET VALUE PER SHARE: Class III $ 17.08 ============== Class M $ 17.02 ==============
See accompanying notes to the financial statements. 12 GMO GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends $ 3,513,527 Interest (including securities lending income of $4,385) 67,937 -------------- Total income 3,581,464 -------------- EXPENSES: Management fee (Note 3) 1,069,785 Shareholder service fee (Note 3) - Class III 276,767 12b-1 fee (Note 3) - Class M 349,164 Administration fee (Note 3) - Class M 279,331 Custodian and transfer agent fees 55,200 Audit and tax fees 19,780 Legal fees 8,648 Trustees fees and related expenses (Note 3) 4,600 Registration fees 10,948 Miscellaneous 3,221 -------------- Total expenses 2,077,444 Fees and expenses reimbursed by Manager (Note 3) (97,796) -------------- Net expenses 1,979,648 -------------- Net investment income 1,601,816 -------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 22,499,455 Closed futures contracts (1,051,966) -------------- Net realized gain 21,447,489 -------------- Change in net unrealized appreciation (depreciation) on: Investments (66,153,041) Open futures contracts 140,544 -------------- Net unrealized loss (66,012,497) -------------- Net realized and unrealized loss (44,565,008) --------------
See accompanying notes to the financial statements. 13 GMO GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (42,963,192) ==============
See accompanying notes to the financial statements. 14 GMO GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 --------------------- --------------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 1,601,816 $ 2,384,172 Net realized gain 21,447,489 35,790,047 Change in net unrealized appreciation (depreciation) (66,012,497) 95,212,422 --------------- --------------- Net increase (decrease) in net assets from operations (42,963,192) 133,386,641 --------------- --------------- Distributions to shareholders from: Net investment income Class III (762,511) (2,827,789) Class M (319,135) (434,159) --------------- --------------- Total distributions from net investment income (1,081,646) (3,261,948) --------------- --------------- Net realized gains Class III (13,045,193) (8,019,206) Class M (10,630,834) (1,698,158) --------------- --------------- Total distributions from net realized gains (23,676,027) (9,717,364) --------------- --------------- (24,757,673) (12,979,312) --------------- --------------- Net share transactions (Note 6): Class III (2,891,963) 37,594,845 Class M 146,999,840 156,705,819 --------------- --------------- Increase in net assets resulting from net share transactions 144,107,877 194,300,664 --------------- --------------- Total increase in net assets 76,387,012 314,707,993 NET ASSETS: Beginning of period 637,064,947 322,356,954 --------------- --------------- End of period (including accumulated undistributed net investment income of $520,170 and $0, respectively) $ 713,451,959 $ 637,064,947 =============== ===============
See accompanying notes to the financial statements. 15 GMO GROWTH FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ---------------------------------------------------------------------- (UNAUDITED) 2004 2003 2002 2001(a) 2000(a) ---------------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 19.03 $ 14.29 $ 18.23 $ 21.19 $ 54.45 $ 45.54 ------------ ---------- ---------- ---------- ---------- ---------- Income from investment operations: Net investment income 0.06 0.10 0.10 0.10 0.14 0.22 Net realized and unrealized gain (loss) (1.28) 5.14 (3.94) (2.97) (10.78) 18.84 ------------ ---------- ---------- ---------- ---------- ---------- Total from investment operations (1.22) 5.24 (3.84) (2.87) (10.64) 19.06 ------------ ---------- ---------- ---------- ---------- ---------- Less distributions to shareholders: From net investment income (0.04) (0.14) (0.10) (0.09) (0.15) (0.26) From net realized gains (0.69) (0.36) -- -- (22.47) (9.89) ------------ ---------- ---------- ---------- ---------- ---------- Total distributions (0.73) (0.50) (0.10) (0.09) (22.62) (10.15) ------------ ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 17.08 $ 19.03 $ 14.29 $ 18.23 $ 21.19 $ 54.45 ============ ========== ========== ========== ========== ========== TOTAL RETURN (b) (6.48)%** 36.93% (21.13)% (13.57)% (25.76)% 45.24% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 396,640 $ 437,200 $ 302,051 $ 116,306 $ 114,988 $ 204,662 Net expenses to average daily net assets 0.48%* 0.48% 0.48% 0.48% 0.48% 0.48% Net investment income to average daily net assets 0.62%* 0.62% 0.72% 0.54% 0.27% 0.50% Portfolio turnover rate 61%** 97% 72% 101% 111% 48% Fees and expenses reimbursed by the Manager to average daily net assets: 0.03%* 0.05% 0.09% 0.07% 0.07% 0.06%
(a) Amounts were restated to reflect a 1:11 reverse stock split effective March 16, 2001. (b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 16 GMO GROWTH FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS M SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 -------------------------- (UNAUDITED) 2004 2003(a) -------------------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 18.97 $ 14.25 $ 15.27 ---------- ---------- ---------- Income from investment operations: Net investment income 0.03 0.09 0.04 Net realized and unrealized gain (loss) (1.27) 5.09 (1.01) ---------- ---------- ---------- Total from investment operations (1.24) 5.18 (0.97) ---------- ---------- ---------- Less distributions to shareholders: From net investment income (0.02) (0.10) (0.05) From net realized gains (0.69) (0.36) -- ---------- ---------- ---------- Total distributions (0.71) (0.46) (0.05) ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 17.02 $ 18.97 $ 14.25 ========== ========== ========== TOTAL RETURN (b) (6.60)%** 36.58% (6.31)%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 316,812 $ 199,865 $ 20,306 Net expenses to average daily net assets 0.78%* 0.78% 0.78%* Net investment income to average daily net assets 0.32%* 0.29% 0.51%* Portfolio turnover rate 61%** 97% 72% Fees and expenses reimbursed by the Manager to average daily net assets: 0.03%* 0.05% 0.09%*
(a) Period from September 11, 2002 (commencement of operations) through February 28, 2003. (b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 17 GMO GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION 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. Throughout the six months ended August 31, 2004, 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 3). The principal economic difference between the classes of shares is the level of fees borne by the classes. 2. SIGNIFICANT ACCOUNTING POLICIES 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. 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 18 GMO GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, 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 the Schedule of Investments for all open futures contracts as of August 31, 2004. 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 using standard models that incorporate 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 on swap contracts 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 August 31, 2004, the Fund held no open swap agreements. 19 GMO GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. See Schedule of Investments for open repurchase agreements as of August 31, 2004. 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. As of August 31, 2004, the Fund had loaned securities having a market value of $12,039,366 collateralized by cash in the amount of $12,433,625 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. 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. 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 20 GMO GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. 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 between the classes of shares of the Fund based on the relative net assets of each class. Shareholder service, 12b-1, and administration fees, which are directly attributable to a class of shares, are charged to that class's operations. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% for Class III shares. Class M shares of the Fund pay GMO an administration fee monthly at the annual rate of 0.20% 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 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, 2005 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees (Class III only), administration 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 0.33% of the average daily net assets. The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $2,760. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 21 GMO GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004, aggregated $483,915,537 and $385,554,370 respectively. 5. PRINCIPAL SHAREHOLDERS At August 31, 2004, 34.8% 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. 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------------------- ---------------------------- CLASS III: SHARES AMOUNT SHARES AMOUNT ----------- -------------- ------------ ------------- Shares sold 4,951,370 $ 85,446,371 4,941,266 $ 89,848,240 Shares issued to shareholders in reinvestment of distributions 788,507 13,798,989 577,098 10,293,178 Shares repurchased (5,499,397) (102,137,323) (3,682,608) (62,546,573) ----------- -------------- ------------ ------------- Net increase (decrease) 240,480 $ (2,891,963) 1,835,756 $ 37,594,845 =========== ============== ============ ============= SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------------------- ---------------------------- CLASS M: SHARES AMOUNT SHARES AMOUNT ----------- -------------- ------------ ------------- Shares sold 8,971,767 $ 162,896,018 9,595,449 $ 164,701,580 Shares issued to shareholders in reinvestment of distributions 628,296 10,949,969 119,910 2,132,317 Shares repurchased (1,521,989) (26,846,147) (603,850) (10,128,078) ----------- -------------- ------------ -------------- Net increase 8,078,074 $ 146,999,840 9,111,509 $ 156,705,819 =========== ============== ============ ==============
7. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 22 GMO GROWTH FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees, 12b-1 fees and other expenses. The following tables, assuming a $1,000 investment in a class of shares, disclose the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the classes' actual return and actual expenses, and (2) a hypothetical annualized 5% return and the classes' actual expenses: Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * ----------------------------------------------------------------- 1) Actual $ 1,000.00 $ 935.20 $ 2.34 2) Hypothetical 1,000.00 1,022.79 2.45
*Expenses are calculated using the Class III annualized expense ratio for the six months ended August 31, 2004 of 0.48%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. Class M
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * ----------------------------------------------------------------- 1) Actual $ 1,000.00 $ 934.00 $ 3.80 2) Hypothetical 1,000.00 1,021.27 3.97
*Expenses are calculated using the Class M annualized expense ratio for the six months ended August 31, 2004 of 0.78%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 23 GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
CLASSIFICATION % OF NET ASSETS - ----------------------------------------------------------------------------------------- Apartments 15.9% Diversified 8.1 Health Care 5.5 Hotels 4.5 Industrial 5.8 Manufactured Housing 0.6 Office Central Business District 9.7 Office Suburban 12.4 Outlets 1.5 Regional Malls 14.7 Shopping Centers 11.8 Storage 3.7 Triple Net 3.6 Mutual Funds 0.6 Short-Term Investments and Other Assets and Liabilities (net) 1.6 --------------- 100.0% ===============
See accompanying notes to the financial statements. 1 GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------- REAL ESTATE INVESTMENTS -- 97.8% COMMON STOCKS -- 1.2% HOTELS -- 1.2% 91,400 Starwood Hotels & Resorts Worldwide, Inc. 4,039,880 ------------ TOTAL COMMON STOCKS (COST $3,682,258) 4,039,880 ------------ REAL ESTATE INVESTMENT TRUSTS -- 96.6% APARTMENTS -- 15.9% 27,900 AMLI Residential Properties Trust 867,690 73,900 Apartment Investment & Management Co, Class A 2,623,450 297,000 Archstone-Smith Trust 9,281,250 32,900 Associated Estates Realty Corp 308,273 104,900 Avalonbay Communities Inc 6,335,960 84,900 BRE Properties Inc 3,172,713 42,400 Camden Property Trust 1,996,192 59,900 Cornerstone Realty Income Trust 575,040 474,200 Equity Residential Properties Trust 15,359,338 24,900 Essex Property Trust Inc 1,836,375 38,700 Gables Residential Trust 1,287,162 39,000 Home Properties of NY Inc (a) 1,572,870 67,900 Investors Real Estate Trust 682,395 18,300 Mid America Apartment Community 725,595 84,300 Post Properties 2,562,720 33,400 Summit Properties Inc 907,144 30,500 Town & Country Trust (a) 774,395 111,600 United Dominion Realty Trust Inc 2,369,268 ------------ 53,237,830 ------------ DIVERSIFIED -- 8.1% 185,800 Catellus Development Corp 5,066,766 32,500 Colonial Properties Trust 1,314,625 38,300 Cousins Properties Inc 1,378,800
See accompanying notes to the financial statements. 2 GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------- DIVERSIFIED -- CONTINUED 77,900 Crescent Real Estate Equities 1,244,063 24,800 Glenborough Realty Trust Inc 507,904 25,300 Pennsylvania Real Estate 967,978 233,500 Vornado Realty Trust 14,654,460 62,700 Washington Real Estate Investment Trust 1,901,691 ------------ 27,036,287 ------------ HEALTH CARE -- 5.5% 81,600 Health Care Inc 2,774,400 203,000 Health Care Property Investors Inc 5,146,050 63,700 Healthcare Realty Trust Inc 2,404,675 115,400 Nationwide Health Properties 2,342,620 123,000 Senior Housing Properties Trust 2,152,500 23,100 Universal Health Realty Income 676,599 111,100 Ventas Inc 3,038,585 ------------ 18,535,429 ------------ HOTELS -- 3.3% 12,000 Boykin Lodging Co 100,440 43,400 Equity Inns Inc 414,470 45,500 Felcor Lodging Trust Inc * 532,805 108,100 Hospitality Properties Trust 4,534,795 306,700 Host Marriott Corp * 4,094,445 38,500 Innkeepers USA Trust 444,290 19,400 Lasalle Hotel Properties 547,856 50,400 Meristar Hospitality Corp * 290,304 21,700 Winston Hotels Inc 221,557 ------------ 11,180,962 ------------ INDUSTRIAL -- 5.8% 100,400 AMB Property Corp 3,749,940 43,500 Centerpoint Properties Corp 1,829,610 22,900 Eastgroup Properties Inc 772,875 52,400 First Industrial Realty Trust 2,096,000 304,400 Prologis 11,004,060 ------------ 19,452,485 ------------
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) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------- MANUFACTURED HOUSING -- 0.6% 14,000 American Land Lease Inc 268,800 20,400 Manufactured Home Communities 682,788 26,700 Sun Communities Inc 1,041,300 9,200 United Mobile Homes Inc 131,560 ------------ 2,124,448 ------------ OFFICE CENTRAL BUSINESS DISTRICT -- 9.7% 158,200 Boston Properties Inc 8,776,936 688,500 Equity Office Properties Trust 19,663,560 55,100 SL Green Realty Corp 2,755,000 84,900 Trizec Properties Inc 1,434,810 ------------ 32,630,306 ------------ OFFICE SUBURBAN -- 12.4% 33,700 Alexandria Real Estate Equity Inc 2,183,760 73,000 Arden Realty Group Inc 2,396,590 34,800 Bedford Property Investors 1,075,320 89,600 Brandywine Realty Trust 2,652,160 43,700 CarrAmerica Realty Corp 1,456,958 30,500 Corporate Office Properties 806,725 28,000 CRT Properties, Inc. 624,960 188,800 Duke Realty Investments 6,419,200 39,300 Highwood Properties Inc 966,780 361,800 HRPT Properties Trust 3,900,204 48,400 Kilroy Realty Corp 1,831,940 154,200 Liberty Property Trust 6,238,932 104,100 Mack-Cali Realty Corp 4,711,566 35,700 Mission West Properties 359,856 17,100 Parkway Properties Inc 807,975 64,000 Prentiss Properties Trust 2,349,440 28,200 PS Business Parks Inc 1,120,950 54,000 Reckson Associates Realty Corp 1,587,600 ------------ 41,490,916 ------------
See accompanying notes to the financial statements. 4 GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------- OUTLETS -- 1.5% 66,100 Chelsea Property Group Inc 4,445,225 11,800 Tanger Factory Outlet Centers Inc 520,380 ------------ 4,965,605 ------------ REGIONAL MALLS -- 14.7% 56,100 CBL & Associates Properties Inc 3,426,588 423,300 General Growth Properties 12,770,961 25,400 Glimcher Realty Trust 643,636 63,800 Macerich Co 3,477,100 55,000 Mills Corp 2,801,700 350,000 Simon Property Group Inc 19,582,500 27,200 Taubman Centers Inc (a) 700,944 89,400 The Rouse Co 5,940,630 ------------ 49,344,059 ------------ SHOPPING CENTERS -- 11.8% 24,700 Acadia Realty Trust 361,855 142,000 Developers Diversified Realty Corp 5,354,820 144,600 Equity One Inc 2,865,972 53,000 Federal Realty Investment Trust 2,405,140 45,300 Heritage Property Investment Trust 1,316,418 167,500 Kimco Realty Corp 8,428,600 20,600 Kramont Realty Trust 380,688 161,800 New Plan Excel Realty Trust 4,161,496 67,000 Pan Pacific Retail Property Inc 3,577,130 17,200 Ramco-Gershenson Properties 464,744 102,600 Regency Centers Corp 4,719,600 23,700 Saul Centers Inc (a) 788,025 26,800 Urstadt Biddle Properties Inc 405,216 124,800 Weingarten Realty 4,195,776 ------------ 39,425,480 ------------
See accompanying notes to the financial statements. 5 GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES / PAR VALUE ($) DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------------- STORAGE -- 3.7% 191,100 Public Storage Inc 9,717,435 36,500 Shurgard Storage Centers Inc 1,456,350 27,800 Sovran Self Storage 1,102,270 -------------- 12,276,055 -------------- TRIPLE NET -- 3.6% 62,200 Capital Automotive 1,920,114 87,400 Commercial Net Lease Realty 1,560,090 16,700 Correctional Properties Trust 446,725 48,100 Corrections Corporation of America * 1,666,184 31,900 Entertainment Properties Trust 1,191,465 40,700 Getty Realty Corp 1,021,977 73,200 Lexington Corporate Properties Trust 1,548,912 54,900 Realty Income Corp 2,421,639 6,900 U.S. Restaurant Properties Inc 114,678 -------------- 11,891,784 -------------- TOTAL REAL ESTATE INVESTMENT TRUSTS (COST $282,330,000) 323,591,646 -------------- TOTAL REAL ESTATE INVESTMENTS (COST $286,012,258) 327,631,526 -------------- MUTUAL FUNDS -- 0.6% 1,415,394 Dreyfus Cash Management Plus Fund (b) 1,415,394 603,696 Merrimac Cash Series, Premium Class (b) 603,696 -------------- TOTAL MUTUAL FUNDS (COST $2,019,090) 2,019,090 -------------- SHORT-TERM INVESTMENT -- 3.0% CASH EQUIVALENT -- 0.7% 2,383,010 Harris Trust & Savings Bank Eurodollar Time Deposit, 1.51%, due 9/16/04 (b) 2,383,010 --------------
See accompanying notes to the financial statements. 6 GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT -- 2.3% 7,630,450 Citigroup Global Markets Repurchase Agreement, dated 8/31/04, due 9/01/04, with a maturity value of $7,630,683 and an effective yield of 1.10%, collateralized by a U.S. Treasury Note with a rate of 2.75%, a maturity date of 7/31/06 and a market value of $7,789,318. 7,630,450 -------------- TOTAL SHORT-TERM INVESTMENTS (COST $10,013,460) 10,013,460 -------------- TOTAL INVESTMENTS -- 101.4% (Cost $298,044,808) 339,664,076 Other Assets and Liabilities (net) -- (1.4%) (4,770,997) -------------- TOTAL NET ASSETS -- 100.0% $ 334,893,079 ==============
NOTES TO THE SCHEDULE OF INVESTMENTS: * Non-income producing security. (a) All or a portion of this security is out on loan (Note 2). (b) Investment of security lending collateral (Note 2). At August 31, 2004, the approximate 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 ----------------- ----------------- ---------------- ---------------- $ 299,175,819 $ 40,636,662 $ (148,405) $ 40,488,257
At February 29, 2004, GMO Real Estate Fund had capital loss carryforwards available to offset future capital gains, if any, to the extent permitted by the Internal Revenue Code, of $1,159,465, $15,979,464, $3,875,337 and $323,175 expiring in 2007, 2008, 2009 and 2010, respectively. Utilization of the capital loss carryforwards above could be subject to limitations imposed by the Internal Revenue Code related to share ownership activity. See accompanying notes to the financial statements. 7 GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments, at value, including securities on loan of $4,275,958 (cost $298,044,808) (Note 2) $ 339,664,076 Receivable for investments sold 10,860,710 Dividends and interest receivable 247,118 Receivable for expenses reimbursed by Manager (Note 3) 63,808 -------------- Total assets 350,835,712 -------------- LIABILITIES: Payable for investments purchased 11,323,163 Payable upon return of securities loaned (Note 2) 4,402,100 Payable for Fund shares repurchased 133 Payable to affiliate for (Note 3): Management fee 146,575 Shareholder service fee 40,715 Trustees fee 125 Accrued expenses 29,822 -------------- Total liabilities 15,942,633 -------------- NET ASSETS $ 334,893,079 ============== NET ASSETS CONSIST OF: Paid-in capital $ 279,610,082 Accumulated undistributed net investment income 7,185,275 Accumulated net realized gain 6,478,454 Net unrealized appreciation 41,619,268 -------------- $ 334,893,079 ============== NET ASSETS ATTRIBUTABLE TO: Class III shares $ 334,893,079 ============== SHARES OUTSTANDING: Class III 21,641,903 ============== NET ASSET VALUE PER SHARE: Class III $ 15.47 ==============
See accompanying notes to the financial statements. 8 GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends $ 7,904,509 Interest (including securities lending income of $12,407) 28,473 -------------- Total income 7,932,982 -------------- EXPENSES: Management fee (Note 3) 811,739 Shareholder service fee (Note 3) - Class III 225,483 Custodian and transfer agent fees 20,056 Audit and tax fees 20,884 Legal fees 2,852 Trustees fees and related expenses (Note 3) 1,517 Registration fees 1,472 Miscellaneous 1,012 -------------- Total expenses 1,085,015 Fees and expenses reimbursed by Manager (Note 3) (46,276) Management fee waived (Note 3) (315,676) -------------- Net expenses 723,063 -------------- Net investment income 7,209,919 -------------- REALIZED AND UNREALIZED GAIN: Net realized gain on investments 29,501,392 -------------- Change in net unrealized appreciation (depreciation) on investments 3,673,815 -------------- Net realized and unrealized gain 33,175,207 -------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 40,385,126 ==============
See accompanying notes to the financial statements. 9 GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 7,209,919 $ 8,284,492 Net realized gain 29,501,392 18,615,586 Change in net unrealized appreciation(depreciation) 3,673,815 38,285,209 -------------- -------------- Net increase in net assets from operations 40,385,126 65,185,287 -------------- -------------- Distributions to shareholders from: Net investment income Class III (4,814,090) (6,612,628) -------------- -------------- Net share transactions (Note 6): Class III 107,864,047 (9,370,702) -------------- -------------- Total increase in net assets 143,435,083 49,201,957 NET ASSETS: Beginning of period 191,457,996 142,256,039 -------------- -------------- End of period (including accumulated undistributed net investment income of $7,185,275 and $4,789,446, respectively) $ 334,893,079 $ 191,457,996 ============== ==============
See accompanying notes to the financial statements. 10 GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 -------------------------------------------------------------- (UNAUDITED) 2004 2003 2002 2001 2000 ---------------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 14.65 $ 10.49 $ 11.17 $ 10.31 $ 8.26 $ 9.13 ---------- ---------- ---------- ---------- ---------- ---------- Income from investment operations: Net investment income 0.35+ 0.58+ 0.50+ 0.56+ 0.60 0.51+ Net realized and unrealized gain (loss) 0.65 14.50 (0.71) 0.84 1.92 (0.87) ---------- ---------- ---------- ---------- ---------- ---------- Total from investment operations 1.00 15.08 (0.21) 1.40 2.52 (0.36) ---------- ---------- ---------- ---------- ---------- ---------- Less distributions to shareholders: From net investment income (0.18) (0.43) (0.47) (0.54) (0.47) (0.51) ---------- ---------- ---------- ---------- ---------- ---------- Total distributions (0.18) (0.43) (0.47) (0.54) (0.47) (0.51) ---------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 15.47 $ 14.65 $ 10.49 $ 11.17 $ 10.31 $ 8.26 ========== ========== ========== ========== ========== ========== TOTAL RETURN (a) 6.92%** 44.56% (2.16)% 13.73% 30.86% (4.69)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 334,893 $ 191,458 $ 142,256 $ 192,606 $ 133,420 $ 120,508 Net expenses to average daily net assets 0.48%* 0.52% 0.69% 0.69% 0.69% 0.69% Net investment income to average daily net assets 4.80%* 4.61% 4.47% 5.18% 5.85% 5.64% Portfolio turnover rate 69%** 56% 61% 6% 11% 13% Fees and expenses reimbursed and/or waived by the Manager to average daily net assets: 0.24%* 0.24% 0.04% 0.05% 0.05% 0.06%
(a) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 11 GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION GMO Real Estate 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 primarily real estate investment trusts ("REITs") and other real estate related companies. 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. 2. SIGNIFICANT ACCOUNTING POLICIES 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. 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 12 GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, 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 August 31, 2004, 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 or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. See Schedule of Investments for the open repurchase agreement as of August 31, 2004. 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. As of August 31, 2004, the Fund had loaned securities having a market value of $4,275,958, collateralized by cash in the amount of $4,402,100, 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. 13 GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. 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. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of return of capital is conclusively determined. 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 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. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.54% of average daily net assets. For the period from June 30, 2003 through August 31, 2004, GMO waived 0.21% of the Fund's management fee. GMO has temporarily agreed to waive 0.21% of the Fund's management fee until such time as it notifies shareholders that it is discontinuing the waiver. For the period from May 2, 2003 through June 29, 2003, GMO waived 0.15% of the Fund's management fee. Prior to May 2, 2003, GMO did not waive any of the Fund's management fee. This waiver is in addition to the Manager's contractual agreement to reimburse the Fund with respect to certain Fund expenses through June 30, 2005 as described below. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee 14 GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 0.15% for Class III shares. GMO has entered into a binding agreement effective until at least June 30, 2005 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 0.54% of the average daily net assets. The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $965. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004, aggregated $304,814,621 and $195,904,461, respectively. 5. PRINCIPAL SHAREHOLDER AND RELATED PARTIES At August 31, 2004, 43.9% 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. At August 31, 2004, 2.33% of the Fund was held by sixteen related parties comprised of certain GMO employee accounts. As of August 31, 2004, substantially all of the Fund's shares were held by accounts for which the Manager has investment discretion. 15 GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ------------------------------ ------------------------------ SHARES AMOUNT SHARES AMOUNT -------------- -------------- -------------- -------------- Class III: Shares sold 17,572,366 $ 239,558,429 9,152,479 $ 115,177,669 Shares issued to shareholders in reinvestment of distributions 259,406 3,761,382 412,921 5,097,864 Shares repurchased (9,262,799) (135,455,764) (10,050,988) (129,646,235) -------------- -------------- -------------- -------------- Net increase (decrease) 8,568,973 $ 107,864,047 (485,588) $ (9,370,702) ============== ============== ============== ==============
7. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 16 GMO REAL ESTATE FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees and other expenses. The following table, assuming a $1,000 investment in a class of shares, discloses the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the class's actual return and actual expenses, and (2) a hypothetical annualized 5% return and the class's actual expenses: Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * ------------------------------------------------------------------- 1) Actual $ 1,000.00 $ 1,069.20 $ 2.50 2) Hypothetical 1,000.00 1,022.79 2.45 -------------------------------------------------------------------
*Expenses are calculated using the Class III annualized expense ratio for the six months ended August 31, 2004 of 0.48%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 17 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
CLASSIFICATION % OF NET ASSETS - ---------------------------------------------------------------------------------------- Automotive 5.1% Construction 20.2 Consumer Goods 4.7 Financial 19.7 Food & Beverage 1.1 Health Care 6.6 Machinery 0.5 Manufacturing 3.9 Metals & Mining 0.5 Oil & Gas 1.6 Primary Process Industry 2.1 Retail Stores 9.6 Services 8.0 Technology 7.1 Transportation 0.9 Utility 5.2 Mutual Funds 2.4 Futures 0.0 Short-Term Investments and Other Assets and Liabilities (net) 0.8 ---------------- 100.0% ================
See accompanying notes to the financial statements. 1 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- COMMON STOCKS -- 96.8% AUTOMOTIVE -- 5.1% 13,000 American Axle & Manufacturing Holdings, Inc. 440,570 20,650 ArvinMeritor, Inc. 394,415 4,900 BorgWarner, Inc. 219,226 2,600 Cooper Tire & Rubber Co. 58,864 40,700 Dana Corp. 768,009 8,200 Dura Automotive Systems, Inc. * 68,306 22,800 Goodyear Tire & Rubber Co. (The) *(a) 250,344 17,800 Lear Corp. 959,064 600 Modine Manufacturing Co. 17,880 900 Oshkosh Truck Corp. 45,864 3,100 Superior Industries International, Inc. (a) 98,270 1,600 Tenneco Automotive, Inc. * 21,504 14,900 Visteon Corp. 139,017 -------------- 3,481,333 -------------- CONSTRUCTION -- 20.2% 1,000 American Home Mortgage Investment Corp. REIT 27,220 2,100 American Mortgage Acceptance Corp. REIT 32,298 3,300 American Woodmark Corp. 228,426 60,300 Annaly Mortgage Management, Inc. REIT 1,076,355 18,000 Anthracite Capital, Inc. REIT 207,900 39,500 Anworth Mortgage Asset Corp. REIT 442,400 4,000 Associated Estates Realty Corp. REIT 37,480 3,000 Avalonbay Communities, Inc. REIT 181,200 1,400 Beazer Homes USA, Inc. 136,710 2,900 Camden Property Trust REIT 136,532 18,300 Capstead Mortgage Corp. REIT (a) 257,664 3,100 Crescent Real Estate Equities Co. REIT 49,507 2,200 Dycom Industries, Inc. * 56,584 4,900 Emcor Group, Inc. * 198,940 14,000 Felcor Lodging Trust, Inc. REIT * 163,940 1,700 First Industrial Realty Trust, Inc. REIT 68,000 1,100 Fluor Corp. 47,025 2,200 Healthcare Realty Trust, Inc. REIT 83,050
See accompanying notes to the financial statements. 2 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- CONSTRUCTION -- CONTINUED 17,300 Host Marriott Corp. REIT * 230,955 5,000 Hovnanian Enterprises, Inc. * 172,100 98,000 HRPT Properties Trust REIT 1,056,440 3,100 Innkeepers USA Trust REIT 35,774 2,500 Integrated Electrical Services, Inc. * 12,050 5,600 Jacobs Engineering Group, Inc. * 219,016 7,600 KB Home 522,652 700 Kilroy Realty Corp. REIT 26,495 21,600 Lafarge North America, Inc. 967,896 2,900 Liberty Property Trust REIT 117,334 18,100 LNR Property Corp. REIT 1,133,060 8,400 Louisiana-Pacific Corp. 207,144 5,400 M/I Schottenstein Homes, Inc. 210,870 1,600 Martin Marietta Materials, Inc. 71,984 6,449 MDC Holdings, Inc. 444,014 55,100 Meristar Hospitality Corp. REIT * 317,376 3,300 Meritage Corp. * 220,473 69,300 MFA Mortgage Investments, Inc. REIT 645,183 2,300 National Health Investors, Inc. REIT 66,332 1,000 NCI Building Systems, Inc. * 30,680 800 NVR, Inc. * 401,800 13,400 Post Properties, Inc. REIT 407,360 1,300 Potlatch Corp. 55,770 300 PS Business Parks, Inc. REIT 11,925 1,900 Regency Centers Corp. REIT 87,400 4,000 Ryland Group, Inc. 352,600 3,200 Standard-Pacific Corp. 161,504 400 Sun Communities, Inc. REIT 15,600 1,100 Taubman Centers, Inc. REIT 28,347 800 Texas Industries, Inc. 35,040 4,900 Thor Industries, Inc. 125,538 16,200 Thornburg Mortgage, Inc. REIT 471,420 15,800 Toll Brothers, Inc. * 701,362 6,600 Universal Forest Products, Inc. 197,274 9,200 USG Corp. *(a) 161,736
See accompanying notes to the financial statements. 3 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- CONSTRUCTION -- CONTINUED 2,600 Washington Group International, Inc. * 91,468 5,400 Winnebago Industries, Inc. 169,560 8,500 York International Corp. 276,760 -------------- 13,891,523 -------------- CONSUMER GOODS -- 4.7% 1,900 Action Performance Cos., Inc. 20,748 12,000 Blyth, Inc. 360,120 6,600 Brunswick Corp. 259,446 6,100 Callaway Golf Co. 73,749 4,600 Columbia Sportswear Co. * 250,884 2,300 CPI Corp. 30,498 4,800 Ethan Allen Interiors, Inc. 171,552 12,375 Fossil, Inc. * 355,286 5,900 Furniture Brands International, Inc. 135,700 2,800 Genesco, Inc. * 63,084 4,900 Genlyte Group, Inc. * 292,579 4,000 Maytag Corp. 80,920 17,300 Oakley, Inc. 198,431 2,700 Shuffle Master, Inc. *(a) 89,478 5,600 Skechers U.S.A., Inc.-Class A * 74,480 300 Stanley Furniture Co., Inc. 12,114 7,300 Steven Madden, Ltd. * 133,225 1,400 Timberland Co.-Class A * 78,190 5,900 Tupperware Corp. 100,713 9,800 Universal Corp. 442,274 1,700 Yankee Candle Co., Inc. * 46,087 -------------- 3,269,558 -------------- FINANCIAL -- 19.7% 3,000 Allmerica Financial Corp. * 87,000 3,200 Amerco, Inc. * 90,240 18,700 American Financial Group, Inc. 550,715 4,600 American Medical Security Group, Inc. * 103,684 18,600 AmeriCredit Corp. * 388,926
See accompanying notes to the financial statements. 4 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- FINANCIAL -- CONTINUED 2,600 AMERIGROUP Corp. * 133,484 11,400 AmerUs Group Co. 454,404 4,800 Astoria Financial Corp. 174,432 6,300 Brown & Brown, Inc. 282,870 3,400 Central Pacific Financial Corp. 95,030 1,300 Ceres Group, Inc. * 7,033 700 City National Corp. 46,186 6,900 Colonial BancGroup (The), Inc. 139,242 8,000 Commerce Group, Inc. 383,600 9,000 Commercial Federal Corp. 245,430 5,400 Community First Bankshares, Inc. 173,718 6,998 Delphi Financial Group, Inc.-Class A 275,161 7,000 Downey Financial Corp. 377,090 5,100 Erie Indemnity Co.-Class A 253,674 8,100 Federated Investors, Inc.-Class B 233,685 7,335 Fidelity National Financial, Inc. 276,163 19,100 First American Corp. 553,327 1,500 First Citizens BancShares, Inc.-Class A 175,515 3,600 FirstFed Financial Corp. * 164,160 3,800 FirstMerit Corp. 100,092 7,100 Flagstar Bancorp, Inc. 153,289 5,000 Fremont General Corp. 100,800 6,000 GATX Corp. 161,820 8,100 Greater Bay Bancorp 230,607 2,600 Hibernia Corp.-Class A 69,810 41,200 IMPAC Mortgage Holdings, Inc. REIT 1,063,372 3,500 Irwin Financial Corp. 90,055 5,800 Kansas City Life Insurance Co. 235,938 4,100 Landamerica Financial Group, Inc. 176,464 1,800 MAF Bancorp, Inc. 75,294 10,500 Nationwide Financial Services, Inc.-Class A 365,295 3,300 Novastar Financial, Inc. REIT (a) 132,792 1,300 Ohio Casualty Corp. * 26,195 3,300 People's Bank 108,867 18,100 PMI Group (The), Inc. 751,693 17,300 Protective Life Corp. 676,949
See accompanying notes to the financial statements. 5 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- FINANCIAL -- CONTINUED 59,600 Providian Financial Corp. *(a) 860,624 12,900 Reinsurance Group of America, Inc. 514,065 3,600 Ryder System, Inc. 157,716 2,800 SEI Investments Co. 91,504 900 Selective Insurance Group, Inc. 31,077 6,500 Stewart Information Services Corp. 237,510 3,000 Student Loan Corp. 431,250 5,800 Triad Guaranty, Inc. * 323,060 8,500 UICI 236,385 4,100 United Rentals, Inc. *(a) 60,229 1,200 Unitrin, Inc. 50,340 8,816 Washington Federal, Inc. 227,100 500 Webster Financial Corp. 24,600 3,600 World Acceptance Corp. * 80,388 1,300 Zenith National Insurance Corp. 56,186 -------------- 13,566,135 -------------- FOOD & BEVERAGE -- 1.1% 800 Coors (Adolph) - Class B 54,792 200 Corn Products International, Inc. 9,230 5,000 Interstate Bakeries Corp. 25,850 7,700 PepsiAmericas, Inc. 152,768 2,050 Sanderson Farms, Inc. 70,089 360 Seaboard Corp. 191,538 17,300 Tyson Foods, Inc.-Class A 285,104 -------------- 789,371 -------------- HEALTH CARE -- 6.6% 3,300 Andrx Group * 66,528 4,100 Bausch & Lomb, Inc. 270,395 13,100 Beverly Enterprises, Inc. * 93,927 1,600 Cerner Corp. *(a) 70,096 3,600 Decode Genetics, Inc. * 20,160 6,800 Dentsply International, Inc. 346,460 2,100 Enzon Pharmaceuticals, Inc. * 29,232
See accompanying notes to the financial statements. 6 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- HEALTH CARE -- CONTINUED 700 Haemonetics Corp. * 22,134 600 Healthcare Services Group, Inc. 10,680 10,100 Healthsouth Corp. * 54,843 1,400 Henry Schein, Inc. * 87,192 18,000 Humana, Inc. * 342,000 900 ICU Medical, Inc. *(a) 23,571 1,600 Kindred Healthcare, Inc. * 41,376 13,700 Lincare Holdings, Inc. * 440,318 900 Matria Healthcare, Inc. *(a) 23,778 3,900 MIM Corp. * 25,272 2,400 NeighborCare, Inc. * 60,936 15,900 OCA, Inc. *(a) 81,249 1,100 Ocular Sciences, Inc. * 47,960 6,400 Owens & Minor, Inc. 156,800 8,200 Pacificare Health Systems, Inc. * 267,402 3,800 Patterson Cos., Inc. * 278,274 1,800 Perrigo Co. 35,352 2,400 Pharmaceutical Product Development, Inc. * 81,480 7,200 PolyMedica Corp. 218,952 3,300 Priority Healthcare Corp.-Class B * 73,359 3,200 Province Healthcare Co. * 62,528 3,200 PSS World Medical, Inc. * 34,528 3,700 RehabCare Group, Inc. * 85,063 12,250 Renal Care Group, Inc. * 387,958 14,000 Res-Care, Inc. * 148,120 2,900 Techne Corp. *(a) 112,346 2,000 Triad Hospitals, Inc. * 63,580 1,600 United Surgical Partners International, Inc. * 57,776 1 UnitedHealth Group, Inc. 66 4,400 Universal Health Services, Inc.-Class B 198,220 3,800 Valeant Pharmaceuticals International 89,148 -------------- 4,509,059 -------------- MACHINERY -- 0.5% 3,400 Flowserve Corp. * 77,996 1,500 MSC Industrial Direct Co. - Class A 46,605
See accompanying notes to the financial statements. 7 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- MACHINERY -- CONTINUED 2,200 NACCO Industries, Inc.-Class A 174,372 2,800 UNOVA, Inc. * 40,824 -------------- 339,797 -------------- MANUFACTURING -- 3.9% 3,500 Bemis Co., Inc. 92,505 1,100 Caraustar Industries, Inc. * 17,457 3,800 Greif, Inc.-Class A 148,200 8,920 Jacuzzi Brands, Inc. * 77,604 11,500 Kaman Corp.-Class A 134,090 900 Mine Safety Appliances Co. 35,577 800 Mueller Industries, Inc. 31,432 35,100 Owens-IIlinois, Inc. * 563,355 1,700 Pactiv Corp. * 40,205 4,900 Pentair, Inc. 162,876 11,500 Precision Castparts Corp. 633,535 6,500 Rock-Tenn Co.-Class A 93,600 15,300 Shaw Group (The), Inc. *(a) 157,437 4,600 SPX Corp. 167,854 3,800 Temple Inland, Inc. 259,464 6,000 Walter Industries, Inc. 89,040 -------------- 2,704,231 -------------- METALS & MINING -- 0.5% 3,500 Arch Coal, Inc. 112,805 700 Brush Engineering Materials, Inc. * 14,343 1,800 Century Aluminum Co. * 44,604 1,100 Cleveland Cliffs, Inc. * 73,425 800 Imco Recycling, Inc. * 8,304 4,800 Stillwater Mining Co. * 68,736 -------------- 322,217 -------------- OIL & GAS -- 1.6% 3,500 Ashland, Inc. 180,005 1,300 Cimarex Energy Co. * 38,909
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) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- OIL & GAS -- CONTINUED 500 Giant Industries, Inc. * 11,150 2,100 Pioneer Natural Resources Co. (a) 70,245 1,400 Premcor, Inc. * 46,942 7,900 Sunoco, Inc. 485,850 1,500 Swift Energy Co. * 30,525 6,900 Tesoro Petroleum Corp. * 163,392 1,900 Western Gas Resources, Inc. 53,048 -------------- 1,080,066 -------------- PRIMARY PROCESS INDUSTRY -- 2.1% 1,000 A. Schulman, Inc. 20,060 9,900 AK Steel Holding Corp. * 60,291 4,200 Allegheny Technologies, Inc. 79,002 1,200 Cabot Corp. 47,808 1,500 Carpenter Technology Corp. 66,450 4,600 Commercial Metals Co. 160,908 6,100 FMC Corp. * 282,003 1,200 Georgia Gulf Corp. 45,540 4,500 Lubrizol Corp. 160,425 1,200 OM Group, Inc. * 40,860 1,400 Oregon Steel Mills, Inc. * 20,272 1,300 Quanex Corp. 59,904 1,600 Ryerson Tull, Inc. 25,504 4,400 Steel Dynamics, Inc. (a) 137,984 3,000 Steel Technologies, Inc. 60,270 5,900 Stepan Co. 133,930 3,000 W.R. Grace & Co. * 22,860 -------------- 1,424,071 -------------- RETAIL STORES -- 9.6% 18,800 7-Eleven, Inc. * 363,216 2,100 Aaron Rents, Inc. 43,134 16,500 Abercrombie & Fitch Co.-Class A 462,000 9,200 American Eagle Outfitters, Inc. * 306,360 2,900 America's Car Mart, Inc. * 93,003
See accompanying notes to the financial statements. 9 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- RETAIL STORES -- CONTINUED 3,700 AnnTaylor Stores Corp. * 89,429 13,100 BJ's Wholesale Club, Inc. * 331,692 5,900 Blockbuster, Inc.-Class A (a) 47,377 2,600 Charlotte Russe Holding, Inc. * 37,154 8,300 Charming Shoppes, Inc. * 56,938 11,400 Chico's FAS, Inc. * 466,260 1,900 Christopher & Banks Corp. 33,459 4,400 Claire's Stores, Inc. 107,096 7,700 Dollar Tree Stores, Inc. * 181,027 1,300 Electronics Boutique Holdings Corp. * 39,689 11,400 Foot Locker, Inc. 255,018 5,100 Group 1 Automotive, Inc. * 140,097 5,100 Ingles Markets, Inc.-Class A 58,089 10,800 Insight Enterprises, Inc. * 172,800 1,700 J. Jill Group (The), Inc. * 30,753 4,500 Lithia Motors, Inc.-Class A 95,625 1,700 Longs Drug Stores Corp. 41,276 1,700 Men's Wearhouse, Inc. * 47,600 9,400 Nautilus Group, Inc. (a) 183,206 1,300 Neiman-Marcus Group, Inc.-Class A 69,160 7,800 Nordstrom, Inc. 289,614 1,800 Payless Shoesource, Inc. * 20,880 14,000 Pier 1 Imports, Inc. 242,900 13,700 Rent-A-Center, Inc. * 412,370 900 Ruddick Corp. 17,163 8,500 Shopko Stores, Inc. * 143,820 9,800 Sonic Automotive, Inc. 203,840 1,300 Stage Stores, Inc. * 41,522 38,800 Supervalu, Inc. 1,022,768 2,300 The Pep Boys - Manny, Moe & Jack 36,570 2,500 Too, Inc. * 39,125 7,800 Toys R Us, Inc. * 126,672 6,000 Trans World Entertainment Corp. * 59,820 6,400 United Auto Group, Inc. 155,072 16,900 Winn-Dixie Stores, Inc. (a) 70,473 -------------- 6,634,067 --------------
See accompanying notes to the financial statements. 10 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- SERVICES -- 8.0% 14,475 Applebee's International, Inc. 348,413 4,500 Argosy Gaming Co. * 150,435 4,450 Banta Corp. 172,260 6,200 Brinker International, Inc. * 188,790 3,500 Brink's Co. (The) 100,800 15,100 Caesars Entertainment, Inc. * 233,295 1,600 California Pizza Kitchen, Inc. * 30,544 14,200 Catalina Marketing Corp. * 319,500 9,850 CEC Entertainment, Inc. * 331,650 3,900 Central European Distribution Corp. *(a) 95,511 300 Consolidated Graphics, Inc. * 12,255 5,100 Copart, Inc. * 110,772 5,200 Factset Research Systems, Inc. 231,556 9,600 First Health Group Corp. * 146,400 4,000 Handleman Co. 84,400 6,200 Isle of Capri Casinos, Inc. * 113,212 5,400 ITT Educational Services, Inc. * 186,678 8,200 Jack in the Box, Inc. * 231,568 1,500 Mandalay Resort Group 101,760 7,600 Manpower, Inc. 320,948 600 Nash Finch Co. 17,718 8,600 Outback Steakhouse, Inc. 336,604 5,100 Papa John's International, Inc. *(a) 146,421 8,100 Regis Corp. 331,533 5,000 RR Donnelley & Sons Co. 153,650 11,100 Ryan's Restaurant Group, Inc. * 152,514 5,800 Sabre Holdings Corp. 133,400 20,700 Service Corp. International * 124,407 10,200 Sonic Corp. * 227,970 9,200 URS Corp. * 227,240 4,900 World Fuel Services Corp. 172,382 -------------- 5,534,586 --------------
See accompanying notes to the financial statements. 11 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- TECHNOLOGY -- 7.1% 1,200 Acuity Brands, Inc. 27,612 1,200 Anixter International, Inc. 42,324 4,600 Arrow Electronics, Inc. *(a) 99,544 5,900 Autodesk, Inc. 262,019 6,000 Avnet, Inc. * 95,280 2,700 AVX Corp. 31,266 2,900 BE Aerospace, Inc. * 30,740 2,800 Black Box Corp. 101,472 6,000 CellStar Corp. * 28,860 5,200 Cirrus Logic, Inc. * 26,312 3,000 Commscope, Inc. * 59,610 25,400 Convergys Corp. * 353,060 9,100 CSG Systems International, Inc. * 131,677 3,200 Esterline Technologies Corp. * 101,536 7,100 General Cable Corp. * 74,763 2,700 Global Imaging Systems, Inc. * 75,600 16,100 Goodrich Corp. 511,336 2,800 Harris Corp. 134,848 25,000 Ikon Office Solutions, Inc. 282,000 4,400 InFocus Corp. * 37,664 19,900 Ingram Micro, Inc.-Class A * 294,918 2,300 John H. Harland Co. 67,597 1,900 Mantech International Corp.-Class A * 30,438 4,600 MatrixOne, Inc. * 21,528 6,300 Maximus, Inc. * 183,267 4,300 Microsemi Corp. * 46,397 7,000 NCR Corp. * 309,190 1,900 Polycom, Inc. * 37,107 8,400 Pomeroy IT Solutions, Inc. * 109,116 3,000 Radisys Corp. * 34,800 4,500 Reynolds & Reynolds, Inc. (The) - Class A 110,565 2,300 SBS Technologies, Inc. * 23,598 1,400 ScanSource, Inc. * 84,056 9,100 Stellent, Inc. * 62,881 11,600 Tech Data Corp. * 436,856
See accompanying notes to the financial statements. 12 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- TECHNOLOGY -- CONTINUED 24,100 Tellabs, Inc. * 218,587 6,200 United Stationers, Inc. * 255,254 6,900 Wind River Systems, Inc. * 74,865 -------------- 4,908,543 -------------- TRANSPORTATION -- 0.9% 8,200 America West Holdings Corp.-Class B *(a) 54,120 9,500 AMR Corp. * 84,930 1,100 CNF, Inc. 45,122 16,100 Delta Airlines, Inc. *(a) 65,044 2,500 JB Hunt Transport Services, Inc. 84,750 1,700 Kansas City Southern * 25,500 2,600 Landstar System, Inc. * 136,448 8,800 Northwest Airlines Corp.-Class A *(a) 82,896 1,600 SCS Transportation, Inc. * 29,696 -------------- 608,506 -------------- UTILITY -- 5.2% 32,800 AES Corp. (The) * 330,952 11,400 Allegheny Energy, Inc. *(a) 167,466 11,100 Alliant Energy Corp. 288,489 3,600 Boston Communications Group, Inc. *(a) 28,260 52,400 Centerpoint Energy, Inc. 573,256 27,700 CMS Energy Corp. *(a) 265,920 4,800 DPL, Inc. 97,584 7,600 Duquesne Light Holdings, Inc. 142,804 7,300 Energy East Corp. 177,901 1,500 Equitable Resources, Inc. 78,645 3,400 National Fuel Gas Co. 91,052 3,000 NSTAR 146,400 7,300 OGE Energy Corp. 189,800 4,400 Pinnacle West Capital Corp. 185,724 6,100 PNM Resources, Inc. 130,357 5,000 Puget Energy, Inc. 114,550 4,600 Reliant Energy, Inc. * 45,816
See accompanying notes to the financial statements. 13 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES / PAR VALUE ($) DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- UTILITY -- CONTINUED 500 Talk America Holdings, Inc. *(a) 2,885 29,600 TECO Energy, Inc. 392,496 3,000 UIL Holdings Corp. 147,240 -------------- 3,597,597 -------------- TOTAL COMMON STOCKS (COST $58,483,173) 66,660,660 -------------- MUTUAL FUNDS -- 2.4% 1,166,688 Dreyfus Cash Management Plus Fund (b) 1,166,688 497,618 Merrimac Cash Series, Premium Class (b) 497,618 -------------- TOTAL MUTUAL FUNDS (COST $1,664,306) 1,664,306 -------------- SHORT-TERM INVESTMENTS -- 4.7% CASH EQUIVALENT -- 2.9% 1,964,280 Harris Trust & Savings Bank Eurodollar Time Deposit, 1.51%, due 9/16/04 (b) 1,964,280 -------------- REPURCHASE AGREEMENT -- 1.8% 1,262,401 Citigroup Global Markets Repurchase Agreement, dated 8/31/04, due 9/01/04, with a maturity value of $1,262,440 and an effective yield of 1.10%, collateralized by a U.S. Treasury Note with a rate of 2.75%, a maturity date of 7/31/06 and a market value, including accrued interest of $1,290,801. 1,262,401 -------------- TOTAL SHORT-TERM INVESTMENTS (COST $3,226,681) 3,226,681 -------------- TOTAL INVESTMENTS -- 103.9% (Cost $63,374,160) 71,551,647 Other Assets and Liabilities (net) -- (3.9%) (2,715,349) -------------- TOTAL NET ASSETS -- 100.0% $ 68,836,298 ==============
See accompanying notes to the financial statements. 14 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) NOTES TO THE SCHEDULE OF INVESTMENTS: REIT - Real Estate Investment Trust * Non-income producing security. (a) All or a portion of this security is out on loan (Note 2). (b) Investment of security lending collateral (Note 2). At August 31, 2004, the approximate 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 -------------- ---------------- ---------------- -------------- $ 63,698,389 $ 9,971,038 $ (2,117,780) $ 7,853,258
A summary of outstanding financial instruments at August 31, 2004 is as follows: FUTURES CONTRACTS
NUMBER OF CONTRACT NET UNREALIZED CONTRACTS TYPE EXPIRATION DATE VALUE APPRECIATION --------- --------------------------- --------------- ----------- -------------- Buys 4 Russell 2000 September 2004 $ 1,096,200 $ 8,241 =============
At August 31, 2004, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. See accompanying notes to the financial statements. 15 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments, at value, including securities on loan of $3,441,257 (cost $63,374,160) (Note 2) $ 71,551,647 Receivable for investments sold 1,885,666 Dividends and interest receivable 104,887 Receivable for collateral on open futures contracts (Note 2) 56,000 Receivable for expenses reimbursed by Manager (Note 3) 10,602 -------------- Total assets 73,608,802 -------------- LIABILITIES: Payable for investments purchased 1,029,973 Payable upon return of securities loaned (Note 2) 3,628,586 Payable to affiliate for (Note 3): Management fee 18,788 Shareholder service fee 8,540 Trustees fee 623 Payable for variation margin on open futures contracts (Note 2) 33,748 Accrued expenses 52,246 -------------- Total liabilities 4,772,504 -------------- NET ASSETS $ 68,836,298 ============== NET ASSETS CONSIST OF: Paid-in capital $ 58,393,583 Accumulated undistributed net investment income 264,502 Accumulated net realized gain 1,992,485 Net unrealized appreciation 8,185,728 -------------- $ 68,836,298 ============== NET ASSETS ATTRIBUTABLE TO: Class III shares $ 68,836,298 ============== SHARES OUTSTANDING: Class III 6,296,497 ============== NET ASSET VALUE PER SHARE: Class III $ 10.93 ==============
See accompanying notes to the financial statements. 16 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends $ 997,419 Interest (including securities lending income of $10,462) 13,117 -------------- Total income 1,010,536 -------------- EXPENSES: Management fee (Note 3) 187,281 Shareholder service fee (Note 3) - Class III 85,128 Custodian and transfer agent fees 34,592 Audit and tax fees 21,712 Legal fees 2,300 Trustees fees and related expenses (Note 3) 1,213 Registration fees 5,244 Miscellaneous 920 -------------- Total expenses 338,390 Fees and expenses reimbursed by Manager (Note 3) (64,768) -------------- Net expenses 273,622 -------------- Net investment income 736,914 -------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain on: Investments 23,607,786 Closed futures contracts 183,462 -------------- Net realized gain 23,791,248 -------------- Change in net unrealized appreciation (depreciation) on: Investments (30,315,836) Open futures contracts 8,241 -------------- Net unrealized loss (30,307,595) -------------- Net realized and unrealized loss (6,516,347) -------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (5,779,433) ==============
See accompanying notes to the financial statements. 17 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 736,914 $ 2,364,326 Net realized gain 23,791,248 35,960,341 Change in net unrealized appreciation (depreciation) (30,307,595) 49,205,106 --------------- --------------- Net increase (decrease) in net assets from operations (5,779,433) 87,529,773 --------------- --------------- Distributions to shareholders from: Net investment income Class III (1,034,195) (2,339,392) Net realized gains Class III (36,090,790) (1,587,884) --------------- --------------- (37,124,985) (3,927,276) --------------- --------------- Net share transactions (Note 6): Class III (68,120,427) (51,931,075) Purchase premiums and redemption fees (Notes 2 and 6): Class III 592,752 681,978 --------------- --------------- Total decrease in net assets resulting from net share transactions and net purchase premiums and redemption fees (67,527,675) (51,249,097) --------------- --------------- Total increase (decrease) in net assets (110,432,093) 32,353,400 NET ASSETS: Beginning of period 179,268,391 146,914,991 --------------- --------------- End of period (including accumulated undistributed net investment income of $264,502 and $561,783, respectively) $ 68,836,298 $ 179,268,391 =============== ===============
See accompanying notes to the financial statements. 18 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ------------------------------ (UNAUDITED) 2004 2003 ---------------- ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 15.51 $ 9.81 $ 14.91 ------------ ------------ ------------ Income from investment operations: Net investment income 0.10 0.17 0.18 Net realized and unrealized gain (loss) (0.61) 5.78 (2.74) ------------ ------------ ------------ Total from investment operations (0.51) 5.95 (2.56) ------------ ------------ ------------ Less distributions to shareholders: From net investment income (0.11) (0.15) (0.17) From net realized gains (3.96) (0.10) (2.37) ------------ ------------ ------------ Total distributions (4.07) (0.25) (2.54) ------------ ------------ ------------ NET ASSET VALUE, END OF PERIOD $ 10.93 $ 15.51 $ 9.81 ============ ============ ============ TOTAL RETURN (a) (3.06)%(b)** 61.14%(b) (18.58)%(b) RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 68,836 $ 179,268 $ 146,915 Net expenses to average daily net assets 0.48%* 0.48% 0.48% Net investment income to average daily net assets 1.30%* 1.21% 1.21% Portfolio turnover rate 28%** 86% 69% Fees and expenses reimbursed by the Manager to average daily net assets: 0.11%* 0.08% 0.08% Purchase premiums and redemption fees consisted of the following per share amounts: (c) $ 0.07 $ 0.04 $ 0.08 YEAR ENDED FEBRUARY 28/29, -------------------------------------------------- 2002 2001 2000 ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 13.86 $ 12.41 $ 11.69 ------------ ------------ ------------ Income from investment operations: Net investment income 0.23 0.23 0.15 Net realized and unrealized gain (loss) 1.58 2.38 1.11 ------------ ------------ ------------ Total from investment operations 1.81 2.61 1.26 ------------ ------------ ------------ Less distributions to shareholders: From net investment income (0.21) (0.20) (0.14) From net realized gains (0.55) (0.96) (0.40) ------------ ------------ ------------ Total distributions (0.76) (1.16) (0.54) ------------ ------------ ------------ NET ASSET VALUE, END OF PERIOD $ 14.91 $ 13.86 $ 12.41 ============ ============ ============ TOTAL RETURN (a) 13.39%(b) 22.14%(b) 10.66% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 313,596 $ 305,178 $ 265,778 Net expenses to average daily net assets 0.48% 0.48% 0.48% Net investment income to average daily net assets 1.60% 1.73% 1.12% Portfolio turnover rate 59% 111% 50% Fees and expenses reimbursed by the Manager to average daily net assets: 0.04% 0.06% 0.06% Purchase premiums and redemption fees consisted of the following per share amounts: (c) $ 0.01 $ 0.03 N/A
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) Calculation excludes purchase premiums and redemption fees which are borne by the shareholders. (c) Effective March 1, 2000, the Fund adopted the provision of the revised AICPA Audit and Accounting Guide for Investment Companies which requires the disclosure of the per share effect of purchase premiums 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. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 19 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION 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. 2. SIGNIFICANT ACCOUNTING POLICIES 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 as determined in good faith by the Trustees or other persons acting at their direction. FUTURES CONTRACTS The Fund may purchase and sell futures contracts 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 20 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, 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 the Schedule of Investments for open futures contracts as of August 31, 2004. 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 using standard models that incorporate 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 on swap contracts 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 August 31, 2004, the Fund held 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 21 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. See the Schedule of Investments for the open repurchase agreement as of August 31, 2004. 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. As of August 31, 2004, the Fund had loaned securities having a market value of $3,441,257, collateralized by cash in the amount of $3,628,586, 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. 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. 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. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. 22 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 are each 0.50% of the amount invested or redeemed. If the Manager determines that any portion of a cash purchase or redemption is offset by a corresponding cash redemption or purchase occurring on the same day, it will waive the purchase premium or redemption fee with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived in extraordinary circumstances if the Fund will not incur transaction costs. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the six months ended August 31, 2004 and the year ended February 29, 2004, the Fund received $35,171 and $327,767 in purchase premiums and $557,581 and $354,211 in redemption fees, respectively. There is no premium for reinvested distributions or in-kind transactions. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% for Class III shares. GMO has entered into a binding agreement effective until at least June 30, 2005 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 0.33% of the average daily net assets. The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $661. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004, aggregated $31,830,285 and $134,502,796, respectively. 23 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 5. PRINCIPAL SHAREHOLDERS AND RELATED PARTIES At August 31, 2004, 32.4% 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. At August 31, 2004, 0.3% of the Fund was held by eleven related parties comprised of certain GMO employee accounts. As of August 31, 2004, a significant portion of the Fund's shares was held by accounts for which the Manager has investment discretion. 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 --------------- --------------- --------------- --------------- SHARES AMOUNT SHARES AMOUNT --------------- --------------- --------------- --------------- Class III: Shares sold 574,375 $ 7,921,780 5,966,991 $ 75,662,260 Shares issued to shareholders in reinvestment of distributions 3,104,201 36,722,254 278,145 3,686,317 Shares repurchased (8,938,255) (112,764,461) (9,663,812) (131,279,652) Purchase premiums and redemption fees -- 592,752 -- 681,978 --------------- --------------- --------------- --------------- Net decrease (5,259,679) $ (67,527,675) (3,418,676) $ (51,249,097) =============== =============== =============== ===============
7. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 24 GMO SMALL CAP VALUE FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees, and other expenses. The following table, assuming a $1,000 investment in a class of shares, discloses the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the class's actual return and actual expenses, and (2) a hypothetical annualized 5% return and the class's actual expenses:
CLASS III ------------------------------------------------------------------------ OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED* ------------------------------------------------------------------------ 1) Actual $ 1,000.00 $ 969.40 $ 2.38 2) Hypothetical 1,000.00 1,022.79 2.45 ------------------------------------------------------------------------
*Expenses are calculated using the Class III annualized expense ratio for the six months ended August 31, 2004 of 0.48%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 25 GMO SHORT-DURATION INVESTMENT FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO SHORT-DURATION INVESTMENT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
CLASSIFICATION % OF NET ASSETS - ------------------------------------------------------------------------------------------- U.S. Government Agency 8.1% U.S. Government 7.9 Mutual Funds 83.4 Short-Term Investments and Other Assets and Liabilities (net) 0.6 --------------- 100.0% ===============
See accompanying notes to the financial statements. 1 GMO SHORT-DURATION INVESTMENT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES / PAR VALUE ($) DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 16.0% U.S. GOVERNMENT -- 7.9% 2,891,475 U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09 (a) 3,256,072 -------------- U.S. GOVERNMENT AGENCY -- 8.1% 198,333 Agency for International Development Floater (Support of Botswana), Variable Rate, 6 mo. U.S. Treasury Bill + .40%, 2.22%, due 10/01/12 195,606 1,275,975 Agency for International Development Floater (Support of C.A.B.E.I.), Variable Rate, 6 mo. U.S. Treasury Bill + .40%, 2.19%, due 10/01/12 1,260,025 1,252,436 Agency for International Development Floater (Support of Honduras), Variable Rate, 3 mo. U.S. Treasury Bill x 117%, 1.16%, due 10/01/11 1,247,739 59,987 Agency for International Development Floater (Support of Peru), Series A, Variable Rate, 6 mo. U.S. Treasury Bill +.35%, 2.14%, due 05/01/14 59,762 597,859 Small Business Administration Pool #502320, Variable Rate, Prime - 2.18%, 2.06%, due 08/25/18 599,239 -------------- 3,362,371 -------------- TOTAL DEBT OBLIGATIONS (COST $6,523,687) 6,618,443 -------------- MUTUAL FUNDS -- 83.4% AFFILIATED ISSUERS -- 83.4% 1,360,173 GMO Short-Duration Collateral Fund 34,466,785 9,192 GMO Special Purpose Holding Fund 161,685 -------------- TOTAL MUTUAL FUNDS (COST $34,288,708) 34,628,470 -------------- TOTAL INVESTMENTS -- 99.4% (Cost $40,812,395) 41,246,913 Other Assets and Liabilities (net) -- 0.6% 256,255 -------------- TOTAL NET ASSETS -- 100.0% $ 41,503,168 ==============
Variable rates - The rates shown on Variable rate notes are the current interest rates at August 31, 2004, which are subject to change based on the terms of the security. (a) Indexed security in which price and/or coupon is linked to prices of other securities, securities indicies, or other financial indicators (Note 2). See accompanying notes to the financial statements. 2 GMO SHORT-DURATION INVESTMENT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) At August 31, 2004, the approximate 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 -------------- ---------------- ---------------- -------------- $ 40,992,076 $ 279,016 $ (24,179) $ 254,837
At February 29, 2004, GMO Short-Duration Investment Fund had a capital loss carryforward available to offset future capital gains, if any. To the extent permitted by the Internal Revenue Code, of $1,151,233 expiring in 2012. Utilization of the capital loss carryforwards above could be subject to limitations imposed by the Internal Revenue Code related to share ownership activity. At February 29, 2004, GMO Short-Duration Investment Fund elected to defer to March 1, 2004 post-October losses of $236,504. See accompanying notes to the financial statements. 3 GMO SHORT-DURATION INVESTMENT FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments in unaffiliated issuers, at value (cost $6,523,687) (Note 2) $ 6,618,443 Investments in affiliated issuers, at value (cost $34,288,708) (Notes 2 and 7) 34,628,470 Cash 266,165 Receivable for Fund shares sold 4,880,694 Interest receivable 32,822 Receivable for expenses reimbursed by Manager (Note 3) 3,007 -------------- Total assets 46,429,601 -------------- LIABILITIES: Payable for investments purchased 4,900,000 Payable to affiliate for (Note 3): Management fee 1,554 Shareholder service fee 4,661 Trustees fee 149 Accrued expenses 20,069 -------------- Total liabilities 4,926,433 -------------- NET ASSETS $ 41,503,168 ============== NET ASSETS CONSIST OF: Paid-in capital $ 43,038,961 Accumulated undistributed net investment income 39,022 Accumulated net realized loss (2,009,333) Net unrealized appreciation 434,518 -------------- $ 41,503,168 ============== NET ASSETS ATTRIBUTABLE TO: Class III shares $ 41,503,168 ============== SHARES OUTSTANDING: Class III 4,718,172 ============== NET ASSET VALUE PER SHARE: Class III $ 8.80 ==============
See accompanying notes to the financial statements. 4 GMO SHORT-DURATION INVESTMENT FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends from affiliated issuers (Note 7) $ 286,580 Interest 150,314 -------------- Total income 436,894 -------------- EXPENSES: Management fee (Note 3) 10,123 Shareholder service fee (Note 3) - Class III 30,369 Custodian and transfer agent fees 3,312 Audit and tax fees 13,616 Legal fees 552 Trustees fees and related expenses (Note 3) 1,404 Registration fees 1,564 Miscellaneous 184 -------------- Total expenses 61,124 Fees and expenses reimbursed by Manager (Note 3) (19,228) -------------- Net expenses 41,896 -------------- Net investment income 394,998 -------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments in affiliated issuers (476,569) Realized gains distributions from affiliated issuers (Note 7) 14,902 -------------- Net realized loss on investments (461,667) -------------- Change in net unrealized appreciation (depreciation) on investments 598,701 -------------- Net realized and unrealized gain 137,034 -------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 532,032 ==============
See accompanying notes to the financial statements. 5 GMO SHORT-DURATION INVESTMENT FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 394,998 $ 634,942 Net realized loss (461,667) (132,071) Change in net unrealized appreciation (depreciation) 598,701 553,502 --------------- --------------- Net increase in net assets from operations 532,032 1,056,373 --------------- --------------- Distributions to shareholders from: Net investment income Class III (355,976) (635,270) Return of capital Class III -- (1,857) --------------- --------------- (355,976) (637,127) --------------- --------------- Net share transactions (Note 6): Class III (2,828,610) (11,579,121) --------------- --------------- Total decrease in net assets (2,652,554) (11,159,875) NET ASSETS: Beginning of period 44,155,722 55,315,597 --------------- --------------- End of period (including accumulated undistributed net investment income of $39,022 and $0, respectively) $ 41,503,168 $ 44,155,722 =============== ===============
See accompanying notes to the financial statements. 6 GMO SHORT-DURATION INVESTMENT FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ------------------------------ (UNAUDITED) 2004 2003 ---------------- ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 8.75 $ 8.68 $ 9.62 ------------ ------------ ------------ Income from investment operations: Net investment income (a)+ 0.09 0.12 0.08 Net realized and unrealized gain (loss) 0.03 0.07 (0.54) ------------ ------------ ------------ Total from investment operations 0.12 0.19 (0.46) ------------ ------------ ------------ Less distributions to shareholders: From net investment income (0.07) (0.12) (0.33) From net realized gains -- -- (0.15) Return of capital -- (0.00)(b) -- ------------ ------------ ------------ Total distributions (0.07) (0.12) (0.48) ------------ ------------ ------------ NET ASSET VALUE, END OF PERIOD $ 8.80 $ 8.75 $ 8.68 ============ ============ ============ TOTAL RETURN (c) 1.41%** 2.24% (4.91)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 41,503 $ 44,156 $ 55,316 Net expenses to average daily net assets 0.21%*(d) 0.21%(d) 0.21%(d) Net investment income to average daily net assets (a) 1.97%* 1.36% 0.88% Portfolio turnover rate 49%** 4% 43% Fees and expenses reimbursed by the Manager to average daily net assets: 0.09%* 0.10% 0.08% YEAR ENDED FEBRUARY 28/29, -------------------------------------------------- 2002 2001 2000 ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 9.92 $ 9.62 $ 9.63 ------------ ------------ ------------ Income from investment operations: Net investment income (a)+ 0.30 0.42 0.46 Net realized and unrealized gain (loss) 0.07 0.33 0.05 ------------ ------------ ------------ Total from investment operations 0.37 0.75 0.51 ------------ ------------ ------------ Less distributions to shareholders: From net investment income (0.39) (0.44) (0.52) From net realized gains (0.28) (0.01) -- Return of capital -- -- -- ------------ ------------ ------------ Total distributions (0.67) (0.45) (0.52) ------------ ------------ ------------ NET ASSET VALUE, END OF PERIOD $ 9.62 $ 9.92 $ 9.62 ============ ============ ============ TOTAL RETURN (c) 3.73% 7.91% 5.42% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 48,347 $ 40,505 $ 43,491 Net expenses to average daily net assets 0.20%(d) 0.20%(d) 0.20% Net investment income to average daily net assets (a) 3.04% 4.30% 4.82% Portfolio turnover rate 91% 50% 178% Fees and expenses reimbursed by the Manager to average daily net assets: 0.12% 0.09% 0.08%
(a) Net investment income for the years is affected by the timing of the declaration of dividends by other GMO Funds in which the Fund invests. (b) Return of capital was less than $(0.01). (c) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (d) New expenses exclude expenses incurred indirectly through investment in underlying funds (See Note 3). + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 7 GMO SHORT-DURATION INVESTMENT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION GMO Short-Duration Investment 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 provide current income through investment in a portfolio of high-quality fixed income instruments. The Fund's benchmark is the Citigroup 3-Month Treasury Bill Index. At August 31, 2004, 0.4% of the Fund was invested in the GMO Special Purpose Holding Fund and 83.0% of the Fund was invested in the GMO Short-Duration Collateral Fund, separate funds of GMO Trust managed by GMO. Shares of the GMO Special Purpose Holding Fund and the GMO Short-Duration Collateral Fund are not publicly available for direct purchase. The financial statements of the GMO Special Purpose Holding Fund and the GMO Short-Duration Collateral Fund should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646. 2. SIGNIFICANT ACCOUNTING POLICIES 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 other funds of the Trust ("underlying funds") and other 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 8 GMO SHORT-DURATION INVESTMENT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 and the differences could be material to the financial statements. As of August 31, 2004, the total value of these securities represented 29.6% of net assets. 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. See the Schedule of Investments for all indexed securities held as of August 31, 2004. 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 or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. As of August 31, 2004 there were no open 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 9 GMO SHORT-DURATION INVESTMENT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. As of August 31, 2004, 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. 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. 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. 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. 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. (See Note 3.) 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.05% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee 10 GMO SHORT-DURATION INVESTMENT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 0.15%. GMO has entered into a binding agreement effective until at least June 30, 2005 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 0.05% of the average daily net assets. The Fund incurs fees and expenses indirectly as a shareholder in GMO Special Purpose Holding Fund and GMO Short-Duration Collateral Fund. For the six months ended August 31, 2004, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
INDIRECT OPERATING INDIRECT INVESTMENT-RELATED EXPENSES (EXCLUDING EXPENSES (INCLUDING, BUT NOT MANAGEMENT FEES, LIMITED TO, INTEREST EXPENSE, SHAREHOLDER SERVICE INDIRECT FOREIGN AUDIT EXPENSE, AND TOTAL INDIRECT NET FEES AND INVESTMENT- SHAREHOLDER INVESTMENT-RELATED LEGAL INDIRECT MANAGEMENT FEES RELATED EXPENSES) SERVICE FEES EXPENSES) EXPENSES --------------- -------------------- ------------ ----------------------------- -------- (0.025%) 0.027% 0.000% 0.001% 0.003
The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $1,220. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004, aggregated $20,097,161 and $22,996,565, respectively. 5. PRINCIPAL SHAREHOLDERS AND RELATED PARTIES At August 31, 2004, 50.3% 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. At August 31, 2004, 2.5% of the Fund was held by eleven related parties comprised of certain GMO employee accounts. As of August 31, 2004, greater than 10% of the Fund's shares were held by accounts for which the Manager has investment discretion. 11 GMO SHORT-DURATION INVESTMENT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 -------------------------------- -------------------------------- CLASS III: SHARES AMOUNT SHARES AMOUNT --------------- --------------- --------------- --------------- Shares sold 1,159,535 $ 10,182,559 7 $ 64 Shares issued to shareholders in reinvestment of distributions 40,354 351,813 72,379 629,717 Shares repurchased (1,525,531) (13,362,982) (1,402,139) (12,208,902) --------------- --------------- --------------- --------------- Net decrease (325,642) $ (2,828,610) (1,329,753) $ (11,579,121) =============== =============== =============== ===============
7. INVESTMENTS IN AFFILIATED ISSUERS A summary of the Fund's transactions in the shares of these issuers during the six months ended August 31, 2004, is set forth below:
VALUE, BEGINNING REALIZED OF SALES DIVIDEND GAINS VALUE, END AFFILIATE PERIOD PURCHASES PROCEEDS INCOME DISTRIBUTIONS OF PERIOD -------------------------------------------------------------------------------------------------------------- GMO Short-Duration Collateral Fund $ 28,755,502 $ 19,814,021 $ 14,300,000 $ 3,439 $ 14,902 $ 34,466,785 GMO Special Purpose Holding Fund 8,533,147 283,141 8,508,235 283,141 -- 161,685* ------------- ------------- ------------- ------------- ------------- ------------- Totals $ 37,288,649 $ 20,097,162 $ 22,808,235 $ 286,580 $ 14,902 $ 34,628,470 ============= ============= ============= ============= ============= =============
* After effect of return of capital distribution of $141,683 on June 10, 2004. 8. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 12 GMO SHORT-DURATION INVESTMENT FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees, other expenses and indirect expenses incurred due to its investment in underlying funds. The following table, assuming a $1,000 investment in a class of shares, discloses the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the class's actual return and actual expenses, and (2) a hypothetical annualized 5% return and the class's actual expenses:
CLASS III ------------------------------------------------------------------- OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED* ------------------------------------------------------------------- 1) Actual $ 1,000.00 $ 1,014.10 $ 1.07 2) Hypothetical 1,000.00 1,024.15 1.07
*Expenses are calculated using the Class III annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2004 of 0.21%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 13 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
CLASSIFICATION % OF NET ASSETS - ----------------------------------------------------------------------------------------------- Automotive 4.5% Construction 12.0 Consumer Goods 6.9 Financial 17.4 Food & Beverage 1.7 Health Care 9.7 Machinery 1.3 Manufacturing 3.9 Metals & Mining 0.8 Oil & Gas 2.2 Primary Process Industry 3.8 Retail Stores 7.9 Services 9.1 Technology 11.1 Transportation 1.1 Utility 5.8 Short-Term Investments and Other Assets and Liabilities (net) 0.8 ---------------- 100.0% ================
See accompanying notes to the financial statements. 1 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- COMMON STOCKS -- 99.2% AUTOMOTIVE -- 4.5% 3,900 American Axle & Manufacturing Holdings, Inc. 132,171 5,225 ArvinMeritor, Inc. 99,797 3,000 BorgWarner, Inc. 134,220 4,700 Cooper Tire & Rubber Co. 106,408 9,500 Dana Corp. 179,265 3,800 Goodyear Tire & Rubber Co. (The) * 41,724 3,500 Lear Corp. 188,580 900 Oshkosh Truck Corp. 45,864 2,500 Superior Industries International, Inc. 79,250 1,600 Tenneco Automotive, Inc. * 21,504 4,700 Visteon Corp. 43,851 -------------- 1,072,634 -------------- CONSTRUCTION -- 12.0% 7,800 Annaly Mortgage Management, Inc. REIT 139,230 4,800 Anthracite Capital, Inc. REIT 55,440 1,500 Anworth Mortgage Asset Corp. REIT 16,800 2,700 Associated Estates Realty Corp. REIT 25,299 700 Beazer Homes USA, Inc. 68,355 2,700 Capstead Mortgage Corp. REIT 38,016 3,000 Centex Corp. 137,310 2,000 Commercial Net Lease Realty REIT 35,700 1,400 Crescent Real Estate Equities Co. REIT 22,358 400 Emcor Group, Inc. * 16,240 800 First Industrial Realty Trust, Inc. REIT 32,000 800 Fluor Corp. 34,200 800 Healthcare Realty Trust, Inc. 30,200 800 Highwoods Properties, Inc. REIT 19,680 1,400 Hovnanian Enterprises, Inc. * 48,188 11,400 HRPT Properties Trust REIT 122,892 1,100 Jacobs Engineering Group, Inc. * 43,021 2,500 KB Home 171,925 3,300 Lafarge North America, Inc. 147,873 2,400 Louisiana-Pacific Corp. 59,184
See accompanying notes to the financial statements. 2 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- CONSTRUCTION -- CONTINUED 600 M/I Schottenstein Homes, Inc. 23,430 2,134 MDC Holdings, Inc. 146,926 1,000 Meritage Corp. * 66,810 4,100 MFA Mortgage Investments, Inc. REIT 38,171 1,600 Mission West Properties REIT 16,128 2,900 National Health Investors, Inc. REIT 83,636 200 NVR, Inc. * 100,450 1,400 Post Properties, Inc. REIT 42,560 2,800 Pulte Homes, Inc. 165,060 900 Regency Centers Corp. REIT 41,400 1,800 Ryland Group, Inc. 158,670 700 Sovran Self Storage, Inc. REIT 27,755 800 St. Joe Co. 38,720 2,300 Standard-Pacific Corp. 116,081 500 Texas Industries, Inc. 21,900 800 Thornburg Mortgage, Inc. REIT 23,280 4,400 Toll Brothers, Inc. * 195,316 2,500 USG Corp. * 43,950 2,400 Ventas, Inc. REIT 65,640 500 William Lyon Homes, Inc. * 41,625 1,200 Winnebago Industries, Inc. 37,680 2,300 York International Corp. 74,888 -------------- 2,833,987 -------------- CONSUMER GOODS -- 6.9% 1,900 Arctic Cat, Inc. 49,628 1,800 Blyth, Inc. 54,018 2,400 Brunswick Corp. 94,344 1,500 Columbia Sportswear Co. * 81,810 1,200 Ethan Allen Interiors, Inc. 42,888 3,800 Fossil, Inc. * 109,098 2,200 Furniture Brands International, Inc. 50,600 300 Genlyte Group, Inc. * 17,913 4,400 GTECH Holdings Corp. 103,400 1,600 Harman International Industries, Inc. 154,704
See accompanying notes to the financial statements. 3 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- CONSUMER GOODS -- CONTINUED 500 Maytag Corp. 10,115 400 Middleby Corp. 20,048 5,500 Nu Skin Enterprises, Inc.-Class A 142,010 3,200 Plantronics, Inc. 124,320 3,000 Polo Ralph Lauren Corp. 109,590 2,500 Reebok International, Ltd. 84,925 1,400 Shuffle Master, Inc. * 46,396 2,000 Standard Commercial Corp. 30,600 1,400 Steinway Musical Instruments, Inc. * 39,774 2,500 Steven Madden, Ltd. * 45,625 300 Timberland Co.-Class A * 16,755 4,700 Tupperware Corp. 80,229 2,200 Universal Corp. 99,286 900 Yankee Candle Co., Inc. * 24,399 -------------- 1,632,475 -------------- FINANCIAL -- 17.4% 1,300 1st Source Corp. 32,825 1,200 Amcore Financial, Inc. 33,744 700 American Capital Strategies, Ltd. 21,840 3,200 American Financial Group, Inc. 94,240 1,300 American Medical Security Group, Inc. * 29,302 5,400 AmeriCredit Corp. * 112,914 600 AMERIGROUP Corp. * 30,804 3,800 AmerUs Group Co. 151,468 1,300 Associated Banc Corp. 40,690 2,100 Astoria Financial Corp. 76,314 2,100 Brown & Brown, Inc. 94,290 700 Camden National Corp. 22,750 1,000 Center Financial Corp. 17,020 500 Chittenden Corp. 17,950 1,300 Citizens Banking Corp. 41,587 5,300 Colonial BancGroup (The), Inc. 106,954 1,900 Commerce Group, Inc. 91,105 1,600 Commercial Federal Corp. 43,632 900 Community First Bankshares, Inc. 28,953
See accompanying notes to the financial statements. 4 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- FINANCIAL -- CONTINUED 1,300 CompuCredit Corp. * 24,453 1,804 Delphi Financial Group, Inc.-Class A 70,933 2,100 Downey Financial Corp. 113,127 2,400 Federated Investors, Inc.-Class B 69,240 3,961 Fidelity National Financial, Inc. 149,132 5,200 First American Corp. 150,644 600 FirstFed Financial Corp. * 27,360 2,700 FirstMerit Corp. 71,118 3,600 Flagstar Bancorp, Inc. 77,724 3,700 Fremont General Corp. 74,592 4,100 GATX Corp. 110,577 1,000 Great Southern Bancorp, Inc. 32,230 3,500 Greater Bay Bancorp 99,645 1,800 HealthExtras, Inc. * 21,294 4,600 IMPAC Mortgage Holdings, Inc. REIT 118,726 1,600 IndyMac Bancorp, Inc. 55,200 900 Investors Financial Services Corp. 41,742 900 Kansas City Life Insurance Co. 36,611 1,300 Landamerica Financial Group, Inc. 55,952 1,100 MAF Bancorp, Inc. 46,013 2,000 Nationwide Financial Services, Inc.-Class A 69,580 1,950 New Century Financial Corp. 104,597 900 Ohio Casualty Corp. * 18,135 2,000 People's Bank 65,980 2,900 PMI Group (The), Inc. 120,437 1,300 Pre-Paid Legal Services, Inc. * 32,110 2,900 Protective Life Corp. 113,477 14,600 Providian Financial Corp. * 210,824 1,600 Reinsurance Group of America, Inc. 63,760 2,600 Ryder System, Inc. 113,906 1,600 SEI Investments Co. 52,288 1,200 Stewart Information Services Corp. 43,848 900 Student Loan Corp. 129,375 1,500 Trustmark Corp. 44,970 2,100 United Rentals, Inc. * 30,849 2,600 Unitrin, Inc. 109,070
See accompanying notes to the financial statements. 5 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- FINANCIAL -- CONTINUED 2,279 Washington Federal, Inc. 58,707 1,200 Webster Financial Corp. 59,040 1,600 WFS Financial, Inc. 72,592 700 WSFS Financial Corp. 35,035 800 Zenith National Insurance Corp. 34,576 -------------- 4,117,851 -------------- FOOD & BEVERAGE -- 1.7% 400 Coors (Adolph) - Class B 27,396 2,100 Lancaster Colony Corp. 86,688 1,300 Natures Sunshine Products, Inc. 19,227 5,500 PepsiAmericas, Inc. 109,120 1,600 Sanderson Farms, Inc. 54,704 2,800 Smithfield Foods, Inc. * 71,960 2,100 Tyson Foods, Inc.-Class A 34,608 -------------- 403,703 -------------- HEALTH CARE -- 9.7% 1,200 American Medical Systems Holdings, Inc. * 37,872 1,150 American Pharmaceutical Partners, Inc. * 34,971 3,100 Andrx Group * 62,496 1,500 Bausch & Lomb, Inc. 98,925 5,800 Beverly Enterprises, Inc. * 41,586 1,700 Cerner Corp. * 74,477 900 Charles River Laboratories International, Inc. * 39,195 4,000 Covance, Inc. * 149,800 5,200 Cytyc Corp. * 124,592 1,900 D&K Healthcare Resources, Inc. 20,235 3,300 DHB Industries, Inc. * 41,811 1,800 eResearch Technology, Inc. * 36,198 700 Haemonetics Corp. * 22,134 14,500 Healthsouth Corp. * 78,735 600 Hologic, Inc. * 11,112 6,100 Humana, Inc. * 115,900 1,200 Idexx Laboratories, Inc. * 58,452 1,900 ImClone Systems, Inc. * 101,232
See accompanying notes to the financial statements. 6 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- HEALTH CARE -- CONTINUED 400 Invitrogen Corp. * 19,800 1,400 Kindred Healthcare, Inc. * 36,204 1,300 LCA-Vision, Inc. 30,654 1,500 Lifepoint Hospital, Inc. * 43,335 2,700 Lincare Holdings, Inc. * 86,778 3,100 OCA, Inc. * 15,841 1,000 Ocular Sciences, Inc. * 43,600 2,500 Orthologic Corp. * 17,750 1,500 Owens & Minor, Inc. 36,750 4,800 Pacificare Health Systems, Inc. * 156,528 1,300 Pharmaceutical Product Development, Inc. * 44,135 2,600 PolyMedica Corp. 79,066 1,100 Possis Medical, Inc. * 19,250 1,700 Priority Healthcare Corp.-Class B * 37,791 1,100 RehabCare Group, Inc. * 25,289 3,400 Renal Care Group, Inc. * 107,678 2,300 Res-Care, Inc. * 24,334 1,700 Salix Pharmaceuticals, Ltd. * 39,763 3,000 Select Medical Corp. 39,840 1,000 Techne Corp. * 38,740 1,700 United Surgical Partners International, Inc. * 61,387 1,100 Universal Health Services, Inc.-Class B 49,555 3,700 Ventiv Health, Inc. * 55,759 800 West Pharmaceutical Services, Inc. 31,992 -------------- 2,291,542 -------------- MACHINERY -- 1.3% 1,100 Carbo Ceramics, Inc. 70,785 700 Cummins, Inc. 47,103 700 Lincoln Electric Holdings, Inc. 21,042 2,000 MSC Industrial Direct Co. - Class A 62,140 600 Stanley Works (The) 25,956 600 Tidewater, Inc. 17,508 2,100 Watts Water Technologies, Inc.-Class A 53,466 -------------- 298,000 --------------
See accompanying notes to the financial statements. 7 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- MANUFACTURING -- 3.9% 3,400 American Greetings Corp.-Class A * 81,838 600 Bemis Co., Inc. 15,858 2,200 Caraustar Industries, Inc. * 34,914 800 Greif, Inc.-Class A 31,200 800 Harsco Corp. 35,904 1,900 Kaman Corp.-Class A 22,154 800 Mine Safety Appliances Co. 31,624 6,600 Owens-IIlinois, Inc. * 105,930 2,500 Pentair, Inc. 83,100 3,900 Precision Castparts Corp. 214,851 3,700 Shaw Group (The), Inc. * 38,073 2,000 Sonoco Products Co. 51,820 1,600 SPX Corp. 58,384 1,500 Standex International Corp. 36,420 1,300 Temple Inland, Inc. 88,764 -------------- 930,834 -------------- METALS & MINING -- 0.8% 2,000 Arch Coal, Inc. 64,460 2,000 Brush Engineering Materials, Inc. * 40,980 1,300 Century Aluminum Co. * 32,214 700 Cleveland Cliffs, Inc. * 46,725 -------------- 184,379 -------------- OIL & GAS -- 2.2% 2,300 Ashland, Inc. 118,289 5,200 Chesapeake Energy Corp. 73,476 1,000 Cimarex Energy Co. * 29,930 1,600 KCS Energy, Inc. * 20,080 1,600 Layne Christensen Co. * 24,304 1,100 Premcor, Inc. * 36,883 600 Stone Energy Corp. * 24,960 1,000 Sunoco, Inc. 61,500 1,900 Swift Energy Co. * 38,665 2,000 Tesoro Petroleum Corp. * 47,360
See accompanying notes to the financial statements. 8 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- OIL & GAS -- CONTINUED 1,200 Vintage Petroleum, Inc. 19,680 1,400 Western Gas Resources, Inc. 39,088 -------------- 534,215 -------------- PRIMARY PROCESS INDUSTRY -- 3.8% 700 A. Schulman, Inc. 14,042 6,400 AK Steel Holding Corp. * 38,976 4,400 Allegheny Technologies, Inc. 82,764 1,000 Carpenter Technology Corp. 44,300 1,700 Central Garden & Pet Co. * 53,278 3,000 Commercial Metals Co. 104,940 2,300 Cytec Industries, Inc. 110,952 2,000 FMC Corp. * 92,460 1,600 Lubrizol Corp. 57,040 300 Millipore Corp. * 15,090 900 OM Group, Inc. * 30,645 1,300 Oregon Steel Mills, Inc. * 18,824 1,200 Quanex Corp. 55,296 1,700 Ryerson Tull, Inc. 27,098 2,700 Steel Dynamics, Inc. 84,672 2,000 United States Steel Corp. 73,820 -------------- 904,197 -------------- RETAIL STORES -- 7.9% 3,800 7-Eleven, Inc. * 73,416 5,200 Abercrombie & Fitch Co.-Class A 145,600 2,200 American Eagle Outfitters, Inc. * 73,260 900 AnnTaylor Stores Corp. * 21,753 4,500 BJ's Wholesale Club, Inc. * 113,940 4,000 Charming Shoppes, Inc. * 27,440 1,200 Children's Place * 23,532 1,200 Christopher & Banks Corp. 21,132 1,800 Claire's Stores, Inc. 43,812 1,600 Dollar Tree Stores, Inc. * 37,616 3,500 Dress Barn, Inc. * 57,995 3,400 Foot Locker, Inc. 76,058
See accompanying notes to the financial statements. 9 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- RETAIL STORES -- CONTINUED 1,700 Group 1 Automotive, Inc. * 46,699 1,700 Ingles Markets, Inc.-Class A 19,363 1,500 Insight Enterprises, Inc. * 24,000 2,400 Interpool, Inc. 44,640 1,000 Longs Drug Stores Corp. 24,280 400 Men's Wearhouse, Inc. * 11,200 1,200 Nautilus Group, Inc. 23,388 1,700 Neiman-Marcus Group, Inc.-Class A 90,440 1,800 Nordstrom, Inc. 66,834 900 Pantry (The), Inc. * 17,514 4,400 Payless Shoesource, Inc. * 51,040 3,600 Pier 1 Imports, Inc. 62,460 4,550 Rent-A-Center, Inc. * 136,955 4,600 Ross Stores, Inc. 97,290 500 Ruddick Corp. 9,535 2,000 Shopko Stores, Inc. * 33,840 3,000 Sonic Automotive, Inc. 62,400 5,100 Supervalu, Inc. 134,436 1,500 Toys R Us, Inc. * 24,360 1,500 United Auto Group, Inc. 36,345 3,700 Urban Outfitters, Inc. * 112,295 8,000 Winn-Dixie Stores, Inc. 33,360 -------------- 1,878,228 -------------- SERVICES -- 9.1% 4,900 Allied Waste Industries, Inc. * 50,176 4,650 Applebee's International, Inc. 111,926 1,900 Argosy Gaming Co. * 63,517 2,000 Banta Corp. 77,420 2,400 Bob Evans Farms, Inc. 60,096 1,100 Bright Horizons Family Solutions, Inc. * 54,439 1,400 Brinker International, Inc. * 42,630 2,400 Brink's Co. (The) 69,120 800 Career Education Corp. * 24,672 4,100 Catalina Marketing Corp. * 92,250 3,050 CEC Entertainment, Inc. * 102,694
See accompanying notes to the financial statements. 10 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- SERVICES -- CONTINUED 1,200 Central European Distribution Corp. * 29,388 2,100 Consolidated Graphics, Inc. * 85,785 3,600 Copart, Inc. * 78,192 2,100 Factset Research Systems, Inc. 93,513 3,800 First Health Group Corp. * 57,950 1,000 Hughes Supply, Inc. 60,590 3,300 InfoUSA, Inc. * 29,997 1,600 Isle of Capri Casinos, Inc. * 29,216 2,100 ITT Educational Services, Inc. * 72,597 3,300 Jack in the Box, Inc. * 93,192 1,100 Keystone Automotive Industries, Inc. * 24,420 2,900 Labor Ready, Inc. * 35,931 2,800 Lone Star Steakhouse & Saloon, Inc. 64,932 1,300 Nash Finch Co. 38,389 1,200 O'Charley's, Inc. * 19,488 1,900 Outback Steakhouse, Inc. 74,366 1,500 Papa John's International, Inc. * 43,065 1,700 Prime Hospitality Corp. * 20,434 1,600 Regis Corp. 65,488 3,600 Ryan's Restaurant Group, Inc. * 49,464 1,000 Sabre Holdings Corp. 23,000 3,650 Sonic Corp. * 81,578 1,300 TeleTech Holdings, Inc. * 10,712 1,900 URS Corp. * 46,930 2,000 World Fuel Services Corp. 70,360 3,500 XM Satellite Radio Holdings, Inc.-Class A * 96,145 -------------- 2,144,062 -------------- TECHNOLOGY -- 11.1% 500 Acuity Brands, Inc. 11,505 1,400 Acxiom Corp. 31,458 2,600 Adtran, Inc. 69,628 2,200 Ametek, Inc. 62,810 700 Arrow Electronics, Inc. * 15,148 1,600 Avaya, Inc. * 19,392 2,800 BE Aerospace, Inc. * 29,680
See accompanying notes to the financial statements. 11 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- TECHNOLOGY -- CONTINUED 600 BEI Technologies, Inc. 16,704 800 Black Box Corp. 28,992 1,125 Brightpoint, Inc. * 14,906 1,762 Celestica, Inc. * 25,197 2,700 Ciber, Inc. * 18,198 6,800 Convergys Corp. * 94,520 2,100 Covansys Corp. * 19,845 3,800 Digitas, Inc. * 27,170 500 Diodes, Inc. * 9,605 7,900 Earthlink, Inc. * 79,079 1,800 Embarcadero Technologies, Inc. * 14,256 6,500 Extreme Networks, Inc. * 30,225 4,200 Foundry Networks, Inc. * 38,304 1,600 Global Imaging Systems, Inc. * 44,800 3,700 Goodrich Corp. 117,512 1,300 Harris Corp. 62,608 1,800 Helix Technology Corp. 24,498 7,400 Ikon Office Solutions, Inc. 83,472 1,700 Infospace, Inc. * 64,600 5,400 Ingram Micro, Inc.-Class A * 80,028 900 Innovative Solutions & Support, Inc. * 24,048 2,500 Intervoice, Inc. * 22,575 2,800 iVillage, Inc. * 16,268 4,600 MatrixOne, Inc. * 21,528 1,500 Maximus, Inc. * 43,635 1,400 Mercury Computer Systems, Inc. * 37,828 4,000 Microsemi Corp. * 43,160 500 MTS Systems Corp. 10,875 1,300 NCR Corp. * 57,421 1,300 Paxar Corp. * 26,312 4,200 Pixelworks, Inc. * 43,848 900 Rogers Corp. * 41,751 1,800 S1 Corp. * 14,220 800 SBS Technologies, Inc. * 8,208 1,000 ScanSource, Inc. * 60,040 2,900 Scientific-Atlanta, Inc. 78,996
See accompanying notes to the financial statements. 12 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- TECHNOLOGY -- CONTINUED 1,300 Siliconix, Inc. * 44,538 3,000 SPSS, Inc. * 41,400 2,300 Syntel, Inc. 35,121 2,800 Take-Two Interactive Software, Inc. * 91,700 4,800 Tech Data Corp. * 180,768 1,200 Tekelec * 21,924 4,900 Tibco Software, Inc. * 30,968 2,100 Trimble Navigation, Ltd. * 57,834 3,300 United Stationers, Inc. * 135,861 1,000 Viasat, Inc. * 19,820 900 Vicor Corp. 10,656 2,100 WebEx Communications, Inc. * 40,740 2,200 Websense, Inc. * 84,370 2,300 WESCO International, Inc. * 46,552 8,900 Wind River Systems, Inc. * 96,565 -------------- 2,623,670 -------------- TRANSPORTATION -- 1.1% 2,300 Continental Airlines, Inc.-Class B * 22,195 5,300 Delta Airlines, Inc. * 21,412 1,300 JB Hunt Transport Services, Inc. 44,070 3,200 Kansas City Southern * 48,000 900 Knight Transportation, Inc. * 17,901 500 Landstar System, Inc. * 26,240 4,100 Northwest Airlines Corp.-Class A * 38,622 1,200 USF Corp. 41,112 -------------- 259,552 -------------- UTILITY -- 5.8% 10,400 AES Corp. (The) * 104,936 2,800 Allegheny Energy, Inc. * 41,132 2,700 Alliant Energy Corp. 70,173 11,100 Centerpoint Energy, Inc. 121,434 6,800 CMS Energy Corp. * 65,280 3,900 DPL, Inc. 79,287 2,000 Duquesne Light Holdings, Inc. 37,580
See accompanying notes to the financial statements. 13 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES/ PAR VALUE($) DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------- UTILITY -- CONTINUED 4,000 El Paso Electric Co. * 61,360 900 Energen Corp. 42,696 1,400 Energy East Corp. 34,118 600 Great Plains Energy, Inc. 18,096 2,900 National Fuel Gas Co. 77,662 2,000 Northeast Utilities 38,340 900 NSTAR 43,920 2,600 OGE Energy Corp. 67,600 1,600 Pinnacle West Capital Corp. 67,536 3,600 PNM Resources, Inc. 76,932 1,300 Puget Energy, Inc. 29,783 1,300 Questar Corp. 52,884 6,600 Reliant Energy, Inc. * 65,736 6,700 TECO Energy, Inc. 88,842 800 UIL Holdings Corp. 39,264 1,400 Wisconsin Energy Corp. 45,850 -------------- 1,370,441 -------------- TOTAL COMMON STOCKS (COST $18,102,040) 23,479,770 -------------- SHORT-TERM INVESTMENT -- 0.9% REPURCHASE AGREEMENT-- 0.9% 200,167 Citigroup Global Markets Repurchase Agreement, dated 8/31/04, due 9/01/04, with a maturity value of $200,173, and an effective yield of 1.10%, collateralized by a U.S. Treasury Note with a rate of 2.75%, maturity date of 7/31/06, and a market value, including accrued interest of $204,748. 200,167 -------------- TOTAL SHORT-TERM INVESTMENTS (COST $200,167) 200,167 --------------
See accompanying notes to the financial statements. 14 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
VALUE ($) - -------------------------------------------------------------------------------------- TOTAL INVESTMENTS -- 100.1% (Cost $18,302,207) 23,679,937 Other Assets and Liabilities (net) -- (0.1%) (16,640) -------------- TOTAL NET ASSETS -- 100.0% $ 23,663,297 ==============
NOTES TO THE SCHEDULE OF INVESTMENTS: REIT - Real Estate Investment Trust * Non-income producing security. At August 31, 2004, the approximate 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 -------------- ---------------- ---------------- -------------- $ 18,302,207 $ 5,756,800 $ (379,070) $ 5,377,730
At February 29, 2004, GMO Tax-Managed Small Companies Fund had capital loss carryforwards available to offset future capital gains, if any, to the extent permitted by the Internal Revenue Code, of $4,900,098, $1,587,943 and $393,614 expiring in 2009, 2010 and 2011, respectively. Utilization of the capital loss carryforwards above could be subject to limitations imposed by the Internal Revenue Code related to share ownership activity. See accompanying notes to the financial statements. 15 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments, at value (cost $18,302,207) (Note 2) $ 23,679,937 Dividends and interest receivable 21,288 Receivable for expenses reimbursed by Manager (Note 3) 4,247 ------------- Total assets 23,705,472 ------------- LIABILITIES: Payable to affiliate for (Note 3): Management fee 10,855 Shareholder service fee 2,961 Trustees fee 60 Accrued expenses 28,299 ------------- Total liabilities 42,175 ------------- NET ASSETS $ 23,663,297 ============= NET ASSETS CONSIST OF: Paid-in capital $ 24,213,851 Accumulated undistributed net investment income 22,624 Accumulated net realized loss (5,950,908) Net unrealized appreciation 5,377,730 ------------- $ 23,663,297 ============= NET ASSETS ATTRIBUTABLE TO: Class III shares $ 23,663,297 ============= SHARES OUTSTANDING: Class III 1,698,718 ============= NET ASSET VALUE PER SHARE: Class III $ 13.93 =============
See accompanying notes to the financial statements. 16 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends $ 153,397 Interest 547 ------------- Total income 153,944 ------------- EXPENSES: Management fee (Note 3) 67,195 Shareholder service fee (Note 3) - Class III 18,326 Custodian and transfer agent fees 8,924 Audit and tax fees 17,664 Legal fees 368 Trustees fees and related expenses (Note 3) 204 Registration fees 828 Miscellaneous 185 ------------- Total expenses 113,694 Fees and expenses reimbursed by Manager (Note 3) (27,969) ------------- Net expenses 85,725 ------------- Net investment income 68,219 ------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 956,124 Closed futures contracts (25,377) ------------- Net realized gain 930,747 ------------- Change in net unrealized appreciation (depreciation) on investments (2,438,443) ------------- Net realized and unrealized loss (1,507,696) ------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (1,439,477) =============
See accompanying notes to the financial statements. 17 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 --------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 68,219 $ 138,470 Net realized gain 930,747 2,525,683 Change in net unrealized appreciation (depreciation) (2,438,443) 7,123,319 ------------ ------------ Net increase (decrease) in net assets from operations (1,439,477) 9,787,472 ------------ ------------ Distributions to shareholders from: Net investment income Class III (45,595) (143,023) ------------ ------------ Net share transactions (Note 6): Class III 614,723 (5,838,979) Purchase premiums (Notes 2 and 6): Class III 5,000 -- ------------ ------------ Total increase (decrease) in net assets resulting from net share transactions and purchase premiums 619,723 (5,838,979) ------------ ------------ Total increase (decrease) in net assets (865,349) 3,805,470 NET ASSETS: Beginning of period 24,528,646 20,723,176 ------------ ------------ End of period (including accumulated undistributed net investment income of $22,624 and $0, respectively) $ 23,663,297 $ 24,528,646 ============ ============
See accompanying notes to the financial statements. 18 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 --------------------------------------------------------------- (UNAUDITED) 2004 2003 2002 2001 2000(a) ---------------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 14.80 $ 9.66 $ 11.76 $ 10.54 $ 9.52 $ 10.00 ---------- ---------- ---------- ---------- ---------- ---------- Income from investment operations: Net investment income 0.04 0.08 0.11 0.15 0.12 0.08 Net realized and unrealized gain (loss) (0.88) 5.14 (2.10) 1.23 1.02 (0.50) ---------- ---------- ---------- ---------- ---------- ---------- Total from investment operations (0.84) 5.22 (1.99) 1.38 1.14 (0.42) ---------- ---------- ---------- ---------- ---------- ---------- Less distributions to shareholders: From net investment income (0.03) (0.08) (0.11) (0.16) (0.12) (0.06) ---------- ---------- ---------- ---------- ---------- ---------- Total distributions (0.03) (0.08) (0.11) (0.16) (0.12) (0.06) ---------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 13.93 $ 14.80 $ 9.66 $ 11.76 $ 10.54 $ 9.52 ========== ========== ========== ========== ========== ========== TOTAL RETURN (b) (5.70)%** 54.21% (17.00)% 13.25% 12.12% (4.25)%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 23,663 $ 24,529 $ 20,723 $ 37,544 $ 41,042 $ 39,000 Net expenses to average daily net assets 0.70%* 0.70% 0.71% 0.70% 0.70% 0.70%* Net investment income to average daily net assets 0.56%* 0.62% 0.90% 1.30% 1.25% 1.08%* Portfolio turnover rate 45%** 66% 55% 65% 131% 18% Fees and expenses reimbursed by the Manager to average daily net assets: 0.23%* 0.31% 0.18% 0.20% 0.17% 0.21%* Purchase premiums and redemption fees consisted of the following per share amounts: (c) --(d) -- $ 0.01 --(d) $ 0.01 N/A
(a) Period from June 1,1999 (commencement of operations) through February 29, 2000. (b) The total return would have been lower had certain expenses not been reimbursed during the period shown. Calculation excludes purchase premiums which are borne by the shareholders. (c) Effective March 1, 2000, the Fund adopted the provision of the revised AICPA Audit and Accounting Guide for Investment Companies which requires the disclosure of the per share effect of purchase premiums 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) Purchase premiums were less than $0.01 per share. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 19 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION 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 Russell 2500 Index (after tax), which is computed by the Manager by applying the maximum historical applicable individual federal income tax rate to the Russell 2500 Index's dividend yield. 2. SIGNIFICANT ACCOUNTING POLICIES 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 as determined in good faith by the Trustees or other persons acting at their direction. FUTURES CONTRACTS The Fund may purchase and sell futures contracts 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 20 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, 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 August 31, 2004, 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 using standard models that incorporate 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 on swap contracts 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 August 31, 2004, the Fund held no open swap agreements. 21 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. See Schedule of Investments for the open repurchase agreement as of August 31, 2004. 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. As of August 31, 2004, 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. 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. 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. Dividends representing a return of capital are reflected 22 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) as a reduction of cost, when the amount of the return of capital is conclusively determined. 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 OF FUND SHARES The premium on cash purchases of Fund shares is 0.50% of the amount invested. If the Manager determines that any portion of a cash purchase or redemption is offset by a corresponding cash redemption or purchase occurring on the same day, it will waive the purchase premium with respect to that portion. In addition, the purchase premium charged by the Fund may be waived in extraordinary circumstances if the Fund will not incur transaction costs. All purchase premiums are paid and recorded by the Fund as paid-in capital. For the six months ended August 31, 2004 and the year ended February 29, 2004, the Fund received $5,000 and $0 in purchase premiums, respectively. There is no fee for redemptions, reinvested distributions or in-kind transactions. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.55% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% for Class III shares. GMO has entered into a binding agreement effective until at least June 30, 2005 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 0.55% of the average daily net assets. The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $112. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004, aggregated $11,605,841 and $10,860,910, respectively. 23 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 5. PRINCIPAL SHAREHOLDERS AND RELATED PARTY At August 31, 2004, 58.6% 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. At August 31, 2004, 6.0% of the Fund was held by one related party comprised of certain GMO employee accounts. 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ------------------------------ ------------------------------ SHARES AMOUNT SHARES AMOUNT ------------- ------------- ------------- ------------- Class III: Shares sold 67,779 $ 995,000 -- $ -- Shares issued to shareholders in reinvestment of distributions 1,374 19,723 5,634 69,114 Shares repurchased (27,894) (400,000) (493,952) (5,908,093) Purchase premiums -- 5,000 -- -- ------------- ------------- ------------- ------------- Net increase (decrease) 41,259 $ 619,723 (488,318) $ (5,838,979) ============= ============= ============= =============
7. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 24 GMO TAX-MANAGED SMALL COMPANIES FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees and other expenses. The following table, assuming a $1,000 investment in a class of shares, discloses the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the classes' actual return and actual expenses, and (2) a hypothetical annualized 5% return and the class's actual expenses: Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * ----------------------------------------------------------------- 1) Actual $ 1,000.00 $ 943.00 $ 3.43 2) Hypothetical 1,000.00 1,021.68 3.57
*Expenses are calculated using the Class III annualized expense ratio for the six months ended August 31, 2004 of 0.70%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 25 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
CLASSIFICATION % OF NET ASSETS - ------------------------------------------------------------------------------------------------ Automotive 5.3% Construction 2.4 Consumer Goods 7.0 Financial 20.3 Food & Beverage 0.9 Health Care 11.3 Machinery 0.8 Manufacturing 3.3 Metals & Mining 1.0 Oil & Gas 6.6 Primary Process Industry 0.4 Retail Stores 10.4 Services 3.9 Technology 11.7 Transportation 0.2 Utility 13.2 Short-Term Investments and Other Assets and Liabilities (net) 1.3 ----------------- 100.0% =================
See accompanying notes to the financial statements. 1 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- COMMON STOCKS -- 98.7% AUTOMOTIVE -- 5.3% 9,400 Delphi Corp. 86,104 3,000 Eaton Corp. 181,050 86,069 Ford Motor Co. 1,214,434 39,341 General Motors Corp. 1,625,177 2,000 Gentex Corp. 68,680 22,900 Harley-Davidson, Inc. 1,397,358 8,200 Johnson Controls, Inc. 461,660 3,400 Lear Corp. 183,192 1,500 Paccar, Inc. 90,285 ------------- 5,307,940 ------------- CONSTRUCTION -- 2.4% 5,200 Centex Corp. 238,004 21,300 D.R. Horton, Inc. 659,022 12,100 Georgia-Pacific Corp. 411,158 6,400 KB Home 440,128 5,700 Lennar Corp.-Class A 261,060 400 NVR, Inc. * 200,900 3,200 Pulte Homes, Inc. 188,640 ------------- 2,398,912 ------------- CONSUMER GOODS -- 7.0% 44,000 Altria Group, Inc. 2,153,800 400 Black & Decker Corp. 27,572 26,700 Eastman Kodak Co. 789,786 3,100 Fortune Brands, Inc. 226,765 13,900 Gillette Co. (The) 590,750 4,700 Harman International Industries, Inc. 454,443 5,200 International Game Technology 150,020 10,100 Jones Apparel Group, Inc. 360,469 17,200 Kimberly Clark Corp. 1,147,240 8,400 Liz Claiborne, Inc. 319,788 3,800 Mohawk Industries, Inc. * 292,296
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) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- CONSUMER GOODS -- CONTINUED 3,200 Nike, Inc.-Class B 240,992 2,700 VF Corp. 133,218 1,700 Whirlpool Corp. 103,938 ------------- 6,991,077 ------------- FINANCIAL -- 20.3% 16,900 Allstate Corp. (The) 797,849 5,150 AMBAC Financial Group, Inc. 388,825 38,200 American International Group, Inc. 2,721,368 1,300 AON Corp. 33,735 1,300 Arthur J. Gallagher & Co. 41,418 8,628 Bank of America Corp. 388,087 1,700 BB&T Corp. 67,983 2,000 Bear Stearns Cos. (The), Inc. 175,840 15,200 Capital One Financial Corp. 1,029,952 900 Charter One Financial, Inc. 40,023 6,300 CIT Group, Inc. 225,162 700 CNA Financial Corp. * 16,870 9,500 Comerica, Inc. 571,425 12,798 Countrywide Financial Corp. 454,969 1,600 Erie Indemnity Co.-Class A 79,584 30,700 Fannie Mae 2,285,615 3,100 Federated Investors, Inc.-Class B 89,435 16,757 Fidelity National Financial, Inc. 630,901 9,300 Freddie Mac 624,216 1,350 Greenpoint Financial Corp. 59,467 13,000 Hartford Financial Services Group, Inc. 795,080 1,200 Jefferson Pilot Corp. 57,480 16,310 JPMorgan Chase & Co. 645,550 5,400 KeyCorp 169,290 1,200 Legg Mason, Inc. 96,816 6,600 Lincoln National Corp. 298,980 10,800 Loews Corp. 613,440 3,900 Marsh & McLennan Cos., Inc. 174,291 1,900 Marshall & Ilsley Corp. 76,152 3,000 MBIA, Inc. 171,810
See accompanying notes to the financial statements. 3 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- FINANCIAL -- CONTINUED 49,200 MBNA Corp. 1,187,688 3,100 Merrill Lynch & Co., Inc. 158,317 11,000 MGIC Investment Corp. 750,970 3,900 Morgan Stanley 197,847 5,000 National City Corp. 188,950 8,950 Old Republic International Corp. 210,772 9,600 PMI Group (The), Inc. 398,688 2,800 PNC Financial Services Group, Inc. 150,276 6,400 Radian Group, Inc. 283,520 864 Regions Financial Corp. 27,899 4,100 SEI Investments Co. 133,988 800 Sovereign Bancorp, Inc. 17,488 1,730 St. Paul Travelers Companies 60,014 2,000 Suntrust Banks, Inc. 136,200 3,300 Synovus Financial Corp. 83,820 7,000 T. Rowe Price Group, Inc. 346,710 5,600 Torchmark Corp. 288,288 26,700 UnumProvident Corp. 432,006 4,300 Wachovia Corp. 201,713 31,200 Washington Mutual, Inc. 1,211,496 ------------- 20,288,263 ------------- FOOD & BEVERAGE -- 0.9% 10,800 Coca Cola Enterprises, Inc. 223,020 6,700 ConAgra Foods, Inc. 175,540 17,000 Sara Lee Corp. 376,210 9,200 Tyson Foods, Inc.-Class A 151,616 ------------- 926,386 ------------- HEALTH CARE -- 11.3% 2,000 Aetna, Inc. 185,300 8,900 AmerisourceBergen Corp. 481,490 2,100 Bard (C.R.), Inc. 117,810 11,000 Baxter International, Inc. 335,940 2,400 Becton, Dickinson & Co. 115,488
See accompanying notes to the financial statements. 4 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- HEALTH CARE -- CONTINUED 5,000 Biomet, Inc. 228,250 9,100 Cardinal Health, Inc. 411,320 10,200 Cigna Corp. 678,912 4,900 Forest Laboratories, Inc. * 224,665 14,300 Guidant Corp. 855,140 5,500 Health Net, Inc. * 142,670 10,600 Humana, Inc. * 201,400 2,000 ImClone Systems, Inc. * 106,560 24,100 Johnson & Johnson 1,400,210 10,500 King Pharmaceuticals, Inc. * 130,830 4,700 Lincare Holdings, Inc. * 151,058 8,100 McKesson Corp. 250,695 35,000 Merck & Co., Inc. 1,573,950 61,530 Pfizer, Inc. 2,010,185 31,500 Schering-Plough Corp. 581,490 4,600 Stryker Corp. 208,380 13,200 Tenet Healthcare Corp. * 137,544 9,700 UnitedHealth Group, Inc. 641,461 3,000 Varian Medical Systems, Inc. * 99,450 ------------- 11,270,198 ------------- MACHINERY -- 0.8% 3,500 Caterpillar, Inc. 254,450 6,600 Deere and Co. 417,582 2,100 Smith International, Inc. * 119,658 800 Stanley Works (The) 34,608 ------------- 826,298 ------------- MANUFACTURING -- 3.3% 14,400 American Standard Cos., Inc. * 541,584 4,800 Danaher Corp. 246,816 15,000 General Electric Co. 491,850 17,900 Honeywell International, Inc. 644,042 11,300 Illinois Tool Works, Inc. 1,031,577
See accompanying notes to the financial statements. 5 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- MANUFACTURING -- CONTINUED 3,000 SPX Corp. 109,470 900 Temple Inland, Inc. 61,452 3,400 Textron, Inc. 215,866 ------------- 3,342,657 ------------- METALS & MINING -- 1.0% 23,100 Alcoa, Inc. 747,978 2,700 Phelps Dodge Corp. 220,212 ------------- 968,190 ------------- OIL & GAS -- 6.6% 5,800 Amerada Hess Corp. 466,900 4,200 Burlington Resources, Inc. 152,166 11,700 ChevronTexaco Corp. 1,140,750 9,283 ConocoPhillips 690,934 49,400 Exxon Mobil Corp. 2,277,340 1,300 Kerr-McGee Corp. 68,614 16,000 Marathon Oil Corp. 580,320 11,300 Occidental Petroleum Corp. 583,645 3,200 Sunoco, Inc. 196,800 3,900 Unocal Corp. 145,626 4,700 Valero Energy Corp. 310,341 ------------- 6,613,436 ------------- PRIMARY PROCESS INDUSTRY -- 0.4% 1,800 Engelhard Corp. 50,886 2,400 Nucor Corp. 187,896 300 PPG Industries, Inc. 17,931 2,600 Sherwin-Williams Co. (The) 107,380 ------------- 364,093 ------------- RETAIL STORES -- 10.4% 3,500 Abercrombie & Fitch Co.-Class A 98,000 26,200 Albertson's, Inc. 643,996 8,600 Autonation, Inc. * 141,384
See accompanying notes to the financial statements. 6 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- RETAIL STORES -- CONTINUED 11,200 Bed Bath & Beyond, Inc. * 419,104 2,200 CDW Corp. 128,700 2,800 Chico's FAS, Inc. * 114,520 15,100 CVS Corp. 604,000 4,300 Dollar General Corp. 84,710 6,200 Dollar Tree Stores, Inc. * 145,762 3,300 Fastenal Co. 207,174 6,100 Federated Department Stores 264,740 4,800 Foot Locker, Inc. 107,376 97,100 Home Depot, Inc. 3,549,976 10,200 JC Penney Co., Inc. Holding Co. 390,864 19,000 Kroger Co. * 314,070 5,600 Limited Brands, Inc. 112,448 4,500 May Department Stores Co. (The) 110,295 4,600 Nordstrom, Inc. 170,798 7,400 Ross Stores, Inc. 156,510 47,100 Safeway, Inc. * 951,420 11,100 Sears Roebuck & Co. 424,908 8,700 Supervalu, Inc. 229,332 5,000 Target Corp. 222,900 18,800 TJX Cos., Inc. 397,808 1,500 Toys R Us, Inc. * 24,360 5,400 Wal-Mart Stores, Inc. 284,418 1,600 Whole Foods Market, Inc. 124,368 ------------- 10,423,941 ------------- SERVICES -- 3.9% 2,300 Apollo Group, Inc.-Class A * 179,400 6,100 Caesars Entertainment, Inc. * 94,245 2,600 Harrah's Entertainment, Inc. 125,294 11,100 Interpublic Group of Cos., Inc. * 117,105 52,400 McDonald's Corp. 1,415,848 900 Omnicom Group 61,929 6,200 Outback Steakhouse, Inc. 242,668 2,500 Robert Half International, Inc. 61,250
See accompanying notes to the financial statements. 7 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- SERVICES -- CONTINUED 3,000 RR Donnelley & Sons Co. 92,190 4,700 Sabre Holdings Corp. 108,100 14,900 Starbucks Corp. * 644,276 13,500 Sysco Corp. 433,890 6,300 Wendy's International, Inc. 216,531 1,700 Yum! Brands, Inc. 67,507 ------------- 3,860,233 ------------- TECHNOLOGY -- 11.7% 1,300 American Power Conversion Corp. 21,840 30,700 Boeing Co. (The) 1,603,154 3,700 Computer Associates International, Inc. 89,614 13,000 Corning, Inc. * 131,560 38,000 Dell, Inc. * 1,323,920 17,100 Electronic Data Systems Corp. 328,662 18,900 First Data Corp. 798,525 4,200 General Dynamics Corp. 410,088 4,600 Goodrich Corp. 146,096 9,500 Hewlett-Packard Co. 169,955 83,100 Intel Corp. 1,769,199 1,500 Lexmark International, Inc. * 132,675 37,300 Microsoft Corp. 1,018,290 64,000 Motorola, Inc. 1,033,600 11,200 National Semiconductor Corp. * 149,296 5,400 NCR Corp. * 238,518 8,200 Oracle Corp. * 81,754 39,800 Qualcomm, Inc. 1,514,390 3,000 Tellabs, Inc. * 27,210 21,500 Texas Instruments, Inc. 420,110 4,900 Time Warner, Inc. * 80,115 7,100 Total System Services, Inc. 157,904 6,900 Xerox Corp. * 92,667 ------------- 11,739,142 -------------
See accompanying notes to the financial statements. 8 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- TRANSPORTATION -- 0.2% 4,600 Burlington Northern Santa Fe Corp. 164,680 ------------- UTILITY -- 13.2% 5,500 AES Corp. (The) * 55,495 500 Ameren Corp. 23,395 16,100 American Electric Power Co., Inc. 526,953 37,080 AT&T Corp. 548,042 31,600 AT&T Wireless Services, Inc. * 461,992 60,700 BellSouth Corp. 1,624,332 3,200 Centerpoint Energy, Inc. 35,008 1,400 Consolidated Edison, Inc. 59,080 1,700 Constellation Energy Group, Inc. 69,870 1,700 DTE Energy Co. 70,244 25,700 Duke Energy Corp. 568,998 9,400 Edison International 252,672 25,900 El Paso Corp. 211,862 2,600 Exelon Corp. 95,810 1,500 FirstEnergy Corp. 60,360 1,200 FPL Group, Inc. 83,040 1,300 NiSource, Inc. 27,040 38,100 PG&E Corp. * 1,112,139 1,600 Pinnacle West Capital Corp. 67,536 3,800 PPL Corp. 181,754 1,000 Progress Energy, Inc. 43,890 4,000 Public Service Enterprise Group, Inc. 169,360 131,826 SBC Communications, Inc. 3,399,793 4,500 Sempra Energy 162,675 31,100 Sprint Corp.-FON Group 612,048 6,300 TXU Corp. 262,269 56,342 Verizon Communications, Inc. 2,211,423 4,500 Williams Cos., Inc. 53,505 7,100 Xcel Energy, Inc. 125,315 ------------- 13,175,900 ------------- TOTAL COMMON STOCKS (COST $94,088,798) 98,661,346 -------------
See accompanying notes to the financial statements. 9 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENT -- 1.2% REPURCHASE AGREEMENT -- 1.2% 1,152,981 Citigroup Global Markets Repurchase Agreement, dated 8/31/04, due 9/01/04, with a maturity value of $1,153,016 and an effective yield of 1.10%, collateralized by a U.S. Treasury Note with a rate of 2.75%, a maturity date of 7/31/06 and a market value, including accrued interest of $1,176,063. 1,152,981 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $1,152,981) 1,152,981 ------------- TOTAL INVESTMENTS -- 99.9% (Cost $95,241,779) 99,814,327 Other Assets and Liabilities (net) -- 0.1% 108,585 ------------- TOTAL NET ASSETS -- 100.0% $ 99,922,912 =============
NOTES TO THE SCHEDULE OF INVESTMENTS: * Non-income producing security. At August 31, 2004, the approximate 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 ---------------- ------------------ ------------------ ---------------- $ 95,241,779 $ 7,149,748 $ (2,577,200) $ 4,572,548
At February 29, 2004, GMO Tax-Managed U.S. Equities Fund had capital loss carryfowards available to offset future capital gains, if any, to the extent permitted by the Internal Revenue Code, of $24,242, $1,030,107, $3,063,585 and $1,837,014 expiring in 2008, 2010, 2011 and 2012, respectively. Utilization of the capital loss carryforwards above could be subject to limitations imposed by the Internal Revenue Code related to share ownership activity. See accompanying notes to the financial statements. 10 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments, at value (cost $95,241,779) (Note 2) $ 99,814,327 Dividends and interest receivable 166,250 Receivable for expenses reimbursed by Manager (Note 3) 5,952 -------------- Total assets 99,986,529 -------------- LIABILITIES: Payable to affiliate for (Note 3): Management fee 27,541 Shareholder service fee 12,518 Trustees fee 132 Accrued expenses 23,426 -------------- Total liabilities 63,617 -------------- NET ASSETS $ 99,922,912 ============== NET ASSETS CONSIST OF: Paid-in capital $ 99,937,492 Accumulated undistributed net investment income 247,014 Accumulated net realized loss (4,834,142) Net unrealized appreciation 4,572,548 -------------- $ 99,922,912 ============== NET ASSETS ATTRIBUTABLE TO: Class III shares $ 99,922,912 ============== SHARES OUTSTANDING: Class III 9,019,017 ============== NET ASSET VALUE PER SHARE: Class III $ 11.08 ==============
See accompanying notes to the financial statements. 11 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends $ 849,274 Interest 4,240 -------------- Total income 853,514 -------------- EXPENSES: Management fee (Note 3) 153,889 Shareholder service fee (Note 3) - Class III 69,950 Custodian and transfer agent fees 12,236 Audit and tax fees 17,848 Legal fees 1,196 Trustees fees and related expenses (Note 3) 522 Registration fees 460 Miscellaneous 460 -------------- Total expenses 256,561 Fees and expenses reimbursed by Manager (Note 3) (32,200) -------------- Net expenses 224,361 -------------- Net investment income 629,153 -------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain on: Investments 988,276 Closed futures contracts 132,530 -------------- Net realized gain 1,120,806 -------------- Change in net unrealized appreciation (depreciation) on investments (5,015,374) -------------- Net realized and unrealized loss (3,894,568) -------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (3,265,415) ==============
See accompanying notes to the financial statements. 12 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 629,153 $ 681,403 Net realized gain (loss) 1,120,806 (533,891) Change in net unrealized appreciation (depreciation) (5,015,374) 15,258,594 ------------ ------------ Net increase (decrease) in net assets from operations (3,265,415) 15,406,106 ------------ ------------ Distributions to shareholders from: Net investment income Class III (479,388) (685,290) ------------ ------------ Net share transactions (Note 6): Class III 41,641,107 6,958,552 ------------ ------------ Total increase in net assets 37,896,304 21,679,368 NET ASSETS: Beginning of period 62,026,608 40,347,240 ------------ ------------ End of period (including accumulated undistributed net investment income of $247,014 and $97,249, respectively) $ 99,922,912 $ 62,026,608 ============ ============
See accompanying notes to the financial statements. 13 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ---------------------------------------------------------------------- (UNAUDITED) 2004 2003 2002 2001 2000 ---------------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 11.58 $ 8.62 $ 11.24 $ 12.08 $ 12.64 $ 10.67 ---------- ---------- ---------- ---------- ---------- ---------- Income from investment operations: Net investment income 0.08+ 0.14+ 0.14+ 0.16+ 0.15+ 0.13 Net realized and unrealized gain (loss) (0.53) 2.96 (2.64) (0.86) (0.57) 1.97 ---------- ---------- ---------- ---------- ---------- ---------- Total from investment operations (0.45) 3.10 (2.50) (0.70) (0.42) 2.10 ---------- ---------- ---------- ---------- ---------- ---------- Less distributions to shareholders: From net investment income (0.05) (0.14) (0.12) (0.14) (0.14) (0.13) ---------- ---------- ---------- ---------- ---------- ---------- Total distributions (0.05) (0.14) (0.12) (0.14) (0.14) (0.13) ---------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 11.08 $ 11.58 $ 8.62 $ 11.24 $ 12.08 $ 12.64 ========== ========== ========== ========== ========== ========== TOTAL RETURN (a) (3.86)%** 36.21% (22.33)% (5.78)% (3.44)% 19.83% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 99,923 $ 62,027 $ 40,347 $ 27,495 $ 11,418 $ 13,275 Net expenses to average daily net assets 0.48%* 0.48% 0.49% 0.48% 0.48% 0.48% Net investment income to average daily net assets 1.35%* 1.34% 1.41% 1.36% 1.18% 1.11% Portfolio turnover rate 30%** 70% 63% 45% 161% 19% Fees and expenses reimbursed by the Manager to average daily net assets: 0.07%* 0.13% 0.16% 0.36% 0.54% 0.44%
(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. See accompanying notes to the financial statements. 14 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION 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 Index (after tax), which is computed by the Manager by applying the maximum historical applicable individual federal tax rate to the S&P 500 Index's dividend yield and to its estimated short-term and long-term realized capital gains (losses) (arising from changes in the constituents of the S&P 500 Index). 2. SIGNIFICANT ACCOUNTING POLICIES 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. 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 15 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, 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 August 31, 2004, 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 using standard models that incorporate 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 on swaps contracts 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 August 31, 2004, the Fund held no open swap agreements. 16 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. See Schedule of Investments for the open repurchase agreement as of August 31, 2004. 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. As of August 31, 2004, 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. 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. 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 17 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) at the fair market value of the securities received. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. 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. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets at the annual rate of 0.15% for Class III shares. GMO has entered into a binding agreement effective until at least June 30, 2005 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 0.33% of the average daily net assets. The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $338. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004, aggregated $67,765,932 and $26,379,782, respectively. 5. PRINCIPAL SHAREHOLDERS At August 31, 2004, 57.7% 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. 18 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------------------- ---------------------------- SHARES AMOUNT SHARES AMOUNT ------------ ------------ ------------ ------------ Class III: Shares sold 3,690,230 $ 41,925,527 1,462,760 $ 14,921,766 Shares issued to shareholders in reinvestment of distributions 18,964 212,599 10,692 109,995 Shares repurchased (44,373) (497,019) (799,211) (8,073,209) ------------ ------------ ------------ ------------ Net increase 3,664,821 $ 41,641,107 674,241 $ 6,958,552 ============ ============ ============ ============
7. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 19 GMO TAX-MANAGED U.S. EQUITIES FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees, and other expenses. The following table, assuming a $1,000 investment in a class of shares, discloses the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the class's actual return and actual expenses, and (2) a hypothetical annualized 5% return and the class's actual expenses: Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * --------------------------------------------------------------------- 1) Actual $ 1,000.00 $ 961.40 $ 2.37 2) Hypothetical 1,000.00 1,022.79 2.45
*Expenses are calculated using the Class III annualized expense ratio for the six months ended August 31, 2004 of 0.48%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004, on your investment in a particular class of shares by dividing your investment value at August 31, 2004, by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 20 GMO U.S. QUALITY EQUITY FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO U.S. QUALITY EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
CLASSIFICATION % OF NET ASSETS - --------------------------------------------------------------------------------------------------- Automotive 4.4% Consumer Goods 5.1 Financial 6.9 Food & Beverage 4.5 Health Care 29.4 Manufacturing 2.5 Primary Process Industry 0.2 Retail Stores 16.7 Services 1.1 Technology 14.5 Utility 4.4 Futures 0.0 Short-Term Investments and Other Assets and Liabilities (net) 10.3 ---------------- 100.0% ================
See accompanying notes to the financial statements. 1 GMO U.S. QUALITY EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- COMMON STOCKS -- 89.7% AUTOMOTIVE -- 4.4% 248,600 Harley-Davidson, Inc. 15,169,572 237,600 Johnson Controls, Inc. 13,376,880 51,900 Lear Corp. 2,796,372 ------------- 31,342,824 ------------- CONSUMER GOODS -- 5.1% 67,200 Avon Products, Inc. 2,968,896 59,200 Colgate-Palmolive Co. 3,196,800 103,300 Jones Apparel Group, Inc. 3,686,777 212,200 Kimberly Clark Corp. 14,153,740 33,500 Liz Claiborne, Inc. 1,275,345 34,200 Mohawk Industries, Inc. * 2,630,664 109,400 Procter & Gamble Co. 6,123,118 56,900 VF Corp. 2,807,446 ------------- 36,842,786 ------------- FINANCIAL -- 6.9% 57,800 Aflac, Inc. 2,317,780 227,700 Allstate Corp. (The) 10,749,717 108,800 AMBAC Financial Group, Inc. 8,214,400 93,300 Fidelity National Financial, Inc. 3,512,745 166,000 Jefferson Pilot Corp. 7,951,400 59,300 Marsh & McLennan Cos., Inc. 2,650,117 105,900 MGIC Investment Corp. 7,229,793 42,500 Old Republic International Corp. 1,000,875 118,400 Torchmark Corp. 6,095,232 ------------- 49,722,059 ------------- FOOD & BEVERAGE -- 4.5% 65,900 Anheuser Busch Cos Inc. 3,479,520 148,400 Coca-Cola Co. (The) 6,634,964 448,000 PepsiCo, Inc. 22,400,000 ------------- 32,514,484 -------------
See accompanying notes to the financial statements. 2 GMO U.S. QUALITY EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- HEALTH CARE -- 29.4% 717,200 Abbott Laboratories 29,900,068 94,500 AmerisourceBergen Corp. 5,112,450 201,900 Bristol-Myers Squibb Co. 4,791,087 59,600 Cigna Corp. 3,966,976 227,900 Guidant Corp. 13,628,420 596,100 Johnson & Johnson 34,633,410 165,500 Medtronic, Inc. 8,233,625 939,100 Merck & Co., Inc. 42,231,327 1,372,900 Pfizer, Inc. 44,852,643 303,700 UnitedHealth Group, Inc. 20,083,681 98,700 Wyeth 3,609,459 ------------- 211,043,146 ------------- MANUFACTURING -- 2.5% 337,800 American Standard Cos., Inc. * 12,704,658 56,000 United Technologies Corp. 5,258,960 ------------- 17,963,618 ------------- PRIMARY PROCESS INDUSTRY -- 0.2% 28,100 Sherwin-Williams Co. (The) 1,160,530 ------------- RETAIL STORES -- 16.7% 92,900 Abercrombie & Fitch Co.-Class A 2,601,200 94,100 Albertson's, Inc. 2,312,978 83,400 Bed Bath & Beyond, Inc. * 3,120,828 35,200 CDW Corp. 2,059,200 1,187,900 Home Depot, Inc. 43,429,624 276,200 Lowe's Cos., Inc. 13,727,140 99,500 Staples, Inc. 2,853,660 140,100 Supervalu, Inc. 3,693,036 341,000 Target Corp. 15,201,780 119,800 TJX Cos., Inc. 2,534,968 136,600 Walgreen Co. 4,979,070 362,500 Wal-Mart Stores, Inc. 19,092,875 52,400 Whole Foods Market, Inc. 4,073,052 ------------- 119,679,411 -------------
See accompanying notes to the financial statements. 3 GMO U.S. QUALITY EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES / PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- SERVICES -- 1.1% 57,400 Omnicom Group 3,949,694 109,600 Outback Steakhouse, Inc. 4,289,744 ------------- 8,239,438 ------------- TECHNOLOGY -- 14.5% 686,300 Dell, Inc. * 23,910,692 416,700 First Data Corp. 17,605,575 64,000 Lexmark International, Inc. * 5,660,800 1,585,300 Microsoft Corp. 43,278,690 166,400 Qualcomm, Inc. 6,331,520 150,700 Symantec Corp. * 7,227,572 ------------- 104,014,849 ------------- UTILITY -- 4.4% 837,000 BellSouth Corp. 22,398,120 224,400 Verizon Communications, Inc. 8,807,700 ------------- 31,205,820 ------------- TOTAL COMMON STOCKS (COST $645,229,487) 643,728,965 ------------- SHORT-TERM INVESTMENTS -- 9.0% U.S. GOVERNMENT -- 0.1% 800,000 U.S. Treasury Bill, 1.04%, due 9/23/04 (a) (b) 799,477 ------------- REPURCHASE AGREEMENTS -- 8.9% 35,373,996 Citigroup Global Markets Repurchase Agreement, dated 8/31/04, due 9/01/04, with a maturity value of $35,375,077, and an effective yield of 1.10%, collateralized by a U. S. Treasury Note with a rate of 2.75%, maturity date of 7/31/06, and a market value, including accrued interest of $36,088,032. 35,373,996
See accompanying notes to the financial statements. 4 GMO U.S. QUALITY EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENTS -- CONTINUED 28,384,585 Morgan Stanley Repurchase Agreement, dated 8/31/04, due 9/01/04, with a maturity value of $28,385,452, and an effective yield of 1.10%, collateralized by a U.S. Treasury Bond with a rate of 8.75%, maturity date of 8/15/20, and a market value, including accrued interest of $28,954,543. 28,384,585 ------------- 63,758,581 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $64,558,058) 64,558,058 ------------- TOTAL INVESTMENTS -- 98.7% (Cost $709,787,545) 708,287,023 Other Assets and Liabilities (net) -- 1.3% 9,345,181 ------------- TOTAL NET ASSETS -- 100.0% $ 717,632,204 =============
NOTES TO THE SCHEDULE OF INVESTMENTS: * Non-income producing security. (a) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 2). (b) Rate shown represents yield to maturity. At August 31, 2004, the approximate 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 ----------------- ----------------- ------------------- ------------------ $ 710,415,972 $ 11,250,902 $ (13,379,851) $ (2,128,949)
At February 29, 2004, GMO U.S. Quality Equity Fund elected to defer to March 1, 2004 post-October losses of $40,225. See accompanying notes to the financial statements. 5 GMO U.S. QUALITY EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) A summary of outstanding financial instruments at August 31, 2004 is as follows: FUTURES CONTRACTS
NUMBER OF CONTRACT NET UNREALIZED CONTRACTS TYPE EXPIRATION DATE VALUE APPRECIATION ----------- ---------------------- ------------------ ------------- ------------------ Buys 158 S&P 500 September 2004 $ 43,611,950 $ 68,723 ==================
At August 31, 2004, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. See accompanying notes to the financial statements. 6 GMO U.S. QUALITY EQUITY FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments, at value (cost $709,787,545) (Note 2) $ 708,287,023 Receivable for Fund shares sold 7,000,000 Dividends and interest receivable 1,058,309 Receivable for collateral on open futures contracts (Note 2) 1,808,000 Receivable for expenses reimbursed by Manager (Note 3) 8,916 ------------- Total assets 718,162,248 ------------- LIABILITIES: Payable to affiliate for (Note 3): Management fee 191,309 Shareholder service fee 70,122 Trustees fee 418 Payable for variation margin on open futures contracts (Note 2) 231,050 Accrued expenses 37,145 ------------- Total liabilities 530,044 ------------- NET ASSETS $ 717,632,204 ============= NET ASSETS CONSIST OF: Paid-in capital $ 728,031,410 Accumulated undistributed net investment income 1,080,880 Accumulated net realized loss (10,048,287) Net unrealized depreciation (1,431,799) ------------- $ 717,632,204 ============= NET ASSETS ATTRIBUTABLE TO: Class III shares $ 257,023,488 ============= Class IV shares $ 460,608,716 ============= SHARES OUTSTANDING: Class III 13,198,192 ============= Class IV 23,644,823 ============= NET ASSET VALUE PER SHARE: Class III $ 19.47 ============= Class IV $ 19.48 =============
See accompanying notes to the financial statements. 7 GMO U.S. QUALITY EQUITY FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends $ 2,786,004 Interest 96,428 ------------- Total income 2,882,432 ------------- EXPENSES: Management fee (Note 3) 659,115 Shareholder service fee (Note 3) - Class III 73,655 Shareholder service fee (Note 3) - Class IV 158,159 Custodian and transfer agent fees 18,810 Audit and tax fees 22,632 Legal fees 2,392 Trustees fees and related expenses (Note 3) 1,733 Registration fees 7,176 Miscellaneous 828 ------------- Total expenses 944,500 Fees and expenses reimbursed by Manager (Note 3) (51,838) ------------- Net expenses 892,662 ------------- Net investment income 1,989,770 ------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized loss on: Investments (7,096,451) Closed futures contracts (2,912,711) ------------- Net realized loss (10,009,162) ------------- Change in net unrealized appreciation (depreciation) on: Investments (1,006,105) Open futures contracts 69,823 ------------- Net unrealized loss (936,282) ------------- Net realized and unrealized loss (10,945,444) ------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (8,955,674) =============
See accompanying notes to the financial statements. 8 GMO U.S. QUALITY EQUITY FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
PERIOD FROM FEBRUARY 6, 2004 SIX MONTHS ENDED (COMMENCEMENT AUGUST 31, 2004 OF OPERATIONS) THROUGH (UNAUDITED) FEBRUARY 29, 2004 ------------------ ---------------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 1,989,770 $ 35,218 Net realized loss (10,009,162) (39,125) Change in net unrealized appreciation (depreciation) (936,282) (495,517) -------------- -------------- Net decrease in net assets from operations (8,955,674) (499,424) -------------- -------------- Distributions to shareholders from: Net investment income Class III (196,720) -- Class IV (747,388) -- -------------- -------------- Total distributions from net investment income (944,108) -- -------------- -------------- Net share transactions (Note 6): Class III 239,579,374 19,000,000 Class IV 331,152,036 138,300,000 -------------- -------------- Increase in net assets resulting from net share transactions 570,731,410 157,300,000 -------------- -------------- Total increase in net assets 560,831,628 156,800,576 NET ASSETS: Beginning of period 156,800,576 -- -------------- -------------- End of period (including accumulated undistributed net investment income of $1,080,880 and $35,218, respectively) $ 717,632,204 $ 156,800,576 ============== ==============
See accompanying notes to the financial statements. 9 GMO U.S. QUALITY EQUITY FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PERIOD FROM FEBRUARY 6, 2004 SIX MONTHS ENDED (COMMENCEMENT AUGUST 31, 2004 OF OPERATIONS) THROUGH (UNAUDITED) FEBRUARY 29, 2004 ------------------ ---------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 19.93 $ 20.00 -------------- -------------- Income from investment operations: Net investment income + 0.10 0.01 Net realized and unrealized loss (0.52) (0.08) -------------- -------------- Total from investment operations (0.42) (0.07) -------------- -------------- Less distributions to shareholders: From net investment income (0.04) -- -------------- -------------- Total distributions (0.04) -- -------------- -------------- NET ASSET VALUE, END OF PERIOD $ 19.47 $ 19.93 ============== ============== TOTAL RETURN (a)** (2.09)% (0.35)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 257,023 $ 18,966 Net expenses to average daily net assets * 0.49% 0.47% Net investment income to average daily net assets * 1.01% 1.22% Portfolio turnover rate ** 29% 2% Fees and expenses reimbursed by the Manager to average daily net assets: * 0.03% 1.59%
(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. See accompanying notes to the financial statements. 10 GMO U.S. QUALITY EQUITY FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PERIOD FROM FEBRUARY 6, 2004 SIX MONTHS ENDED (COMMENCEMENT AUGUST 31, 2004 OF OPERATIONS) THROUGH (UNAUDITED) FEBRUARY 29, 2004 ------------------ ---------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 19.93 $ 20.00 -------------- -------------- Income from investment operations: Net investment income + 0.10 0.01 Net realized and unrealized gain (0.51) (0.08) -------------- -------------- Total from investment operations (0.41) (0.07) -------------- -------------- Less distributions to shareholders: From net investment income (0.04) -- -------------- -------------- Total distributions (0.04) -- -------------- -------------- NET ASSET VALUE, END OF PERIOD $ 19.48 $ 19.93 ============== ============== TOTAL RETURN (a)** (2.04)% (0.35)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 460,609 $ 137,835 Net expenses to average daily net assets * 0.43% 0.44% Net investment income to average daily net assets * 0.99% 0.99% Portfolio turnover rate ** 29% 2% Fees and expenses reimbursed by the Manager to average daily net assets: * 0.03% 1.59%
(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. See accompanying notes to the financial statements. 11 GMO U.S. QUALITY EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION GMO U.S. Quality 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 primarily through investment in U.S. equity securities. The Fund's benchmark is the S&P 500 Index. Throughout the six months ended August 31, 2004, 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 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. 2. SIGNIFICANT ACCOUNTING POLICIES 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. 12 GMO U.S. QUALITY EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, 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 the Schedule of Investments for all open futures contracts as of August 31, 2004. 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 using standard models that incorporate 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 on swap contracts 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 13 GMO U.S. QUALITY EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 August 31, 2004, 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 or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. See the Schedule of Investments for the open repurchase agreements as of August 31, 2004. 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. As of August 31, 2004, 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. 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. 14 GMO U.S. QUALITY EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. 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 between the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class's operations. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on average daily net assets of each class at the annual rate of 0.15% for Class III shares and 0.105% for Class IV shares. GMO has entered into a binding agreement effective until at least June 30, 2005 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 0.33% of the average daily net assets. The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $1,487. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004, aggregated $610,015,328 and $100,774,285, respectively. 15 GMO U.S. QUALITY EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 5. PRINCIPAL SHAREHOLDER AND RELATED PARTY At August 31, 2004, 24.8% of the outstanding shares of the Fund were held by one shareholder, holding in excess of 10% of the Fund's outstanding shares. Investment activities of this shareholder may have a material effect on the Fund. At August 31, 2004, less than 0.1% of the Fund was held by one related party comprised of certain GMO employee accounts. As of August 31, 2004, a significant portion of the Fund's shares was held by accounts for which the Manager has investment discretion. 6. 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:
SIX MONTHS ENDED PERIOD FROM FEBRUARY 6, 2004 AUGUST 31, 2004 (COMMENCEMENT OF OPERATIONS) (UNAUDITED) THROUGH FEBRUARY 29, 2004 ---------------------------- ----------------------------- SHARES AMOUNT SHARES AMOUNT ----------- -------------- ------------- ------------ Class III: Shares sold 12,240,775 $ 239,465,425 951,581 $ 19,000,000 Shares issued to shareholders in reinvestment of distributions 5,953 116,154 -- -- Shares repurchased (117) (2,205) -- -- ----------- -------------- ------------- ------------ Net increase 12,246,611 $ 239,579,374 951,581 $ 19,000,000 =========== ============== ============= ============ SIX MONTHS ENDED PERIOD FROM FEBRUARY 6, 2004 AUGUST 31, 2004 (COMMENCEMENT OF OPERATIONS) (UNAUDITED) THROUGH FEBRUARY 29, 2004 ----------------------------- ----------------------------- SHARES AMOUNT SHARES AMOUNT ------------ ------------- ------------ -------------- Class IV: Shares sold 16,707,521 $ 330,717,237 6,915,000 $ 138,300,000 Shares issued to shareholders in reinvestment of distributions 38,181 747,388 -- -- Shares repurchased (15,879) (312,589) -- -- ------------ ------------- ------------ -------------- Net increase 16,729,823 $ 331,152,036 6,915,000 $ 138,300,000 ============ ============= ============ ==============
7. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 16 GMO U.S. QUALITY EQUITY FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees and other expenses. The following tables, assuming a $1,000 investment in a class of shares, disclose the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the classes' actual return and actual expenses, and (2) a hypothetical annualized 5% return and the classes' actual expenses: Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * -------------------------------------------------------------------- 1) Actual $ 1,000.00 $ 979.10 $ 2.44 2) Hypothetical 1,000.00 1,022.74 2.50
*Expenses are calculated using the Class III annualized expense ratio for the six months ended August 31, 2004 of 0.49%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. Class IV
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * -------------------------------------------------------------------- 1) Actual $ 1,000.00 $ 979.60 $ 2.15 2) Hypothetical 1,000.00 1,023.04 2.19
*Expenses are calculated using the Class IV annualized expense ratio for the six months ended August 31, 2004 of 0.43%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 17 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
CLASSIFICATION % OF NET ASSETS - ----------------------------------------------------------------------------------------------- Mutual Funds 100.0% Short-Term Investments and Other Assets and Liabilities (net) (0.0) --------------- 100.0% ===============
See accompanying notes to the financial statements. 1 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES / PAR VALUE $ DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- MUTUAL FUNDS -- 100.0% AFFILIATED ISSUERS -- 100% 644,931 GMO U.S. Quality Equity Fund, Class III 12,556,806 559,324 GMO Real Estate Fund, Class III 8,652,743 285,661 GMO Small Cap Growth Fund, Class III 5,127,615 513,632 GMO Small Cap Value Fund, Class III 5,613,996 4,006,755 GMO U.S. Core Fund, Class III 52,127,878 ------------- TOTAL MUTUAL FUNDS (COST $79,272,757) 84,079,038 ------------- SHORT-TERM INVESTMENT -- 0.0% REPURCHASE AGREEMENT -- 0.0% 9,262 Citigroup Global Markets Repurchase Agreement, dated 8/31/04, due 9/01/04, with maturity value of $9,262 and an effective yield of 1.10%, collateralized by a U.S. Treasury Note with a rate of 2.75%, maturity date of 7/31/06 and market value, including accrued interest of $9,496. 9,262 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $9,262) 9,262 ------------- TOTAL INVESTMENTS -- 100.0% (Cost $79,282,019) 84,088,300 Other Assets and Liabilities (net) -- (0.0%) (15,998) ------------- TOTAL NET ASSETS -- 100.0% $ 84,072,302 =============
See accompanying notes to the financial statements. 2 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) At August 31, 2004, the approximate 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 ---------------- ------------------- ----------------- ---------------- $ 79,499,611 $ 5,717,058 $ (1,128,369) $ 4,588,689
At February 29, 2004, GMO U.S. Sector Fund had capital loss carryforwards available to offset future capital gains, if any, to the extent permitted by the Internal Revenue Code, of $55,779 and $97,318 expiring in 2009 and 2011, respectively. Utilization of the capital loss carryforwards above could be subject to limitations imposed by the Internal Revenue Code related to share ownership activity. See accompanying notes to the financial statements. 3 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments in unaffiliated issuers, at value (cost $9,262) (Note 2) $ 9,262 Investments in affiliated issuers, at value (cost $79,272,757) (Notes 2 and 7) 84,079,038 Receivable for expenses reimbursed by Manager (Note 3) 36,259 ------------ Total assets 84,124,559 ------------ LIABILITIES: Payable to affiliate for (Note 3): Management fee 23,010 Shareholder service fee 10,459 Trustees fee 179 Accrued expenses 18,609 ------------ Total liabilities 52,257 ------------ NET ASSETS $ 84,072,302 ============ NET ASSETS CONSIST OF: Paid-in capital $ 76,393,825 Accumulated undistributed net investment income 499,839 Accumulated net realized gain 2,372,357 Net unrealized appreciation 4,806,281 ------------ $ 84,072,302 ============ NET ASSETS ATTRIBUTABLE TO: Class III shares $ 84,072,302 ============ SHARES OUTSTANDING: Class III 13,832,831 ============ NET ASSET VALUE PER SHARE: Class III $ 6.08 ============
See accompanying notes to the financial statements. 4 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends from affiliated issuers (Note 7) $ 506,286 Interest 491 ------------ Total income 506,777 ------------ EXPENSES: Management fee (Note 3) 125,238 Shareholder service fee (Note 3) - Class III 56,926 Custodian and transfer agent fees 4,784 Audit and tax fees 10,304 Legal fees 1,012 Trustees fees and related expenses (Note 3) 1,181 Registration fees 1,380 Miscellaneous 368 ------------ Total expenses 201,193 Fees and expenses reimbursed by Manager (Note 3) (18,508) Indirectly incurred fees waived or borne by Manager (Note 3) (125,198) Shareholder service fee waived (Note 3) - Class III (56,908) ------------ Net expenses 579 ------------ Net investment income 506,198 ------------ REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain on: Investments in affiliated issuers 1,363,334 Realized gains distributions from affiliated issuers (Note 7) 2,246,688 ------------ Net realized gain on investments 3,610,022 ------------ Change in net unrealized appreciation (depreciation) on investments (6,074,318) ------------ Net realized and unrealized loss (2,464,296) ------------ NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (1,958,098) ============
See accompanying notes to the financial statements. 5 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED AUGUST 31, 2004 FEBRUARY 29, (UNAUDITED) 2004 ---------------- ------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 506,198 $ 637,811 Net realized gain 3,610,022 153,905 Change in net unrealized appreciation (depreciation) (6,074,318) 13,161,993 ------------- ------------- Net increase (decrease) in net assets from operations (1,958,098) 13,953,709 ------------- ------------- Distributions to shareholders from: Net investment income Class III (702,427) (134,596) Net realized gains Class III (1,121,419) (560,818) ------------- ------------- (1,823,846) (695,414) ------------- ------------- Net share transactions (Note 6): Class III 14,497,964 46,897,801 Purchase premiums and redemption fees (Notes 2 and 6): Class III 13,922 41,932 ------------- ------------- Total increase in net assets resulting from net share transactions and net purchase premiums and redemption fees 14,511,886 46,939,733 ------------- ------------- Total increase in net assets 10,729,942 60,198,028 NET ASSETS: Beginning of period 73,342,360 13,144,332 ------------- ------------- End of period (including accumulated undistributed net investment income of $499,839 and $696,068, respectively) $ 84,072,302 $ 73,342,360 ============= =============
See accompanying notes to the financial statements. 6 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 --------------------------------------------------------------------- (UNAUDITED) 2004 2003 2002 2001 2000 ---------------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 6.40 $ 4.53 $ 5.45 $ 5.11 $ 4.84 $ 4.63 ---------- ---------- ---------- ---------- ---------- ---------- Income from investment operations: Net investment income (a)+ 0.04 0.08 0.09 0.11 0.14 0.09 Net realized and unrealized gain (loss) (0.21) 1.89 (1.00) 0.39 0.35 0.54 ---------- ---------- ---------- ---------- ---------- ---------- Total from investment operations (0.17) 1.97 (0.91) 0.50 0.49 0.63 ---------- ---------- ---------- ---------- ---------- ---------- Less distributions to shareholders: From net investment income (0.06) (0.02) (0.01) (0.16) (0.17) (0.23) From net realized gains (0.09) (0.08) -- -- (0.05) (0.19) ---------- ---------- ---------- ---------- ---------- ---------- Total distributions (0.15) (0.10) (0.01) (0.16) (0.22) (0.42) ---------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 6.08 $ 6.40 $ 4.53 $ 5.45 $ 5.11 $ 4.84 ========== ========== ========== ========== ========== ========== TOTAL RETURN (b) (2.68)%**(c) 43.72%(c) (16.78)% 9.80% 10.14% 13.35% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 84,072 $ 73,342 $ 13,144 $ 270 $ 253 $ 1,602 Net expenses to average daily net assets(d) 0.00%*(e) 0.00%(e) 0.02% 0.00%(e) 00.0% 0.00% Net investment income to average daily net assets (a) 1.33%* 1.43% 1.93% 1.99% 2.71% 1.85% Portfolio turnover rate 9%** 17% 24% 2% 35% 22% Fees and expenses reimbursed and/or waived by the Manager to average daily net assets: 0.53%* 0.58% 0.88% 8.97% 3.05% 0.52% Purchase and redemption fees consisted of the following per share amounts: $ 0.00(f) $ 0.00(f) -- -- -- --
(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 and/or waived during the periods shown. (c) Calculation excludes purchase premiums and redemption fees which are borne by the shareholder. (d) Net expenses exclude expenses incurred indirectly through investments in underlying funds. (See Note 3) (e) Net expenses were less than 0.01%. (f) Purchase and redemption fees were less than $0.01. Amounts calculated using average shares outstanding throughout the period. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 7 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION 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" and it makes investments in other funds of the Trust ("underlying funds"). The Fund seeks total return greater than that of the Russell 3000 Index through investment in common stocks, either directly or through investment in shares of other funds of the Trust. The Fund invests 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. These financial statements are available, without charge, upon request, by calling (617) 346-7646 or by visiting GMO's website at www.gmo.com. 2. SIGNIFICANT ACCOUNTING POLICIES 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 the 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. 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 8 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. See the Schedule of Investments for the open repurchase agreement as of August 31, 2004. 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. 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. 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. Dividends representing a return of capital are reflected as a reduction of cost. 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. (See Note 3.) 9 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) PURCHASES AND REDEMPTIONS OF FUND SHARES The premiums on cash purchases and fees on redemptions of Fund shares is 0.08% of the amount invested or redeemed. For the period March 1, 2004 to June 30, 2004, the premiums on cash purchases and fees on redemptions of Fund shares were 0.15%. The redemption fee is only applicable to shares purchased on or after June 30, 2003. If the Manager determines that any portion of a cash purchase or redemption is offset by a corresponding cash redemption or purchase occurring on the same day, it will waive the purchase premium or redemption fee with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived in extraordinary circumstances if the Fund will not incur transaction costs. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the six months ended August 31, 2004 and year ended February 29, 2004, the Fund received $13,922 and $41,506 in purchase premiums and $0 and $426 in redemption fees, respectively. There is no premium for reinvested distributions or in-kind transactions. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% 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 underlying Funds. GMO has entered into a binding agreement effective until at least December 31, 2004, to reimburse the Fund to the extent that the Fund's total annual operating expenses (not including shareholder service fees, expenses indirectly incurred by investment in other funds of the Trust, 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), security lending fees and expenses, interest expenses and transfer taxes (collectively, "Excluded Fund Fees and Expenses")) exceed 0.33% of the Fund's average daily net assets. In addition, GMO has entered into a binding agreement effective until at least December 31, 2004, to reimburse the Fund to the extent that the sum of (i) the Fund's total annual operating expenses (excluding Excluded Fund Fees and Expenses), plus (ii) the amount of fees and expenses incurred by the Fund through its investment in underlying Funds (excluding these Fund's Excluded Fees and Expenses), exceeds 0.33% of the Fund's average daily net assets, subject to a maximum total reimbursement to the Fund equal to 0.33% of the Fund's average daily net assets. 10 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) For the six months ended August 31, 2004, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
INDIRECT OPERATING INDIRECT INVESTMENT-RELATED EXPENSES (EXCLUDING EXPENSES (INCLUDING, BUT NOT MANAGEMENT FEES, LIMITED TO, INTEREST EXPENSE, SHAREHOLDER SERVICE FEES INDIRECT FOREIGN AUDIT EXPENSE, AND TOTAL INDIRECT NET AND INVESTMENT-RELATED SHAREHOLDER INVESTMENT-RELATED LEGAL INDIRECT MANAGEMENT FEES EXPENSES) SERVICE FEES EXPENSE) EXPENSES ------------------------------------------------------------------------------------------------------------ 0.287% 0.045% 0.150% 0.000% 0.482%
The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004, was $997. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004, aggregated $22,554,974 and $7,106,000, respectively. 5. PRINCIPAL SHAREHOLDERS AND RELATED PARTY At August 31, 2004, 47.5% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. At August 31, 2004, 0.4% of the Fund was held by one related party comprised of a certain GMO employee account. 11 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ------------------------------- -------------------------------- SHARES AMOUNT SHARES AMOUNT -------------- -------------- -------------- -------------- Class III: Shares sold 2,064,455 $ 12,674,118 8,747,444 $ 47,990,420 Shares issued to shareholders in reinvestment of distributions 301,462 1,823,846 129,259 695,414 Shares repurchased -- -- (313,276) (1,788,033) Purchase premiums and redemption fees -- 13,922 -- 41,932 -------------- -------------- -------------- -------------- Net increase 2,365,917 $ 14,511,886 8,563,427 $ 46,939,733 ============== ============== ============== ==============
7. INVESTMENTS IN AFFILIATED ISSUERS A summary of the Fund's transactions in the shares of these issuers during the six months ended August 31, 2004, is set forth below:
VALUE, REALIZED BEGINNING OF SALES DIVIDEND GAINS VALUE, END AFFILIATE PERIOD PURCHASES PROCEEDS INCOME DISTRIBUTIONS OF PERIOD ------------------------------------------------------------------------------------------------------------------------- GMO U.S. Quality Equity Fund, Class III $ 4,982,500 $ 7,868,546 $ -- $ 19,546 $ -- $ 12,556,806 GMO Real Estate Fund, Class III 6,288,365 1,834,651 -- 91,651 -- 8,652,743 GMO Small Cap Growth Fund, Class III 5,677,148 471,793 -- 2,346 469,447 5,127,615 GMO Small Cap Value Fund, Class III 7,868,539 1,833,247 1,990,000 56,006 1,777,241 5,613,996 GMO U.S. Core Fund, Class III 48,538,886 10,546,737 5,116,000 336,737 -- 52,127,878 ------------- ------------- ------------- ------------- ------------- ------------- Totals $ 73,355,438 $ 22,554,974 $ 7,106,000 $ 506,286 $ 2,246,688 $ 84,079,038 ============= ============= ============= ============= ============= =============
12 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 8. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 13 GMO U.S. SECTOR FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees, other expenses and indirect expenses incurred due to its investment in underlying funds. The following table, assuming a $1,000 investment in a class of shares, discloses the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the class's actual return and actual expenses, and (2) a hypothetical annualized 5% return and the class's actual expenses: Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * -------------------------------------------------------------------------- 1) Actual $ 1,000.00 $ 973.20 $ 2.39 2) Hypothetical 1,000.00 1,022.79 2.45 --------------------------------------------------------------------------
*Expenses are calculated using the Class III annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2004, of 0.48%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004, on your investment in a particular class of shares by dividing your investment value at August 31, 2004, by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 14 GMO ASIA FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO ASIA FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
CLASSIFICATION % OF NET ASSETS - ---------------------------------------------------------------------------------------- China 1.0% Indonesia 26.4 Malaysia 1.2 Philippines 36.9 South Korea 18.5 Taiwan 2.3 Thailand 6.6 Short-Term Investments and Other Assets and Liabilities (net) 7.1 ------------------ 100.0% ==================
See accompanying notes to the financial statements. 1 GMO ASIA FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------------------------------- COMMON STOCKS -- 92.3% CHINA -- 1.0% 27,000 Bengang Steel Plates Co Ltd Class B 9,609 106,000 Comba Telecom Systems Holdings Ltd 57,334 790,592 Denway Motors Ltd 313,370 187,400 PetroChina Co Ltd Class H 94,811 44,042 Weiqiao Textile Co 70,496 60,000 Zhejiang Southeast Electric Power Co Class B 39,108 --------------- 584,728 --------------- INDONESIA -- 26.4% 14,878,800 Bank Central Asia Tbk 2,869,565 2,316,000 Bank NISP Tbk PT * 132,913 366,000 Bank Rakyat Indonesia 67,862 1,119,100 Bimantara Citra Tbk PT 289,340 5,854,800 Citra Marga Nusaphala Persad * 312,477 108,000 Gudang Garam 147,550 114,000 HM Sampoerna Tbk 64,804 21,000 Indonesian Satellite Corp Tbk PT ADR (a) 467,880 1,812,868 International Nickel 1,573,851 218,700 Limas Stokhomindo Tbk PT * 11,429 3,050,000 PT Bank Mandiri 407,985 8,000,703 PT Bank Pan Indonesia Tbk 227,323 15,105,500 PT Matahari Putra Prima Tbk 812,270 170,000 Ramayana Lestari Sentosa 71,409 6,927,600 Telekomunikasi Indonesia Tbk PT 5,672,576 93,200 Telekomunikasi Indonesia Tbk PT ADR 1,515,432 --------------- 14,644,666 --------------- MALAYSIA -- 1.2% 46,000 Genting Berhad 192,397 111,000 IOI Corp Berhad 252,718 45,100 Malaysian International Shipping Berhad (Foreign Registered) 148,297 40,800 Maxis Communications Berhad 91,688 --------------- 685,100 ---------------
See accompanying notes to the financial statements. 2 GMO ASIA FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------------------------------- PHILIPPINES -- 36.9% 4,141,325 Aboitiz Equity Ventures Inc 232,069 1,571,507 Ayala Corp 150,884 43,054,763 Ayala Land Inc 4,069,566 560,995 Equitable PCI Bank * 419,973 9,047,850 Filinvest Land Inc * 151,933 2,574,190 First Philippine Holdings * 1,112,866 2,097,500 Ginebra San Miguel Inc 1,084,998 89,412 Globe Telecom Inc 1,393,599 9,348,000 Megaworld Corp * 180,104 359,127 Philippine Long Distance Telephone * 8,108,965 36,600 Philippine Long Distance Telephone ADR *(a) 829,722 600,474 San Miguel Corp Class B 736,531 19,927,900 SM Prime Holdings 2,018,793 --------------- 20,490,003 --------------- SOUTH KOREA -- 17.9% 1,184 Clover Hitech Co Ltd * 6,300 1,000 Daekyo Co Ltd 44,971 18,600 Hana Bank 419,889 67,200 Hanwha Chemical Corp 462,960 6,900 Hyundai Department Store Co Ltd 79,915 29,430 Hyundai Motor Co 1,281,149 51,300 Industrial Bank of Korea 335,095 62,500 KIA Motors Corp 550,073 22,300 KT&G Corp 568,870 11,900 Kumho Industrial Co Ltd 82,276 8,580 LG Industrial Systems Co Ltd * 122,590 5,000 POSCO 717,095 11,400 Samsung Electronics 4,486,373 3,300 Samsung SDI Co Ltd 340,160 15,400 SK Telecom Co Ltd ADR 291,060 12,100 SODIFF Advanced Materials Co Ltd 177,598 --------------- 9,966,374 ---------------
See accompanying notes to the financial statements. 3 GMO ASIA FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------------------------------- TAIWAN -- 2.3% 6,060 Acer Inc 8,101 196,900 Asustek Computer Inc 441,401 300 Benq Corp 308 210,000 China Bills Finance Corp 62,839 51,000 China Motor Corp Ltd 59,696 44,000 Chunghwa Telecom Co Ltd 69,932 96,612 Compal Electronics Inc 91,816 50,880 Formosa Plastics Corp 76,507 124,199 Hon Hai Precision Industry Co Ltd 407,982 8,900 International Bank of Taipei 5,917 54,351 Inventec Co Ltd 29,208 7,933 Quanta Computer Inc 13,565 --------------- 1,267,272 --------------- THAILAND -- 6.6% 157,800 Advanced Info Service Pcl (Foreign Registered) (b) 358,034 100 Bangkok Dusit Medical Service Pcl (Foreign Registered)(b) 31 10,331,000 Central Pattana Pcl (Foreign Registered) (b) 2,108,367 1,847,800 Charoen Pokphand Foods Pcl (Foreign Registered) (b) 168,587 255,400 Home Product Center Pcl (Foreign Registered) (b) 26,122 473,500 Krungthai Card Pcl (Foreign Registered) (b) 270,571 168,611 PTT Pcl (Foreign Registered) (b) 607,242 2,439,000 Tanayong Co Ltd (Foreign Registered) *(b) (c) 586 189,000 Thai Union Frozen Products Pcl (Foreign Registered) 108,908 --------------- 3,648,448 --------------- TOTAL COMMON STOCKS (COST $39,907,574) 51,286,591 --------------- PREFERRED STOCKS -- 0.5% SOUTH KOREA -- 0.5% 8,400 Hyundai Motor Co 5.05% 185,512 300 Samsung Electronics (Non Voting) 4.08% 77,718 --------------- 263,230 --------------- TOTAL PREFERRED STOCKS (COST $181,785) 263,230 ---------------
See accompanying notes to the financial statements. 4 GMO ASIA FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
UNITS / PAR VALUE ($) DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------------------------------- RIGHTS AND WARRANTS -- 0.1% THAILAND -- 0.1% 659,620 Charoen Pokphand Foods Pcl Warrants, Expires 4/29/05 (Foreign Registered) * 36,426 480,663 Telecomasia Corp Pcl Warrants, Expires 4/03/08 *(b) -- --------------- 36,426 --------------- TOTAL RIGHTS AND WARRANTS (COST $94,824) 36,426 --------------- SHORT-TERM INVESTMENTS -- 6.9% CASH EQUIVALENTS -- 6.9% 3,200,000 Societe Generale GC Time Deposit, 1.57%, due 09/01/04 3,200,000 657,200 The Boston Global Investment Trust (d) 657,200 --------------- 3,857,200 --------------- TOTAL SHORT-TERM INVESTMENTS (COST $3,857,200) 3,857,200 --------------- TOTAL INVESTMENTS -- 99.8% (Cost $44,041,383) 55,443,447 Other Assets and Liabilities (net) -- 0.2% 88,021 --------------- TOTAL NET ASSETS -- 100.0% $ 55,531,468 ===============
NOTES TO SCHEDULE OF INVESTMENTS: ADR - American Depositary Receipt Foreign Registered - shares issued to foreign investors in markets that have foreign ownership limits. * Non-income producing security. (a) All or a portion of this security is out on loan (Note 2). (b) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 2). (c) Bankrupt issuer. (d) Investment of security lending collateral (Note 2). See accompanying notes to the financial statements. 5 GMO ASIA FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) At August 31, 2004, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
GROSS UNREALIZED GROSS UNREALIZED NET UNREALIZED AGGREGATE COST APPRECIATION DEPRECIATION APPRECIATION ---------------- ------------------ ------------------ ---------------- $ 44,183,146 $ 12,739,535 $ (1,479,234) $ 11,260,301
At February 29, 2004, GMO Asia Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Internal Revenue Code of $5,276,432 expiring in 2011. Utilization of the capital loss carryforward above could be subject to limitations imposed by the Internal Revenue Code related to share ownership activity. See accompanying notes to the financial statements. 6 GMO ASIA FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY (SHOWING PERCENTAGE OF EQUITY INVESTMENTS) AUGUST 31, 2004 (UNAUDITED) At August 31, 2004, industry sector diversification of the Fund's equity investments was as follows: INDUSTRY SECTOR Telecommunication Services 36.4% Financials 27.0 Information Technology 11.6 Consumer Discretionary 7.8 Materials 6.2 Consumer Staples 5.7 Utilities 2.7 Energy 1.4 Industrials 1.2 ------ 100.0% ======
See accompanying notes to the financial statements. 7 GMO ASIA FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments, at value, including securities on loan of $638,296 (cost $44,041,383) (Note 2) $ 55,443,447 Cash 19,331 Foreign currency, at value (cost $134,568) (Note 2) 134,103 Receivable for investments sold 580,550 Dividends and interest receivable 307,397 Receivable for expenses reimbursed by Manager (Note 3) 6,820 -------------- Total assets 56,491,648 -------------- LIABILITIES: Payable for investments purchased 132,063 Payable upon return of securities loaned (Note 2) 657,200 Payable to affiliate for (Note 3): Management fee 44,088 Shareholder service fee 8,164 Trustees fee 325 Accrued expenses 118,340 -------------- Total liabilities 960,180 -------------- NET ASSETS $ 55,531,468 ============== NET ASSETS CONSIST OF: Paid-in capital $ 53,470,940 Accumulated undistributed net investment income 539,853 Accumulated net realized loss (9,877,726) Net unrealized appreciation 11,398,401 -------------- $ 55,531,468 ============== NET ASSETS ATTRIBUTABLE TO: Class III shares $ 55,531,468 ============== SHARES OUTSTANDING: Class III 9,004,163 ============== NET ASSET VALUE PER SHARE: Class III $ 6.17 ==============
See accompanying notes to the financial statements. 8 GMO ASIA FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends (net of withholding taxes of $258,403) $ 1,821,401 Interest (including securities lending income of $730) 36,044 -------------- Total income 1,857,445 -------------- EXPENSES: Management fee (Note 3) 386,468 Shareholder service fee (Note 3) - Class III 71,568 Custodian fees 222,456 Transfer agent fees 14,168 Audit and tax fees 26,588 Legal fees 1,932 Trustees fees and related expenses (Note 3) 831 Registration fees 920 Miscellaneous 552 -------------- Total expenses 725,483 Fees and expenses reimbursed by Manager (Note 3) (41,032) -------------- Net expenses 684,451 -------------- Net investment income 1,172,994 -------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 28,418,812 Foreign currency, forward contracts and foreign currency related transactions (299,503) -------------- Net realized gain 28,119,309 -------------- Change in net unrealized appreciation (depreciation) on: Investments (40,810,315) Foreign currency, forward contracts and foreign currency related transactions (3,801) -------------- Net unrealized loss (40,814,116) -------------- Net realized and unrealized loss (12,694,807) -------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (11,521,813) ==============
See accompanying notes to the financial statements. 9 GMO ASIA FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 1,172,994 $ 2,404,224 Net realized gain 28,119,309 30,655,704 Change in net unrealized appreciation (depreciation) (40,814,116) 55,010,290 ---------------- ----------------- Net increase (decrease) in net assets from operations (11,521,813) 88,070,218 ---------------- ----------------- Distributions to shareholders from: Net investment income Class III (3,253,571) (809,606) Net realized gains Class III (32,459,411) -- ---------------- ----------------- (35,712,982) (809,606) ---------------- ----------------- Net share transactions (Note 6): Class III (39,146,029) (51,306,824) Purchase premiums and redemption fees (Notes 2 and 6): Class III 297,824 306,876 ---------------- ----------------- Total decrease in net assets resulting from net share transactions and net purchase premiums and redemption fees (38,848,205) (50,999,948) ---------------- ----------------- Total increase (decrease) in net assets (86,083,000) 36,260,664 NET ASSETS: Beginning of period 141,614,468 105,353,804 ---------------- ----------------- End of period (including accumulated undistributed net investment income of $539,853 and $2,620,430, respectively) $ 55,531,468 $ 141,614,468 ================ =================
See accompanying notes to the financial statements. 10 GMO ASIA FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ------------------------------------------------------------------- (UNAUDITED) 2004 2003 2002 2001 2000 ----------------- --------- --------- --------- --------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 13.77 $ 7.25 $ 8.09 $ 7.87 $ 12.35 $ 7.67 ----------- --------- --------- --------- --------- --------- Income from investment operations: Net investment income 0.31 0.23 0.06 0.07 0.09 0.03 Net realized and unrealized gain (loss) (1.76) 6.35 (0.85) 0.26 (3.32) 5.01 ----------- --------- --------- --------- --------- --------- Total from investment operations (1.45) 6.58 (0.79) 0.33 (3.23) 5.04 ----------- --------- --------- --------- --------- --------- Less distributions to shareholders: From net investment income (0.51) (0.06) (0.05) (0.11) (0.01) (0.02) From net realized gains (5.64) -- -- -- (1.24) (0.34) ----------- --------- --------- --------- --------- --------- Total distributions (6.15) (0.06) (0.05) (0.11) (1.25) (0.36) ----------- --------- --------- --------- --------- --------- NET ASSET VALUE, END OF PERIOD $ 6.17 $ 13.77 $ 7.25 $ 8.09 $ 7.87 $ 12.35 =========== ========= ========= ========= ========= ========= TOTAL RETURN (a) (10.51)%(b)** 91.04%(b) (9.82)%(b) 4.41%(b) (27.45)%(b) 65.57% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 55,531 $ 141,614 $ 105,354 $ 117,878 $ 113,927 $ 119,218 Net expenses to average daily net assets 1.43%* 1.25% 1.35% 1.28% 1.30% 1.25% Net investment income to average daily net assets 1.24%(c)** 1.76% 0.80% 1.01% 1.22% 0.22% Portfolio turnover rate 24%** 39% 72% 68% 84% 121% Fees and expenses reimbursed by the Manager to average daily net assets: 0.09%* 0.07% 0.06% 0.09% 0.07% 0.07% Purchase premiums and redemption fees consisted of the following per share amounts: (d) $ 0.04 $ 0.02 $ 0.00(e) $ 0.00(e) $ 0.03 --
See accompanying notes to the financial statements. 11 GMO ASIA FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS -- (CONTINUED) (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) (a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) Calculation excludes purchase premiums and redemption fees which are borne by the shareholder. (c) The ratio for the six months ended August 31, 2004, has not been annualized since the Fund believes it would not be appropriate because the Fund's dividend income is not earned ratably throughout the fiscal year. (d) Effective March 1, 2000 the Fund adopted the provision 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. (e) Purchase premiums and redemption fees were less than $0.01 per share. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 12 GMO ASIA FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION 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, an index maintained by the Manager and composed of the S&P/IFCI (Investable) Country Indices of seven Asian countries (China, Indonesia, Korea, Malaysia, the Philippines, Taiwan and Thailand), all of which are equally weighted. 2. SIGNIFICANT ACCOUNTING POLICIES 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. The value of securities which are primarily traded on foreign exchanges are 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. For other assets, and in cases where market prices are not readily available or the Manager believes established valuation methodologies are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value. Because many foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, foreign equity securities held by the Fund are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available. 13 GMO ASIA FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. As of August 31, 2004, there were no forward foreign currency contracts outstanding. 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. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of 14 GMO ASIA FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, 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 August 31, 2004, 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. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying investment increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of August 31, 2004, 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 closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. As of August 31, 2004, 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 15 GMO ASIA FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. As of August 31, 2004, the Fund held no indexed securities. 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 using standard models that incorporate 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 on swap contracts 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 August 31, 2004, 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. As of August 31, 2004, the Fund had loaned securities having a market value of $638,296 collateralized by cash in the amount of $657,200 which was invested in a short-term instrument. 16 GMO ASIA FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 generally 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. 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. 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. 17 GMO ASIA FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases and fees on redemptions of Fund shares are each 0.80%. If the Manager determines that any portion of a cash purchase or redemption is offset by a corresponding cash redemption or purchase occurring on the same day, it will waive the purchase premium or redemption fee with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived in extraordinary circumstances if the Fund will not incur transaction costs. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the six months ended August 31, 2004 and the year ended February 29, 2004, the Fund received $84 and $59,456 in purchase premiums and $297,740 and $247,420 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. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.81% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% for Class III shares. GMO has entered into a binding agreement effective until at least June 30, 2005 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 0.81% of average daily net assets. The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004, was $463. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 18 GMO ASIA FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004, aggregated $21,980,689 and $97,901,413, respectively. 5. PRINCIPAL SHAREHOLDERS AND RELATED PARTIES At August 31, 2004, 91.3% of the outstanding shares of the Fund were held by four 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. At August 31, 2004, 0.1% of the Fund was held by five related parties comprised of certain GMO employee accounts. 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ------------------------------ ------------------------------ SHARES AMOUNT SHARES AMOUNT ------------ -------------- ------------ -------------- Class III: Shares sold $ 1,174 $ 15,415 1,429,811 $ 15,518,829 Shares issued to shareholders in reinvestment of distributions 4,043,775 25,944,966 40,217 384,474 Shares repurchased (5,326,708) (65,106,410) (5,724,218) (67,210,127) Purchase premiums and redemption fees -- 297,824 -- 306,876 ------------ -------------- ------------ -------------- Net decrease (1,281,759) $ (38,848,205) (4,254,190) $ (50,999,948) ============ ============== ============ ==============
7. SUBSEQUENT EVENTS Effective September 23, 2004, the name, investment objective, fees charged (including purchase premiums and redemption fees), and strategies of the Fund have been changed. The Fund's new name is GMO Emerging Markets Quality Fund. Information regarding the Fund, including its investment objective and strategies, is contained in the accompanying prospectus. Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 19 GMO ASIA FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees and other expenses. The following table, assuming a $1,000 investment in a class of shares, discloses the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the class's actual return and actual expenses, and (2) a hypothetical annualized 5% return and the class's actual expenses: Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * ----------------------------------------------------------------- 1) Actual $ 1,000.00 $ 894.90 $ 6.83 2) Hypothetical 1,000.00 1,018.00 7.27
*Expenses are calculated using the Class III annualized expense ratio for the six months ended August 31, 2004 of 1.43%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 20 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
CLASSIFICATION % OF NET ASSETS - ------------------------------------------------------------------------------ U.S. Government Agency 5.4% U.S. Government 1.8 Corporate Debt 0.5 Banking 0.8 Mutual Funds 90.8 Futures 0.3 Swaps 0.7 Short-Term Investments and Other Assets and Liabilities (net) (0.3) ------------ 100.0% ============
See accompanying notes to the financial statements. 1 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE ($)/ SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 7.7% CORPORATE DEBT -- 0.5% 2,500,000 Bank Austria Creditanstalt, AG, Series EMTN, 144A, 7.25%, due 02/15/17 2,996,250 ------------- U.S. GOVERNMENT -- 1.8% 1,127,410 U.S. Treasury Inflation Indexed Note, 4.25%, due 01/15/10 (a) (b) 1,309,734 8,211,789 U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09 (a) (b) 9,247,245 ------------- 10,556,979 ------------- U.S. GOVERNMENT AGENCY -- 5.4% 10,000,000 Agency for International Development Floater (Support of India), Variable Rate, 3 mo. LIBOR + .10%, 1.89%, due 02/01/27 9,887,500 4,716,502 Agency for International Development Floater (Support of Jamaica), Variable Rate, 6 mo. U.S. Treasury Bill + .75%, 2.54%, due 03/30/19 4,698,816 5,250,000 Agency for International Development Floater (Support of Jamaica),Variable Rate, 6 mo. LIBOR + .30%, 2.28%, due 12/01/14 5,251,627 5,560,000 Agency for International Development Floater (Support of Sri Lanka),Variable Rate, 6 mo. LIBOR + .20%, 2.18%, due 06/15/12 5,546,100 5,500,003 Agency for International Development Floater (Support of Zimbabwe), Variable Rate, 3 mo. U.S. Treasury Bill x 115%, 1.14%, due 01/01/12 5,458,753 ------------- 30,842,796 ------------- TOTAL DEBT OBLIGATIONS (COST $43,938,742) 44,396,025 ------------- PREFERRED STOCKS -- 0.8% BANKING -- 0.8% 10,000 Home Ownership Funding 2 Preferred 144A, 13.338% 4,462,480 ------------- TOTAL PREFERRED STOCKS (COST $5,373,174) 4,462,480 -------------
See accompanying notes to the financial statements. 2 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) ----------------------------------------------------------------------------------------- MUTUAL FUNDS -- 90.8% 20,505,166 GMO Short-Duration Collateral Fund (c) 519,600,903 1,483 GMO Special Purpose Holding Fund (c) 26,079 1,380,605 Merrimac Cash Series, Premium Class 1,380,605 ------------- TOTAL MUTUAL FUNDS (COST $518,485,942) 521,007,587 ------------- TOTAL INVESTMENTS -- 99.3% (Cost $567,797,858) 569,866,092 Other Assets and Liabilities (net) -- 0.7% 4,089,981 ------------- TOTAL NET ASSETS -- 100.0% $ 573,956,073 =============
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. EMTN - Euromarket Medium Term Note Variable rates - The rates shown on Variable rate notes are the current interest rates at August 31, 2004, 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 margin requirements on open financial futures contracts and/or open swap contracts (Note 2). (b) Indexed security in which price and/or coupon is linked to prices of other securities, securities indices, or other financial indicators (Note 2). (c) Affiliated issuer. CURRENCY ABBREVIATIONS: USD - United States Dollar At August 31, 2004, the approximate 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 --------------- ---------------- ---------------- -------------- $ 567,816,753 $ 3,214,855 $ (1,165,516) $ 2,049,339
See accompanying notes to the financial statements. 3 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) A summary of outstanding financial instruments at August 31, 2004 is as follows: FUTURES CONTRACTS
NET UNREALIZED NUMBER OF CONTRACT APPRECIATION CONTRACTS TYPE EXPIRATION DATE VALUE (DEPRECIATION) --------- ------------------------- --------------- ------------- -------------- Buys 504 U.S. Long Bond December 2004 $ 56,101,500 $ 807,805 646 U.S. Treasury Note 10 Yr. December 2004 72,553,875 480,057 789 U.S. Treasury Note 5 Yr. December 2004 87,320,109 532,617 -------------- $ 1,820,479 ============== Sales 560 Euro 90 Day December 2004 $ 136,955,000 $ (87,220) ==============
At August 31, 2004, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. SWAP AGREEMENTS
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------ ---------- ---------------------------------------------- -------------- INTEREST RATE SWAPS 194,000,000 USD 6/8/06 Agreement with JP Morgan Chase Bank dated $ 1,408,243 6/04/04 to receive the notional amount multiplied by 3.08% and to pay the notional amount multiplied by the 3 month Floating Rate LIBOR. 68,000,000 USD 6/8/09 Agreement with JP Morgan Chase Bank dated (2,121,105) 6/04/04 to pay the notional amount multiplied by 4.412% and to receive the notional amount multiplied by the 3 month Floating Rate LIBOR.
See accompanying notes to the financial statements. 4 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------ ---------- ---------------------------------------------- -------------- 8,500,000 USD 10/24/13 Agreement with JP Morgan Chase Bank dated $ (139,894) 10/22/03 to pay the notional amount multiplied by 4.704% and to receive the notional amount multiplied by the 3 month LIBOR. TOTAL RETURN SWAPS 10,000,000 USD 9/30/04 Agreement with Citibank N.A. dated 6/29/04 to 238,695 receive the notional amount multiplied by the return of the Lehman Brothers CMBS AAA Index and to pay initial market value multiplied by the 1 month LIBOR adjusted by a specified spread. 50,000,000 USD 11/1/04 Agreement with Lehman Brothers Special 917,423 Financing Inc. dated 11/24/03 to receive the notional amount multiplied by the return on the Lehman Brothers U.S. Government Bond Index and to pay the notional amount multiplied by the 1 month LIBOR adjusted by a specified spread. 10,000,000 USD 1/31/05 Agreement with Citibank N.A. dated 7/30/04 to 370,661 receive the notional amount multiplied by the return of the Lehman Brothers CMBS 8.5+ AAA Index and to pay initial market value multiplied by the 1 month LIBOR adjusted by a specified spread. 75,000,000 USD 2/1/05 Agreement with Lehman Brothers Special 1,377,384 Financing Inc. dated 1/30/04 to receive the notional amount multiplied by the return on the Lehman Brothers U.S. Government Bond Index and to pay the notional amount multiplied by the 1 month LIBOR adjusted by a specified spread.
See accompanying notes to the financial statements. 5 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------ ---------- ---------------------------------------------- -------------- 25,000,000 USD 5/1/05 Agreement with Lehman Brothers Special 458,711 Financing Inc. dated 4/30/04 to receive the notional amount multiplied by the return on the Lehman Brothers U.S. Government Bond Index and to pay the notional amount multiplied by the 1 month LIBOR adjusted by a specified spread. 75,000,000 USD 8/1/05 Agreement with Lehman Brothers Special 1,379,259 Financing Inc. dated 6/17/03 to receive the notional amount multiplied by the return on the Lehman Brothers U.S. Government Bond Index and to pay the notional amount multiplied by the 1 month LIBOR adjusted by a specified spread. -------------- $ 3,889,377 ==============
See accompanying notes to the financial statements. 6 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments in unaffiliated issuers, at value (cost $50,692,521) (Note 2) $ 50,239,110 Investments in affiliated issuers, at value (cost $517,105,337) (Notes 2 and 7) 519,626,982 Interest receivable 335,240 Receivable for variation margin on open futures contracts (Note 2) 777,030 Net receivable for open swap contracts (Note 2) 4,255,646 Receivable for expenses reimbursed by Manager (Note 3) 11,377 ----------------- Total assets 575,245,385 ----------------- LIABILITIES: Payable for investments purchased 800,000 Payable for Fund shares repurchased 342,477 Payable to affiliate for (Note 3): Management fee 47,173 Shareholder service fee 70,759 Trustees fee 675 Accrued expenses 28,228 ----------------- Total liabilities 1,289,312 ----------------- NET ASSETS $ 573,956,073 ================= NET ASSETS CONSIST OF: Paid-in capital $ 563,315,989 Distributions in excess of net investment income (570,164) Accumulated net realized gain 3,519,378 Net unrealized appreciation 7,690,870 ----------------- $ 573,956,073 ================= NET ASSETS ATTRIBUTABLE TO: Class III shares $ 573,956,073 ================= SHARES OUTSTANDING: Class III 57,035,371 ================= NET ASSET VALUE PER SHARE: Class III $ 10.06 =================
See accompanying notes to the financial statements. 7 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Interest $ 864,259 Dividends 165,534 Dividends from affiliated issuers (Note 7) 74,345 ----------------- Total income 1,104,138 ----------------- EXPENSES: Management fee (Note 3) 238,034 Shareholder service fee (Note 3) - Class III 357,052 Custodian and transfer agent fees 27,600 Audit and tax fees 18,676 Legal fees 6,992 Trustees fees and related expenses (Note 3) 2,846 Registration fees 4,600 Miscellaneous 2,116 ----------------- Total expenses 657,916 Fees and expenses reimbursed by Manager (Note 3) (58,696) ----------------- Net expenses 599,220 ----------------- Net investment income 504,918 ----------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments in unaffiliated issuers 2,398,769 Investments in affiliated issuers 98,108 Realized gains distributions from affiliated issuers (Note 7) 237,191 Closed futures contracts 1,190,459 Closed swap contracts (67,145) ----------------- Net realized gain 3,857,382 ----------------- Change in net unrealized appreciation (depreciation) on: Investments 545,413 Open futures contracts 1,468,907 Open swap contracts 2,422,368 ----------------- Net unrealized gain 4,436,688 ----------------- Net realized and unrealized gain 8,294,070 ----------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 8,798,988 =================
See accompanying notes to the financial statements. 8 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 504,918 $ 4,717,800 Net realized gain 3,857,382 6,716,642 Change in net unrealized appreciation (depreciation) 4,436,688 1,047,768 ----------------- ----------------- Net increase in net assets from operations 8,798,988 12,482,210 ----------------- ----------------- Distributions to shareholders from: Net investment income Class III (1,274,649) (4,605,805) Net realized gains Class III (4,975,095) (5,411,146) ----------------- ----------------- (6,249,744) (10,016,951) ----------------- ----------------- Net share transactions (Note 6): Class III 198,130,013 257,588,646 ----------------- ----------------- Total increase in net assets 200,679,257 260,053,905 NET ASSETS: Beginning of period 373,276,816 113,222,911 ----------------- ----------------- End of period (including distributions in excess of net investment income of $570,164 and accumulated undistributed net investment income of $199,567, respectively) $ 573,956,073 $ 373,276,816 ================= =================
See accompanying notes to the financial statements. 9 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ---------------------------------------------------------------------- (UNAUDITED) 2004(a) 2003(a) 2002(a) 2001(a)(b) 2000 --------------- ----------- ----------- ----------- ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.07 $ 10.08 $ 9.68 $ 9.98 $ 9.23 $ 9.65 ----------- ----------- ----------- ----------- ----------- ----------- Income from investment operations: Net investment income (c) 0.01+ 0.23+ 0.22+ 0.41+ 0.60+ 0.60 Net realized and unrealized gain (loss) 0.11 0.24 0.86 0.22 0.73 (0.42) ----------- ----------- ----------- ----------- ----------- ----------- Total from investment operations 0.12 0.47 1.08 0.63 1.33 0.18 ----------- ----------- ----------- ----------- ----------- ----------- Less distributions to shareholders: From net investment income (0.03) (0.20) (0.27) (0.50) (0.58) (0.58) From net realized gains (0.10) (0.28) (0.41) (0.43) -- (0.02) ----------- ----------- ----------- ----------- ----------- ----------- Total distributions (0.13) (0.48) (0.68) (0.93) (0.58) (0.60) ----------- ----------- ----------- ----------- ----------- ----------- NET ASSET VALUE, END OF PERIOD $ 10.06 $ 10.07 $ 10.08 $ 9.68 $ 9.98 $ 9.23 =========== =========== =========== =========== =========== =========== TOTAL RETURN (d) 1.16%** 4.79% 11.43% 6.62% 14.91% 2.03% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 573,956 $ 373,277 $ 113,223 $ 155,000 $ 170,534 $ 164,457 Net operating expenses to average daily net assets 0.25%* 0.25% 0.25% 0.25% 0.25% 0.25% Interest expense to average daily net assets -- -- -- -- 0.07%(e) 0.19%(e) Total net expenses to average daily net assets (f) 0.25%* 0.25% 0.25% 0.25% 0.32% 0.44% Net investment income to average daily net assets (c) 0.21%* 2.30% 2.23% 4.16% 6.37% 5.85% Portfolio turnover rate 5%** 15% 71% 19% 65% 20% Fees and expenses reimbursed by the Manager to average daily net assets: 0.02%* 0.06% 0.05% 0.05% 0.05% 0.05%
See accompanying notes to the financial statements. 10 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS -- (CONTINUED) (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) (a) As a result of changes in generally accepted accounting principles, the Fund has reclassified periodic payments made under interest rate swap agreements, previously included within interest income, as a component of realized gain (loss) in the Statement of Operations. The effect of this reclassification was to increase the net investment income ratio for the year ending February 29, 2004 by 0.12% and net investment income per share by $0.01. For consistency, similar reclassifications have been made to prior year amounts, resulting to the net investment income ratio of 0.34%, 0.19% and 0.04% and to net investment income per share of $0.03, $0.02 and $0.01 in the fiscal years ending February 28/29, 2003, 2002 and 2001, respectively. (b) Effective March 1, 2000, the Fund adopted the provision 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/supplemental data for periods prior to March 1, 2000 have not been restated to reflect this change. (c) Net investment income is affected by timing of the declaration of dividends by other GMO Funds in which the Fund invests. (d) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (e) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income. (f) 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. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 11 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION 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 August 31, 2004, less than 0.1% of the Fund was invested in the GMO Special Purpose Holding Fund and 90.5% was invested in the GMO Short-Duration Collateral Fund, separate funds of GMO Trust managed by GMO. Shares of the GMO Special Purpose Holding Fund and the GMO Short-Duration Collateral Fund are not publicly available for direct purchase. The financial statements of the GMO Special Purpose Holding Fund and the GMO Short-Duration Collateral Fund should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646 or by visiting GMO's website at www.gmo.com. 2. SIGNIFICANT ACCOUNTING POLICIES 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. CHANGE IN ACCOUNTING PRINCIPLE For the year ended February 29, 2004, as a result of a recent FASB Emerging Issues Task Force consensus (and subsequent related SEC staff guidance), the Fund reclassified periodic payments made under interest rate swap agreements, previously included within interest income, as a component of realized gain (loss) in the Statement of Operations. For consistency, similar reclassifications have been made to the per share amounts in all prior year financial highlights presented. Prior year net investment income ratios in the financial highlights have also been modified accordingly. This reclassification increased net investment income and decreased net realized gains by $240,213 for the year ended February 29, 2004. This change had no effect on the Fund's net asset value, either in total or per share, or its total increase (decrease) in net assets from operations during any period. 12 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 funds of the Trust ("underlying funds") and other 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 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. As of August 31, 2004, the total value of these securities represented 29.5% of net assets. 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 13 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) degrees, risk of loss in excess of the variation margin disclosed in the Statement of Assets and Liabilities. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, 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 the Schedule of Investments for all open futures contracts as of August 31, 2004. 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. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying investment increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of August 31, 2004, 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 closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. As of August 31, 2004, 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. 14 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. As of August 31, 2004, the Fund did not hold any loan assignments. 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. See the Schedule of Investments for all indexed securities held by the Fund as of August 31, 2004. 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, 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 using standard models that incorporate 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 on swap contracts 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 15 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 the Schedule of Investments for a summary of open swap agreements as of August 31, 2004. 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. As of August 31, 2004, the Fund did not have any open repurchase agreements. 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. The market value of the securities the Fund has sold is determined daily and any additional required collateral is allocated to or sent by the Fund on the next business day. As of August 31, 2004, there were no open reverse repurchase agreements. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of 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. As of August 31, 2004, the Fund had no securities on loan. 16 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. 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. 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. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. 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. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.10% 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 0.15% for Class III shares. 17 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) GMO has entered into a binding agreement effective until at least June 30, 2005 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 0.10% of the average daily net assets. The Fund incurs fees and expenses indirectly as a shareholder in GMO Special Purpose Holding Fund and GMO Short-Duration Collateral Fund. For the six months ended August 31, 2004, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
INDIRECT OPERATING INDIRECT INVESTMENT-RELATED EXPENSES (EXCLUDING EXPENSES (INCLUDING, BUT NOT MANAGEMENT FEES, LIMITED TO, INTEREST EXPENSE, INDIRECT NET SHAREHOLDER SERVICE FEES INDIRECT FOREIGN AUDIT EXPENSE, AND TOTAL MANAGEMENT AND INVESTMENT-RELATED SHAREHOLDER INVESTMENT-RELATED LEGAL INDIRECT FEES EXPENSES) SERVICE FEES EXPENSE) EXPENSES ----------------------------------------------------------------------------------------------------- (0.013%) 0.014% 0.000% LESS THAN 0.001% 0.001%
The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $1,834. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES For the six months ended August 31, 2004, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
PURCHASES SALES --------------- -------------- U.S. Government securities $ 6,450,241 $ 2,247,808 Investments (non-U.S. Government securities) 213,472,196 22,395,248
5. PRINCIPAL SHAREHOLDERS AND RELATED PARTIES At August 31, 2004, 82.2% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. One of the shareholders is another fund of GMO Trust. Investment activities of these shareholders may have a material effect on the Fund. At August 31, 2004, less than 0.1% of the Fund was held by five related parties comprised of certain GMO employee accounts. As of August 31, 2004, substantially all of the Fund's shares were held by accounts for which the Manager has investment discretion. 18 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ------------------------------ ------------------------------ SHARES AMOUNT SHARES AMOUNT ------------- ------------- ------------- ------------- Class III: Shares sold 19,957,373 $ 198,133,572 29,740,583 $ 296,994,016 Shares issued to shareholders in reinvestment of distributions 627,519 6,188,505 973,592 9,657,413 Shares repurchased (624,075) (6,192,064) (4,873,046) (49,062,783) ------------- ------------- ------------- ------------- Net increase 19,960,817 $ 198,130,013 25,841,129 $ 257,588,646 ============= ============= ============= =============
7. INVESTMENTS IN AFFILIATED ISSUERS A summary of the Fund's transactions in the shares of these issuers during the six months ended August 31, 2004, is set forth below:
VALUE, REALIZED BEGINNING SALES DIVIDEND GAINS VALUE, END AFFILIATE OF PERIOD PURCHASES PROCEEDS INCOME DISTRIBUTIONS OF PERIOD --------------- --------------- --------------- --------------- --------------- --------------- --------------- GMO Special Purpose Holding Fund $ 590,956 $ 19,609 $ 560,660 $ 19,609 $ -- $ 26,079* GMO Short-Duration Collateral Fund 318,187,834 213,452,587 14,700,000 54,736 237,191 519,600,903 --------------- --------------- --------------- --------------- --------------- --------------- Totals $ 318,778,790 $ 213,472,196 $ 15,260,660 $ 74,345 $ 237,191 $ 519,626,982 =============== =============== =============== =============== =============== ===============
* After effect of return of capital distribution of $22,853 on June 10, 2004. 8. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 19 GMO DOMESTIC BOND FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees, other expenses and indirect expenses due to its investment in underlying funds. The following table, assuming a $1,000 investment in a class of shares, discloses the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the class's actual return and actual expense, and (2) a hypothetical annualized 5% return and the class's actual expense: Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * ------------------------------------------------------------ 1) Actual $ 1,000.00 $ 1,011.60 $ 1.27 2) Hypothetical 1,000.00 1,023.95 1.28
*Expenses are calculated using the Class III annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2004 of 0.25%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004, on your investment in a particular class of shares by dividing your investment value at August 31, 2004, by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 20 GMO GLOBAL BALANCED ASSET ALLOCATION FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO GLOBAL BALANCED ASSET ALLOCATION FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
CLASSIFICATION % OF NET ASSETS - ----------------------------------------------------------------------------------------------- Mutual Funds 100.0% Short-Term Investments and Other Assets and Liabilities (net) (0.0) --------------- 100.0% ===============
See accompanying notes to the financial statements. 1 GMO GLOBAL BALANCED ASSET ALLOCATION FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------ MUTUAL FUNDS -- 100.0% AFFILIATED ISSUERS -- 100.0% 1,367,567 GMO Alpha Only Fund, Class III 13,703,025 6,177,932 GMO Core Plus Bond Fund, Class III 64,621,173 4,242,983 GMO Currency Hedged International Bond Fund, Class III 39,205,162 3,393,569 GMO Currency Hedged International Equity Fund, Class III 25,214,218 6,507,673 GMO Domestic Bond Fund, Class III 65,467,195 634,511 GMO Emerging Countries Fund, Class III 8,381,887 961,654 GMO Emerging Country Debt Fund, Class IV 10,443,565 2,486,721 GMO Emerging Markets Fund, Class VI 36,679,137 2,153,418 GMO Inflation Indexed Bond Fund, Class III 25,797,944 915,095 GMO International Bond Fund, Class III 9,105,200 2,006,732 GMO International Growth Fund, Class III 45,914,027 2,031,450 GMO International Intrinsic Value Fund, Class IV 50,075,231 1,660,372 GMO International Small Companies Fund, Class III 26,981,050 1,672,457 GMO Real Estate Fund, Class III 25,872,905 353,900 GMO Short-Duration Investment Fund, Class III 3,114,322 8,486,902 GMO U.S. Core Fund, Class VI 110,244,853 1,996,475 GMO U.S. Quality Equity Fund, Class IV 38,891,331 85,655 GMO Value Fund, Class III 794,020 ----------- TOTAL MUTUAL FUNDS (COST $546,442,011) 600,506,245 -----------
See accompanying notes to the financial statements. 2 GMO GLOBAL BALANCED ASSET ALLOCATION FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------ SHORT-TERM INVESTMENT -- 0.0% REPURCHASE AGREEMENT -- 0.0% 9,934 Citigroup Global Markets Repurchase Agreement, dated 8/31/04, due 9/01/04, with a maturity value of $9,934 and an effective yield of 0.30%, collateralized by a U.S.Treasury Note with a rate of 2.75%, maturiy date of 7/31/06 and a market value of $10,133. 9,934 --------------- TOTAL SHORT-TERM INVESTMENT (COST $9,934) 9,934 --------------- TOTAL INVESTMENTS -- 100.0% (Cost $546,451,945) 600,516,179 Other Assets and Liabilities (net) -- (0.0%) (35,006) --------------- TOTAL NET ASSETS -- 100.0% $ 600,481,173 ===============
At August 31, 2004, the approximate 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 -------------- ---------------- ---------------- -------------- $ 546,755,042 $ 54,758,035 $ (996,898) $ 53,761,137
At February 29, 2004, GMO Global Balanced Asset Allocation Fund had capital loss carryforwards to offset future capital gains, if any, to the extent permitted by the Internal Revenue Code of $2,552 and $1,276 expiring in 2008 and 2010, respectively. Utilization of the capital loss carryforwards above could be subject to limitations imposed by the Internal Revenue Code related to share ownership activity. See accompanying notes to the financial statements. 3 GMO GLOBAL BALANCED ASSET ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments in unaffiliated issuers, at value (cost $9,934) (Note 2) $ 9,934 Investments in affiliated issuers, at value (cost $546,442,011) (Notes 2 and 7) 600,506,245 Receivable for expenses reimbursed by Manager (Note 3) 7,874 -------------- Total assets 600,524,053 -------------- LIABILITIES: Payable for Fund shares repurchased 5,093 Payable to affiliate for (Note 3): Trustees fee 1,014 Accrued expenses 36,773 -------------- Total liabilities 42,880 -------------- NET ASSETS $ 600,481,173 ============== NET ASSETS CONSIST OF: Paid-in capital $ 532,174,200 Accumulated undistributed net investment income 2,465,186 Accumulated net realized gain 11,777,553 Net unrealized appreciation 54,064,234 -------------- $ 600,481,173 ============== NET ASSETS ATTRIBUTABLE TO: Class III shares $ 600,481,173 ============== SHARES OUTSTANDING: Class III 56,809,208 ============== NET ASSET VALUE PER SHARE: Class III $ 10.57 ==============
See accompanying notes to the financial statements. 4 GMO GLOBAL BALANCED ASSET ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends from affiliated issuers (Note 7) $ 2,485,013 Interest 2,705 -------------- Total income 2,487,718 -------------- EXPENSES: Custodian and transfer agent fees 26,772 Audit and tax fees 9,936 Legal fees 6,164 Trustees fees and related expenses (Note 3) 3,331 Registration fees 3,404 Miscellaneous 2,300 -------------- Total expenses 51,907 Fees and expenses reimbursed by Manager (Note 3) (48,576) -------------- Net expenses 3,331 -------------- Net investment income 2,484,387 -------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain on: Investments in affiliated issuers 7,469,723 Realized gains distributions from affiliated issuers (Note 7) 4,661,774 -------------- Net realized gain on investments 12,131,497 -------------- Change in net unrealized appreciation (depreciation) on investments (14,768,947) -------------- Net realized and unrealized loss (2,637,450) -------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (153,063) ==============
See accompanying notes to the financial statements. 5 GMO GLOBAL BALANCED ASSET ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 2,484,387 $ 7,318,487 Net realized gain 12,131,497 10,028,331 Change in net unrealized appreciation (depreciation) (14,768,947) 87,757,076 ---------------- ----------------- Net increase (decrease) in net assets from operations (153,063) 105,103,894 ---------------- ----------------- Distributions to shareholders from: Net investment income Class III (2,396,564) (9,122,583) Net realized gains Class III (3,944,345) (832,307) ---------------- ----------------- (6,340,909) (9,954,890) ---------------- ----------------- Net share transactions (Note 6): Class III 153,031,769 54,273,484 Purchase premiums and redemption fees (Notes 2 and 6): Class III 136,243 240,006 ---------------- ----------------- Total increase in net assets resulting from net share transactions and net purchase premiums and redemption fees 153,168,012 54,513,490 ---------------- ----------------- Total increase in net assets 146,674,040 149,662,494 NET ASSETS: Beginning of period 453,807,133 304,144,639 ---------------- ----------------- End of period (including accumulated undistributed net investment income of $2,465,186 and $2,377,363, respectively) $ 600,481,173 $ 453,807,133 ================ =================
See accompanying notes to the financial statements. 6 GMO GLOBAL BALANCED ASSET ALLOCATION FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ---------------------------------- (UNAUDITED) 2004 2003 ---------------- ------------- ------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.74 $ 8.13 $ 8.64 ---------------- ------------- ------------- Income from investment operations: Net investment income (a) 0.04 0.18 0.20 Net realized and unrealized gain (loss) (0.08) 2.68 (0.28) ---------------- ------------- ------------- Total from investment operations (0.04) 2.86 (0.08) ---------------- ------------- ------------- Less distributions to shareholders: From net investment income (0.05) (0.23) (0.43) From net realized gains (0.08) (0.02) -- ---------------- ------------- ------------- Total distributions (0.13) (0.25) (0.43) ---------------- ------------- ------------- NET ASSET VALUE, END OF PERIOD $ 10.57 $ 10.74 $ 8.13 ================ ============= ============= TOTAL RETURN (b) (0.39)%**(c) 35.53%(c) (1.06)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 600,481 $ 453,807 $ 304,145 Net expenses to average daily net assets (d) 0.00%*(e) 0.00%(e) 0.00%(e) Net investment income to average daily net assets (a) 1.01%* 2.19% 4.01% Portfolio turnover rate 7%** 59% 61% Fees and expenses reimbursed by the Manager to average daily net assets: 0.02%* 0.03% 0.05% Purchase premiums and redemption fees consisted of the following per share amounts: + $ 0.00(f) $ 0.01 -- YEAR ENDED FEBRUARY 28/29, -------------------------------------------------------- 2002 2001 2000 ------------- ------------- ------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 8.99 $ 8.96 $ 8.52 ------------- ------------- ------------- Income from investment operations: Net investment income (a) 0.23 0.21 0.20+ Net realized and unrealized gain (loss) (0.20) 0.18 1.69 ------------- ------------- ------------- Total from investment operations 0.03 0.39 1.89 ------------- ------------- ------------- Less distributions to shareholders: From net investment income (0.38) (0.36) -- From net realized gains -- -- (1.45) ------------- ------------- ------------- Total distributions (0.38) (0.36) (1.45) ------------- ------------- ------------- NET ASSET VALUE, END OF PERIOD $ 8.64 $ 8.99 $ 8.96 ============= ============= ============= TOTAL RETURN (b) 0.49% 4.29% 22.45% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 7,318 $ 11,021 $ 10,834 Net expenses to average daily net assets (d) 0.00%(e) 0.00% 0.00% Net investment income to average daily net assets (a) 2.66% 2.31% 2.24% Portfolio turnover rate 25% 12% 12% Fees and expenses reimbursed by the Manager to average daily net assets: 0.31% 0.20% 0.19% Purchase premiums and redemption fees consisted of the following per share amounts: + -- -- --
(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) Calculation excludes purchase premiums and redemption fees which are borne by the shareholder. (d) Net expenses exclude expenses incurred indirectly through investment in underlying funds. (See Note 3). (e) Net expenses to average daily net assets was less than 0.01%. (f) Purchase premiums and redemption fees were less than $0.01. + Computed using average shares outstanding throughout the period. * Annualized ** Not annualized See accompanying notes to the financial statements. 7 GMO GLOBAL BALANCED ASSET ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION GMO Global Balanced Asset 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" and makes investments in other funds of the Trust ("underlying funds"). The Fund seeks total return greater than the return of the GMO Global Balanced Index through investment to varying extents in the underlying funds. The GMO Global 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 (All Country World Index) ex-U.S. Index (an international (excluding U.S. and including emerging markets) 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 and 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 Global Balanced Index reflects investment of all applicable dividends, capital gains, and interest. The Fund pursues its objective by investing in the least expensive class of underlying domestic equity, international equity, and fixed income funds of the Trust that is currently operational. The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 330-7646 or by visiting GMO's website at www.gmo.com. 2. SIGNIFICANT ACCOUNTING POLICIES 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. Foreign equity securities held by certain 8 GMO GLOBAL BALANCED ASSET ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) underlying funds in which the Fund invests are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available. 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. 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. 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 of the underlying funds. 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 or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. See the Schedule of Investments for the open repurchase agreement as of August 31, 2004. 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. 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. 9 GMO GLOBAL BALANCED ASSET ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. 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 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 (See Note 3). PURCHASES AND REDEMPTIONS OF FUND SHARES Effective June 30, 2003, the Fund began to charge purchase and redemption fees on Fund shares. The premiums on cash purchases and fees on redemptions of Fund shares are each 0.09% of the amount invested or redeemed. The redemption fee is only applicable to shares purchased on or after June 30, 2003. The Fund's purchase premium and redemption fee are approximately equal to the weighted average of the purchase premiums and redemption fees, if any, of the underlying funds in which the Fund was invested. The level of purchase premium and redemption fee for the Fund will be adjusted approximately annually to account for changes in the Fund's investments (i.e., changes in the percentage of Fund assets allocated to each underlying fund). If the Manager determines that any portion of a cash purchase or redemption is offset by a corresponding cash redemption or purchase occurring on the same day, it will waive the purchase premium or redemption fee with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived in extraordinary circumstances if the Fund will not incur transaction costs. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the six months ended August 31, 2004, the Fund received $135,546 and $240,006 in purchase premiums and $697 and $0 in redemption fees, respectively. There is no premium for reinvested distributions. 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 10 GMO GLOBAL BALANCED ASSET ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. 3. 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, 2005 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, transfer taxes, and expenses indirectly incurred by investments in the underlying funds). The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the six months ended August 31, 2004, the indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
INDIRECT OPERATING INDIRECT INVESTMENT-RELATED EXPENSES (EXCLUDING EXPENSES (INCLUDING, BUT NOT MANAGEMENT FEES, LIMITED TO, INTEREST EXPENSE, SHAREHOLDER SERVICE FEES INDIRECT FOREIGN AUDIT EXPENSE, AND TOTAL INDIRECT NET AND INVESTMENT-RELATED SHAREHOLDER INVESTMENT-RELATED LEGAL INDIRECT MANAGEMENT FEES EXPENSES) SERVICE FEES EXPENSE) EXPENSES -------------------------------------------------------------------------------------------------------------- 0.322% 0.075% 0.118% 0.005% 0.520%
The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $2,043. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004, aggregated $187,275,781 and $33,289,893, respectively. 11 GMO GLOBAL BALANCED ASSET ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 5. PRINCIPAL SHAREHOLDER AND RELATED PARTIES At August 31, 2004, 15.8% 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. At August 31, 2004, 0.2% of the Fund was held by nine related parties comprised of certain GMO employee accounts. 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ------------------------------ ------------------------------- SHARES AMOUNT SHARES AMOUNT ---------- -------------- ----------- -------------- Class III: Shares sold 15,443,170 $ 162,462,268 22,027,764 $ 208,908,510 Shares issued to shareholders in reinvestment of distributions 585,704 6,126,472 920,581 9,063,874 Shares repurchased (1,468,314) (15,556,971) (18,122,281) (163,698,900) Purchase premiums and redemption fees -- 136,243 -- 240,006 ---------- -------------- ----------- -------------- Net increase 14,560,560 $ 153,168,012 4,826,064 $ 54,513,490 ========== ============== =========== ==============
12 GMO GLOBAL BALANCED ASSET ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 7. INVESTMENTS IN AFFILIATED ISSUERS A summary of the Fund's transactions in the shares of these issuers during the six months ended August 31, 2004, is set forth below:
VALUE, REALIZED BEGINNING OF SALES DIVIDEND GAINS VALUE, END AFFILIATE PERIOD PURCHASES PROCEEDS INCOME DISTRIBUTIONS OF PERIOD ------------------------------------------------------------------------------------------------------------------------------ GMO Alpha Only Fund, Class III $ 12,805,633 $ 1,000,000 $ 155,115 $ -- $ -- $ 13,703,025 GMO Core Plus Bond Fund, Class III 46,657,470 18,148,528 851,169 -- 298,528 64,621,173 GMO Currency Hedged International Bond Fund, Class III 22,411,638 17,416,487 1,088,002 65,229 -- 39,205,162 GMO Currency Hedged International Equity Fund, Class III 19,742,605 5,475,000 239,860 -- -- 25,214,218 GMO Domestic Bond Fund, Class III 48,435,265 18,431,486 1,628,616 150,714 566,772 65,467,195 GMO Emerging Countries Fund, Class III 9,013,093 510,981 109,577 9,508 501,474 8,381,887 GMO Emerging Country Debt Fund, Class IV 7,360,504 2,787,996 91,524 224,369 63,627 10,443,565 GMO Emerging Markets Fund, Class VI 32,637,970 10,310,574 4,916,147 157,788 2,161 36,679,137 GMO Inflation Indexed Bond Fund, Class III 14,851,360 10,930,484 182,887 1,401 339,083 25,797,944 GMO International Bond Fund, Class III 8,237,711 1,283,898 99,941 283,898 -- 9,105,200 GMO International Growth Fund, Class III 26,174,638 21,079,822 338,712 124,861 267,961 45,914,027 GMO International Intrinsic Value Fund, Class IV 34,361,076 17,587,280 2,292,458 239,180 -- 50,075,231
13 GMO GLOBAL BALANCED ASSET ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED)
VALUE, REALIZED BEGINNING OF SALES DIVIDEND GAINS VALUE, END AFFILIATE PERIOD PURCHASES PROCEEDS INCOME DISTRIBUTIONS OF PERIOD ------------------------------------------------------------------------------------------------------------------------------ GMO International Small Companies Fund, Class III $ 30,732,747 $ 4,063,323 $ 6,022,108 $ 104,761 $ 1,108,562 $ 26,981,050 GMO Real Estate Fund, Class III 15,601,759 8,994,689 451,817 274,689 -- 25,872,905 GMO Short-Duration Investment Fund, Class III 3,108,433 25,658 37,676 25,658 -- 3,114,322 GMO Small Cap Value Fund, Class III 10,453,279 1,555,399 10,136,990 41,794 1,513,606 -- GMO U.S. Core Fund, Class VI 84,713,205 33,030,783 3,821,386 709,770 -- 110,244,853 GMO U.S. Quality Equity Fund, Class IV 25,410,750 14,437,358 312,589 65,358 -- 38,891,331 GMO Value Fund, Class III 1,110,443 206,035 513,319 6,035 -- 794,020 ------------- ------------- ------------- ------------- ------------- ------------- Totals $ 453,819,579 $ 187,275,781 $ 33,289,893 $ 2,485,013 $ 4,661,774 $ 600,506,245 ============= ============= ============= ============= ============= =============
8. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 14 GMO GLOBAL BALANCED ASSET ALLOCATION FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as custodian and transfer agent fees, audit and tax fees, other expenses and indirect expenses incurred by its investment in underlying funds. The following table, assuming a $1,000 investment in a class of shares, discloses the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the class's actual return and actual expenses, and (2) a hypothetical annualized 5% return and the class's actual expenses: Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * ----------------------------------------------------------- 1) Actual $ 1,000.00 $ 996.10 $ 2.62 2) Hypothetical 1,000.00 1,022.58 2.65
*Expenses are calculated using the Class III annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2004 of 0.52%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 15 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
CLASSIFICATION % OF NET ASSETS - ------------------------------------------------------------------------------------------------ Mutual Funds 100.0% Short-Term Investments and Other Assets and Liabilities (net) (0.0) --------------- 100.0% ===============
See accompanying notes to the financial statements 1 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES / PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- MUTUAL FUNDS -- 100.0% AFFILIATED ISSUERS -- 100.0% 680,617 GMO Emerging Countries Fund, Class III 8,990,945 4,613,865 GMO Emerging Markets Fund, Class VI 68,054,513 6,234,492 GMO International Growth Fund, Class III 142,645,187 6,861,188 GMO International Intrinsic Value Fund, Class IV 169,128,293 1,469,418 GMO International Small Companies Fund, Class III 23,878,043 --------------- TOTAL MUTUAL FUNDS (COST $386,802,671) 412,696,981 --------------- SHORT-TERM INVESTMENT -- 0.0% REPURCHASE AGREEMENT -- 0.0% 12,769 Citigroup Global Markets Repurchase Agreement, dated 8/31/04, due 9/01/04, with a maturity value of $12,769 and an effective yield of 1.10%, collateralized by a U.S. Treasury Note with a rate of 2.75%, a maturity date of 7/31/06 and a market value, including accrued interest of $13,026. 12,769 --------------- TOTAL SHORT-TERM INVESTMENTS (COST $12,769) 12,769 --------------- TOTAL INVESTMENTS -- 100.0% (Cost $386,815,440) 412,709,750 Other Assets and Liabilities (net) -- (0.0%) (13,891) --------------- TOTAL NET ASSETS -- 100.0% $ 412,695,859 ===============
See accompanying notes to the financial statements 2 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) At August 31, 2004, the approximate 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 -------------- ---------------- ---------------- -------------- $ 387,400,879 $ 25,308,871 $ -- $ 25,308,871
At February 29, 2004, GMO International Equity Allocation Fund had capital loss carryforwards available to offset future capital gains, if any, to the extent permitted by the Internal Revenue Code, of $180,039, $3,610,151, $1,731,139 and $114,118 expiring in 2008, 2010, 2011, and 2012, respectively. Utilization of the capital loss carryforwards above could be subject to limitations imposed by the Internal Revenue Code related to share ownership activity. See accompanying notes to the financial statements 3 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments in unaffiliated issuers, at value (cost $12,769) (Note 2) $ 12,769 Investments in affiliated issuers, at value (cost $386,802,671) (Notes 2 and 7) 412,696,981 Receivable for expenses reimbursed by Manager (Note 3) 6,448 --------------- Total assets 412,716,198 --------------- LIABILITIES: Payable to affiliate for (Note 3): Trustees fee 403 Accrued expenses 19,936 --------------- Total liabilities 20,339 --------------- NET ASSETS $ 412,695,859 =============== NET ASSETS CONSIST OF: Paid-in capital $ 383,464,506 Accumulated undistributed net investment income 1,813,261 Accumulated net realized gain 1,523,782 Net unrealized appreciation 25,894,310 --------------- $ 412,695,859 =============== NET ASSETS ATTRIBUTABLE TO: Class III shares $ 412,695,859 =============== SHARES OUTSTANDING: Class III 32,722,495 =============== NET ASSET VALUE PER SHARE: Class III $ 12.61 ===============
See accompanying notes to the financial statements 4 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends from affiliated issuers (Note 7) $ 1,822,677 Interest 8,039 --------------- Total income 1,830,716 --------------- EXPENSES: Custodian and transfer agent fees 16,376 Audit and tax fees 9,016 Legal fees 4,048 Trustees fees and related expenses (Note 3) 2,133 Registration fees 4,692 Miscellaneous 1,472 --------------- Total expenses 37,737 Fees and expenses reimbursed by Manager (Note 3) (35,604) --------------- Net expenses 2,133 --------------- Net investment income 1,828,583 --------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain on: Investments in affiliated issuers 5,065,049 Realized gains distributions from affiliated issuers (Note 7) 2,679,619 --------------- Net realized gain on investments 7,744,668 --------------- Change in net unrealized appreciation (depreciation) on investments (12,365,050) --------------- Net realized and unrealized loss (4,620,382) --------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (2,791,799) ===============
See accompanying notes to the financial statements 5 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED AUGUST 31, 2004 FEBRUARY 29, (UNAUDITED) 2004 ---------------- -------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 1,828,583 $ 3,013,863 Net realized gain 7,744,668 4,353,528 Change in net unrealized appreciation (depreciation) (12,365,050) 47,887,803 ---------------- -------------- Net increase (decrease) in net assets from operations (2,791,799) 55,255,194 ---------------- -------------- Distributions to shareholders from: Net investment income Class III (2,502,248) (3,178,417) ---------------- -------------- Net share transactions (Note 6): Class III 161,437,133 100,185,475 Purchase premiums and redemption fees (Notes 2 and 6): Class III 276,003 246,579 ---------------- -------------- Total increase in net assets resulting from net share transactions and net purchase premiums and redemption fees 161,713,136 100,432,045 ---------------- -------------- Total increase in net assets 156,419,089 152,508,831 NET ASSETS: Beginning of period 256,276,770 103,767,939 ---------------- -------------- End of period (including accumulated undistributed net investment income of $1,813,261 and $2,486,926, respectively) $ 412,695,859 $ 256,276,770 ================ ==============
See accompanying notes to the financial statements 6 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ------------------------------------------------------------------------------- (UNAUDITED) 2004 2003 2002 2001 2000 ------------------ ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 12.83 8.23 $ 9.02 $ 9.67 $ 9.87 $ 8.28 ---------- ---------- ---------- ---------- ---------- ---------- Income from investment operations: Net investment income (a)+ 0.07 0.25 0.36 0.25 0.16 0.22 Net realized and unrealized gain (loss) (0.21) 4.60 (0.83) (0.66) (0.06) 1.73 ---------- ---------- ---------- ---------- ---------- ---------- Total from investment operations (0.14) 4.85 (0.47) (0.41) 0.10 1.95 ---------- ---------- ---------- ---------- ---------- ---------- Less distributions to shareholders: From net investment income (0.08) (0.25) (0.32) (0.24) (0.30) (0.08) From net realized gains -- -- -- -- -- (0.28) ---------- ---------- ---------- ---------- ---------- ---------- Total distributions (0.08) (0.25) (0.32) (0.24) (0.30) (0.36) ---------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 12.61 $ 12.83 $ 8.23 $ 9.02 $ 9.67 $ 9.87 ========== ========== ========== ========== ========== ========== TOTAL RETURN (b) (1.11)%(c)** 60.41%(c) (5.58)% (4.26)% 0.87% 23.58% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 412,696 $ 256,277 $ 103,768 $ 65,712 $ 72,975 $ 76,047 Net expenses to average daily net assets (d) 0.00%(e)* 0.00%(e) 0.00%(e) 0.00%(e) 0.00% 0.00% Net investment income to average daily net assets (a) 1.04%* 2.35% 4.11% 2.83% 1.62% 2.24% Portfolio turnover rate 5%** 43% 19% 50% 14% 8% Fees and expenses reimbursed by the Manager to average daily net assets: 0.02%* 0.05% 0.05% 0.05% 0.05% 0.04% Purchase premiums and redemption fees consisted of the following per share amounts: $ 0.01+ $ 0.02+ -- -- -- --
(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) Calculation excludes purchase premiums and redemption fees which are borne by the shareholder. (d) Net expenses exclude expenses incurred indirectly through investment in underlying funds. (See Note 3). (e) Net expenses to average daily net assets was less than 0.01%. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements 7 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION 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" and makes investments in other funds of the Trust ("underlying funds"). The Fund seeks total return greater than the return of the MSCI ACWI (All Country World Index) ex-U.S. Index through investment to varying extents in shares of underlying 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. These financial statements are available, without charge, upon request, by calling (617) 330-7646 or by visiting GMO's website at www.gmo.com. 2. SIGNIFICANT ACCOUNTING POLICIES 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. Foreign equity securities held by certain underlying funds in which the Fund invests are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available. 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. 8 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. 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 of the underlying funds. 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 or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. See the Schedule of Investments for the open repurchase agreement as of August 31, 2004. 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. 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. 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 9 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 (See Note 3). PURCHASES AND REDEMPTIONS OF FUND SHARES The premiums on cash purchases and fees on redemptions of Fund shares are each 0.17% of the amount invested or redeemed. The redemption fee is only applicable to shares purchased on or after June 30, 2003. The Fund's purchase premium and redemption fee are approximately equal to the weighted average of the purchase premiums and redemptions fees, if any, of the underlying funds in which the Fund was invested. The level of purchase premium and redemption fee for the Fund will be adjusted approximately annually to account for changes in the Fund's investments (i.e., changes in the percentage of Fund assets allocated to each underlying fund). If the Manager determines that any portion of a cash purchase or redemption is offset by a corresponding cash redemption or purchase occurring on the same day, it will waive the purchase premium and redemption fee with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived in extraordinary circumstances if the Fund will not incur transaction costs. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the six months ended August 31, 2004 and the year ended February 29, 2004, the Fund received $275,251 and $235,443 in purchase premiums and $752 and $11,136 in redemption fees, respectively. There is no premium for reinvested distributions or in-kind transactions. INVESTMENT RISK The Fund is subject to the investment risk associated with an investment in the underlying funds, some of which may invest in foreign securities. There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. 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. 10 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 3. 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, 2005 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, transfer taxes and expenses indirectly incurred by investments in the underlying funds). The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the six months ended August 31, 2004, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
INDIRECT OPERATING INDIRECT INVESTMENT- EXPENSES RELATED EXPENSES (EXCLUDING (INCLUDING, BUT NOT MANAGEMENT FEES, LIMITED TO, INTEREST SHAREHOLDER SERVICE EXPENSE, FOREIGN AUDIT INDIRECT NET FEES AND INDIRECT EXPENSE, AND TOTAL MANAGEMENT INVESTMENT-RELATED SHAREHOLDER INVESTMENT-RELATED INDIRECT FEES EXPENSES) SERVICE FEES LEGAL EXPENSE) EXPENSES ---------------------------------------------------------------------------------------- 0.528% 0.100% 0.110% LESS THAN 0.001% 0.738%
The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $1,397. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the August 31, 2004, aggregated $180,605,671 and $16,880,500, respectively. 11 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 5. PRINCIPAL SHAREHOLDERS AND RELATED PARTIES At August 31, 2004, 22.4% 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. At August 31, 2004, less than 0.1% of the Fund was held by three related parties comprised of certain GMO employee accounts. 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 --------------------------- --------------------------- SHARES AMOUNT SHARES AMOUNT ----------- ------------- ---------- ------------- CLASS III: Shares sold 12,768,935 $ 161,649,161 13,178,662 $ 150,996,773 Shares issued to shareholders in reinvestment of distributions 170,198 2,161,515 338,923 2,899,314 Shares repurchased (189,377) (2,373,543) (6,155,689) (53,710,612) Purchase premiums and redemption fees -- 276,003 -- 246,579 ----------- -------------- ---------- ------------- Net increase 12,749,756 $ 161,713,136 7,361,896 $ 100,432,054 =========== ============= ========== =============
12 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 7. INVESTMENTS IN AFFILIATED ISSUERS A summary of the Fund's transactions in the shares of these issuers during the six months ended August 31, 2004, is set forth below:
VALUE, REALIZED BEGINNING SALES DIVIDEND GAINS VALUE, END AFFILIATE OF PERIOD PURCHASES PROCEEDS INCOME DISTRIBUTIONS OF PERIOD --------------------------------------------------------------------------------------------------------------------- GMO Emerging Countries Fund, Class III $ 9,291,363 $ 786,890 $ -- $ 10,196 $ 537,847 $ 8,990,945 GMO Emerging Markets Fund, Class VI 44,703,717 33,565,592 8,011,000 335,437 4,595 68,054,513 GMO International Growth Fund, Class III 81,624,250 64,931,244 -- 517,057 1,109,639 142,645,187 GMO International Intrinsic Value Fund, Class IV 99,933,198 68,816,268 1,211,000 862,883 -- 169,128,293 GMO International Small Companies Fund, Class III 20,719,281 12,505,677 7,658,500 97,104 1,027,538 23,878,043 ------------- ------------- ------------- ------------- ------------- ------------- Totals $ 256,271,809 $ 180,605,671 $ 16,880,500 $ 1,822,677 $ 2,679,619 $ 412,696,981 ============= ============= ============= ============= ============= =============
8. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 13 GMO INTERNATIONAL EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as custodian and transfer agent fees, audit and tax fees, other expenses and indirect expenses incurred due to its investment in underlying funds. The following table, assuming a $1,000 investment in the Fund, discloses the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the class's actual return and actual expenses, and (2) a hypothetical annualized 5% return and the class's actual expenses: Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * --------------------------------------------------------- 1) Actual $ 1,000.00 $ 988.90 $ 3.71 2) Hypothetical 1,000.00 1,021.48 3.77
*Expenses are calculated using the Class III annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2004 of 0.74%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in the Fund by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 14 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
CLASSIFICATION % OF NET ASSETS - -------------------------------------------------------------------------------- U.S. Government 106.3% Corporate Debt 2.1 Mutual Funds 17.2 Reverse Repurchase Agreements (26.2) Short-Term Investments and Other Assets and Liabilities (net) 0.6 --------------- 100.0% ===============
See accompanying notes to the financial statements. 1 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 108.4% UNITED STATES -- 108.4% CORPORATE DEBT -- 2.1% 13,850,000 JP Morgan & Co. Series MTNA, Variable Rate, CPI + 4.00%, 4.56%, due 02/15/12 15,038,330 --------------- U.S. GOVERNMENT -- 106.3% 54,736,280 U.S. Treasury Inflation Indexed Bond, 1.88%, due 07/15/13 (b) 55,565,879 32,603,472 U.S. Treasury Inflation Indexed Bond, 2.38%, due 01/15/25 (b) 33,866,857 61,187,100 U.S. Treasury Inflation Indexed Bond, 3.00%, due 07/15/12 (b) 67,611,746 19,617,120 U.S. Treasury Inflation Indexed Bond, 3.50%, due 01/15/11 (b) 22,210,258 32,602,450 U.S. Treasury Inflation Indexed Bond, 3.63%, due 04/15/28 (b) 41,257,383 28,672,427 U.S. Treasury Inflation Indexed Bond, 3.88%, due 04/15/29 (b) 37,923,766 217,628,600 U.S. Treasury Inflation Indexed Note, 2.00%, due 01/15/14 (a)(b) 222,593,252 17,359,545 U.S. Treasury Inflation Indexed Note, 3.38%, due 01/15/07 (b) 18,609,976 16,023,600 U.S. Treasury Inflation Indexed Note, 3.38%, due 01/15/12 (b) 18,124,195 25,242,935 U.S. Treasury Inflation Indexed Note, 3.63%, due 01/15/08 (b) 27,755,397 30,742,162 U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09 (b) 34,618,558 151,354,793 U.S. Treasury Inflation Indexed Note, 4.25%, due 01/15/10 (a)(b) 175,831,708 --------------- 755,968,975 --------------- Total United States 771,007,305 --------------- TOTAL DEBT OBLIGATIONS (COST $756,573,687) 771,007,305 ---------------
See accompanying notes to the financial statements. 2 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------------------------- MUTUAL FUNDS -- 17.2% 4,165,279 GMO Short-Duration Collateral Fund (c) 105,548,172 28,918 GMO Special Purpose Holding Fund (c) 508,672 15,887,141 Merrimac Cash Series, Premium Class 15,887,141 --------------- TOTAL MUTUAL FUNDS (COST $121,099,976) 121,943,985 --------------- TOTAL INVESTMENTS -- 125.6% (Cost $877,673,663) 892,951,290 Other Assets and Liabilities (net) -- (25.6%) (181,860,316) --------------- TOTAL NET ASSETS -- 100.0% $ 711,090,974 ===============
NOTES TO SCHEDULE OF INVESTMENTS: CPI - Consumer Price Index Variable rates - The rates shown on Variable rate notes are the current interest rates at August 31, 2004, 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 2). (b) Indexed security in which price and/or coupon is linked to prices of other securities, securities indices, or other financial indicators. (Note 2) (c) Affiliated issuer. At August 31, 2004, the approximate 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 -------------- ---------------- ---------------- -------------- $ 877,692,147 $ 15,415,518 $ (156,375) $ 15,259,143
See accompanying notes to the financial statements. 3 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) A summary of outstanding financial instruments at August 31, 2004 is as follows: REVERSE REPURCHASE AGREEMENT
FACE VALUE DESCRIPTION MARKET VALUE -------------- ---------------------------------------------------------- -------------- $186,504,154 Barclays Bank, 1.58%, dated 8/16/04, to be repurchased on demand by Barclays Bank, at face value, plus accrued interest. $ 186,635,121 ============== Average balance outstanding $ 40,801,364 Average interest rate 1.24% Maximum balance outstanding $ 205,772,826 Average shares outstanding 30,204,647 Average balance per share outstanding $ 0.93
Average balance outstanding was calculated based on daily balances outstanding during the period that the Fund had entered into reverse repurchase agreements. See accompanying notes to the financial statements. 4 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments in unaffiliated issuers, at value (cost $772,460,828) (Note 2) $ 786,894,446 Investments in affiliated issuers, at value (cost $105,212,835) (Notes 2 and 7) 106,056,844 Receivable for Fund shares sold 3,000,000 Interest receivable 3,280,928 Receivable for expenses reimbursed by Manager (Note 3) 13,919 -------------- Total assets 899,246,137 -------------- LIABILITIES: Payable for Fund shares repurchased 1,300,000 Payable to affiliate for (Note 3): Management fee 59,368 Shareholder service fee 89,052 Trustees fee 879 Payable for reverse repurchase agreements (Note 2) 186,635,121 Accrued expenses 70,743 -------------- Total liabilities 188,155,163 -------------- NET ASSETS $ 711,090,974 ============== NET ASSETS CONSIST OF: Paid-in capital $ 667,472,838 Accumulated undistributed net investment income 16,596,043 Accumulated net realized gain 11,744,466 Net unrealized appreciation 15,277,627 -------------- $ 711,090,974 ============== NET ASSETS ATTRIBUTABLE TO: Class III shares $ 711,090,974 ============== SHARES OUTSTANDING: Class III 59,341,915 ============== NET ASSET VALUE PER SHARE: Class III $ 11.98 ==============
See accompanying notes to the financial statements. 5 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Interest $ 17,194,829 Dividends from affiliated issuers (Note 7) 391,714 -------------- Total income 17,586,543 -------------- EXPENSES: Management fee (Note 3) 262,909 Shareholder service fee (Note 3) - Class III 394,363 Custodian and transfer agent fees 70,012 Audit and tax fees 16,008 Legal fees 8,280 Trustees fees and related expenses (Note 3) 3,127 Registration fees 1,472 Interest expense (Note 2) 269,933 Miscellaneous 2,208 -------------- Total expenses 1,028,312 Fees and expenses reimbursed by Manager (Note 3) (95,680) -------------- Net expenses 932,632 -------------- Net investment income 16,653,911 -------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments in unaffiliated issuers 13,356,267 Investments in affiliated issuers (851,033) Realized gains distributions from affiliated issuers (Note 7) 40,091 Closed futures contracts (726,288) -------------- Net realized gain 11,819,037 -------------- Change in net unrealized appreciation (depreciation) on: Investments (12,683,981) Open futures contracts 4,469 -------------- Net unrealized loss (12,679,512) -------------- Net realized and unrealized loss (860,475) --------------
See accompanying notes to the financial statements. 6 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 15,793,436 ==============
See accompanying notes to the financial statements. 7 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 16,653,911 $ 12,354,926 Net realized gain 11,819,037 15,712,525 Change in net unrealized appreciation (depreciation) (12,679,512) 3,037,454 ------------- ------------- Net increase in net assets from operations 15,793,436 31,104,905 ------------- ------------- Distributions to shareholders from: Net investment income Class III (52,670) (13,030,089) Net realized gains Class III (12,746,234) (6,880,959) ------------- ------------- (12,798,904) (19,911,048) ------------- ------------- Net share transactions (Note 6): Class III 292,482,629 126,332,193 ------------- ------------- Total increase in net assets 295,477,161 137,526,050 NET ASSETS: Beginning of period 415,613,813 278,087,763 ------------- ------------- End of period (including accumulated undistributed net investment income of $16,596,043 and distributions in excess of net investment income of $5,198, respectively) $ 711,090,974 $ 415,613,813 ============= =============
See accompanying notes to the financial statements. 8 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED AUGUST 31, 2004 CASH FLOWS FROM (FOR) OPERATING ACTIVITIES: Net investment income $ 16,653,911 Net accretion (9,700,540) -------------- 6,953,371 -------------- Investments purchased (707,061,655) Investments sold 252,834,769 Short Term investments, net (3,791,719) -------------- (458,018,605) -------------- Realized gains distributions from affiliated issuers 40,091 CHANGE IN ASSETS AND LIABILITIES: (Increase) decrease in interest receivable (1,103,298) (Increase) decrease in receivable for fund shares sold (2,626,778) (Increase) decrease in receivable for securities sold 8,434,005 (Increase) decrease in receivable for expenses reimbursed by Manager 34,794 Increase (decrease) in payable for Fund shares repurchased (9,054,650) Increase (decrease) in payable for securities purchased (9,000,000) Increase (decrease) in payable to affiliate for: Management fee 26,557 Shareholder service fee 39,835 Increase (decrease) in variation margin on open futures contracts (38,497) Increase (decrease) in accrued interest and accrued operating expenses (22,823) Net realized and unrealized gain on futures contracts (721,819) -------------- NET CASH USED FOR OPERATING ACTIVITIES (465,057,817) -------------- CASH FLOWS FROM FINANCING ACTIVITIES* Proceeds from shares sold 332,708,486 Shares redeemed (52,637,855) Cash distribution paid (386,906) Increase (decrease) in payable for reverse repurchase agreements 185,243,125 Increase (decrease) in payable for interest on reverse repurchase agreements 130,967 -------------- NET CASH PROVIDED (USED IN) FINANCING ACTIVITIES 465,057,817 -------------- NET INCREASE IN CASH -- Cash and cash equivalents, at beginning of period -- -------------- Cash and cash equivalents, at end of period -- -------------- *SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Reinvestment of dividends and distributions $ 12,411,998
See accompanying notes to the financial statements. 9 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 --------------------------------------------------------------- (UNAUDITED) 2004 2003 2002 2001(a) 2000 ---------------- --------- --------- --------- --------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 12.02 $ 11.72 $ 10.81 $ 10.64 $ 9.72 $ 9.88 --------- --------- --------- --------- --------- --------- Income from investment operations: Net investment income 0.28 0.30 0.51 0.30 0.71+ 0.65+ Net realized and unrealized gain (loss) (0.08) 0.56 1.25 0.29 0.90 (0.30) --------- --------- --------- --------- --------- --------- Total from investment operations 0.20 0.86 1.76 0.59 1.61 0.35 --------- --------- --------- --------- --------- --------- Less distributions to shareholders: From net investment income (0.00)(b) (0.33) (0.56) (0.37) (0.69) (0.51) From net realized gains (0.24) (0.23) (0.29) (0.05) -- -- --------- --------- --------- --------- --------- --------- Total distributions (0.24) (0.56) (0.85) (0.42) (0.69) (0.51) --------- --------- --------- --------- --------- --------- NET ASSET VALUE, END OF PERIOD $ 11.98 $ 12.02 $ 11.72 $ 10.81 $ 10.64 $ 9.72 ========= ========= ========= ========= ========= ========= TOTAL RETURN (c) 1.74%** 7.54% 16.67% 5.66% 16.86% 3.57% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 711,091 $ 415,614 $ 278,088 $ 149,274 $ 65,887 $ 51,951 Net operating expenses to average daily net assets 0.25%* 0.25% 0.25% 0.25% 0.25% 0.25% Interest expense to average daily net assets (d) 0.10%* 0.13% 0.15% 0.17% 0.37% 0.45% Total net expenses to average daily net assets (e) 0.35%* 0.38% 0.40% 0.42% 0.62% 0.70% Net investment income to average daily net assets 6.33%* 3.49% 4.55% 4.15% 6.87% 6.49% Portfolio turnover rate 46%** 57% 75% 40% 32% 112% Fees and expenses reimbursed by the Manager to average daily net assets: 0.04% 0.06% 0.06% 0.09% 0.11% 0.13%
(a) Effective March 1, 2000, the Fund adopted the provision 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. (b) Distribution from net investment income were less than $0.01. (c) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (d) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income. (e) Net expenses exclude expenses incurred indirectly through investment in GMO Special Purpose Holding Fund and GMO Short-Duration Collateral Fund. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 10 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION 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 August 31, 2004, less than 0.1% of the Fund was invested in the GMO Special Purpose Holding Fund and 14.8% of the Fund was invested in the GMO Short-Duration Collateral Fund, separate funds of GMO Trust managed by GMO. Shares of the GMO Special Purpose Holding Fund and the GMO Short-Duration Collateral Fund are not publicly available for direct purchase. The financial statements of the GMO Special Purpose Holding Fund and the GMO Short-Duration Collateral Fund should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646. 2. SIGNIFICANT ACCOUNTING POLICIES 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 11 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) at amortized cost which approximates fair value. Shares of other funds of the Trust ("underlying funds") and other 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 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. 12 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. As of August 31, 2004, the Fund held no open forward currency contracts. 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. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, 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 August 31, 2004, the Fund held no open futures contracts. INDEXED SECURITIES The Fund may invest in indexed securities whose redemption values and/or coupons are linked to the prices of other securities, securities indices, or other financial indicators. The Fund uses indexed securities to increase or decrease its exposure to different underlying instruments and to gain exposure to markets that may be difficult to invest in through conventional securities. Indexed securities may be more volatile than their underlying instruments, but any loss is limited to the amount of the original investment. See the Schedule of Investments for all indexed securities held by the Fund as of August 31, 2004. 13 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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, 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 using standard models that incorporate 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 on swap contracts 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 interest rates. As of August 31, 2004, 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 or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. As of August 31, 2004, the Fund held no open repurchase agreements. 14 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. The market value of the securities the Fund has sold is determined daily and any additional required collateral is allocated to or sent by the Fund on the next business day. As of August 31, 2004, the Fund had entered into reverse repurchase agreements having a market value plus accrued interest of $186,635,121, collateralized by securities with a market value of $190,923,092. See the Schedule of Investments for a summary of open reverse repurchase agreements as of August 31, 2004. 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. As of August 31, 2004, the Fund had no securities on loan. STATEMENT OF CASH FLOWS The cash amounts shown in the Statement of Cash Flows are the amounts reported as cash in the Fund's Statement of Assets and Liabilities and represent cash on hand at its custodian at August 31, 2004. 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. 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. 15 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. 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. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.10% 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 0.15% for Class III shares. GMO has entered into a binding agreement effective until at least June 30, 2005 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 0.10% of average daily net assets. The Fund incurs fees and expenses indirectly as a shareholder in GMO Special Purpose Holding Fund and GMO Short-Duration Collateral Fund. For the six months ended August 31, 2004, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
INDIRECT OPERATING INDIRECT INVESTMENT-RELATED EXPENSES (EXCLUDING EXPENSES (INCLUDING, BUT NOT MANAGEMENT FEES, LIMITED TO, INTEREST EXPENSE, INDIRECT NET SHAREHOLDER SERVICE FEES INDIRECT FOREIGN AUDIT EXPENSE, AND MANAGEMENT AND INVESTMENT-RELATED SHAREHOLDER INVESTMENT-RELATED LEGAL TOTAL INDIRECT FEES EXPENSES) SERVICE FEES EXPENSE) EXPENSES --------------- ------------------------ ------------ ----------------------------- --------------- (0.003%) 0.004% 0.000% LESS THAN 0.001% 0.001%
The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $1,931. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 16 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 4. PURCHASES AND SALES OF SECURITIES For the six months ended August 31, 2004, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
PURCHASES SALES ------------- ------------- U.S. Government securities $ 628,494,327 $ 220,184,046 Investments (non-U.S. Government securities) 78,567,328 32,650,723
5. PRINCIPAL SHAREHOLDERS AND RELATED PARTIES At August 31, 2004, 47.1% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. One of the shareholders is another fund of GMO Trust. Investment activities of these shareholders may have a material effect on the Fund. At August 31, 2004, 1.8% of the Fund was held by twenty-six related parties comprised of certain GMO employee accounts. As of August 31, 2004, substantially all of the Fund's shares were held by accounts for which the Manager has investment discretion. 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 --------------------------- ---------------------------- SHARES AMOUNT SHARES AMOUNT ----------- ------------- ------------ ------------- Class III: Shares sold 28,138,048 $ 332,708,486 25,469,289 $ 297,845,772 Shares issued to shareholders in reinvestment of distributions 1,062,671 12,411,998 1,536,240 17,841,789 Shares repurchased (4,437,647) (52,637,855) (16,146,233) (189,355,368) ----------- ------------- ------------ ------------- Net increase 24,763,072 $ 292,482,629 10,859,296 $ 126,332,193 =========== ============= ============ =============
17 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 7. INVESTMENTS IN AFFILIATED ISSUERS A summary of the Fund's transactions in the securities of these issuers during the six months ended, is set forth below:
VALUE, REALIZED BEGINNING SALES DIVIDEND GAINS VALUE, END AFFILIATE OF PERIOD PURCHASES PROCEEDS INCOME DISTRIBUTIONS OF PERIOD --------------------------------------------------------------------------------------------------------------- GMO Special Purpose Holding Fund $ 11,526,447 $ 382,462 $ 10,935,523 $ 382,462 $ -- $ 508,672* GMO Short-Duration Collateral Fund 48,297,232 70,484,866 13,700,000 9,252 40,091 105,548,172 ------------ ------------ ------------ --------- -------------- ------------- Totals $ 59,823,679 $ 70,867,328 $ 24,635,523 $ 391,714 $ 40,091 $ 106,056,844 ============ ============ ============ ========= ============== =============
* After effect of the return of capital distribution of $445,746 on June 10, 2004. 8. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 18 GMO INFLATION INDEXED BOND FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees, other expenses and indirect expenses incurred by its investment in underlying funds. The following table, assuming a $1,000 investment in a class of shares, discloses the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the class's actual return and actual expenses, and (2) a hypothetical annualized 5% return and the class's actual expenses: Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED* -------------------------------------------------------- 1) Actual $ 1,000.00 $ 1,017.40 $ 1.83 2) Hypothetical 1,000.00 1,023.39 1.84
*Expenses are calculated using the Class III annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2004 of 0.36%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 19 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
CLASSIFICATION % OF NET ASSETS - ----------------------------------------------------------------------------------------------- Automotive 1.5% Construction 4.7 Consumer Goods 6.6 Financial 8.2 Food & Beverage 1.0 Health Care 17.6 Machinery 2.3 Manufacturing 2.3 Metals & Mining 0.7 Oil & Gas 3.5 Primary Process Industry 2.0 Retail Stores 11.4 Services 12.3 Technology 21.3 Transportation 1.1 Utility 1.2 Mutual Funds 2.9 Futures 0.1 Short-Term Investments and Other Assets and Liabilities (net) (0.7) --------------- 100.0% ===============
See accompanying notes to the financial statements. 1 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- COMMON STOCKS -- 97.7% AUTOMOTIVE -- 1.5% 11,500 Dana Corp. 217,005 1,200 Gentex Corp. 41,208 3,500 Oshkosh Truck Corp. 178,360 1,500 Superior Industries International, Inc. 47,550 11,100 Visteon Corp. 103,563 ------------- 587,686 ------------- CONSTRUCTION -- 4.7% 1,100 American Woodmark Corp. 76,142 800 Avalonbay Communities, Inc. REIT 48,320 3,000 Hovnanian Enterprises, Inc. * 103,260 2,400 Jacobs Engineering Group, Inc. * 93,864 8,100 Louisiana-Pacific Corp. 199,746 990 MDC Holdings, Inc. 68,161 1,700 Meritage Corp. * 113,577 400 NVR, Inc. * 200,900 1,100 Potlatch Corp. 47,190 1,100 Regency Centers Corp. REIT 50,600 1,300 Ryland Group, Inc. 114,595 800 Simpson Manufacturing Co., Inc. 45,200 3,500 St. Joe Co. 169,400 900 Texas Industries, Inc. 39,420 3,800 Thor Industries, Inc. 97,356 5,500 Toll Brothers, Inc. * 244,145 300 William Lyon Homes, Inc. *(a) 24,975 2,000 Winnebago Industries, Inc. 62,800 2,700 York International Corp. 87,912 ------------- 1,887,563 ------------- CONSUMER GOODS -- 6.6% 2,300 Alberto-Culver Co.-Class B 111,067 5,850 Bebe Stores, Inc. *(a) 106,294 3,200 Blyth, Inc. 96,032 6,700 Brunswick Corp. 263,377
See accompanying notes to the financial statements. 2 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- CONSUMER GOODS -- CONTINUED 2,100 Chattem, Inc. * 64,029 2,700 Columbia Sportswear Co. * 147,258 2,300 Ethan Allen Interiors, Inc. 82,202 8,350 Fossil, Inc. * 239,728 2,300 Genesco, Inc. * 51,819 3,900 Harman International Industries, Inc. 377,091 1,700 Kenneth Cole Productions, Inc.-Class A 45,866 3,400 K-Swiss, Inc.-Class A 66,334 500 Matthews International Corp.-Class A 17,675 3,700 Maytag Corp. 74,851 600 Middleby Corp. 30,072 4,500 Nu Skin Enterprises, Inc.-Class A 116,190 5,000 Oakley, Inc. 57,350 5,600 Plantronics, Inc. 217,560 6,800 Quiksilver, Inc. * 147,900 1,500 Shuffle Master, Inc. *(a) 49,710 3,400 Skechers U.S.A., Inc.-Class A * 45,220 2,300 Steven Madden, Ltd. * 41,975 1,300 Timberland Co.-Class A * 72,605 3,500 Topps Co. (The), Inc. 32,795 3,600 Tupperware Corp. 61,452 700 Universal Corp. 31,591 ------------- 2,648,043 ------------- FINANCIAL -- 8.2% 1,200 Accredited Home Lenders Holding Co. * 47,724 2,200 Allmerica Financial Corp. * 63,800 5,600 AmeriCredit Corp. * 117,096 2,000 AmerUs Group Co. 79,720 1,900 Arthur J. Gallagher & Co. 60,534 3,200 Bank of Hawaii Corp. 151,936 4,600 Brown & Brown, Inc. 206,540 900 Chicago Mercantile Exchange 119,817 3,300 Commerce Bancorp, Inc. (a) 173,151 5,400 Commercial Capital Bancorp, Inc. 117,018
See accompanying notes to the financial statements. 3 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- FINANCIAL -- CONTINUED 600 Community First Bankshares, Inc. 19,302 6,400 CompuCredit Corp. * 120,384 9,300 E*Trade Financial Corp. * 109,554 3,800 East-West Bancorp, Inc. 137,674 300 Equifax, Inc. 7,320 3,700 Federated Investors, Inc.-Class B 106,745 1,600 First Marblehead Corp. (The) * 66,192 4,300 Flagstar Bancorp, Inc. 92,837 3,700 GATX Corp. 99,789 2,800 Greater Bay Bancorp 79,716 4,800 HealthExtras, Inc. * 56,784 2,200 IMPAC Mortgage Holdings, Inc. REIT 56,782 1,300 IndyMac Bancorp, Inc. 44,850 2,200 Investors Financial Services Corp. 102,036 2,000 Irwin Financial Corp. 51,460 1,300 Mcgrath Rentcorp 44,577 1,300 Nuveen Investments, Inc.-Class A 37,050 100 Ohio Casualty Corp. * 2,015 700 People's Bank 23,093 2,700 Pre-Paid Legal Services, Inc. * (a) 66,690 1,300 PrivateBancorp, Inc. 38,233 1,300 Protective Life Corp. 50,869 7,800 Providian Financial Corp. * 112,632 4,800 Ryder System, Inc. 210,288 3,400 SEI Investments Co. 111,112 2,310 Sterling Financial Corp. * 76,600 1,000 Triad Guaranty, Inc. * 55,700 1,400 Unitrin, Inc. 58,730 2,900 Zenith National Insurance Corp. 125,338 ------------- 3,301,688 ------------- FOOD & BEVERAGE -- 1.0% 900 Coors (Adolph) - Class B 61,641 100 Corn Products International, Inc. 4,615 1,700 Lancaster Colony Corp. 70,176
See accompanying notes to the financial statements. 4 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- FOOD & BEVERAGE -- CONTINUED 800 NBTY, Inc. * 19,144 4,400 PepsiAmericas, Inc. 87,296 4,000 Sanderson Farms, Inc. 136,760 ------------- 379,632 ------------- HEALTH CARE -- 17.6% 2,550 Advanced Neuromodulation Systems, Inc. * 74,766 1,900 Align Technology, Inc. * 29,108 3,900 American Medical Systems Holdings, Inc. * 123,084 1,353 Amgen, Inc. * 80,219 8,900 Andrx Group * 179,424 1,300 ArthoCare Corp. * 31,200 2,300 Aspect Medical Systems, Inc. * 36,800 4,300 Bausch & Lomb, Inc. 283,585 2,300 Beckman Coulter, Inc. 128,317 6,600 Beverly Enterprises, Inc. * 47,322 1,700 Biosite, Inc. * (a) 80,495 1,900 Bradley Pharmaceuticals, Inc. * (a) 45,790 5,400 Cerner Corp. * (a) 236,574 5,400 Charles River Laboratories International, Inc. * (a) 235,170 3,000 Cooper Cos., Inc. 173,850 4,950 Coventry Health Care, Inc. * 251,361 2,800 Curative Health Services, Inc. * 20,104 4,500 Cytyc Corp. * 107,820 2,200 Dade Behring Holdings, Inc. * 115,654 2,100 DaVita, Inc. * 63,651 5,000 Decode Genetics, Inc. *(a) 28,000 1,900 Dentsply International, Inc. 96,805 2,700 DHB Industries, Inc. * 34,209 1,600 DJ Orthopedics, Inc. * 33,984 4,500 Enzon Pharmaceuticals, Inc. * 62,640 7,200 Eon Labs, Inc. * 181,152 7,450 eResearch Technology, Inc. * 149,819 6,600 First Horizon Pharmaceutical Corp. * 111,144 2,012 Fisher Scientific International, Inc. *(a) 114,624
See accompanying notes to the financial statements. 5 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- HEALTH CARE -- CONTINUED 3,900 Hanger Orthopedic Group, Inc. * 21,255 26,200 Healthsouth Corp. * 142,266 2,600 Henry Schein, Inc. * 161,928 6,600 Humana, Inc. * 125,400 3,300 Idexx Laboratories, Inc. * 160,743 3,300 ImClone Systems, Inc. *(a) 175,824 1,400 Invacare Corp. 61,978 1,481 Invitrogen Corp. * 73,309 800 Kensey Nash Corp. * 22,872 5,800 Kindred Healthcare, Inc. * 149,988 3,300 KOS Pharmaceuticals, Inc. *(a) 120,549 2,000 KV Pharmaceutical Co.-Class A * 31,840 2,500 Kyphon, Inc. * 55,825 2,800 Laserscope *(a) 55,440 2,900 LCA-Vision, Inc. 68,382 4,400 Lifepoint Hospital, Inc. *(a) 127,116 3,800 Lincare Holdings, Inc. * 122,132 1,700 Mentor Corp. 59,806 5,000 MGI Pharma, Inc. * 116,150 3,700 NeighborCare, Inc. * 93,943 1,300 Ocular Sciences, Inc. * 56,680 1,500 Patterson Cos., Inc. * 109,845 1,100 Pediatrix Medical Group, Inc. *(a) 77,110 2,400 Pharmaceutical Product Development, Inc. * 81,480 2,200 PolyMedica Corp. 66,902 2,448 Possis Medical, Inc. *(a) 42,840 2,700 Priority Healthcare Corp.-Class B * 60,021 5,900 PSS World Medical, Inc. * 63,661 1,500 RehabCare Group, Inc. * 34,485 5,600 Renal Care Group, Inc. * 177,352 1,600 Resmed, Inc. * 76,432 3,750 Salix Pharmaceuticals, Ltd. * 87,713 8,900 Select Medical Corp. 118,192 1,700 Sierra Health Services, Inc. * 73,304 2,100 Steris Corp. * 48,048
See accompanying notes to the financial statements. 6 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- HEALTH CARE -- CONTINUED 2,900 Techne Corp. *(a) 112,346 3,000 Triad Hospitals, Inc. * 95,370 4,700 United Surgical Partners International, Inc. * 169,717 1 UnitedHealth Group, Inc. 66 2,900 Universal Health Services, Inc.-Class B 130,645 4,500 Valeant Pharmaceuticals International 105,570 3,800 VCA Antech, Inc. * 72,808 5,100 Ventiv Health, Inc. * 76,857 ------------- 7,040,861 ------------- MACHINERY -- 2.3% 1,400 Briggs & Stratton Corp. 105,140 2,500 Cal Dive International, Inc. * 74,675 3,100 Carbo Ceramics, Inc. 199,485 3,150 Engineered Support Systems, Inc. 136,112 700 FMC Technologies, Inc. * 21,504 3,600 Joy Global, Inc. 109,116 1,600 Manitowoc Co. 53,056 4,000 MSC Industrial Direct Co. - Class A 124,280 1,200 Stanley Works (The) 51,912 3,700 UNOVA, Inc. * 53,946 ------------- 929,226 ------------- MANUFACTURING -- 2.3% 3,300 Ceradyne, Inc. * 128,469 3,250 Jarden Corp. * 98,443 2,000 Mine Safety Appliances Co. 79,060 4,200 Pentair, Inc. 139,608 1,600 Reliance Steel & Aluminum Co. 60,704 2,900 SPX Corp. 105,821 4,200 Temple Inland, Inc. 286,776 ------------- 898,881 -------------
See accompanying notes to the financial statements. 7 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- METALS & MINING -- 0.7% 4,600 Arch Coal, Inc. 148,258 1,800 Cleveland Cliffs, Inc. * 120,150 800 CONSOL Energy, Inc. 25,664 ------------- 294,072 ------------- OIL & GAS -- 3.5% 1,500 Cabot Oil & Gas Corp. 60,615 14,100 Chesapeake Energy Corp. 199,233 1,500 Cimarex Energy Co. * 44,895 2,100 Newfield Exploration Co. * 116,235 2,200 Noble Energy, Inc. 113,256 2,624 Patterson-UTI Energy, Inc. 45,448 4,100 Petroquest Energy, Inc. * 18,245 1,300 Pioneer Natural Resources Co. 43,485 4,200 Plains Exploration & Production Co. * 81,522 1,900 Pogo Producing Co. 83,562 1,100 Stone Energy Corp. * 45,760 4,500 Sunoco, Inc. 276,750 2,800 Swift Energy Co. * 56,980 4,700 Vintage Petroleum, Inc. 77,080 4,900 Western Gas Resources, Inc. 136,808 ------------- 1,399,874 ------------- PRIMARY PROCESS INDUSTRY -- 2.0% 11,300 AK Steel Holding Corp. * 68,817 6,500 Allegheny Technologies, Inc. 122,265 2,100 Carpenter Technology Corp. 93,030 4,000 Commercial Metals Co. 139,920 300 FMC Corp. * 13,869 500 Georgia Gulf Corp. 18,975 3,300 OM Group, Inc. * 112,365 3,200 Oregon Steel Mills, Inc. * 46,336 6,000 Steel Dynamics, Inc. (a) 188,160 600 Steel Technologies, Inc. 12,054 ------------- 815,791 -------------
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) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- RETAIL STORES -- 11.4% 1,200 99 Cents Only Stores *(a) 15,540 5,200 Abercrombie & Fitch Co.-Class A 145,600 4,600 Advance Auto Parts * 170,476 5,350 Aeropostale, Inc. * 166,653 5,500 American Eagle Outfitters, Inc. * 183,150 4,650 AnnTaylor Stores Corp. * 112,391 5,400 BJ's Wholesale Club, Inc. * 136,728 2,100 Charlotte Russe Holding, Inc. * 30,009 5,800 Charming Shoppes, Inc. * 39,788 8,250 Chico's FAS, Inc. * 337,425 1,100 Children's Place * 21,571 9,200 Claire's Stores, Inc. 223,928 3,200 Dollar Tree Stores, Inc. * 75,232 1,600 Electronics Boutique Holdings Corp. * 48,848 5,100 Fastenal Co. 320,178 2,800 Finish Line-Class A 81,228 8,900 Foot Locker, Inc. 199,093 5,000 Hibbett Sporting Goods, Inc. * 90,850 2,600 HOT Topic, Inc. * 39,260 4,400 Insight Enterprises, Inc. * 70,400 1,750 Jos A. Bank Clothiers, Inc. *(a) 47,198 1,700 Men's Wearhouse, Inc. * 47,600 1,900 Michaels Stores, Inc. 108,927 3,700 Movie Gallery, Inc. 66,563 2,763 Nautilus Group, Inc. (a) 53,841 2,100 Neiman-Marcus Group, Inc.-Class A 111,720 9,300 Nordstrom, Inc. 345,309 1,100 O'Reilly Automotive, Inc. * 43,351 8,025 Pacific Sunwear of California, Inc. * 153,759 5,300 Pier 1 Imports, Inc. 91,955 5,050 Rent-A-Center, Inc. * 152,005 2,900 Ross Stores, Inc. 61,335 2,400 Sharper Image Corp. * 43,080 2,300 Sonic Automotive, Inc. 47,840 6,800 Supervalu, Inc. 179,248 2,900 The Pep Boys - Manny, Moe & Jack 46,110
See accompanying notes to the financial statements. 9 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- RETAIL STORES -- CONTINUED 3,200 Too, Inc. * 50,080 13,400 Urban Outfitters, Inc. * 406,690 ------------- 4,564,959 ------------- SERVICES -- 12.3% 1,300 Ameristar Casinos, Inc. 35,399 1,538 Apollo Group, Inc.-Class A * 119,989 8,075 Applebee's International, Inc. 194,365 3,700 Aramark Corp.-Class B 93,647 4,900 Argosy Gaming Co. * 163,807 400 Bright Horizons Family Solutions, Inc. * 19,796 3,700 Brinker International, Inc. * 112,665 6,300 Brink's Co. (The) 181,440 10,200 Caesars Entertainment, Inc. * 157,590 1,900 California Pizza Kitchen, Inc. * 36,271 4,500 Career Education Corp. * 138,780 4,000 Catalina Marketing Corp. * 90,000 4,500 CEC Entertainment, Inc. * 151,515 2,500 Cheesecake Factory (The) * 103,450 1,500 Choice Hotels International, Inc. 77,790 10,100 Copart, Inc. * 219,372 6,000 Corinthian Colleges, Inc. *(a) 68,220 2,400 Corporate Executive Board Co. 141,264 400 Darden Restaurants, Inc. 8,404 4,200 Education Management Corp. * 122,052 3,000 Factset Research Systems, Inc. 133,590 5,400 First Health Group Corp. * 82,350 2,900 Getty Images, Inc. * 160,805 100 Hughes Supply, Inc. 6,059 1,100 IHOP Corp. 38,170 3,000 Isle of Capri Casinos, Inc. * 54,780 3,900 ITT Educational Services, Inc. * 134,823 4,200 Jack in the Box, Inc. * 118,608 6,600 Labor Ready, Inc. * 81,774 2,200 Laureate Education, Inc. * 75,218 3,400 Mandalay Resort Group 230,656
See accompanying notes to the financial statements. 10 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- SERVICES -- CONTINUED 2,200 Manpower, Inc. 92,906 3,300 Outback Steakhouse, Inc. 129,162 1,700 Papa John's International, Inc. * 48,807 3,000 Readers Digest Association (The), Inc. 42,660 3,900 Regis Corp. 159,627 2,000 Resources Connection, Inc. * 65,560 3,200 Robert Half International, Inc. 78,400 4,100 Ruby Tuesday, Inc. 110,905 3,100 SCP Pool Corp. 130,789 14,000 Service Corp. International * 84,140 3,000 Sonic Corp. * 67,050 3,000 Station Casinos, Inc. 138,000 1,400 Stericycle, Inc. * 66,052 800 Strayer Education, Inc. 83,200 5,600 United Natural Foods, Inc. * 138,656 11,000 UnitedGlobalCom, Inc.-Class A * 74,800 2,200 West Corp. * 56,716 ------------- 4,920,079 ------------- TECHNOLOGY -- 21.3% 6,400 Activision, Inc. * 92,096 4,300 Acxiom Corp. 96,621 6,400 Adtran, Inc. 171,392 8,700 Advanced Digital Information Corp. * 82,302 7,300 Advanced Micro Devices, Inc. * 83,439 10,200 Akamai Technologies, Inc. *(a) 137,190 5,000 Alliance Data Systems Corp. * 191,000 1,000 Alliant Techsystems, Inc. * 57,940 4,400 Amphenol Corp.-Class A * 132,264 600 Ansys, Inc. * 27,060 3,700 Anteon International Corp. * 121,545 2,100 Applied Signal Technology, Inc. 72,849 4,100 Armor Holdings, Inc. * 145,386 7,000 Arrow Electronics, Inc. *(a) 151,480 3,200 Artesyn Technologies, Inc. * 27,232 5,700 Ask Jeeves, Inc. * 147,744
See accompanying notes to the financial statements. 11 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- TECHNOLOGY -- CONTINUED 8,600 Autodesk, Inc. 381,926 2,100 Avid Technology, Inc. * 90,867 9,200 Avnet, Inc. * 146,096 6,000 Axcelis Technologies, Inc. * 46,800 3,600 BE Aerospace, Inc. * 38,160 800 BEI Technologies, Inc. 22,272 700 Black Box Corp. 25,368 2,900 CACI International, Inc.-Class A * 141,201 2,300 Carrier Access Corp. * 15,847 6,500 C-COR, Inc. * 51,090 2,400 Ceridian Corp. * 44,376 7,600 Cirrus Logic, Inc. * 38,456 6,200 Cognizant Technology Solutions Corp. * 170,004 1,300 Comtech Telecommunications * 23,543 3,400 Convergys Corp. * 47,260 1,700 Cree, Inc. * 42,517 2,800 CSG Systems International, Inc. * 40,516 7,600 Cypress Semiconductor Corp. * 74,176 3,600 Digital River, Inc. * 86,652 9,300 Digitas, Inc. * 66,495 6,500 Ditech Communications Corp. * 139,880 2,200 Donaldson Co., Inc. 62,480 3,200 eCollege.com, Inc. * 20,992 4,000 Electronics for Imaging * 79,520 1,800 Energizer Holdings, Inc. * 74,412 3,400 ESS Technology * 23,188 9,600 Extreme Networks, Inc. * 44,640 5,300 Fairchild Semiconductor International, Inc. * 65,349 2,200 FileNet Corp. * 43,208 1,600 Global Imaging Systems, Inc. * 44,800 3,200 Global Payments, Inc. 141,952 3,800 Harris Corp. 183,008 4,900 Helix Technology Corp. 66,689 3,400 Integrated Device Technology, Inc. * 36,414 2,200 Intercept, Inc. * 38,082 1,600 International Rectifier Corp. * 52,576
See accompanying notes to the financial statements. 12 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- TECHNOLOGY -- CONTINUED 4,100 Internet Security Systems * 58,999 7,700 Intervoice, Inc. * 69,531 9,900 iVillage, Inc. * 57,519 1,600 John H. Harland Co. 47,024 6,300 Lam Research Corp. * 135,765 2,600 Mattson Technology, Inc. * 19,396 1,800 Maximus, Inc. * 52,362 1,100 Mercury Computer Systems, Inc. * 29,722 2,600 Merix Corp. * 25,896 2,600 Metrologic Instruments, Inc. * 37,414 1,300 Micros Systems, Inc. * 60,502 7,200 Microsemi Corp. * 77,688 6,800 NCR Corp. * 300,356 1,900 Overland Storage, Inc. * 24,890 4,500 PalmOne, Inc. *(a) 146,925 5,300 PerkinElmer, Inc. 92,644 10,000 Pixelworks, Inc. *(a) 104,400 17,500 PMC-Sierra, Inc. *(a) 163,450 4,500 Polycom, Inc. * 87,885 800 Radisys Corp. * 9,280 4,600 Rayovac Corp. * 105,754 5,300 Red Hat, Inc. *(a) 64,978 2,700 Reynolds & Reynolds, Inc. (The) - Class A 66,339 2,000 Rogers Corp. * 92,780 3,000 RSA Security, Inc. * 44,670 10,400 Sapient Corp. * 78,000 2,400 ScanSource, Inc. * 144,096 4,200 Semtech Corp. * 75,978 4,200 Silicon Laboratories, Inc. * 137,718 11,200 Silicon Storage Technology, Inc. * 64,624 1,600 Siliconix, Inc. * 54,816 2,700 Skyworks Solutions, Inc. * 22,491 2,100 Sonic Solutions, Inc. *(a) 31,542 2,100 SPSS, Inc. * 28,980 1,400 SRA International, Inc.-Class A * 63,462 1,932 STATS ChipPAC, Ltd. ADR * 12,326
See accompanying notes to the financial statements. 13 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- TECHNOLOGY -- CONTINUED 2,200 Sybron Dental Specialties, Inc. * 61,336 2,600 Synaptics, Inc. * 47,762 4,400 Syntel, Inc. 67,188 1,900 Take-Two Interactive Software, Inc. * 62,225 4,700 Tech Data Corp. * 177,002 4,300 Tektronix, Inc. 122,851 11,800 Tellabs, Inc. * 107,026 4,400 Transaction Systems Architects-Class A * 74,976 3,000 United Defense Industries, Inc. * 114,690 2,100 United Stationers, Inc. * 86,457 2,100 Varian Semiconductor Equipment Associates, Inc. *(a) 58,800 2,800 Veeco Instruments, Inc. * 54,208 1,900 Viasat, Inc. * 37,658 3,200 WebEx Communications, Inc. *(a) 62,080 3,900 Websense, Inc. * 149,565 10,900 Wind River Systems, Inc. * 118,265 ------------- 8,540,643 ------------- TRANSPORTATION -- 1.1% 5,900 America West Holdings Corp.-Class B *(a) 38,940 2,700 CNF, Inc. 110,754 4,400 JB Hunt Transport Services, Inc. 149,160 1,700 Landstar System, Inc. * 89,216 5,000 Mesa Air Group, Inc. *(a) 32,025 1,300 Old Dominion Freight Line, Inc. * 36,543 ------------- 456,638 ------------- UTILITY -- 1.2% 10,000 Alamosa Holdings, Inc. * 82,000 2,900 DPL, Inc. 58,957 3,500 Energen Corp. 166,040 1,100 NII Holdings, Inc.-Class B * 40,315 5,000 Western Wireless Corp.-Class A *(a) 125,450 ------------- 472,762 ------------- TOTAL COMMON STOCKS (COST $37,622,847) 39,138,398 -------------
See accompanying notes to the financial statements. 14 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES / PAR VALUE ($) DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- MUTUAL FUNDS -- 2.9% 821,268 Dreyfus Cash Management Plus Fund (b) 821,268 350,288 Merrimac Cash Series, Premium Class (b) 350,288 ------------- TOTAL MUTUAL FUNDS (COST $1,171,556) 1,171,556 ------------- SHORT-TERM INVESTMENTS -- 5.8% CASH EQUIVALENTS -- 3.5% 1,382,718 Harris Trust & Savings Bank Eurodollar Time Deposit, 1.51%, due 9/16/04 (b) 1,382,718 ------------- U.S. GOVERNMENT -- 0.3% 125,000 U.S. Treasury Bill, 1.04%, due 9/23/04 (c) (d) 124,918 ------------- REPURCHASE AGREEMENT -- 2.0% 810,410 Citigroup Global Markets Repurchase Agreement, dated 8/31/04, due 9/01/04, with a maturity value of $810,435, and an effective yield of 1.10%, collateralized by a U.S. Treasury Note with a rate of 2.75%, maturity date of 7/21/06 and a market value, including accrued interest of $830,861. 810,410 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $2,318,046) 2,318,046 ------------- TOTAL INVESTMENTS -- 106.4% (Cost $41,112,449) 42,628,000 Other Assets and Liabilities (net) -- (6.4%) (2,546,727) ------------- TOTAL NET ASSETS -- 100.0% $ 40,081,273 =============
See accompanying notes to the financial statements. 15 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) NOTES TO THE SCHEDULE OF INVESTMENTS: ADR - American Depositary Receipt REIT - Real Estate Investment Trust * Non-income producing security. (a) All or a portion of this security is out on loan (Note 2). (b) Investment of security lending collateral (Note 2). (c) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 2). (d) Rate shown represents yield to maturity. At August 31, 2004, the approximate 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 ---------------- ------------------ ---------------- -------------- $ 41,150,821 $ 4,397,898 $ (2,920,719) $ 1,477,179
At February 29, 2004, GMO Small Cap Growth Fund had capital loss carryforwards available to offset future capital gains, if any, to the extent permitted by the Internal Revenue Code, of $1,301,640 and $1,513,997 expiring in 2010 and 2011, respectively. Utilization of the capital loss carryforwards above could be subject to limitations imposed by the Internal Revenue Code related to share ownership activity. A summary of outstanding financial instruments at August 31, 2004 is as follows: FUTURES CONTRACTS
NUMBER OF CONTRACT NET UNREALIZED CONTRACTS TYPE EXPIRATION DATE VALUE APPRECIATION --------- ---------------- ------------------- ------------ --------------- Buys 2 Russell 2000 September 2004 $ 548,100 $ 24,678 ===============
At August 31, 2004, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. See accompanying notes to the financial statements. 16 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments, at value, including securities on loan of $2,453,362 (cost $41,112,449) (Note 2) $ 42,628,000 Receivable for investments sold 1,067,255 Dividends and interest receivable 21,301 Receivable for variation margin on open futures contracts (Note 2) 4,350 Receivable for expenses reimbursed by Manager (Note 3) 9,052 ------------- Total assets 43,729,958 ------------- LIABILITIES: Payable for investments purchased 1,055,474 Payable upon return of securities loaned (Note 2) 2,554,274 Payable to affiliate for (Note 3): Management fee 11,119 Shareholder service fee 5,055 Trustees fee 139 Accrued expenses 22,624 ------------- Total liabilities 3,648,685 ------------- NET ASSETS $ 40,081,273 ============= NET ASSETS CONSIST OF: Paid-in capital $ 40,196,822 Distributions in excess of net investment income (16,721) Distributions in excess of capital gain (1,639,057) Net unrealized appreciation 1,540,229 ------------- $ 40,081,273 ============= NET ASSETS ATTRIBUTABLE TO: Class III shares $ 40,081,273 ============= SHARES OUTSTANDING: Class III 2,232,841 ============= NET ASSET VALUE PER SHARE: Class III $ 17.95 =============
See accompanying notes to the financial statements. 17 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends $ 96,888 Interest (including securities lending income of $4,850) 8,113 ------------- Total income 105,001 ------------- EXPENSES: Management fee (Note 3) 70,562 Shareholder service fee (Note 3) - Class III 32,074 Custodian and transfer agent fees 25,760 Audit and tax fees 18,400 Legal fees 552 Trustees fees and related expenses (Note 3) 404 Registration fees 460 Miscellaneous 184 ------------- Total expenses 148,396 Fees and expenses reimbursed by Manager (Note 3) (45,356) ------------- Net expenses 103,040 ------------- Net investment income 1,961 ------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 1,342,222 Closed futures contracts (105,657) ------------- Net realized gain 1,236,565 ------------- Change in net unrealized appreciation (depreciation) on: Investments (5,647,427) Open futures contracts 27,176 ------------- Net unrealized loss (5,620,251) ------------- Net realized and unrealized loss (4,383,686) ------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (4,381,725) =============
See accompanying notes to the financial statements. 18 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ----------------- ------------------ INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 1,961 $ 5,869 Net realized gain 1,236,565 6,577,843 Change in net unrealized appreciation (depreciation) (5,620,251) 7,453,206 ------------- ------------- Net increase (decrease) in net assets from operations (4,381,725) 14,036,918 ------------- ------------- Distributions to shareholders from: Net investment income Class III (18,682) (29,020) Net realized gains Class III (3,738,543) -- ------------- ------------- (3,757,225) (29,020) ------------- ------------- Net share transactions (Note 6): Class III 6,521,844 9,880,974 Purchase premiums and redemption fees (Notes 2 and 6): Class III 36,771 103,963 ------------- ------------- Total increase in net assets resulting from net share transactions and net purchase premiums and redemption fees 6,558,615 9,984,937 ------------- ------------- Total increase (decrease) in net assets (1,580,335) 23,992,835 NET ASSETS: Beginning of period 41,661,608 17,668,773 ------------- ------------- End of period (including distributions in excess of net investment income of $16,721 and $0, respectively) $ 40,081,273 $ 41,661,608 ============= =============
See accompanying notes to the financial statements. 19 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ----------------------------------------------------------------------- (UNAUDITED) 2004 2003 2002 2001(a) 2000(a) ---------------- -------- ---------- ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 21.78 $ 13.52 $ 16.48 $ 19.08 $ 168.70 $ 108.80 ---------- -------- ---------- ---------- ---------- ---------- Income from investment operations: Net investment income (loss) --(b)+ --(b)+ (0.01)+ 0.01+ (0.04) 0.10 Net realized and unrealized gain (loss) (2.02) 8.28 (2.95) (1.12) (37.26) 70.20 ---------- -------- ---------- ---------- ---------- ---------- Total from investment operations (2.02) 8.28 (2.96) (1.11) (37.30) 70.30 ---------- -------- ---------- ---------- ---------- ---------- Less distributions to shareholders: From net investment income (0.01) (0.02) -- -- -- (0.30) From net realized gains (1.80) -- -- (1.49) (112.32) (10.10) ---------- -------- ---------- ---------- ---------- ---------- Total distributions (1.81) (0.02) -- (1.49) (112.32) (10.40) ---------- -------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 17.95 $ 21.78 $ 13.52 $ 16.48 $ 19.08 $ 168.70 ========== ======== ========== ========== ========== ========== TOTAL RETURN (c) (9.68)%(d)** 61.22%(d) (17.96)%(d) (6.36)%(d) (33.14)%(d) 67.27% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 40,081 $ 41,662 $17,669 $ 17,049 $ 19,957 $ 137,290 Net expenses to average daily net assets 0.48%* 0.48% 0.49% 0.48% 0.48% 0.48% Net investment income to average daily net assets 0.01%* 0.02% (0.06)% 0.07% (0.09)% 0.09% Portfolio turnover rate 59%** 97% 116% 118% 147% 122% Fees and expenses reimbursed by the Manager to average daily net assets: 0.21%* 0.24% 0.37% 0.33% 0.19% 0.11% Purchase premiums and redemption fees consisted of the following per share amounts: (e) $ 0.02 $ 0.06 $ 0.03 $ 0.02 $ 0.87 N/A
(a) Amounts were adjusted to reflect a 1:10 reverse stock split effective December 11, 2000. (b) Net investment income was less than $0.01. (c) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (d) Calculation excludes purchase premiums and redemption fees which are borne by the shareholders. (e) Effective March 1, 2000, the Fund adopted the provision of the revised AICPA Audit and Accounting Guide for Investment Companies which requires the disclosure of the per share effect of purchase premiums 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. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 20 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION 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. 2. SIGNIFICANT ACCOUNTING POLICIES 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 as determined in good faith by the Trustees or other persons acting at their direction. FUTURES CONTRACTS The Fund may purchase and sell futures contracts 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 21 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, 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 the Schedule of Investments for all open futures contracts as of August 31, 2004. 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 using standard models that incorporate 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 on swap contracts 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 August 31, 2004, there were 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 22 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. See the Schedule of Investments for the open repurchase agreements as of August 31, 2004. 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. As of August 31, 2004, the Fund had loaned securities having a market value of $2,453,362 collateralized by cash in the amount of $2,554,274, 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. 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. 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. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. 23 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 0.50% of the amount invested or redeemed. If the Manager determines that any portion of a cash purchase or redemption is offset by a corresponding cash redemption or purchase occurring on the same day, it will waive the purchase premium or redemption fee with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived in extraordinary circumstances if the Fund will not incur transaction costs. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the six months ended August 31, 2004 and for the year ended February 29, 2004, the Fund received $25,400 and $76,859 in purchase premiums and $11,371 and $27,104 in redemption fees, respectively. There is no premium for reinvested distributions or in-kind transactions. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% for Class III shares. GMO has entered into a binding agreement effective until at least June 30, 2005 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 0.33% of the average daily net assets. The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $220. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004, aggregated $26,887,644 and $24,201,215, respectively. 24 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 5. PRINCIPAL SHAREHOLDERS AND RELATED PARTIES At August 31, 2004, 57.3% of the outstanding shares of the Fund were held by four shareholders, each holding in excess of 10% of the Fund's outstanding shares. One of the shareholders is another fund of GMO Trust. Investment activities of these shareholders may have a material effect on the Fund. At August 31, 2004, 0.1% of the Fund was held by three related parties comprised of certain GMO employee accounts. As of August 31, 2004, substantially all of the Fund's shares were held by accounts for which the Manager has investment discretion. 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ------------------------------ ------------------------------ SHARES AMOUNT SHARES AMOUNT ------------- ------------- ------------- ------------- Class III: Shares sold 234,714 $ 5,075,655 928,784 $ 15,444,987 Shares issued to shareholders in reinvestment of distributions 198,823 3,751,783 1,050 20,632 Shares repurchased (113,430) (2,305,594) (323,661) (5,584,645) Purchase premiums and redemption fees -- 36,771 -- 103,963 ------------- ------------- ------------- ------------- Net increase 320,107 $ 6,558,615 606,173 $ 9,984,937 ============= ============= ============= =============
7. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 25 GMO SMALL CAP GROWTH FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees, and other expenses. The following table, assuming a $1,000 investment in a class of shares, discloses the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the class's actual return and actual expenses, and (2) a hypothetical annualized 5% return and the class's actual expenses: Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * -------------------------------------------------------------------- 1) Actual $ 1,000.00 $ 903.20 $ 2.30 2) Hypothetical 1,000.00 1,022.79 2.45
*Expenses are calculated using the Class III annualized expense ratio for the six months ended August 31, 2004 of 0.48%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 26 GMO TAIWAN FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO TAIWAN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
CLASSIFICATION % OF NET ASSETS - ------------------------------------------------------------------------------- Taiwan 98.7% Short-Term Investments and Other Assets and Liabilities (net) 1.3 --------------- 100.0% ===============
See accompanying notes to the financial statements. 1 GMO TAIWAN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------ COMMON STOCKS -- 98.7% TAIWAN -- 98.7% 217,000 Accton Technology Corp * 101,199 5,360,403 Acer Inc 7,165,728 1,125,073 Advanced Semiconductor Engineering Inc * 822,982 378,075 Asia Cement Corp 219,868 7,291,900 Asustek Computer Inc 16,346,645 2,164,000 BES Engineering Corp * 316,876 822,000 Cathay Financial Holding Co Ltd 1,442,627 4,886,000 Cathay Real Estate Development Co Ltd 2,539,830 2,035,000 Chang Hwa Commercial Bank * 1,111,891 2,169,180 Cheng Loong Corp 732,430 7,702,000 China Bills Finance Corp 2,304,695 27,919,037 China Development Financial Holding Corp 12,442,672 5,815,503 China Life Insurance Co * 3,027,308 1,374,000 China Manmade Fibers * 656,376 204,000 China Motor Corp Ltd 238,785 2,219,000 China Petrochemical Development Corp * 327,876 4,754,792 Chinatrust Financial Holding Co 5,034,101 1,010,972 Chung Hung Steel Corp * 437,453 1,390,200 Chung Hwa Pulp Corp 639,688 2,655,000 Chunghwa Telecom Co Ltd 4,219,742 1,079,000 CMC Magnetics Corp 534,710 586,330 Delta Electronics Inc 754,402 7,017 D-Link Corp 7,988 140,429 E.Sun Financial Holdings Co Ltd 80,362 399,000 Far Eastern Department Stores Ltd 196,294 2,614,420 Far Eastern Textile Co Ltd 1,557,961 154,000 Federal Corp 91,953 792,720 Formosa Chemicals & Fibre Co 1,273,534 615,860 Formosa Plastics Corp 926,053 1,036,000 Fubon Financial Holding Co Ltd 954,508 1,368,202 GigaByte Technology Co Ltd 1,709,103 1,490,000 Goldsun Development & Construction Co Ltd * 312,887 878,599 Hon Hai Precision Industry Co Ltd 2,886,115 2,512,220 Hua Nan Financial Holdings Co Ltd 1,763,639
See accompanying notes to the financial statements. 2 GMO TAIWAN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------ TAIWAN -- CONTINUED 2,877,157 International Bank of Taipei 1,912,794 7,203,770 Inventec Co Ltd 3,871,286 1,191,240 Kinpo Electronics 497,637 8,174,000 Macronix International * 2,087,131 29,932 MediaTek Inc 211,784 3,469,000 Mega Financial Holdings Co Ltd 2,108,274 1,243,000 Micro-Star International Co Ltd 999,184 738,000 Mitac International Corp 291,722 1,112,166 Mosel Vitelic Inc * 127,775 211,000 Optimax Technology Corp 507,398 520,000 Oriental Union Chemical 518,124 85,000 Phoenixtec Power Co Ltd 88,960 90,610 President Chain Store Corp 134,625 3,809,521 Prodisc Technology Inc 1,913,702 694,481 Quanta Computer Inc 1,187,497 1,529,000 Siliconware Precision Industries 1,125,477 698,701 Sinopac Holdings Co 352,197 1,005,400 Sunplus Technology Co Ltd 1,455,151 575,000 Systex Corp * 218,743 1,554,000 Taichung Commercial Bank * 408,486 628,000 Taiwan Cellular Corp 592,569 9,863,053 Taiwan Cement Corp 4,947,463 1,056,899 Taiwan Semiconductor Manufacturing Co Ltd 1,471,133 9,551,000 Tatung Co * 3,990,432 1,141,000 TSRC Corp 416,435 20,132,400 United Microelectronics Corp * 13,623,200 9,778,000 Walsin Lihwa Corp * 4,820,290 1,625,000 Waterland Financial Holdings 572,793 795,607 Wintek Corp 836,462 3,152,000 Yageo Corp * 1,315,303 3,873,452 Yang Ming Marine Transport 3,408,171 577,800 Yuen Foong Yu Paper Manufacturing Co Ltd 275,889 829,255 Yulon Motor Co Ltd 821,489 --------------- 130,287,857 --------------- TOTAL COMMON STOCKS (COST $127,730,603) 130,287,857 ---------------
See accompanying notes to the financial statements. 3 GMO TAIWAN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------ SHORT-TERM INVESTMENT -- 0.1% CASH EQUIVALENT -- 0.1% 100,000 Societe Generale GC Time Deposit, 1.57%, due 09/01/04 100,000 --------------- TOTAL SHORT-TERM INVESTMENT (COST $100,000) 100,000 --------------- TOTAL INVESTMENTS -- 98.8% (Cost $127,830,603) 130,387,857 Other Assets and Liabilities (net) -- 1.2% 1,628,521 --------------- TOTAL NET ASSETS -- 100.0% $ 132,016,378 ===============
NOTES TO SCHEDULE OF INVESTMENTS: * Non-income producing security. At August 31, 2004, the approximate 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 -------------- ---------------- ---------------- -------------- $ 127,916,768 $ 3,415,954 $ (944,865) $ 2,471,089
See accompanying notes to the financial statements. 4 GMO TAIWAN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY (SHOWING PERCENTAGE OF EQUITY INVESTMENTS) AUGUST 31, 2004 (UNAUDITED) At August 31, 2004, industry sector diversification of the Fund's equity investments was as follows:
INDUSTRY SECTOR ------------------------------------- Information Technology 50.7% Financials 27.7 Materials 9.0 Industrials 7.8 Telecommunication Services 3.7 Consumer Discretionary 1.0 Consumer Staples 0.1 ------ 100.0% ======
See accompanying notes to the financial statements. 5 GMO TAIWAN FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments, at value (cost $127,830,603) (Note 2) $ 130,387,857 Cash 35,533 Foreign currency, at value (cost $871,212) (Note 2) 870,227 Dividends and interest receivable 1,123,834 -------------- Total assets 132,417,451 -------------- LIABILITIES: Payable for investments purchased 130,188 Payable to affiliate for (Note 3): Management fee 86,843 Shareholder service fee 16,082 Trustees fee 477 Accrued expenses 167,483 -------------- Total liabilities 401,073 -------------- NET ASSETS $ 132,016,378 ============== NET ASSETS CONSIST OF: Paid-in capital 127,977,580 Accumulated undistributed net investment income 1,456,800 Accumulated net realized gain 26,132 Net unrealized appreciation 2,555,866 -------------- $ 132,016,378 ============== NET ASSETS ATTRIBUTABLE TO: Class III shares $ 132,016,378 ============== SHARES OUTSTANDING: Class III 5,690,890 ============== NET ASSET VALUE PER SHARE: Class III $ 23.20 ==============
See accompanying notes to the financial statements. 6 GMO TAIWAN FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends (net of withholding taxes of $717,605) $ 2,899,356 Interest 6,875 -------------- Total income 2,906,231 -------------- EXPENSES: Management fee (Note 3) 602,143 Shareholder service fee (Note 3) - Class III 111,508 Custodian fees 265,972 Transfer agent fees 14,168 Audit and tax fees 24,012 Legal fees 2,576 Trustees fees and related expenses (Note 3) 1,330 Miscellaneous 828 -------------- Net expenses 1,022,537 -------------- Net investment income 1,883,694 -------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 575,336 Foreign currency, forward contracts and foreign currency related transactions (469,747) -------------- Net realized gain 105,589 -------------- Change in net unrealized appreciation (depreciation) on: Investments (32,483,774) Foreign currency, forward contracts and foreign currency related transactions (1,098) -------------- Net unrealized loss (32,484,872) -------------- Net realized and unrealized loss (32,379,283) -------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (30,495,589) ==============
See accompanying notes to the financial statements. 7 GMO TAIWAN FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income (loss) $ 1,883,694 $ (452,918) Net realized gain 105,589 11,370,639 Change in net unrealized appreciation (depreciation) (32,484,872) 35,060,373 -------------- -------------- Net increase (decrease) in net assets from operations (30,495,589) 45,978,094 -------------- -------------- Distributions to shareholders from: Net investment income Class III -- (115,236) Net realized gains Class III (9,930,750) (2,399,795) -------------- -------------- (9,930,750) (2,515,031) -------------- -------------- Net share transactions (Note 6): Class III (9,095,408) 96,489,411 Purchase premiums and redemption fees (Notes 2 and 6): Class III 225,056 193,238 -------------- -------------- Total increase (decrease) in net assets resulting from net share transactions and net purchase premiums and redemption fees (8,870,352) 96,682,649 -------------- -------------- Total increase (decrease) in net assets (49,296,691) 140,145,712 NET ASSETS: Beginning of period 181,313,069 41,167,357 -------------- -------------- End of period (including accumulated undistributed net investment income of $1,456,800 and distributions in excess of net investment income of $426,894, respectively) $ 132,016,378 $ 181,313,069 ============== ==============
See accompanying notes to the financial statements. 8 GMO TAIWAN FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 -------------------------- (UNAUDITED) 2004 2003(a) ---------------- ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 29.67 $ 20.28 $ 20.00 ---------- ---------- --------- Income from investment operations: Net investment income (loss) 0.32 (0.10) (0.12) Net realized and unrealized gain (loss) (5.23) 10.03 0.40 ---------- ---------- --------- Total from investment operations (4.91) 9.93 0.28 ---------- ---------- --------- Less distributions to shareholders: From net investment income -- (0.02) -- From net realized gains (1.56) (0.52) -- ---------- ---------- --------- Total distributions (1.56) (0.54) -- ---------- ---------- --------- NET ASSET VALUE, END OF PERIOD $ 23.20 $ 29.67 $ 20.28 ========== ========== ========= TOTAL RETURN (b) (16.70)%** 49.53% 1.40%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 132,016 $ 181,313 $ 41,167 Net expenses to average daily net assets 1.38%* 1.36% 1.76%* Net investment income (loss) to average daily net assets 1.28%(c)** (0.40)% (1.43)%* Portfolio turnover rate 48%** 86% 50%** Purchase premiums and redemption fees consisted of the following per share amounts:+ $ 0.04 $ 0.04 $ 0.01
(a) Period from October 4, 2002 (commencement of operations) through February 28, 2003. (b) Calculation excludes purchase premiums and redemption fees which are borne by the shareholders. (c) The ratio for the six months ended August 31, 2004, has not been annualized since the Fund belieives it would not be appropriate because the Fund's dividend income is not earned ratably throughout the fiscal year. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 9 GMO TAIWAN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION GMO Taiwan 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 Taiwan securities markets. The Fund's benchmark is the MSCI Taiwan Index. Shares of the Fund are principally available to other GMO Funds and certain accredited investors. 2. SIGNIFICANT ACCOUNTING POLICIES 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. The value of securities which are primarily traded on foreign exchanges are 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. For other assets, and in cases where market prices are not readily available or the Manager believes established valuation methodologies are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value. Because many foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, foreign equity securities held by the Fund are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available. 10 GMO TAIWAN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. As of August 31, 2004, there were no forward foreign currency contracts outstanding. 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. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of 11 GMO TAIWAN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, 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 August 31, 2004, 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. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying investment increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of August 31, 2004, 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 closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. As of August 31, 2004, 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. 12 GMO TAIWAN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. As of August 31, 2004, the Fund held no indexed securities. 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 using standard models that incorporate 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 on swap contracts 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 August 31, 2004, 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 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. As of August 31, 2004, the Fund did not have any securities on loan. 13 GMO TAIWAN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 generally 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. 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 mutual fund shares of the transaction amount. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. 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. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. 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 third fiscal quarter of each year. As a result, the Fund receives substantially less dividend income in the first half of its year. Dividend and interest income generated in Taiwan is subject to a 20% withholding tax. Stock dividends received (except those which have resulted from capitalization of capital surplus) are taxable at 20% of the par value of the stock dividends received. 14 GMO TAIWAN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 0.15% of the amount invested. In the case of cash redemptions, the fee is 0.45% of the amount redeemed. If the Manager determines that any portion of a cash purchase or redemption is offset by a corresponding cash redemption or purchase occurring on the same day, it will waive the purchase premium or redemption fee with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived in extraordinary circumstances if the Fund will not incur transaction costs. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the six months ended August 31, 2004 and the year ended February 29, 2004, the Fund received $35,712 and $154,266 in purchase premiums, respectively and $189,344 and $38,972 in redemption fees, respectively. There is no premium for reinvested distributions or in-kind transactions. INVESTMENT RISK Investments in emerging countries, such as Taiwan, 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 Taiwanese markets are relatively illiquid. Accordingly, the Fund may not be able to realize in an actual sale amounts approximating those used to value its holdings. The Fund may concentrate investments in the securities of a small number of issuers. As a result, the value of the Fund's shares can be expected to change in light of factors affecting those issuers and may fluctuate more widely than the value of shares of a portfolio that invests in a broader range of securities. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.81% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% for class III shares. The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $778. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 15 GMO TAIWAN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 4. PURCHASES AND SALES OF SECURITIES Cost of purchase and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004, aggregated $71,767,645 and $90,943,356, respectively. 5. PRINCIPAL SHAREHOLDERS At August 31, 2004, 91.2% 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. As of August 31, 2004, all of the Fund's shares were held by accounts for which the Manager has investment discretion. 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ------------------------------ ------------------------------ SHARES AMOUNT SHARES AMOUNT ------------ -------------- ------------ -------------- Class III: Shares sold 1,382,151 $ 34,901,180 4,355,258 $ 103,059,495 Shares issued to shareholders in reinvestment of distributions 412,923 9,885,373 101,473 2,495,888 Shares repurchased (2,215,509) (53,881,961) (375,789) (9,065,972) Purchase premiums and redemption fees -- 225,056 -- 193,238 ------------ -------------- ------------ -------------- Net increase (decrease) (420,435) $ (8,870,352) 4,080,942 $ 96,682,649 ============ ============== ============ ==============
7. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 16 GMO TAIWAN FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees, and other expenses. The following table, assuming a $1,000 investment in a class of shares, discloses the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the class's actual return and actual expenses, and (2) a hypothetical annualized 5% return and the class's actual expenses: Class III
OPERATING BEGINNING ENDING EXPENSE AMOUNT VALUE INCURRED * -------------------------------------------------------- 1) Actual $ 1,000.00 $ 833.00 $ 6.38 2) Hypothetical 1,000.00 1,018.25 7.02
*Expenses are calculated using the Class III annualized expense ratio for the six months ended August 31, 2004 of 1.38%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 17 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
CLASSIFICATION % OF NET ASSETS - ------------------------------------------------------------------------------- Automotive 4.1% Construction 1.5 Consumer Goods 4.0 Financial 18.7 Food & Beverage 1.6 Health Care 16.8 Machinery 0.6 Manufacturing 3.2 Metals & Mining 0.6 Oil & Gas 8.2 Primary Process Industry 0.7 Retail Stores 9.2 Services 2.9 Technology 12.1 Transportation 0.7 Utility 13.4 Mutual Funds 1.3 Futures 0.0 Short-Term Investments and Other Assets and Liabilities (net) 0.4 --------------- 100.0% ===============
See accompanying notes to the financial statements. 1 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------ COMMON STOCKS -- 98.3% AUTOMOTIVE -- 4.1% 27,600 Delphi Corp. 252,816 286,493 Ford Motor Co. 4,042,416 104,313 General Motors Corp. (a) 4,309,170 50,400 Harley-Davidson, Inc. 3,075,408 29,200 Johnson Controls, Inc. 1,643,960 6,200 Lear Corp. 334,056 --------------- 13,657,826 --------------- CONSTRUCTION -- 1.5% 28,500 Centex Corp. 1,304,445 39,450 D.R. Horton, Inc. 1,220,583 20,800 Georgia-Pacific Corp. 706,784 12,200 KB Home 838,994 7,800 Lennar Corp.-Class A 357,240 10,500 Pulte Homes, Inc. 618,975 --------------- 5,047,021 --------------- CONSUMER GOODS -- 4.0% 1,600 Coach, Inc. * 67,440 75,900 Eastman Kodak Co. (a) 2,245,122 7,100 Fortune Brands, Inc. 519,365 47,300 Gillette Co. (The) 2,010,250 8,300 Harman International Industries, Inc. 802,527 37,900 Jones Apparel Group, Inc. 1,352,651 57,500 Kimberly Clark Corp. 3,835,250 27,000 Liz Claiborne, Inc. 1,027,890 12,000 Mohawk Industries, Inc. *(a) 923,040 4,500 VF Corp. 222,030 3,800 Whirlpool Corp. 232,332 --------------- 13,237,897 ---------------
See accompanying notes to the financial statements. 2 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------ FINANCIAL -- 18.7% 70,700 Allstate Corp. (The) 3,337,747 14,200 AMBAC Financial Group, Inc. 1,072,100 73,900 American International Group, Inc. 5,264,636 19,306 Bank of America Corp. 868,384 2,300 Bank of New York Co. (The), Inc. 68,540 8,700 BB&T Corp. 347,913 11,821 Bear Stearns Cos. (The), Inc. 1,039,302 16,000 Capital One Financial Corp. 1,084,160 18,700 CIT Group, Inc. 668,338 7,500 Citigroup, Inc. 349,350 7,000 CNA Financial Corp. * 168,700 18,200 Comerica, Inc. 1,094,730 34,600 Countrywide Financial Corp. 1,230,030 161,300 Fannie Mae 12,008,785 55,955 Fidelity National Financial, Inc. 2,106,706 100,600 Freddie Mac 6,752,272 17,700 Greenpoint Financial Corp. 779,685 20,500 Hartford Financial Services Group, Inc. 1,253,780 500 Hudson City Bancorp, Inc. 17,115 71,740 JPMorgan Chase & Co. 2,839,469 22,900 KeyCorp 717,915 27,000 Lincoln National Corp. 1,223,100 6,100 MBIA, Inc. 349,347 105,200 MBNA Corp. 2,539,528 11,100 Metlife, Inc. 413,475 29,900 MGIC Investment Corp. 2,041,273 21,500 National City Corp. 812,485 29,700 Old Republic International Corp. 699,435 26,500 PMI Group (The), Inc. 1,100,545 15,600 PNC Financial Services Group, Inc. 837,252 19,600 Radian Group, Inc. 868,280 19,630 Regions Financial Corp. 633,853 5,700 SEI Investments Co. 186,276 5,400 Sovereign Bancorp, Inc. 118,044 4,800 Suntrust Banks, Inc. 326,880 4,800 T. Rowe Price Group, Inc. 237,744
See accompanying notes to the financial statements. 3 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------ FINANCIAL -- CONTINUED 20,200 Torchmark Corp. 1,039,896 66,800 UnumProvident Corp. 1,080,824 6,600 Wachovia Corp. 309,606 92,800 Washington Mutual, Inc. 3,603,424 --------------- 61,490,924 --------------- FOOD & BEVERAGE -- 1.6% 21,200 Archer Daniels Midland Co. 338,564 43,600 Coca Cola Enterprises, Inc. 900,340 32,100 ConAgra Foods, Inc. 841,020 9,900 McCormick & Co., Inc. 332,145 85,500 Sara Lee Corp. 1,892,115 47,900 Tyson Foods, Inc.-Class A 789,392 3,900 WM Wrigley Jr. Co. 241,917 --------------- 5,335,493 --------------- HEALTH CARE -- 16.8% 6,200 Aetna, Inc. 574,430 54,900 AmerisourceBergen Corp. 2,970,090 11,700 Bard (C.R.), Inc. 656,370 53,500 Baxter International, Inc. 1,633,890 13,300 Becton, Dickinson & Co. 639,996 35,100 Biomet, Inc. 1,602,315 56,900 Bristol-Myers Squibb Co. 1,350,237 43,900 Cardinal Health, Inc. 1,984,280 41,500 Cigna Corp. 2,762,240 3,500 Coventry Health Care, Inc. * 177,730 3,700 Dentsply International, Inc. 188,515 4,800 Express Scripts Inc * 303,360 13,000 Genentech, Inc. * 634,140 80,800 Guidant Corp. 4,831,840 21,700 Health Management Associates, Inc.-Class A 414,904 27,500 Health Net, Inc. * 713,350 39,500 Humana, Inc. * 750,500 130,520 Johnson & Johnson 7,583,212
See accompanying notes to the financial statements. 4 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------ HEALTH CARE -- CONTINUED 32,200 Lincare Holdings, Inc. * 1,034,908 6,800 Manor Care, Inc. 208,556 23,300 McKesson Corp. 721,135 150,900 Merck & Co., Inc. 6,785,973 2,700 Patterson Cos., Inc. * 197,721 221,090 Pfizer, Inc. 7,223,010 136,000 Schering-Plough Corp. 2,510,560 44,200 Stryker Corp. 2,002,260 113,900 Tenet Healthcare Corp. * 1,186,838 35,112 UnitedHealth Group, Inc. 2,321,957 12,200 WellPoint Health Networks * 1,197,796 3,100 Zimmer Holdings, Inc. * 221,030 --------------- 55,383,143 --------------- MACHINERY -- 0.6% 10,300 Caterpillar, Inc. 748,810 14,100 Deere and Co. 892,107 7,200 Smith International, Inc. * 410,256 --------------- 2,051,173 --------------- MANUFACTURING -- 3.2% 35,800 American Standard Cos., Inc. * 1,346,438 10,500 Danaher Corp. 539,910 39,700 General Electric Co. 1,301,763 82,400 Honeywell International, Inc. 2,964,752 32,400 Illinois Tool Works, Inc. 2,957,796 11,300 Sealed Air Corp. * 555,056 7,200 SPX Corp. 262,728 8,600 Textron, Inc. 546,014 --------------- 10,474,457 --------------- METALS & MINING -- 0.6% 59,400 Alcoa, Inc. 1,923,372 ---------------
See accompanying notes to the financial statements. 5 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------ OIL & GAS -- 8.2% 20,400 Amerada Hess Corp. 1,642,200 5,900 Anadarko Petroleum Corp. 349,398 11,000 Ashland, Inc. 565,730 29,800 Burlington Resources, Inc. 1,079,654 41,000 ChevronTexaco Corp. 3,997,500 38,033 ConocoPhillips 2,830,796 211,700 Exxon Mobil Corp. 9,759,370 64,600 Marathon Oil Corp. 2,343,042 41,700 Occidental Petroleum Corp. 2,153,805 11,500 Sunoco, Inc. 707,250 17,500 Unocal Corp. 653,450 16,000 Valero Energy Corp. 1,056,480 --------------- 27,138,675 --------------- PRIMARY PROCESS INDUSTRY -- 0.7% 26,100 Monsanto Co. 955,260 3,700 Nucor Corp. 289,673 21,300 Sherwin-Williams Co. (The) 879,690 --------------- 2,124,623 --------------- RETAIL STORES -- 9.2% 77,976 Albertson's, Inc. (a) 1,916,650 35,900 Autonation, Inc. * 590,196 5,000 CDW Corp. 292,500 31,600 CVS Corp. 1,264,000 17,400 Dollar Tree Stores, Inc. * 409,074 6,000 Fastenal Co. 376,680 1,200 Federated Department Stores 52,080 375,300 Home Depot, Inc. 13,720,968 19,900 JC Penney Co., Inc. Holding Co. 762,568 61,400 Kroger Co. * 1,014,942 26,000 Limited Brands, Inc. 522,080 17,700 May Department Stores Co. (The) 433,827 4,500 Nordstrom, Inc. 167,085 71,000 Rite Aid Corp. * 312,400
See accompanying notes to the financial statements. 6 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------ RETAIL STORES -- CONTINUED 37,100 Ross Stores, Inc. 784,665 163,800 Safeway, Inc. * 3,308,760 34,400 Sears Roebuck & Co. 1,316,832 27,700 Supervalu, Inc. 730,172 8,100 Target Corp. 361,098 38,400 TJX Cos., Inc. 812,544 14,500 Wal-Mart Stores, Inc. 763,715 4,900 Whole Foods Market, Inc. 380,877 --------------- 30,293,713 --------------- SERVICES -- 2.9% 13,200 First Health Group Corp. * 201,300 172,300 McDonald's Corp. 4,655,546 13,300 Outback Steakhouse, Inc. 520,562 16,700 RR Donnelley & Sons Co. 513,191 45,000 Starbucks Corp. * 1,945,800 31,300 Sysco Corp. 1,005,982 19,000 Wendy's International, Inc. 653,030 --------------- 9,495,411 --------------- TECHNOLOGY -- 12.1% 9,400 Applera Corp.-Applied Biosystems Group 178,976 5,500 Autodesk, Inc. 244,255 35,900 Avaya, Inc. * 435,108 95,400 Boeing Co. (The) 4,981,788 51,100 Cisco Systems, Inc. * 958,636 6,000 Computer Associates International, Inc. 145,320 165,000 Dell, Inc. * 5,748,600 4,000 Diebold, Inc. 195,560 46,700 Electronic Data Systems Corp. (a) 897,574 41,300 First Data Corp. 1,744,925 10,100 General Dynamics Corp. 986,164 160,700 Intel Corp. 3,421,303 10,900 International Business Machines Corp. 923,121 14,200 Lexmark International, Inc. * 1,255,990
See accompanying notes to the financial statements. 7 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------ TECHNOLOGY -- CONTINUED 103,400 Microsoft Corp. 2,822,820 261,900 Motorola, Inc. 4,229,685 29,600 National Semiconductor Corp. * 394,568 11,300 NCR Corp. * 499,121 3,112 Northrop Grumman Corp. 160,735 156,600 Qualcomm, Inc. 5,958,630 6,400 Rockwell Automation, Inc. 249,600 27,800 Symantec Corp. * 1,333,288 53,300 Texas Instruments, Inc. 1,041,482 55,100 Time Warner, Inc. * 900,885 1,400 Waters Corp. * 60,634 17,100 Xerox Corp. * 229,653 --------------- 39,998,421 --------------- TRANSPORTATION -- 0.7% 46,100 Burlington Northern Santa Fe Corp. 1,650,380 13,200 CSX Corp. 416,856 4,300 Expeditors International Washington, Inc. (a) 209,754 --------------- 2,276,990 --------------- UTILITY -- 13.4% 25,500 AES Corp. (The) * 257,295 6,100 Ameren Corp. 285,419 33,900 American Electric Power Co., Inc. 1,109,546 150,206 AT&T Corp. 2,220,045 191,900 BellSouth Corp. 5,135,244 19,500 Centerpoint Energy, Inc. 213,330 6,900 Consolidated Edison, Inc. 291,180 9,200 Constellation Energy Group, Inc. 378,120 8,100 DTE Energy Co. 334,692 75,000 Duke Energy Corp. 1,660,500 46,700 Edison International 1,255,296 126,000 El Paso Corp. 1,030,680 10,700 Exelon Corp. 394,295 5,800 FirstEnergy Corp. 233,392
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) AUGUST 31, 2004 (UNAUDITED)
SHARES / PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------ UTILITY -- CONTINUED 3,100 FPL Group, Inc. 214,520 3,300 Kinder Morgan, Inc. 199,650 97,300 PG&E Corp. * 2,840,187 8,000 Pinnacle West Capital Corp. 337,680 26,800 PPL Corp. 1,281,844 7,300 Progress Energy, Inc. 320,397 15,600 Public Service Enterprise Group, Inc. 660,504 463,414 SBC Communications, Inc. 11,951,447 12,700 Sempra Energy 459,105 125,700 Sprint Corp.-FON Group 2,473,776 14,100 TECO Energy, Inc. (a) 186,966 1,800 Telephone & Data Systems, Inc. 138,780 21,200 TXU Corp. 882,556 183,384 Verizon Communications, Inc. 7,197,822 19,400 Xcel Energy, Inc. (a) 342,410 --------------- 44,286,678 --------------- TOTAL COMMON STOCKS (COST $311,144,310) 324,215,817 --------------- MUTUAL FUNDS -- 1.3% 2,970,305 Dreyfus Cash Management Plus Fund (b) 2,970,305 1,266,899 Merrimac Cash Series, Premium Class (b) 1,266,899 --------------- TOTAL MUTUAL FUNDS (COST $4,237,204) 4,237,204 --------------- SHORT-TERM INVESTMENTS -- 3.3% CASH EQUIVALENT -- 1.5% 5,000,918 Harris Trust & Savings Bank Eurodollar Time Deposit, 1.51%, due 9/16/04 (b) 5,000,918 --------------- U.S. GOVERNMENT -- 0.5% 1,500,000 U.S. Treasury Bill, 1.04%, due 9/23/04 (c)(d) 1,499,019 ---------------
See accompanying notes to the financial statements. 9 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------ REPURCHASE AGREEMENT -- 1.3% 4,445,834 Citigroup Global Markets Repurchase Agreement, dated 8/31/04, due 9/01/04, with a maturity value of $4,445,970 and an effective yield of 1.10%, collateralized by a U.S. Treasury Note with a rate of 2.75%, maturity date of 7/31/06 and a market value, with accrued interest of $4,535,114. 4,445,834 --------------- TOTAL SHORT-TERM INVESTMENTS (COST $10,945,771) 10,945,771 --------------- TOTAL INVESTMENTS -- 102.9% (Cost $326,327,285) 339,398,792 Other Assets and Liabilities (net) -- (2.9%) (9,526,194) --------------- TOTAL NET ASSETS -- 100.0% $ 329,872,598 ===============
NOTES TO THE SCHEDULE OF INVESTMENTS: * Non-income producing security. (a) All or a portion of this security is out on loan (Note 2). (b) Investment of security lending collateral (Note 2). (c) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 2). (d) Rate shown represents yield to maturity. At August 31, 2004, the approximate 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 -------------- ---------------- ---------------- -------------- $ 329,119,769 $ 24,503,186 $ (14,224,163) $ 10,279,023
At February 29, 2004, GMO Tobacco-Free Core Fund had capital loss carryforwards available to offset future capital gains, if any, to the extent permitted by the Internal Revenue Code, of $24,719,851, $28,414,910 and $5,841,231 expiring in 2010, 2011 and 2012, respectively. Utilization of the capital loss carryforwards above could be subject to limitations imposed by the Internal Revenue Code related to share ownership activity. See accompanying notes to the financial statements. 10 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) A summary of outstanding financial instruments at August 31, 2004 is as follows: FUTURES CONTRACTS
NUMBER OF CONTRACT NET UNREALIZED CONTRACTS TYPE EXPIRATION DATE VALUE APPRECIATION --------- ---------------- --------------- ---------- -------------- Buys 3 S&P 500 September 2004 $ 828,075 $ 16,982 ==============
At August 31, 2004, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. See accompanying notes to the financial statements. 11 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments, at value, including securities on loan of $8,976,654 (cost $326,327,285) (Note 2) $ 339,398,792 Receivable for investments sold 7,089,167 Dividends and interest receivable 559,454 Receivable for variation margin on open futures contracts (Note 2) 4,868 Receivable for expenses reimbursed by Manager (Note 3) 13,423 -------------- Total assets 347,065,704 -------------- LIABILITIES: Payable for investments purchased 7,778,850 Payable upon return of securities loaned (Note 2) 9,238,122 Payable to affiliate for (Note 3): Management fee 92,159 Shareholder service fee 36,841 Trustees fee 1,448 Accrued expenses 45,686 -------------- Total liabilities 17,193,106 -------------- NET ASSETS $ 329,872,598 ============== NET ASSETS CONSIST OF: Paid-in capital $ 349,039,118 Accumulated undistributed net investment income 861,624 Accumulated net realized loss (33,116,633) Net unrealized appreciation 13,088,489 -------------- $ 329,872,598 ============== NET ASSETS ATTRIBUTABLE TO: Class III shares $ 200,085,237 ============== Class IV shares $ 129,787,361 ============== SHARES OUTSTANDING: Class III 17,653,712 ============== Class IV 11,446,925 ============== NET ASSET VALUE PER SHARE: Class III $ 11.33 ============== Class IV $ 11.34 ==============
See accompanying notes to the financial statements. 12 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends $ 4,024,670 Interest (including securities lending income of $3,339) 25,442 -------------- Total income 4,050,112 -------------- EXPENSES: Management fee (Note 3) 780,433 Shareholder service fee (Note 3) - Class III 147,569 Shareholder service fee (Note 3) - Class IV 145,021 Custodian and transfer agent fees 52,163 Audit and tax fees 19,688 Legal fees 7,820 Trustees fees and related expenses (Note 3) 4,022 Registration fees 1,288 Miscellaneous 2,945 -------------- Total expenses 1,160,949 Fees and expenses reimbursed by Manager (Note 3) (83,904) -------------- Net expenses 1,077,045 -------------- Net investment income 2,973,067 -------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain on: Investments 30,042,057 Closed futures contracts 45,364 -------------- Net realized gain 30,087,421 -------------- Change in net unrealized appreciation (depreciation) on: Investments (47,325,055) Open futures contracts 17,804 -------------- Net unrealized loss (47,307,251) -------------- Net realized and unrealized loss (17,219,830) -------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (14,246,763) ==============
See accompanying notes to the financial statements. 13 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 2,973,067 $ 7,342,958 Net realized gain 30,087,421 14,916,503 Change in net unrealized appreciation (depreciation) (47,307,251) 155,717,816 ---------------- ----------------- Net increase (decrease) in net assets from operations (14,246,763) 177,977,277 ---------------- ----------------- Distributions to shareholders from: Net investment income Class III (1,502,274) (2,594,439) Class IV (1,697,340) (4,883,887) ---------------- ----------------- Total distributions from net investment income (3,199,614) (7,478,326) ---------------- ----------------- Net share transactions (Note 6): Class III 19,086,739 (34,050,800) Class IV (254,591,680) (24,650,110) ---------------- ----------------- Decrease in net assets resulting from net share transactions (235,504,941) (58,700,910) ---------------- ----------------- Total increase (decrease) in net assets (252,951,318) 111,798,041 NET ASSETS: Beginning of period 582,823,916 471,025,875 ---------------- ----------------- End of period (including accumulated undistributed net investment income of $861,624 and $1,088,171, respectively) $ 329,872,598 $ 582,823,916 ================ =================
See accompanying notes to the financial statements. 14 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 --------------------------------------------------------------- (UNAUDITED) 2004 2003 2002 2001 2000 ---------------- --------- --------- --------- --------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 11.76 $ 8.69 $ 11.23 $ 12.29 $ 14.35 $ 14.26 --------- --------- --------- --------- --------- --------- Income from investment operations: Net investment income 0.07+ 0.13+ 0.12+ 0.15+ 0.17+ 0.20 Net realized and unrealized gain (loss) (0.41) 3.07 (2.55) (1.07) (0.20) 1.94 --------- --------- --------- --------- --------- --------- Total from investment operations (0.34) 3.20 (2.43) (0.92) (0.03)(a) 2.14 --------- --------- --------- --------- --------- --------- Less distributions to shareholders: From net investment income (0.09) (0.13) (0.11) (0.14) (0.19) (0.19) From net realized gains -- -- -- -- (1.84) (1.86) --------- --------- --------- --------- --------- --------- Total distributions (0.09) (0.13) (0.11) (0.14) (2.03) (2.05) --------- --------- --------- --------- --------- --------- NET ASSET VALUE, END OF PERIOD $ 11.33 $ 11.76 $ 8.69 $ 11.23 $ 12.29 $ 14.35 ========= ========= ========= ========= ========= ========= TOTAL RETURN (b) (2.91)%** 37.06% (21.69)% (7.53)% (0.83)% 15.10% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 200,085 $ 188,370 $ 163,025 $ 133,203 $ 260,432 $ 321,786 Net expenses to average daily net assets 0.48%* 0.48% 0.48% 0.48% 0.48% 0.48% Net investment income to average daily net assets 1.27%* 1.26% 1.26% 1.24% 1.20% 1.34% Portfolio turnover rate 36%** 63% 62% 85% 82% 108% Fees and expenses reimbursed by the Manager to average daily net assets: 0.04%* 0.04% 0.04% 0.03% 0.05% 0.05%
(a) 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. (b) 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. See accompanying notes to the financial statements. 15 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ----------------------------------- (UNAUDITED) 2004 2003 2002(a) ---------------- ---------- ---------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 11.76 $ 8.69 $ 11.23 $ 12.32 --------- ---------- ---------- --------- Income from investment operations: Net investment income + 0.07 0.13 0.13 0.10 Net realized and unrealized gain (loss) (0.40) 3.07 (2.55) (1.08) --------- ---------- ---------- --------- Total from investment operations (0.33) 3.20 (2.42) (0.98) --------- ---------- ---------- --------- Less distributions to shareholders: From net investment income (0.09) (0.13) (0.12) (0.11) --------- ---------- ---------- --------- Total distributions (0.09) (0.13) (0.12) (0.11) --------- ---------- ---------- --------- NET ASSET VALUE, END OF PERIOD $ 11.34 $ 11.76 $ 8.69 $ 11.23 ========= ========== ========== ========= TOTAL RETURN (b) (2.84)%** 37.12% (21.65)% (8.00)%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 129,787 $ 394,454 $ 308,001 $ 248,095 Net expenses to average daily net assets 0.44%* 0.44% 0.44% 0.44%* Net investment income to average daily net assets 1.25%* 1.31% 1.35% 1.37%* Portfolio turnover rate 36%** 63% 62% 85% Fees and expenses reimbursed by the Manager to average daily net assets: 0.04%* 0.04% 0.04% 0.04%*
(a) Period from July 2, 2001 (commencement of operations) through February 28, 2002. (b) 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. See accompanying notes to the financial statements. 16 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION 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. The Fund seeks to achieve this objective primarily through investment in U.S. equity securities, excluding those companies that are tobacco-producing issuers (as listed within the Tobacco Producing Issuer industry classification maintained by Ford Investor Services). The Fund's benchmark is the S&P 500 Index. Throughout the six months ended August 31, 2004, 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 service fees borne by the classes. Eligibility for and automatic conversion between the classes of shares is generally based on the total amounts of assets invested in a particular fund or with GMO, as more fully outlined in the Trust's prospectus. 2. SIGNIFICANT ACCOUNTING POLICIES 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 as determined in good faith by the Trustees or other persons acting at their direction. 17 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, 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 the Schedule of Investments for all open futures contracts as of August 31, 2004. 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 using standard models that incorporate 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 on swap contracts 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 18 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 August 31, 2004 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 or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. See the Schedule of Investments for the open repurchase agreement as of August 31, 2004. 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. As of August 31, 2004, the Fund had loaned securities having a market value of $8,976,654 collateralized by cash in the amount of $9,238,122, 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. 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income 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 TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. 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 between the classes of shares of the Fund based on the relative net assets of each class. Shareholder service, which are directly attributable to a class of shares, are charged to that class's operations. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of 0.15% for Class III shares and 0.105% for Class IV shares. GMO has entered into a binding agreement effective until at least June 30, 2005 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 0.33% of the average daily net assets. The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $2,366. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 20 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the August 31, 2004, aggregated $157,365,204 and $384,227,100, respectively. 5. PRINCIPAL SHAREHOLDERS AND RELATED PARTY At August 31, 2004, 52.2% 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. At August 31, 2004, less than 0.1% of the Fund was held by one related party comprised of certain GMO employee accounts. 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ------------------------------ ------------------------------ SHARES AMOUNT SHARES AMOUNT ------------ -------------- ------------ -------------- Class III: Shares sold 1,660,613 $ 19,311,070 1,932,775 $ 18,886,632 Shares issued to shareholders in reinvestment of distributions 105,455 1,202,888 209,262 2,139,237 Shares repurchased (125,431) (1,427,219) (4,886,251) (55,076,669) ------------ -------------- ------------ -------------- Net increase (decrease) 1,640,637 $ 19,086,739 (2,744,214) $ (34,050,800) ============ ============== ============ ==============
21 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED)
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ------------------------------ ------------------------------ SHARES AMOUNT SHARES AMOUNT ------------ -------------- ------------ -------------- Class IV: Shares sold -- $ -- 3,102,166 $ 30,016,000 Shares issued to shareholders in reinvestment of distributions 147,341 1,697,340 480,093 4,883,887 Shares repurchased (22,237,483) (256,289,020) (5,492,447) (59,549,997) ------------ -------------- ------------ -------------- Net decrease (22,090,142) $ (254,591,680) (1,910,188) $ (24,650,110) ============ ============== ============ ==============
7. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 22 GMO TOBACCO-FREE CORE FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees, and other expenses. The following tables, assuming a $1,000 investment in a class of shares, disclose the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the classes' actual return and actual expenses, and (2) a hypothetical annualized 5% return and the classes' actual expenses: Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * -------------------------------------------------------- 1) Actual $ 1,000.00 $ 970.90 $ 2.38 2) Hypothetical 1,000.00 1,022.79 2.45
*Expenses are calculated using the Class III annualized expense ratio for the six months ended August 31, 2004 of 0.48%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. Class IV
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * -------------------------------------------------------- 1) Actual $ 1,000.00 $ 971.60 $ 2.16 2) Hypothetical 1,000.00 1,023.01 2.22
*Expenses are calculated using the Class IV annualized expense ratio for the six months ended August 31, 2004 of 0.435%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 23 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
CLASSIFICATION % OF NET ASSETS - --------------------------------------------------------------------------------------------- Automotive 4.4% Construction 1.7 Consumer Goods 6.4 Financial 19.0 Food & Beverage 1.5 Health Care 15.4 Machinery 0.7 Manufacturing 3.0 Metals & Mining 0.5 Oil & Gas 8.2 Primary Process Industry 0.5 Retail Stores 7.4 Services 3.1 Technology 13.3 Transportation 0.5 Utility 12.1 Mutual Funds 0.9 Futures 0.0 Short-Term Investments and Other Assets and Liabilities (net) 1.4 --------------- 100.0% ===============
See accompanying notes to the financial statements. 1 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------ COMMON STOCKS -- 97.7% AUTOMOTIVE -- 4.4% 471,900 Delphi Corp. 4,322,604 3,463,111 Ford Motor Co. (a) 48,864,496 1,278,416 General Motors Corp. (a) 52,811,365 12,800 Genuine Parts Co. 485,248 788,800 Harley-Davidson, Inc. 48,132,576 288,400 Johnson Controls, Inc. 16,236,920 106,800 Lear Corp. 5,754,384 --------------- 176,607,593 --------------- CONSTRUCTION -- 1.7% 288,600 Centex Corp. (a) 13,209,222 652,700 D.R. Horton, Inc. 20,194,538 6,413 Eagle Materials, Inc. 416,268 403,100 Georgia-Pacific Corp. 13,697,338 73,900 KB Home 5,082,103 149,400 Lennar Corp.-Class A 6,842,520 127,500 Pulte Homes, Inc. 7,516,125 --------------- 66,958,114 --------------- CONSUMER GOODS -- 6.4% 1,432,800 Altria Group, Inc. 70,135,560 173,800 Avon Products, Inc. 7,678,484 38,800 Black & Decker Corp. 2,674,484 24,400 Coach, Inc. * 1,028,460 390,500 Colgate-Palmolive Co. 21,087,000 660,600 Eastman Kodak Co. (a) 19,540,548 113,400 Fortune Brands, Inc. 8,295,210 526,700 Gillette Co. (The) 22,384,750 116,200 Harman International Industries, Inc. 11,235,378 278,900 Jones Apparel Group, Inc. 9,953,941 636,600 Kimberly Clark Corp. 42,461,220 173,700 Liz Claiborne, Inc. 6,612,759 98,600 Mohawk Industries, Inc. *(a) 7,584,312 103,700 Nike, Inc.-Class B 7,809,647
See accompanying notes to the financial statements. 2 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------ CONSUMER GOODS -- CONTINUED 84,200 Reynolds American, Inc. 6,357,100 127,200 UST, Inc. 5,103,264 58,800 VF Corp. 2,901,192 76,800 Whirlpool Corp. 4,695,552 --------------- 257,538,861 --------------- FINANCIAL -- 19.0% 813,500 Allstate Corp. (The) 38,405,335 198,600 AMBAC Financial Group, Inc. 14,994,300 1,316,900 American International Group, Inc. 93,815,956 691,466 Bank of America Corp. 31,102,141 112,200 BB&T Corp. 4,486,878 150,379 Bear Stearns Cos. (The), Inc. 13,221,322 392,300 Capital One Financial Corp. 26,582,248 228,900 CIT Group, Inc. 8,180,886 673,800 Citigroup, Inc. 31,385,604 88,400 CNA Financial Corp. * 2,130,440 264,200 Comerica, Inc. 15,891,630 800,798 Countrywide Financial Corp. (a) 28,468,369 941,600 Fannie Mae 70,102,120 661,725 Fidelity National Financial, Inc. 24,913,946 646,400 Freddie Mac 43,386,368 126,400 Friedman Billings Ramsey Group, Inc.-Class A 2,382,640 139,450 Greenpoint Financial Corp. 6,142,772 320,100 Hartford Financial Services Group, Inc. 19,577,316 73,400 Huntington Bancshares, Inc. (a) 1,810,778 852,452 JPMorgan Chase & Co. 33,740,050 275,500 KeyCorp 8,636,925 188,600 Lincoln National Corp. 8,543,580 341,000 Loews Corp. 19,368,800 124,800 Marsh & McLennan Cos., Inc. 5,577,312 25,550 MBIA, Inc. 1,463,248 1,307,000 MBNA Corp. 31,550,980 222,300 Metlife, Inc. 8,280,675 304,500 MGIC Investment Corp. (a) 20,788,215 268,800 National City Corp. 10,157,952
See accompanying notes to the financial statements. 3 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------ FINANCIAL -- CONTINUED 253,300 Old Republic International Corp. 5,965,215 312,700 PMI Group (The), Inc. 12,986,431 153,900 PNC Financial Services Group, Inc. 8,259,813 220,700 Radian Group, Inc. 9,777,010 202,026 Regions Financial Corp. 6,523,420 50,300 SEI Investments Co. 1,643,804 161,200 Sovereign Bancorp, Inc. 3,523,832 85,600 Suntrust Banks, Inc. 5,829,360 151,300 T. Rowe Price Group, Inc. 7,493,889 202,000 Torchmark Corp. 10,398,960 583,500 UnumProvident Corp. 9,441,030 256,600 Wachovia Corp. 12,037,106 1,127,650 Washington Mutual, Inc. 43,786,650 --------------- 762,755,306 --------------- FOOD & BEVERAGE -- 1.5% 131,600 Campbell Soup Co. 3,416,336 560,400 Coca Cola Enterprises, Inc. 11,572,260 420,900 ConAgra Foods, Inc. 11,027,580 57,000 H.J. Heinz Co. 2,160,870 21,500 Hormel Foods Corp. 574,050 48,500 McCormick & Co., Inc. 1,627,175 622,500 Sara Lee Corp. 13,775,925 527,600 Tyson Foods, Inc.-Class A 8,694,848 102,900 WM Wrigley Jr. Co. 6,382,887 --------------- 59,231,931 --------------- HEALTH CARE -- 15.4% 126,100 Abbott Laboratories 5,257,109 65,900 Aetna, Inc. 6,105,635 517,100 AmerisourceBergen Corp. 27,975,110 169,000 Bard (C.R.), Inc. 9,480,900 660,200 Baxter International, Inc. 20,162,508 165,300 Becton, Dickinson & Co. 7,954,236 310,300 Biomet, Inc. 14,165,195 786,900 Bristol-Myers Squibb Co. 18,673,137
See accompanying notes to the financial statements. 4 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------ HEALTH CARE -- CONTINUED 349,200 Cardinal Health, Inc. 15,783,840 419,500 Cigna Corp. 27,921,920 54,100 Dentsply International, Inc. 2,756,395 163,500 Eli Lilly & Co. 10,374,075 82,600 Genentech, Inc. * 4,029,228 902,100 Guidant Corp. 53,945,580 272,800 Health Management Associates, Inc.-Class A 5,215,936 259,400 Health Net, Inc. * 6,728,836 12,610 Hospira, Inc. * 349,297 408,100 Humana, Inc. * 7,753,900 1,395,100 Johnson & Johnson 81,055,310 275,500 Lincare Holdings, Inc. * 8,854,570 93,900 Manor Care, Inc. 2,879,913 335,000 McKesson Corp. 10,368,250 1,473,600 Merck & Co., Inc. 66,267,792 48,700 Patterson Cos., Inc. * 3,566,301 2,794,780 Pfizer, Inc. 91,305,463 1,199,800 Schering-Plough Corp. 22,148,308 393,700 Stryker Corp. 17,834,610 1,017,600 Tenet Healthcare Corp. * 10,603,392 517,000 UnitedHealth Group, Inc. 34,189,210 44,900 WellPoint Health Networks * 4,408,282 367,400 Wyeth 13,435,818 113,200 Zimmer Holdings, Inc. * 8,071,160 --------------- 619,621,216 --------------- MACHINERY -- 0.7% 123,700 Caterpillar, Inc. 8,992,990 196,400 Deere and Co. 12,426,228 92,100 Smith International, Inc. * 5,247,858 --------------- 26,667,076 --------------- MANUFACTURING -- 3.0% 481,300 American Standard Cos., Inc. * 18,101,693 124,100 Danaher Corp. 6,381,222 1,222,900 General Electric Co. 40,098,891
See accompanying notes to the financial statements. 5 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------ MANUFACTURING -- CONTINUED 406,200 Honeywell International, Inc. 14,615,076 412,400 Illinois Tool Works, Inc. 37,647,996 17,800 Sealed Air Corp. * 874,336 83,100 SPX Corp. 3,032,319 --------------- 120,751,533 --------------- METALS & MINING -- 0.5% 602,200 Alcoa, Inc. 19,499,236 --------------- OIL & GAS -- 8.2% 231,200 Amerada Hess Corp. 18,611,600 114,800 Anadarko Petroleum Corp. 6,798,456 104,200 Ashland, Inc. 5,359,006 421,000 Burlington Resources, Inc. 15,252,830 471,700 ChevronTexaco Corp. 45,990,750 551,615 ConocoPhillips 41,056,704 100,500 Devon Energy Corp. 6,513,405 2,360,800 Exxon Mobil Corp. 108,832,880 72,400 Kerr-McGee Corp. 3,821,272 666,100 Marathon Oil Corp. 24,159,447 495,200 Occidental Petroleum Corp. 25,577,080 153,100 Sunoco, Inc. 9,415,650 178,100 Unocal Corp. 6,650,254 146,900 Valero Energy Corp. (a) 9,699,807 --------------- 327,739,141 --------------- PRIMARY PROCESS INDUSTRY -- 0.5% 105,100 Monsanto Co. 3,846,660 69,700 Nucor Corp. 5,456,813 224,400 Sherwin-Williams Co. (The) 9,267,720 --------------- 18,571,193 --------------- RETAIL STORES -- 7.4% 38,200 Abercrombie & Fitch Co.-Class A 1,069,600 751,052 Albertson's, Inc. (a) 18,460,858 244,600 Autonation, Inc. * 4,021,224
See accompanying notes to the financial statements. 6 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------ RETAIL STORES -- CONTINUED 232,400 Bed Bath & Beyond, Inc. * 8,696,408 107,000 CDW Corp. 6,259,500 324,800 CVS Corp. 12,992,000 153,200 Dollar General Corp. 3,018,040 197,900 Dollar Tree Stores, Inc. * 4,652,629 68,000 Fastenal Co. 4,269,040 3,180,400 Home Depot, Inc. 116,275,424 371,100 JC Penney Co., Inc. Holding Co. 14,220,552 687,600 Kroger Co. * 11,366,028 185,800 Limited Brands, Inc. 3,730,864 430,100 May Department Stores Co. (The) 10,541,751 89,900 Nordstrom, Inc. 3,337,987 242,200 Ross Stores, Inc. 5,122,530 1,599,900 Safeway, Inc. * 32,317,980 516,400 Sears Roebuck & Co. 19,767,792 132,000 Supervalu, Inc. 3,479,520 8,800 Target Corp. 392,304 438,300 TJX Cos., Inc. 9,274,428 73,900 Whole Foods Market, Inc. 5,744,247 --------------- 299,010,706 --------------- SERVICES -- 3.1% 34,900 Apollo Group, Inc.-Class A * 2,722,200 28,400 Dun & Bradstreet Corp. * 1,565,976 251,300 First Health Group Corp. * 3,832,325 77,900 Harrah's Entertainment, Inc. 3,754,001 1,990,700 McDonald's Corp. 53,788,714 64,400 Omnicom Group 4,431,364 162,600 Outback Steakhouse, Inc. 6,364,164 127,300 RR Donnelley & Sons Co. 3,911,929 567,000 Starbucks Corp. * 24,517,080 337,200 Sysco Corp. 10,837,608 163,300 Wendy's International, Inc. 5,612,621 96,600 Yum! Brands, Inc. 3,835,986 --------------- 125,173,968 ---------------
See accompanying notes to the financial statements. 7 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------ TECHNOLOGY -- 13.3% 159,200 Applera Corp.-Applied Biosystems Group 3,031,168 146,400 Autodesk, Inc. 6,501,624 226,500 Avaya, Inc. * 2,745,180 14,900 BMC Software, Inc. * 223,053 1,228,600 Boeing Co. (The) 64,157,492 6,000 Cadence Design Systems, Inc. * 74,580 705,300 Cisco Systems, Inc. * 13,231,428 22,700 Computer Associates International, Inc. 549,794 2,145,700 Dell, Inc. * 74,756,188 55,300 Diebold, Inc. 2,703,617 705,200 Electronic Data Systems Corp. (a) 13,553,944 4,800 Energizer Holdings, Inc. * 198,432 672,400 First Data Corp. 28,408,900 200,000 General Dynamics Corp. 19,528,000 733,100 Hewlett-Packard Co. 13,115,159 1,695,300 Intel Corp. 36,092,937 436,100 International Business Machines Corp. 36,933,309 105,000 Lexmark International, Inc. * 9,287,250 1,080,500 Microsoft Corp. 29,497,650 2,682,700 Motorola, Inc. 43,325,605 105,000 NCR Corp. * 4,637,850 147,600 Northrop Grumman Corp. 7,623,540 2,011,600 Qualcomm, Inc. 76,541,380 270,700 Symantec Corp. * 12,982,772 705,100 Texas Instruments, Inc. 13,777,654 925,200 Time Warner, Inc. * 15,127,020 99,300 Waters Corp. * 4,300,683 247,600 Xerox Corp. * 3,325,268 --------------- 536,231,477 --------------- TRANSPORTATION -- 0.5% 462,600 Burlington Northern Santa Fe Corp. 16,561,080 75,200 CSX Corp. 2,374,816 --------------- 18,935,896 ---------------
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) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------ UTILITY -- 12.1% 199,700 AES Corp. (The) * 2,014,973 71,400 Ameren Corp. (a) 3,340,806 287,400 American Electric Power Co., Inc. 9,406,602 1,613,871 AT&T Corp. 23,853,013 1,840,800 BellSouth Corp. 49,259,808 160,500 Centerpoint Energy, Inc. 1,755,870 106,200 Consolidated Edison, Inc. 4,481,640 68,600 Constellation Energy Group, Inc. 2,819,460 80,700 DTE Energy Co. 3,334,524 1,197,300 Duke Energy Corp. 26,508,222 324,400 Edison International 8,719,872 1,399,800 El Paso Corp. 11,450,364 98,900 Exelon Corp. 3,644,465 115,800 FirstEnergy Corp. 4,659,792 78,800 FPL Group, Inc. 5,452,960 23,200 Kinder Morgan, Inc. 1,403,600 1,019,200 PG&E Corp. * 29,750,448 63,900 Pinnacle West Capital Corp. 2,697,219 199,000 PPL Corp. 9,518,170 79,900 Progress Energy, Inc. 3,506,811 131,200 Public Service Enterprise Group, Inc. 5,555,008 4,813,782 SBC Communications, Inc. 124,147,438 154,500 Sempra Energy 5,585,175 1,770,850 Sprint Corp.-FON Group 34,850,328 272,900 TECO Energy, Inc. (a) 3,618,654 302,300 TXU Corp. 12,584,749 2,316,022 Verizon Communications, Inc. 90,903,864 162,900 Xcel Energy, Inc. (a) 2,875,185 --------------- 487,699,020 --------------- TOTAL COMMON STOCKS (COST $3,773,139,054) 3,922,992,267 ---------------
See accompanying notes to the financial statements. 9 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES / PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------ MUTUAL FUNDS -- 0.9% 24,283,584 Dreyfus Cash Management Plus Fund (b) 24,283,584 10,357,473 Merrimac Cash Series, Premium Class (b) 10,357,473 ---------------- TOTAL MUTUAL FUNDS (COST $34,641,057) 34,641,057 ---------------- SHORT-TERM INVESTMENTS -- 5.4% CASH EQUIVALENTS -- 1.0% 40,884,763 Harris Trust & Savings Bank Eurodollar Time Deposit, 1.51%, due 9/16/04 (b) 40,884,763 ---------------- U.S. GOVERNMENT -- 0.2% 9,000,000 U.S. Treasury Bill, 1.04%, due 9/23/04 (c)(d) 8,994,116 ---------------- REPURCHASE AGREEMENT -- 4.2% 168,306,800 Citigroup Global Markets Repurchase Agreement, dated 8/31/04, due 9/01/04, with a maturity value of $168,311,943, an effective yield of 1.10%, collateralized by a U.S. Treasury Note with a rate of 2.75%, maturity date of 7/31/06, and a market value, including accrued interest of $171,673,590. 168,306,800 ---------------- TOTAL SHORT-TERM INVESTMENTS (COST $218,185,679) 218,185,679 ---------------- TOTAL INVESTMENTS -- 104.0% (Cost $4,025,965,790) 4,175,819,003 Other Assets and Liabilities (net) -- (4.0%) (158,980,551) ---------------- TOTAL NET ASSETS -- 100.0% $ 4,016,838,452 ================
NOTES TO THE SCHEDULE OF INVESTMENTS: * Non-income producing security. (a) All or a portion of this security is out on loan (Note 2). (b) Investment of security lending collateral (Note 2). (c) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 2). (d) Rate shown represents yield to marturity. See accompanying notes to the financial statements. 10 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) At August 31, 2004, the approximate 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 ---------------- ---------------- ---------------- -------------- $ 4,038,388,523 $ 322,903,342 $ (185,472,862) $ 137,430,480
At February 29, 2004, GMO U.S. Core Fund had capital loss carryforwards available to offset future capital gains, if any, to the extent permitted by the Internal Revenue Code, of $170,940,887, $190,371,968 and $59,483,961 expiring in 2010, 2011, and 2012, respectively. Utilization of the capital loss carryforwards above could be subject to limitations imposed by the Internal Revenue Code related to share ownership activity. A summary of outstanding financial instruments at August 31, 2004 is as follows: FUTURES CONTRACTS
NUMBER OF CONTRACT NET UNREALIZED CONTRACTS TYPE EXPIRATION DATE VALUE APPRECIATION --------- ---------------------- ----------------- ------------ -------------- Buys 80 S&P 500 September 2004 $ 22,082,000 $ 379,199 ==============
At August 31, 2004, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. See accompanying notes to the financial statements. 11 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments, at value, including securities on loan of $72,794,021 (cost $4,025,965,790) (Note 2) $ 4,175,819,003 Receivable for investments sold 56,015,425 Dividends and interest receivable 6,665,894 Receivable for variation margin on open futures contracts (Note 2) 296,678 Receivable for expenses reimbursed by Manager (Note 3) 65,596 ---------------- Total assets 4,238,862,596 ---------------- LIABILITIES: Payable for investments purchased 114,579,080 Payable upon return of securities loaned (Note 2) 75,525,820 Payable for Fund shares repurchased 30,163,241 Payable to affiliate for (Note 3): Management fee 1,109,760 Shareholder service fee 399,684 Administration fee - Class M 24,180 Trustees fee 8,790 Payable for 12b-1 fee - Class M 58,790 Accrued expenses 154,799 ---------------- Total liabilities 222,024,144 ---------------- NET ASSETS $ 4,016,838,452 ================
See accompanying notes to the financial statements. 12 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) (CONTINUED) NET ASSETS CONSIST OF: Paid-in capital $ 4,139,725,239 Accumulated undistributed net investment income 9,665,834 Accumulated net realized loss (282,785,033) Net unrealized appreciation 150,232,412 ---------------- $ 4,016,838,452 ================ NET ASSETS ATTRIBUTABLE TO: Class II shares $ 497,738,038 ================ Class III shares $ 1,362,366,489 ================ Class IV shares $ 754,007,874 ================ Class V shares $ 434,132,703 ================ Class VI shares $ 817,434,180 ================ Class M shares $ 151,159,168 ================ SHARES OUTSTANDING: Class II 38,331,820 ================ Class III 104,741,102 ================ Class IV 58,038,166 ================ Class V 33,438,118 ================ Class VI 62,935,384 ================ Class M 11,637,745 ================ NET ASSET VALUE PER SHARE: Class II $ 12.98 ================ Class III $ 13.01 ================ Class IV $ 12.99 ================ Class V $ 12.98 ================ Class VI $ 12.99 ================ Class M $ 12.99 ================
See accompanying notes to the financial statements. 13 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends $ 35,759,093 Interest (including securities lending income of $12,165) 274,571 ---------------- Total income 36,033,664 ---------------- EXPENSES: Management fee (Note 3) 6,610,392 Shareholder service fee (Note 3) - Class II 574,604 Shareholder service fee (Note 3) - Class III 1,106,851 Shareholder service fee (Note 3) - Class IV 386,796 Shareholder service fee (Note 3) - Class V 186,511 Shareholder service fee (Note 3) - Class VI 190,476 12b-1 fee (Note 3) - Class M 174,856 Administration fee (Note 3) - Class M 139,885 Custodian and transfer agent fees 263,763 Audit and tax fees 26,588 Legal fees 54,464 Trustees fees and related expenses (Note 3) 28,491 Registration fees 20,976 Miscellaneous 20,333 ---------------- Total expenses 9,784,986 Fees and expenses reimbursed by Manager (Note 3) (386,124) ---------------- Net expenses 9,398,862 ---------------- Net investment income 26,634,802 ---------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain on: Investments 157,282,462 Closed futures contracts 881,846 ---------------- Net realized gain 158,164,308 ---------------- Change in net unrealized appreciation (depreciation) on: Investments (310,242,104) Open futures contracts 379,199 ---------------- Net unrealized loss (309,862,905) ---------------- Net realized and unrealized loss (151,698,597) ---------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (125,063,795) ================
See accompanying notes to the financial statements. 14 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 26,634,802 $ 41,064,995 Net realized gain 158,164,308 50,095,498 Change in net unrealized appreciation (depreciation) (309,862,905) 886,595,152 ---------------- ----------------- Net increase (decrease) in net assets from operations (125,063,795) 977,755,645 ---------------- ----------------- Distributions to shareholders from: Net investment income Class II (3,548,349) (5,078,401) Class III (10,266,284) (19,675,170) Class IV (5,499,391) (7,427,145) Class V (3,291,127) (5,916,344) Class VI (5,417,380) (1,075,848) Class M (799,774) (933,685) ---------------- ----------------- Total distributions from net investment income (28,822,305) (40,106,593) ---------------- ----------------- Net share transactions (Note 6): Class II (32,082,097) 189,093,135 Class III (99,141,753) (80,194,410) Class IV 72,383,116 79,625,844 Class V 3,291,127 (112,633,974) Class VI 299,891,937 512,230,961 Class M 15,160,142 52,097,396 ---------------- ----------------- Increase in net assets resulting from net share transactions 259,502,472 640,218,952 ---------------- ----------------- Total increase in net assets 105,616,372 1,577,868,004 NET ASSETS: Beginning of period 3,911,222,080 2,333,354,076 ---------------- ----------------- End of period (including accumulated undistributed net investment income of $9,665,834 and $11,853,337, respectively) $ 4,016,838,452 $ 3,911,222,080 ================ =================
See accompanying notes to the financial statements. 15 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS II SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 --------------------------------------------------------------- (UNAUDITED) 2004 2003 2002 2001 2000 ---------------- --------- --------- --------- --------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 13.51 $ 9.97 $ 12.89 $ 13.94 $ 16.62 $ 18.57 --------- --------- --------- --------- --------- --------- Income from investment operations: Net investment income + 0.08 0.15 0.14 0.17 0.20 0.23 Net realized and unrealized gain (loss) (0.52) 3.54 (2.91) (1.04) 0.03(a) 2.29 --------- --------- --------- --------- --------- --------- Total from investment operations (0.44) 3.69 (2.77) (0.87) 0.23 2.52 --------- --------- --------- --------- --------- --------- Less distributions to shareholders: From net investment income (0.09) (0.15) (0.15) (0.17) (0.18) (0.24) From net realized gains -- -- -- (0.01) (2.73) (4.23) --------- --------- --------- --------- --------- --------- Total distributions (0.09) (0.15) (0.15) (0.18) (2.91) (4.47) --------- --------- --------- --------- --------- --------- NET ASSET VALUE, END OF PERIOD $ 12.98 $ 13.51 $ 9.97 $ 12.89 $ 13.94 $ 16.62 ========= ========= ========= ========= ========= ========= TOTAL RETURN (b) (3.26)%** 37.26% (21.63)% (6.29)% 0.75% 13.61% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 497,738 $ 552,424 $ 241,431 $ 176,456 $ 114,454 $ 95,041 Net expenses to average daily net assets 0.55%* 0.55% 0.55% 0.55% 0.55% 0.55% Net investment income to average daily net assets 1.25%* 1.22% 1.30% 1.27% 1.21% 1.21% Portfolio turnover rate 36%** 57% 74% 69% 81% 90% Fees and expenses reimbursed by the Manager to average daily net assets: 0.02%* 0.03% 0.03% 0.02% 0.02% 0.02%
(a) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain/loss for the period due to the timing of purchases and redemptions of Fund shares in relation to the fluctuating market values of the Fund. (b) 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. See accompanying notes to the financial statements. 16 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 --------------------------------------------------------------------- (UNAUDITED) 2004 2003 2002 2001 2000 ---------------- ----------- ----------- ----------- ---------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 13.54 $ 9.98 $ 12.90 $ 13.95 $ 16.63 $ 18.59 ----------- ----------- ----------- ----------- ---------- ----------- Income from investment operations: Net investment income+ 0.09 0.16 0.15 0.18 0.20 0.24 Net realized and unrealized gain (loss) (0.53) 3.56 (2.92) (1.05) 0.04(a) 2.28 ----------- ----------- ----------- ----------- ----------- ----------- Total from investment operations (0.44) 3.72 (2.77) (0.87) 0.24 2.52 ----------- ----------- ----------- ----------- ----------- ----------- Less distributions to shareholders: From net investment income (0.09) (0.16) (0.15) (0.17) (0.19) (0.25) From net realized gains -- -- -- (0.01) (2.73) (4.23) ----------- ----------- ----------- ----------- ----------- ----------- Total distributions (0.09) (0.16) (0.15) (0.18) (2.92) (4.48) ----------- ----------- ----------- ----------- ----------- ----------- NET ASSET VALUE, END OF PERIOD $ 13.01 $ 13.54 $ 9.98 $ 12.90 $ 13.95 $ 16.63 =========== =========== =========== =========== =========== ========== TOTAL RETURN (b) (3.23)%** 37.50% (21.59)% (6.23)% 0.83% 13.66% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 1,362,366 $ 1,517,458 $ 1,141,725 $ 1,321,634 $ 1,532,124 $ 1,623,734 Net expenses to average daily net assets 0.48%* 0.48% 0.48% 0.48% 0.48% 0.48% Net investment income to average daily net assets 1.31%* 1.32% 1.34% 1.33% 1.27% 1.27% Portfolio turnover rate 36%** 57% 74% 69% 81% 90% Fees and expenses reimbursed by the Manager to average daily net assets: 0.02%* 0.03% 0.03% 0.02% 0.02% 0.02%
(a) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain/loss for the period due to the timing of purchases and redemptions of Fund shares in relation to the fluctuating market values of the Fund. (b) 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. See accompanying notes to the financial statements. 17 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 --------------------------------------------------------------------- (UNAUDITED) 2004 2003 2002 2001 2000 ---------------- ---------- ---------- ---------- ----------- ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 13.52 $ 9.97 $ 12.89 $ 13.94 $ 16.62 $ 18.58 ---------------- ---------- ---------- ---------- ----------- ------------ Income from investment operations: Net investment income + 0.09 0.16 0.16 0.18 0.21 0.25 Net realized and unrealized gain (loss) (0.52) 3.55 (2.92) (1.04) 0.04(a) 2.28 ---------------- ---------- ---------- ---------- ----------- ------------ Total from investment operations (0.43) 3.71 (2.76) (0.86) 0.25 2.53 ---------------- ---------- ---------- ---------- ----------- ------------ Less distributions to shareholders: From net investment income (0.10) (0.16) (0.16) (0.18) (0.20) (0.26) From net realized gains -- -- -- (0.01) (2.73) (4.23) ---------------- ---------- ---------- ---------- ----------- ------------ Total distributions (0.10) (0.16) (0.16) (0.19) (2.93) (4.49) ---------------- ---------- ---------- ---------- ----------- ------------ NET ASSET VALUE, END OF PERIOD $ 12.99 $ 13.52 $ 9.97 $ 12.89 $ 13.94 $ 16.62 ================ ========== ========== ========== =========== ============ TOTAL RETURN (b) (3.20)%** 37.50% (21.55)% (6.20)% 0.92% 13.74% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 754,008 $ 709,525 $ 463,254 $ 744,813 $ 1,287,842 $ 1,343,460 Net expenses to average daily net assets 0.44%* 0.44% 0.44% 0.44% 0.44% 0.44% Net investment income to average daily net assets 1.36%* 1.36% 1.39% 1.36% 1.31% 1.32% Portfolio turnover rate 36%** 57% 74% 69% 81% 90% Fees and expenses reimbursed by the Manager to average daily net assets: 0.02%* 0.03% 0.03% 0.02% 0.02% 0.02%
(a) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain/loss for the period due to the timing of purchases and redemptions of Fund shares in relation to the fluctuating market values of the Fund. The total returns would have been lower had certain expenses not been reimbursed during the (b) periods shown. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 18 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS V SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 -------------------------------------------- (UNAUDITED) 2004 2003 2002(a) ----------------- ---------- ------------ -------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 13.51 $ 9.96 $ 12.88 $ 14.00 ----------------- ---------- ------------ -------------- Income from investment operations: Net investment income + 0.09 0.16 0.16 0.13 Net realized and unrealized gain (loss) (0.52) 3.55 (2.92) (1.10) ----------------- ---------- ------------ -------------- Total from investment operations (0.43) 3.71 (2.76) (0.97) ----------------- ---------- ------------ -------------- Less distributions to shareholders: From net investment income (0.10) (0.16) (0.16) (0.14) From net realized gains -- -- -- (0.01) ----------------- ---------- ------------ -------------- Total distributions (0.10) (0.16) (0.16) (0.15) ----------------- ---------- ------------ -------------- NET ASSET VALUE, END OF PERIOD $ 12.98 $ 13.51 $ 9.96 $ 12.88 ================= ========== ============ ============== TOTAL RETURN (b) (3.20)%** 37.55% (21.55)% (6.96)%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 434,133 $ 448,352 $ 426,703 $ 445,738 Net expenses to average daily net assets 0.42%* 0.42% 0.42% 0.42%** Net investment income to average daily net assets 1.38%* 1.40% 1.41% 1.46%** Portfolio turnover rate 36%** 57% 74% 69% Fees and expenses reimbursed by the Manager to average daily net assets: 0.02%* 0.03% 0.03% 0.02%**
(a) Period from July 2, 2001 (commencement of operations) through February 28, 2002. (b) 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. See accompanying notes to the financial statements. 19 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS VI SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PERIOD FROM JUNE 30, 2003 SIX MONTHS ENDED (COMMENCEMENT AUGUST 31, 2004 OF OPERATIONS) THROUGH (UNAUDITED) FEBRUARY 29, 2004 -------------------- ------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 13.52 $ 11.54 -------------------- ------------------------- Income from investment operations: Net investment income + 0.09 0.10 Net realized and unrealized gain (0.52) 2.01 -------------------- ------------------------- Total from investment operations (0.43) 2.11 -------------------- ------------------------- Less distributions to shareholders: From net investment income (0.10) (0.13) -------------------- ------------------------- Total distributions (0.10) (0.13) -------------------- ------------------------- NET ASSET VALUE, END OF PERIOD $ 12.99 $ 13.52 ==================== ========================= TOTAL RETURN (a) (3.18)%** 18.41%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 817,434 $ 542,274 Net expenses to average daily net assets 0.39%* 0.39%* Net investment income to average daily net assets 1.42% 1.17%* Portfolio turnover rate 36%** 57% Fees and expenses reimbursed by the Manager to average daily net assets: 0.02%* 0.03%*
(a) The total return would have been lower had certain expenses not been reimbursed during the period shown. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 20 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS M SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 -------------------------- (UNAUDITED) 2004 2003 (a) -------------------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 13.52 $ 9.96 $ 12.89 -------------------- ---------- ---------- Income from investment operations: Net investment income + 0.07 0.12 0.11 Net realized and unrealized gain (loss) (0.52) 3.57 (2.94) -------------------- ---------- ---------- Total from investment operations (0.45) 3.69 (2.83) -------------------- ---------- ---------- Less distributions to shareholders: From net investment income (0.08) (0.13) (0.10) -------------------- ---------- ---------- Total distributions (0.08) (0.13) (0.10) -------------------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 12.99 $ 13.52 $ 9.96 ==================== ========== ========== TOTAL RETURN (a) (3.36)%** 37.23% (22.03)%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 151,159 $ 141,188 $ 60,242 Net expenses to average daily net assets 0.78%* 0.78% 0.78%* Net investment income to average daily net assets 1.02%* 0.98% 1.18%* Portfolio turnover rate 36%** 57% 74% Fees and expenses reimbursed by the Manager to average daily net assets: 0.02%* 0.03% 0.03%*
(a) Period from April 15, 2002 (commencement of operations) through February 28, 2003. (b) 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. See accompanying notes to the financial statements. 21 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION GMO U.S. Core Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in U.S. equity securities. The Fund's benchmark is the S&P 500 Index. The Fund has six classes of shares outstanding: Class II, Class III, Class IV, Class V, Class VI and Class M. Class M shares bear an administrative fee and a 12b-1 fee. (See Note 3). 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, excluding Class M, 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. 2. SIGNIFICANT ACCOUNTING POLICIES 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 as determined in good faith by the Trustees or other persons acting at their direction. 22 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, 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 the Schedule of Investments for open futures contracts as of August 31, 2004. 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 using standard models that incorporate 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 on swap contracts 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 23 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 August 31, 2004, 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 or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. See the Schedule of Investments for the open repurchase agreement as of August 31, 2004. 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. As of August 31, 2004, the Fund had loaned securities having a market value of $72,794,021, collateralized by cash in the amount of $75,525,820, 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. 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. 24 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. 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's operations. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of 0.22% for Class II shares, 0.15% for Class III shares, 0.105% for Class IV shares, 0.085% for Class V shares and 0.055% for Class VI shares. Class M shares of the Fund pay GMO an administration fee monthly at the annual rate of 0.20% 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 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, 2005 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, Class V and Class VI only), administration fees (Class M only), 12b-1 fees (Class M only), fees and expenses of the independent Trustees of the Trust (including legal fees), brokerage 25 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 0.33% of the average daily net assets. The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $17,083. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004, aggregated $1,596,927,614 and $1,397,114,389, respectively. 5. PRINCIPAL SHAREHOLDERS AND RELATED PARTIES At August 31, 2004, 26.1% of the outstanding shares of the Fund were held by two shareholders. Investment activities of these shareholders may have a material effect on the Fund. At August 31, 2004, less than 0.1% of the Fund was held by six related parties comprised of certain GMO employee accounts. As of August 31, 2004, greater than 10% of the Fund's shares were held by accounts for which the Manager has investment discretion. 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------------------------- ---------------------------------- SHARES AMOUNT SHARES AMOUNT --------------- --------------- --------------- --------------- Class II: Shares sold 3,066,828 $ 40,217,794 22,557,342 $ 259,615,277 Shares issued to shareholders in reinvestment of distributions 210,612 2,761,560 339,348 3,948,342 Shares repurchased (5,829,718) (75,061,451) (6,235,535) (74,470,484) --------------- --------------- --------------- --------------- Net increase (decrease) (2,552,278) $ (32,082,097) 16,661,155 $ 189,093,135 =============== =============== =============== ===============
26 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED)
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------------------------- ---------------------------------- SHARES AMOUNT SHARES AMOUNT --------------- --------------- --------------- --------------- Class III: Shares sold 13,504,469 $ 176,264,838 59,091,455 $ 712,132,733 Shares issued to shareholders in reinvestment of distributions 632,747 8,307,114 1,356,325 15,769,262 Shares repurchased (21,502,985) (283,713,705) (62,706,770) (808,096,405) --------------- --------------- --------------- --------------- Net decrease (7,365,769) $ (99,141,753) (2,258,990) $ (80,194,410) =============== =============== =============== =============== SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------------------------- ---------------------------------- SHARES AMOUNT SHARES AMOUNT --------------- --------------- --------------- --------------- Class IV: Shares sold 7,983,440 $ 104,723,975 22,888,027 $ 268,399,183 Shares issued to shareholders in reinvestment of distributions 419,688 5,499,391 631,936 7,231,390 Shares repurchased (2,850,178) (37,840,250) (17,498,621) (196,004,729) --------------- --------------- --------------- --------------- Net increase 5,552,950 $ 72,383,116 6,021,342 $ 79,625,844 =============== =============== =============== =============== SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------------------------- ---------------------------------- SHARES AMOUNT SHARES AMOUNT --------------- --------------- --------------- --------------- Class V: Shares sold -- $ -- 679,001 $ 7,287,557 Shares issued to shareholders in reinvestment of distributions 251,102 3,291,127 512,575 5,863,188 Shares repurchased -- -- (10,831,378) (125,784,719) --------------- --------------- --------------- --------------- Net increase (decrease) 251,102 $ 3,291,127 (9,639,802) $ (112,633,974) =============== =============== =============== ===============
27 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED)
SIX MONTHS ENDED PERIOD FROM JUNE 30, 2003 AUGUST 31, 2004 (COMMENCEMENT OF OPERATIONS) (UNAUDITED) THROUGH FEBRUARY 29, 2004 ---------------------------------- ---------------------------------- SHARES AMOUNT SHARES AMOUNT --------------- --------------- --------------- --------------- Class VI: Shares sold 22,728,292 $ 298,787,146 50,440,061 $ 651,635,725 Shares issued to shareholders in reinvestment of distributions 413,977 5,417,380 88,045 1,075,848 Shares repurchased (330,567) (4,312,589) (10,404,424) (140,480,612) --------------- --------------- --------------- --------------- Net increase 22,811,702 $ 299,891,937 40,123,682 $ 512,230,961 =============== =============== =============== =============== SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------------------------- ---------------------------------- SHARES AMOUNT SHARES AMOUNT --------------- --------------- --------------- --------------- Class M: Shares sold 1,651,011 $ 21,141,735 6,928,541 $ 79,295,865 Shares issued to shareholders in reinvestment of distributions 61,079 799,774 80,701 933,685 Shares repurchased (519,797) (6,781,367) (2,612,992) (28,132,154) --------------- --------------- --------------- --------------- Net increase 1,192,293 $ 15,160,142 4,396,250 $ 52,097,396 =============== =============== =============== ===============
7. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 28 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees, 12b-1 fees and other expenses. The following tables, assuming a $1,000 investment in a class of shares, disclose the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the classes' actual returns and actual expenses, and (2) a hypothetical annualized 5% return and the classes' actual expenses: Class II
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * ---------------------------------------------------------------- 1) Actual $ 1,000.00 $ 967.40 $ 2.73 2) Hypothetical 1,000.00 1,022.43 2.80 ----------------------------------------------------------------
*Expenses are calculated using the Class II annualized expense ratio for the six months ended August 31, 2004 of 0.55%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * ---------------------------------------------------------------- 1) Actual $ 1,000.00 $ 967.70 $ 2.38 2) Hypothetical 1,000.00 1,022.79 2.45 ----------------------------------------------------------------
*Expenses are calculated using the Class III annualized expense ratio for the six months ended August 31, 2004 of 0.48%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. Class IV
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * ---------------------------------------------------------------- 1) Actual $ 1,000.00 $ 968.00 $ 2.16 2) Hypothetical 1,000.00 1,023.01 2.22 ----------------------------------------------------------------
*Expenses are calculated using the Class IV annualized expense ratio for the six months ended August 31, 2004 of 0.435%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. 29 GMO U.S. CORE FUND (A SERIES OF GMO TRUST) FUND EXPENSES -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) Class V
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * ---------------------------------------------------------------- 1) Actual $ 1,000.00 $ 968.00 $ 2.06 2) Hypothetical 1,000.00 1,023.11 2.12 ----------------------------------------------------------------
*Expenses are calculated using the Class V annualized expense ratio for the six months ended August 31, 2004 of 0.415%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. Class VI
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * ---------------------------------------------------------------- 1) Actual $ 1,000.00 $ 968.20 $ 1.91 2) Hypothetical 1,000.00 1,023.26 1.96 ----------------------------------------------------------------
*Expenses are calculated using the Class VI annualized expense ratio for the six months ended August 31, 2004 of 0.385%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. Class M
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * ---------------------------------------------------------------- 1) Actual $ 1,000.00 $ 966.40 $ 3.87 2) Hypothetical 1,000.00 1,021.27 3.97 ----------------------------------------------------------------
*Expenses are calculated using the Class M annualized expense ratio for the six months ended August 31, 2004 of 0.78%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 30 GMO VALUE FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS --TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
CLASSIFICATION % OF NET ASSETS - ------------------------------------------------------------------------------- Auto & Transportation 2.1% Consumer Discretionary 15.6 Consumer Staples 9.8 Financial Services 28.5 Health Care 11.6 Integrated Oils 4.0 Materials & Processing 1.0 Other 2.7 Other Energy 1.1 Producer Durables 5.9 Technology 3.7 Utilities 9.7 Mutual Funds 0.9 Futures 0.0 Short-Term Investments and Other Assets and Liabilities (net) 3.4 --------------- 100.0% ===============
See accompanying notes to the financial statements. 1 GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------ COMMON STOCKS -- 95.7% AUTO & TRANSPORTATION -- 2.1% 9,400 Burlington Northern Santa Fe Corp. 336,520 6,100 Harley-Davidson, Inc. 372,223 9,000 Lear Corp. 484,920 --------------- 1,193,663 --------------- CONSUMER DISCRETIONARY -- 15.6% 29,100 Cendant Corp. 629,433 45,100 Dollar General Corp. 888,470 21,400 Federated Department Stores 928,760 41,700 Home Depot, Inc. 1,524,552 23,300 Jones Apparel Group, Inc. 831,577 10,900 Kimberly Clark Corp. 727,030 11,300 Lowe's Cos., Inc. 561,610 4,900 Omnicom Group (a) 337,169 6,100 Tech Data Corp. * 229,726 8,400 Time Warner, Inc. * 137,340 10,500 VF Corp. 518,070 32,900 Viacom, Inc.-Class B 1,095,899 23,400 Walt Disney Co. 525,330 --------------- 8,934,966 --------------- CONSUMER STAPLES -- 9.8% 41,200 Altria Group, Inc. 2,016,740 14,900 Constellation Brands, Inc.-Class A * 547,873 19,400 Dean Foods Co. *(a) 719,158 31,200 Kroger Co. * 515,736 57,000 Sara Lee Corp. 1,261,410 20,100 Supervalu, Inc. 529,836 --------------- 5,590,753 --------------- FINANCIAL SERVICES -- 28.5% 22,600 Allstate Corp. (The) 1,066,946 3,700 AMBAC Financial Group, Inc. 279,350
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) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------ FINANCIAL SERVICES -- CONTINUED 16,300 Assurant, Inc. 432,602 9,800 Bank of America Corp. 440,804 14,700 Chubb Corp 999,747 6,500 Cigna Corp. 432,640 31,400 Citigroup, Inc. 1,462,612 3,400 Factset Research Systems, Inc. 151,402 7,800 Fannie Mae 580,710 15,300 First Data Corp. 646,425 11,200 Freddie Mac 751,744 11,000 Hartford Financial Services Group, Inc. 672,760 19,400 Marsh & McLennan Cos., Inc. 866,986 46,000 MBNA Corp. 1,110,440 15,400 Metlife, Inc. 573,650 11,700 Morgan Stanley 593,541 7,900 National City Corp. 298,541 46,700 Old Republic International Corp. 1,099,785 7,900 Protective Life Corp. 309,127 21,700 Providian Financial Corp. * 313,348 10,600 Radian Group, Inc. 469,580 8,518 Regions Financial Corp. 275,046 17,400 UnumProvident Corp. 281,532 16,500 Wachovia Corp. 774,015 37,000 Washington Mutual, Inc. 1,436,710 --------------- 16,320,043 --------------- HEALTH CARE -- 11.6% 9,700 Baxter International, Inc. 296,238 8,100 Cardinal Health, Inc. 366,120 8,600 Guidant Corp. 514,280 19,600 Johnson & Johnson 1,138,760 54,500 Merck & Co., Inc. 2,450,865 40,200 Pfizer, Inc. 1,313,334 8,800 UnitedHealth Group, Inc. 581,944 --------------- 6,661,541 ---------------
See accompanying notes to the financial statements. 3 GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------ INTEGRATED OILS -- 4.0% 3,000 ChevronTexaco Corp. 292,500 10,000 ConocoPhillips 744,300 27,100 Exxon Mobil Corp. 1,249,310 --------------- 2,286,110 --------------- MATERIALS & PROCESSING -- 1.0% 10,700 Ashland, Inc. 550,301 --------------- OTHER -- 2.7% 31,700 Honeywell International, Inc. 1,140,566 7,300 Johnson Controls, Inc. 410,990 --------------- 1,551,556 --------------- OTHER ENERGY -- 1.1% 14,500 Apache Corp. 648,005 --------------- PRODUCER DURABLES -- 5.9% 3,300 Centex Corp. 151,041 10,500 D.R. Horton, Inc. 324,870 16,700 Hovnanian Enterprises, Inc. * 574,814 7,000 Lennar Corp.-Class A 320,600 9,500 Lexmark International, Inc. * 840,275 2,100 MDC Holdings, Inc. 144,585 4,900 Northrop Grumman Corp. 253,085 2,200 Ryland Group, Inc. 193,930 6,300 United Technologies Corp. 591,633 --------------- 3,394,833 --------------- TECHNOLOGY -- 3.7% 19,900 Dell, Inc. * 693,316 16,500 Hewlett-Packard Co. 295,185 40,400 Microsoft Corp. 1,102,920 --------------- 2,091,421 ---------------
See accompanying notes to the financial statements. 4 GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES / PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------ UTILITIES -- 9.7% 27,000 American Electric Power Co., Inc. 883,710 39,700 BellSouth Corp. 1,062,372 68,200 SBC Communications, Inc. 1,758,878 12,400 Sempra Energy 448,260 35,800 Verizon Communications, Inc. 1,405,150 --------------- 5,558,370 --------------- TOTAL COMMON STOCKS (COST $52,427,528) 54,781,562 --------------- MUTUAL FUNDS -- 0.9% 350,464 Dreyfus Cash Management Plus Fund (b) 350,464 149,481 Merrimac Cash Series, Premium Class (b) 149,481 --------------- TOTAL MUTUAL FUNDS (COST $499,945) 499,945 --------------- SHORT-TERM INVESTMENTS -- 5.2% CASH EQUIVALENT -- 1.0% 590,055 Harris Trust & Savings Bank Eurodollar Time Deposit, 1.51%, due 9/16/04 (b) 590,055 --------------- REPURCHASE AGREEMENT -- 4.2% 2,396,642 Citigroup Global Markets Repurchase Agreement, dated 8/31/04, due 9/01/04, with a maturity value of $2,396,716, and an effective yield of 1.10%, collateralized by a U.S. Treasury Note with a rate of 2.75%, maturity date of 7/31/06 and a market value, including accured interest of $2,448,071. 2,396,642 --------------- TOTAL SHORT-TERM INVESTMENTS (COST $2,986,697) 2,986,697 --------------- TOTAL INVESTMENTS -- 101.8% (Cost $55,914,170) 58,268,204 Other Assets and Liabilities (net) -- (1.8%) (1,009,552) --------------- TOTAL NET ASSETS -- 100.0% $ 57,258,652 ===============
See accompanying notes to the financial statements. 5 GMO VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) NOTES TO THE SCHEDULE OF INVESTMENTS: * Non-income producing security. (a) All or a portion of this security is out on loan (Note 2). (b) Investment of security lending collateral (Note 2). At August 31, 2004, the approximate 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 -------------- ---------------- ---------------- -------------- $ 56,614,187 $ 2,703,743 $ (1,049,726) $ 1,654,017
At February 29, 2004, GMO Value Fund had capital loss carryforwards available to offset future capital gains, if any, to the extent permitted by the Internal Revenue Code of $394,435, $16,413,957 and $6,482,499 expiring in 2010, 2011 and 2012, respectively. Utilization of the capital loss carryforwards above could be subject to limitations imposed by the Internal Revenue Code related to share ownership activity. A summary of outstanding financial instruments at August 31, 2004 is as follows: FUTURES CONTRACTS
NUMBER OF CONTRACT NET UNREALIZED CONTRACTS TYPE EXPIRATION DATE VALUE APPRECIATION --------- ---------------- --------------- ---------- -------------- Buys 3 S&P 500 September 2004 $ 165,615 $ 1,921 ==============
At August 31, 2004, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. See accompanying notes to the financial statements. 6 GMO VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments, at value, including securities on loan of $1,060,637 (cost $55,914,170) (Note 2) $ 58,268,204 Receivable for Fund shares sold 24,724 Dividends and interest receivable 95,461 Receivable for variation margin on open futures contracts (Note 2) 751 Receivable for collateral on open futures contracts (Note 2) 9,600 Receivable for expenses reimbursed by Manager (Note 3) 8,401 -------------- Total assets 58,407,141 -------------- LIABILITIES: Payable upon return of securities loaned (Note 2) 1,090,000 Payable to affiliate for (Note 3): Management fee 21,990 Shareholder service fee 5,462 Administration fee - Class M 2,279 Trustees fee 117 Payable for 12b-1 fee - Class M 5,819 Accrued expenses 22,822 -------------- Total liabilities 1,148,489 -------------- NET ASSETS $ 57,258,652 ============== NET ASSETS CONSIST OF: Paid-in capital $ 77,888,605 Accumulated undistributed net investment income 140,510 Accumulated net realized loss (23,126,418) Net unrealized appreciation 2,355,955 -------------- $ 57,258,652 ============== NET ASSETS ATTRIBUTABLE TO: Class III shares $ 43,430,034 ============== Class M shares $ 13,828,618 ============== SHARES OUTSTANDING: Class III 4,686,894 ============== Class M 1,495,768 ============== NET ASSET VALUE PER SHARE: Class III $ 9.27 ============== Class M $ 9.25 ==============
See accompanying notes to the financial statements. 7 GMO VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends $ 623,821 Interest (including securities lending income of $122) 3,201 -------------- Total income 627,022 -------------- EXPENSES: Management fee (Note 3) 132,742 Shareholder service fee (Note 3) - Class III 33,978 12b-1 fee (Note 3) - Class M 15,512 Administration fee (Note 3) - Class M 12,410 Custodian and transfer agent fees 20,792 Audit and tax fees 21,620 Legal fees 828 Trustees fees and related expenses (Note 3) 416 Registration fees 6,348 Miscellaneous 276 -------------- Total expenses 244,922 Fees and expenses reimbursed by Manager (Note 3) (49,864) -------------- Net expenses 195,058 -------------- Net investment income 431,964 -------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain on: Investments 5,077,315 Closed futures contracts 33,942 -------------- Net realized gain 5,111,257 -------------- Change in net unrealized appreciation (depreciation) on: Investments (5,345,620) Open futures contracts 1,921 -------------- Net unrealized loss (5,343,699) -------------- Net realized and unrealized loss (232,442) -------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 199,522 ==============
See accompanying notes to the financial statements. 8 GMO VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 431,964 $ 1,055,170 Net realized gain (loss) 5,111,257 (6,812,715) Change in net unrealized appreciation (depreciation) (5,343,699) 19,245,846 ---------------- ----------------- Net increase in net assets from operations 199,522 13,488,301 ---------------- ----------------- Distributions to shareholders from: Net investment income Class III (243,974) (1,146,041) Class M (47,480) (162,700) ---------------- ----------------- Total distributions from net investment income (291,454) (1,308,741) ---------------- ----------------- Net share transactions (Note 6): Class III (3,388,966) (126,044,557) Class M 2,919,439 1,777,888 ---------------- ----------------- Decrease in net assets resulting from net share transactions (469,527) (124,266,669) ---------------- ----------------- Total decrease in net assets (561,459) (112,087,109) NET ASSETS: Beginning of period 57,820,111 169,907,220 ---------------- ----------------- End of period (including accumulated undistributed net investment income of $140,510 and $0, respectively) $ 57,258,652 $ 57,820,111 ================ =================
See accompanying notes to the financial statements. 9 GMO VALUE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ------------------------------------------------------------- (UNAUDITED) 2004 2003 2002 2001 2000 ---------------- --------- --------- --------- --------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.28 $ 6.73 $ 8.82 $ 9.57 $ 7.98 $ 10.40 --------- --------- --------- --------- --------- --------- Income from investment operations: Net investment income 0.07 0.13 0.14 0.18 0.18 0.21 Net realized and unrealized gain (loss) (0.03) 2.59 (2.10) (0.51) 2.32 (0.83) --------- --------- --------- --------- --------- --------- Total from investment operations 0.04 2.72 (1.96) (0.33) 2.50 (0.62) --------- --------- --------- --------- --------- --------- Less distributions to shareholders: From net investment income (0.05) (0.17) (0.13) (0.17) (0.18) (0.23) From net realized gains -- -- -- (0.25) (0.73) (1.57) --------- --------- --------- --------- --------- --------- Total distributions (0.05) (0.17) (0.13) (0.42) (0.91) (1.80) --------- --------- --------- --------- --------- --------- NET ASSET VALUE, END OF PERIOD $ 9.27 $ 9.28 $ 6.73 $ 8.82 $ 9.57 $ 7.98 ========= ========= ========= ========= ========= ========= TOTAL RETURN (a) 0.42%** 40.69% (22.29)% (3.64)% 32.72% (8.45)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 43,430 $ 46,904 $ 163,463 $ 232,289 $ 247,971 $ 178,329 Net expenses to average daily net assets 0.61%* 0.61% 0.61% 0.61% 0.61% 0.61% Net investment income to average daily net assets 1.56%* 1.74% 1.79% 1.89% 1.99% 2.06% Portfolio turnover rate 72%** 127% 100% 95% 102% 104% Fees and expenses reimbursed by the Manager to average daily net assets: 0.17%* 0.20% 0.07% 0.06% 0.05% 0.05%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 10 GMO VALUE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS M SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ----------------------------------- (UNAUDITED) 2004 2003 2002(a) ---------------- --------- --------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.26 $ 6.72 $ 8.82 $ 9.06 --------- --------- --------- --------- Income from investment operations: Net investment income 0.06 0.11 0.12 0.01 Net realized and unrealized gain (loss) (0.03) 2.57 (2.10) (0.25) --------- --------- --------- --------- Total from investment operations 0.03 2.68 (1.98) (0.24) --------- --------- --------- --------- Less distributions to shareholders: From net investment income (0.04) (0.14) (0.12) -- --------- --------- --------- --------- Total distributions (0.04) (0.14) (0.12) -- --------- --------- --------- --------- NET ASSET VALUE, END OF PERIOD $ 9.25 $ 9.26 $ 6.72 $ 8.82 ========= ========= ========= ========= TOTAL RETURN (b) 0.29%** 40.23% (22.56)% (2.65)%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 13,829 $ 10,916 $ 6,444 $ 486 Net expenses to average daily net assets 0.91%* 0.91% 0.92% 0.91%* Net investment income to average daily net assets 1.26%* 1.42% 1.46% 1.52%* Portfolio turnover rate 72%** 127% 100% 95% Fees and expenses reimbursed by the Manager to average daily net assets: 0.17%* 0.20% 0.07% 0.06%*
(a) Period from January 10, 2002 (commencement of operations) through February 28, 2002. (b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 11 GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION 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 six months ended August 31, 2004, the Fund had two classes of shares outstanding: Class III and Class M. Class M shares bear an administration fee and a 12b-1 fee, while Class III shares bear a shareholder service fee (See Note 3). The principal economic difference between the classes of shares is the type and level of fees. 2. SIGNIFICANT ACCOUNTING POLICIES 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 as determined in good faith by the Trustees or other persons acting at their direction. 12 GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, 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 the Schedule of Investments for all open futures contracts as of August 31, 2004. 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 using standard models that incorporate 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 on swap contracts 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 13 GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 August 31, 2004, 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. See the Schedule of Investments for the open repurchase agreement as of August 31, 2004. 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. As of August 31, 2004, the Fund had loaned securities having a market value of $1,060,637 collateralized by cash in the amount of $1,090,000, 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. 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. 14 GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 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 between the classes of shares of the Fund based on the relative net assets of each class. Shareholder service, 12b-1, and administration fees, which are directly attributable to a class of shares, are charged to that class's operations. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.46% 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 0.15% for Class III shares. Class M shares of the Fund pay GMO an administration fee monthly at the annual rate of 0.20% 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 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, 2005 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees (Class III only), administration fees (Class M only), 12b-1 fees (Class M only), fees and expenses of the 15 GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 0.46% of average daily net assets. The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $232. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004, aggregated $40,240,434 and $41,586,052, respectively. 5. PRINCIPAL SHAREHOLDERS AND RELATED PARTIES At August 31, 2004, 54.1% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. At August 31, 2004, less than 0.1% of the Fund was held by four related parties comprised of certain GMO employee accounts.. As of August 31, 2004, greater than 10% of the Fund's shares were held by accounts for which the Manager has investment discretion. 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ------------------------------ ------------------------------ SHARES AMOUNT SHARES AMOUNT ------------ -------------- ------------ -------------- Class III: Shares sold 130,020 $ 1,193,280 546,928 $ 4,023,325 Shares issued to shareholders in reinvestment of distributions 22,110 204,083 97,052 791,137 Shares repurchased (517,146) (4,786,329) (19,876,245) (130,859,019) ------------ -------------- ------------ -------------- Net decrease (365,016) $ (3,388,966) (19,232,265) $ (126,044,557) ============ ============== ============ ==============
16 GMO VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED)
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ------------------------------ ------------------------------ SHARES AMOUNT SHARES AMOUNT ------------ -------------- ------------ -------------- Class M: Shares sold 342,194 $ 3,144,073 482,342 $ 3,960,130 Shares issued to shareholders in reinvestment of distributions 5,151 47,480 19,668 162,700 Shares repurchased (29,781) (272,114) (282,747) (2,344,942) ------------ -------------- ------------ -------------- Net increase 317,564 $ 2,919,439 219,263 $ 1,777,888 ============ ============== ============ ==============
7. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 17 GMO VALUE FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees, 12b-1 fees and other expenses. The following tables, assuming a $1,000 investment in a class of shares, disclose the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the classes' actual return and actual expenses, and (2) a hypothetical annualized 5% return and the classes' actual expenses: Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * -------------------------------------------------------- 1) Actual $ 1,000.00 $ 1,004.20 $ 3.08 2) Hypothetical 1,000.00 1,022.13 3.11 --------------------------------------------------------
*Expenses are calculated using the Class III annualized expense ratio for the six months ended August 31, 2004 of 0.61%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. Class M
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * -------------------------------------------------------- 1) Actual $ 1,000.00 $ 1,002.90 $ 4.59 2) Hypothetical 1,000.00 1,020.62 4.63 --------------------------------------------------------
*Expenses are calculated using the Class M annualized expense ratio for the six months ended August 31, 2004 of 0.91%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 18 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
CLASSIFICATION % OF NET ASSETS - -------------------------------------------------------------------------------------- Private Investment Fund 0.0% Mutual Funds 100.0 Short-Term Investments and Other Assets and Liabilities (net) (0.0) --------------- 100.0% ===============
See accompanying notes to the financial statements. 1 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------ AFFILIATED ISSUERS -- 100.0% PRIVATE INVESTMENT FUND -- 0.0% 175 GMO SPV I, LLC * 1,544 --------------- TOTAL PRIVATE INVESTMENT FUND (COST $2,097) 1,544 --------------- MUTUAL FUNDS -- 100.0% 296,197 GMO Alpha Only Fund, Class III 2,967,890 945,996 GMO Currency Hedged International Equity Fund, Class III 7,028,748 285,214 GMO Emerging Countries Fund, Class III 3,767,673 570,395 GMO Emerging Country Debt Fund, Class IV 6,194,482 1,354,573 GMO Emerging Markets Fund, Class VI 19,979,946 6,718 GMO Growth Fund, Class III 114,738 225,958 GMO Inflation Indexed Bond Fund, Class III 2,706,972 1,055,772 GMO International Growth Fund, Class III 24,156,064 1,172,117 GMO International Intrinsic Value Fund, Class IV 28,892,682 826,965 GMO International Small Companies Fund, Class III 13,438,180 844,239 GMO Real Estate Fund, Class III 13,060,379 16,580 GMO Short-Duration Investment Fund, Class III 145,903 7,102,132 GMO U.S. Core Fund, Class VI 92,256,689 704,257 GMO U.S. Quality Equity Fund, Class IV 13,718,925 107,406 GMO Value Fund, Class III 995,658 --------------- TOTAL MUTUAL FUNDS (COST $203,499,495) 229,424,929 --------------- TOTAL AFFILIATED ISSUERS (COST $203,501,592) 229,426,473 ---------------
See accompanying notes to the financial statements. 2 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------ SHORT-TERM INVESTMENT -- 0.0% REPURCHASE AGREEMENT -- 0.0% 12,704 Citigroup Global Markets Repurchase Agreement, dated 8/31/04, due 9/01/04, with a maturity value of $12,704, and an effective yield of 1.10%, collateralized by a U.S. Treasury Note with a rate of 2.75%, maturity date of 7/31/06, and a market value, including accrued interest of $12,958. 12,704 --------------- TOTAL SHORT-TERM INVESTMENT (COST $12,704) 12,704 --------------- TOTAL INVESTMENTS -- 100.0% (Cost $203,514,296) 229,439,177 Other Assets and Liabilities (net) -- (0.0%) (15,556) --------------- TOTAL NET ASSETS -- 100.0% $ 229,423,621 ===============
NOTES TO THE SCHEDULE OF INVESTMENTS: * Non-income producing security. At August 31, 2004, the approximate 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 -------------- ----------------- ---------------- ---------------- $ 203,837,541 $ 25,987,831 $ (386,195) $ 25,601,636
See accompanying notes to the financial statements. 3 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments in unaffiliated issuers, at value (cost $12,704) (Note 2) $ 12,704 Investments in affiliated issuers, at value (cost $203,501,592) (Notes 2 and 7) 229,426,473 Receivable for expenses reimbursed by Manager (Note 3) 4,836 --------------- Total assets 229,444,013 --------------- LIABILITIES: Payable to affiliate for (Note 3): Trustees fee 526 Accrued expenses 19,866 --------------- Total liabilities 20,392 --------------- NET ASSETS $ 229,423,621 =============== NET ASSETS CONSIST OF: Paid-in capital $ 196,748,970 Accumulated undistributed net investment income 1,419,852 Accumulated net realized gain 5,329,918 Net unrealized appreciation 25,924,881 --------------- $ 229,423,621 =============== NET ASSETS ATTRIBUTABLE TO: Class III shares $ 229,423,621 =============== SHARES OUTSTANDING: Class III 21,752,074 =============== NET ASSET VALUE PER SHARE: Class III $ 10.55 ===============
See accompanying notes to the financial statements. 4 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends from affiliated issuers (Note 7) $ 1,420,770 Interest 743 --------------- Total income 1,421,513 --------------- EXPENSES: Custodian and transfer agent fees 14,260 Audit and tax fees 9,016 Legal fees 3,036 Trustees fees and related expenses (Note 3) 3,601 Registration fees 1,472 Miscellaneous 1,104 --------------- Total expenses 32,489 Fees and expenses reimbursed by Manager (Note 3) (30,828) --------------- Net expenses 1,661 --------------- Net investment income 1,419,852 --------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain on: Investments in affiliated issuers 2,959,903 Realized gains distributions from affiliated issuers (Note 7) 2,775,087 --------------- Net realized gain on investments 5,734,990 --------------- Change in net unrealized appreciation (depreciation) on investments (10,995,122) --------------- Net realized and unrealized loss (5,260,132) --------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (3,840,280) ===============
See accompanying notes to the financial statements. 5 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 1,419,852 $ 2,991,729 Net realized gain 5,734,990 7,546,095 Change in net unrealized appreciation (depreciation) (10,995,122) 48,547,085 ----------------- ----------------- Net increase (decrease) in net assets from operations (3,840,280) 59,084,909 ----------------- ----------------- Distributions to shareholders from: Net investment income Class III -- (3,981,084) Net realized gains Class III (2,482,819) (2,513,352) ----------------- ----------------- (2,482,819) (6,494,436) ----------------- ----------------- Net share transactions (Note 6): Class III 12,862,281 90,408,502 Purchase premiums and redemption fees (Notes 2 and 6): Class III 28,538 120,648 ----------------- ----------------- Total increase in net assets resulting from net share transactions and net purchase premiums and redemption fees 12,890,819 90,529,150 ----------------- ----------------- Total increase in net assets 6,567,720 143,119,623 NET ASSETS: Beginning of period 222,855,901 79,736,278 ----------------- ----------------- End of period (including accumulated undistributed net investment income of $1,419,852 and $0, respectively) $ 229,423,621 $ 222,855,901 ================= =================
See accompanying notes to the financial statements. 6 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ------------------------------------------------------------------ (UNAUDITED) 2004 2003 2002 2001 2000 ---------------- --------- --------- --------- --------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.86 $ 7.51 $ 8.66 $ 8.92 $ 9.49 $ 8.85 ---------------- --------- --------- --------- --------- --------- Income from investment operations: Net investment income (a) 0.07 0.14 0.15 0.23 0.24 0.25 Net realized and unrealized gain (loss) (0.26) 3.55 (1.07) (0.14) 0.39 1.45 ---------------- --------- --------- --------- --------- --------- Total from investment operations (0.19) 3.69 (0.92) 0.09 0.63 1.70 ---------------- --------- --------- --------- --------- --------- Less distributions to shareholders: From net investment income -- (0.21) (0.23) (0.13) (0.51) (0.43) From net realized gains (0.12) (0.13) -- (0.22) (0.69) (0.63) ---------------- --------- --------- --------- --------- --------- Total distributions (0.12) (0.34) (0.23) (0.35) (1.20) (1.06) ---------------- --------- --------- --------- --------- --------- NET ASSET VALUE, END OF PERIOD $ 10.55 $ 10.86 $ 7.51 $ 8.66 $ 8.92 $ 9.49 ================ ========= ========= ========= ========= ========= TOTAL RETURN (b) (1.75)%**(c) 49.63%(c) (10.84)% 1.12% 6.57% 19.14% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 229,424 $ 222,856 $ 79,736 $ 40,124 $ 42,776 $ 36,669 Net expenses to average daily net assets (d) 0.00%*(e) 0.00%(e) 0.00%(e) 0.00%(e) 0.00% 0.00% Net investment income to average daily net assets (a) 1.25%* 1.99% 3.06% 2.73% 2.56% 2.63% Portfolio turnover rate 10%** 73% 30% 13% 19% 18% Fees and expenses reimbursed by the Manager to average daily net assets: 0.03%* 0.05% 0.07% 0.07% 0.07% 0.09% Purchase premiums and redemption fees consisted of the following per share amounts: + $ 0.00(f) $ 0.01 -- -- -- --
(a) Recognition of net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the Fund invests. (b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (c) Calculations excludes purchase premiums and redemption fees which are borne by the shareholders. (d) Net expenses exclude expenses incurred indirectly through investment in underlying funds. (See Note 3). (e) Net expenses to average daily net assets was less than 0.01%. (f) Purchase premiums and redemption fees were less than $0.01 per share. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 7 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION 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" and makes investments in other funds of the Trust ("underlying funds"). The Fund seeks total return greater than that of the GMO Global Equity Index through investment to varying extents in underlying funds of the Trust. The GMO Global Equity Index, a composite index computed by the Manager, consists of (i) the S&P 500 Index (an index of large capitalization U.S. stocks, independently maintained and published by Standard & Poor's) and (ii) the MSCI ACWI (All Country World Index) ex-U.S. Index (an international (excluding U.S. and including emerging markets) equity index, independently maintained and published by Morgan Stanley Capital International) in the following proportions: 75% (S&P 500) and 25% (MSCI ACWI (All Country World Index) ex-U.S. Index). The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646. 2. SIGNIFICANT ACCOUNTING POLICIES 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 fund 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. Foreign equity securities held by certain underlying funds in which the Fund invests are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available. 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 8 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. 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 of the underlying funds. 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 or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. See Schedule of Investments for the open repurchase agreement as of August 31, 2004. 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. 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. 9 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. PURCHASE AND REDEMPTION OF FUND SHARES Effective June 30, 2003, the Fund began to charge purchase and redemption fees on Fund shares. The premium on cash purchases of Fund shares is 0.15% of the amount invested. In the case of cash redemptions, which applies to shares acquired on or after June 30, 2003, the fee is 0.14% of the amount redeemed. The Fund's purchase premium and redemption fee are approximately equal to the weighted average of the purchase premiums and redemptions fees, if any, of the underlying funds in which the Fund was invested. The level of purchase premium and redemption fee for the Fund will be adjusted approximately annually to account for changes in the Fund's investments (i.e., changes in the percentage of Fund assets allocated to each underlying fund). If the Manager determines that any portion of a cash purchase or redemption is offset by a corresponding cash redemption or purchase occurring on the same day, it will waive the purchase premium or redemption fee with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived in extraordinary circumstances if the Fund will not incur transaction costs. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the six months ended August 31, 2004 and the year ended February 29, 2004, the Fund received $27,486 and $119,831 in purchase premiums and $1,052 and $817 in redemption fees, respectively. There is no premium for reinvested distributions or in-kind transactions. INVESTMENT RISK The Fund is subject to the investment risk associated with an investment in the underlying funds, some of which may invest in foreign securities. There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. 10 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. 3. 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 December 31, 2004, 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, transfer taxes and expenses indirectly incurred by investments in the underlying funds). The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the six months ended August 31, 2004, these indirect fees and expenses expressed as a percentage of the Fund's average daily net assets were as follows:
INDIRECT INVESTMENT- RELATED EXPENSES INDIRECT OPERATING (INCLUDING, BUT NOT EXPENSES (EXCLUDING LIMITED TO, INTEREST MANAGEMENT FEES, EXPENSE, FOREIGN AUDIT INDIRECT NET SHAREHOLDER SERVICE INDIRECT EXPENSE, AND TOTAL MANAGEMENT FEES AND INVESTMENT- SHAREHOLDER INVESTMENT-RELATED INDIRECT FEES RELATED EXPENSES) SERVICE FEES LEGAL EXPENSE) EXPENSES -------------------------------------------------------------------------------------- 0.414% 0.072% 0.093% 0.002% 0.581%
The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $2,957. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004, aggregated $37,099,767 and $22,506,547, respectively. 11 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 5. PRINCIPAL SHAREHOLDERS AND RELATED PARTY At August 31, 2004, 35.5% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. At August 31, 2004, less than 0.1% of the Fund was held by one related party comprised of certain GMO employee accounts.. 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ------------------------- ------------------------- CLASS III: SHARES AMOUNT SHARES AMOUNT --------- ------------ --------- ------------ Shares sold 1,637,287 $ 17,269,734 9,966,233 $ 90,802,386 Shares issued to shareholders in reinvestment of distributions 227,794 2,387,286 486,125 4,942,065 Shares repurchased (641,703) (6,794,739) (540,674) (5,335,949) Purchase premiums and redemption fees -- 28,538 -- 120,648 --------- ------------ --------- ------------ Net increase 1,223,378 $ 12,890,819 9,911,684 $ 90,529,150 ========= ============ ========= ============
12 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 7. INVESTMENTS IN AFFILIATED ISSUERS A summary of the Fund's transactions in the shares of these issuers during the six months ended August 31, 2004, is set forth below:
VALUE, REALIZED BEGINNING OF SALES DIVIDEND GAINS VALUE, AFFILIATE PERIOD PURCHASES PROCEEDS INCOME DISTRIBUTIONS END OF PERIOD ------------------ ------------- ------------ ------------ ----------- ------------- ------------- GMO Alpha Only Fund, Class III $ 2,949,824 $ 9,302 $ 263 $ -- $ -- $ 2,967,890 GMO Currency Hedged International Equity Fund, Class III 6,912,619 22,622 624 -- -- 7,028,748 GMO Emerging Countries Fund, Class III 3,990,530 241,384 362 4,273 225,386 3,767,673 GMO Emerging Country Debt Fund, Class IV 5,198,822 807,832 463 147,855 41,929 6,194,482 GMO Emerging Markets Fund, Class VI 30,519,082 177,052 8,831,360 98,480 1,349 19,979,946 GMO Growth Fund, Class III 122,313 5,117 11 258 4,472 114,738 GMO Inflation Indexed Bond Fund, Class III 1,939,255 762,081 172 221 53,567 2,706,972 GMO International Growth Fund, Class III 18,288,002 6,546,573 1,628 83,059 178,250 24,156,064 GMO International Intrinsic Value Fund, Class IV 22,594,881 5,941,683 2,013 138,127 -- 28,892,682 GMO International Small Companies Fund, Class III 17,155,051 659,369 3,486,526 52,172 552,071 13,438,180 GMO Real Estate Fund, Class III 10,007,887 2,188,649 912 150,923 -- 13,060,379
13 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) GMO Short-Duration Investment Fund, Class III 143,423 1,661 13 1,199 -- 145,903 GMO Small Cap Value Fund, Class III 9,718,278 1,766,990 9,414,884 48,926 1,718,063 -- GMO U.S. Core Fund, Class VI 79,309,935 16,685,090 491,203 659,222 -- 92,256,689 GMO U.S. Quality Equity Fund, Class IV 12,755,200 1,273,824 -- 29,590 -- 13,718,925 GMO SPV I, LLC 2,102 -- -- -- -- 1,544* GMO Value Fund, Class III 1,262,676 10,538 276,113 6,465 -- 995,658 ------------- ------------ ------------ ----------- ------------- ------------- Totals $ 222,869,880 $ 37,099,767 $ 22,506,547 $ 1,420,770 $ 2,775,087 $ 229,426,473 ============= ============ ============ =========== ============= =============
* After effect of the return of capital distribution of $1,408 on June 10, 2004. 8. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 14 GMO GLOBAL (U.S.+) EQUITY ALLOCATION FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as custodian and transfer agent fees, audit and tax fees, other expenses and indirect expenses incurred due to its investment in underlying funds. The following table, assuming a $1,000 investment in a class of shares, discloses the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the class's actual return and actual expenses, and (2) a hypothetical annualized 5% return and the class's actual expenses: Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * ----------------------------------------------------------- 1) Actual $ 1,000.00 $ 982.50 $ 2.90 2) Hypothetical 1,000.00 1,022.28 2.96
*Expenses are calculated using the Class III annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2004 of 0.58%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 15 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
DESCRIPTION % OF NET ASSETS - --------------------------------------------------------------------------------------------- U.S. Government 3.0% Mutual Funds 96.8 Put Options Purchased 0.1 Forward Currency Contracts 0.1 Futures 1.5 Swaps 0.1 Short-Term Investments and Other Assets and Liabilities (net) (1.6) ---------------- 100.0% ================
See accompanying notes to the financial statements. 1 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE / PRINCIPAL AMOUNT / SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 3.0% UNITED STATES -- 3.0% U.S. GOVERNMENT -- 3.0% USD 17,348,850 U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09 (a) (b) 19,536,433 ------------- TOTAL DEBT OBLIGATIONS (COST $19,401,711) 19,536,433 ------------- PUT OPTIONS PURCHASED -- 0.1% CROSS CURRENCY OPTIONS -- 0.1% JPY 7,260,000,000 JPY Put/USD Call, Expires 11/19/2004, Strike 112.40 451,862 ------------- TOTAL PUT OPTIONS PURCHASED (COST $1,852,512) 451,862 ------------- MUTUAL FUNDS -- 96.8% 1,831,360 GMO Emerging Country Debt Fund, Class III (c) 19,870,253 24,252,331 GMO Short-Duration Collateral Fund (c) 614,554,075 5,496 GMO Special Purpose Holding Fund (c) 96,667 2,340,157 Merrimac Cash Series, Premium Class 2,340,157 ------------- TOTAL MUTUAL FUNDS (COST $633,060,612) 636,861,152 ------------- TOTAL INVESTMENTS -- 99.9% (Cost $654,314,835) 656,849,447 Other Assets and Liabilities (net) -- 0.1% 899,673 ------------- TOTAL NET ASSETS -- 100.0% $ 657,749,120 =============
See accompanying notes to the financial statements. 2 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) NOTES TO SCHEDULE OF INVESTMENTS: (a) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts and open swap contracts (Note 2). (b) Indexed security in which price and/or coupon is linked to prices of other securities, securities indices, or other financial indicators (Note 2). (c) Affiliated Issuer. CURRENCY ABBREVIATIONS: AUD - Australian Dollar JPY - Japanese Yen CAD - Canadian Dollar NOK - Norwegian Krone CHF - Swiss Franc NZD - New Zealand Dollars EUR - Euro SEK - Swedish Krona GBP - British Pound USD - United States Dollar At August 31, 2004, the approximate 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 ---------------- ---------------- ---------------- -------------- $ 654,353,255 $ 3,896,842 $ (1,400,650) $ 2,496,192
At February 29, 2004, GMO Currency Hedged International Bond Fund (the "Fund") had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Internal Revenue Code, of $3,639,053 expiring in 2009. Utilization of the capital loss carryforward above could be subject to limitations imposed by the Internal Revenue Code related to share ownership activity. At February 29, 2004, the Fund elected to defer to March 1, 2004 post-October capital losses of $376,779. See accompanying notes to the financial statements. 3 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) A summary of outstanding financial instruments at August 31, 2004 is as follows: FORWARD CURRENCY CONTRACTS
NET UNREALIZED SETTLEMENT APPRECIATION DATE DELIVER/RECEIVE UNITS OF CURRENCY VALUE (DEPRECIATION) ------------ ------------------- ----------------- ------------- --------------- Buys 10/12/04 AUD 51,300,000 $ 36,077,345 $ 146,054 9/07/04 CHF 5,800,000 4,574,730 (106,804) 9/14/04 EUR 53,800,000 65,373,455 (530,063) 11/16/04 GBP 60,600,000 108,329,250 456,490 9/21/04 NZD 39,000,000 25,528,251 142,683 ------------ $ 108,360 ============ Sales 10/12/04 AUD 10,400,000 $ 7,313,926 $ (30,390) 11/02/04 CAD 100,000 75,831 (539) 9/07/04 CHF 50,200,000 39,595,078 332,825 9/14/04 EUR 82,100,000 99,761,352 150,561 9/28/04 JPY 5,900,000,000 53,825,249 (65,420) ------------ $ 387,037 ============
FORWARD CROSS CURRENCY CONTRACTS
NET UNREALIZED SETTLEMENT APPRECIATION DATE DELIVER/UNITS OF CURRENCY RECEIVE/IN EXCHANGE FOR (DEPRECIATION) ------------ ------------------------- ------------------------------ --------------- 10/05/04 CHF 45,840,256 EUR 30,000,000 $ 253,555 10/12/04 EUR 18,500,000 NOK 154,596,160 (99,185) 11/09/04 EUR 49,000,000 SEK 449,239,355 245,949 10/12/04 NOK 126,787,500 EUR 15,000,000 (127,871) ------------ $ 272,448 ============
See accompanying notes to the financial statements. 4 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) FUTURES CONTRACTS
NET UNREALIZED NUMBER OF CONTRACT APPRECIATION CONTRACTS TYPE EXPIRATION DATE VALUE (DEPRECIATION) ----------- ---------------------------------- ----------------- -------------- --------------- Buys 1094 Canadian Government Bond 10 Yr. December 2004 $ 90,984,001 $ 418,710 1383 Euro BOBL September 2004 188,698,914 3,144,604 2218 Euro Bund September 2004 313,167,303 8,188,711 315 Euro Euribor 3 Month March 2005 93,518,019 370,236 250 Federal Fund 30 Day October 2004 102,398,816 3,771 3 Japanese Government Bond 10 Yr. (LIF) September 2004 3,766,368 95 437 UK Guilt Long Bond December 2004 84,124,964 326,547 --------------- $ 12,452,674 =============== Sales 208 Australian Government Bond 10 Yr. September 2004 $ 15,201,370 $ (147,847) 426 Australian Government Bond 3 Yr. September 2004 30,617,360 (70,298) 315 Euro Euribor 3 Month March 2006 92,805,017 (497,293) 38 Japanese Government Bond 10 Yr. September 2004 47,662,308 (862,461) 171 Swiss Federal Bond September 2004 17,220,693 (173,819) 88 U.S. Long Bond December 2004 9,795,500 (126,217) 76 U.S. Treasury Note 10 Yr. December 2004 8,535,750 (61,155) 545 U.S. Treasury Note 5 Yr. December 2004 60,316,172 (415,955) --------------- $ (2,355,045) ===============
At August 31, 2004, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. See accompanying notes to the financial statements. 5 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ---------------------------------------------------- ---------------- INTEREST RATE SWAPS 60,000,000 EUR 3/13/06 Agreement with Citibank N.A. dated 3/09/04 to pay $ 83,105 the notional amount multiplied by 2.34% and to receive the notional amount multiplied by the 6 month Floating Rate EURIBOR. 33,300,000 EUR 6/5/06 Agreement with Citibank N.A. dated 6/01/04 to pay (195,230) the notional amount multiplied by 2.824% and to receive the notional amount multiplied by the 6 month Floating Rate EURIBOR. 40,400,000 USD 6/5/06 Agreement with Citibank N.A. dated 6/01/04 to 229,013 receive the notional amount multiplied by 2.9835% and to pay the notional amount multiplied by the 3 month LIBOR. 29,500,000 CAD 6/8/06 Agreement with JP Morgan Chase Bank dated 6/08/04 144,360 to receive the notional amount multiplied by 3.41% and to pay the notional amount multiplied by the 3 month Floating Canadian Deposit Offering Rate. 29,500,000 CAD 6/10/06 Agreement with JP Morgan Chase Bank dated 6/10/04 154,854 to receive the notional amount multiplied by 3.44% and to pay the notional amount multiplied by the 3 month Floating Canadian Deposit Offering Rate. 29,500,000 CAD 6/14/06 Agreement with JP Morgan Chase Bank dated 6/14/04 206,339 to receive the notional amount multiplied by 3.5725% and to pay the notional amount multiplied by the 3 month Floating Canadian Deposit Offering Rate. 27,000,000 GBP 7/1/06 Agreement with JP Morgan Chase Bank dated 7/01/04 (156,396) to pay the notional amount multiplied by 5.3375% and to receive the notional amount multiplied by the 6 month Floating Rate British LIBOR.
See accompanying notes to the financial statements. 6 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ---------------------------------------------------- ---------------- 48,600,000 USD 7/6/06 Agreement with JP Morgan Chase Bank dated 7/01/04 $ 384,509 to receive the notional amount multiplied by 3.129% and to pay the notional amount multiplied by the 3 month LIBOR. 35,500,000 GBP 8/4/06 Agreement with Deutsche Bank AG dated 8/04/04 to (294,619) pay the notional amount multiplied by 5.42% and to receive the notional amount multiplied by the 6 month Floating Rate British LIBOR. 64,500,000 USD 8/6/06 Agreement with JP Morgan Chase Bank dated 8/04/04 379,905 to receive the notional amount multiplied by 3.04% and to pay the notional amount multiplied by the 3 month LIBOR. 186,000,000 SEK 8/30/07 Agreement with Deutsche Bank AG dated 8/26/04 to 41,630 receive the notional amount multiplied by 3.60% and to pay the notional amount multiplied by the 3 month Floating Rate Swedish LIBOR. 25,200,000 EUR 3/11/09 Agreement with Citibank N.A. dated 3/09/04 to (58,262) receive the notional amount multiplied by 3.21% and to pay the notional amount multiplied by the 6 month Floating Rate EURIBOR. 8,400,000 SEK 5/22/09 Agreement with Citibank N.A. dated 5/21/04 to 12,114 receive the notional amount multiplied by 4.3775% and to pay the notional amount multiplied by the 3 month Floating Rate Swedish LIBOR. 109,500,000 SEK 7/15/11 Agreement with Citibank N.A. dated 7/13/04 to 151,186 receive the notional amount multiplied by 4.615% and to pay the notional amount multiplied by the 3 month Floating Rate Swiss LIBOR. 300,000 CHF 10/23/13 Agreement with JP Morgan Chase Bank dated 10/21/03 (4,836) to pay the notional amount multiplied by 3.0275% and to
See accompanying notes to the financial statements. 7 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ---------------------------------------------------- ---------------- receive the notional amount multiplied by the 6 month Floating Rate Swiss LIBOR. 2,000,000 CHF 2/26/14 Agreement with Deutsche Bank AG dated 2/24/04 to $ 5,649 pay the notional amount multiplied by 2.77% and to receive the notional amount multiplied by the 6 month Floating Rate Swiss LIBOR. 15,000,000 CHF 4/21/14 Agreement with JP Morgan Chase Bank dated 4/19/04 15,312 to pay the notional amount multiplied by 2.81% and to receive the notional amount multiplied by the 6 month Floating Rate Swiss LIBOR. 42,600,000 SEK 5/21/14 Agreement with Citibank N.A. dated 5/18/04 to 153,720 receive the notional amount multiplied by 5.0725% and to pay the notional amount multiplied by the 3 month Floating Rate Swedish LIBOR. 36,300,000 SEK 6/4/14 Agreement with JP Morgan Chase Bank dated 6/02/04 140,509 to receive the notional amount multiplied by 5.1% and to pay the notional amount multiplied by the 3 month Floating Rate Swedish LIBOR. 11,600,000 EUR 6/18/14 Agreement with Citibank N.A. dated 6/18/04 to pay (378,657) the notional amount multiplied by 4.4725% and to receive the notional amount multiplied by the 6 month Floating Rate EURIBOR. 14,100,000 USD 6/18/14 Agreement with JP Morgan Chase Bank dated 6/16/04 764,556 to receive the notional amount multiplied by 5.229% and to pay the notional amount multiplied by the 3 month LIBOR. 15,300,000 USD 7/19/14 Agreement with JP Morgan Chase Bank dated 7/15/04 500,999 to receive the notional amount multiplied by 4.9675% and to pay the notional amount multiplied by the 3 month LIBOR. 21,800,000 AUD 7/21/14 Agreement with Citibank N.A. dated 7/15/04 to pay (216,193) the notional amount multiplied by 6.1225% and to receive the
See accompanying notes to the financial statements. 8 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ---------------------------------------------------- ---------------- notional amount multiplied by the 6 month Floating Rate Australian BBSW. 27,000,000 CAD 8/16/14 Agreement with JP Morgan Chase Bank dated 8/16/04 $ 123,546 to receive the notional amount multiplied by 4.9825% and to pay the notional amount multiplied by the 3 month Floating Canadian Deposit Offering Rate. 27,800,000 AUD 8/17/14 Agreement with Deutsche Bank AG dated 8/16/04 to (129,987) pay the notional amount multiplied by 6.0475% and to receive the notional amount multiplied by the 6 month Floating Rate Australian BBSW. 16,000,000 USD 8/25/14 Agreement with Citibank N.A. dated 8/20/04 to 102,059 receive the notional amount multiplied by 4.6525% and to pay the notional amount multiplied by the 3 month LIBOR. 4,000,000 CAD 6/8/34 Agreement with JP Morgan Chase Bank dated 6/08/04 (246,696) to pay the notional amount multiplied by 5.9775% and to receive the notional amount multiplied by the 3 month Floating Canadian Deposit Offering Rate. 8,800,000 USD 6/10/34 Agreement with Citibank N.A. dated 6/08/04 to pay (815,919) the notional amount multiplied by 5.89% and to receive the notional amount multiplied by the 3 month LIBOR. 4,000,000 CAD 6/10/34 Agreement with JP Morgan Chase Bank dated 6/10/04 (184,971) to pay the notional amount multiplied by 5.96% and to receive the notional amount multiplied by the 3 month Floating Canadian Deposit Offering Rate. 4,000,000 CAD 6/14/34 Agreement with JP Morgan Chase Bank dated 6/14/04 (193,963) to pay the notional amount multiplied by 5.98% and to receive the notional amount multiplied by the 3 month Floating Canadian Deposit Offering Rate.
See accompanying notes to the financial statements. 9 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ---------------------------------------------------- ---------------- TOTAL RETURN SWAPS 3,000,000 USD 7/26/05 Agreement with JP Morgan Chase Bank dated 7/01/03 to receive the notional amount multiplied by the return on the JP Morgan Non-U.S. Hedged Traded Total Return Government Bond Index and to pay the notional amount multiplied by the 1 month LIBOR adjusted by a specified spread. $ 14,326 --------------- $ 731,962 ===============
See accompanying notes to the financial statements. 10 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments in unaffiliated issuers, at value (cost $23,594,380) (Note 2) $ 22,328,452 Investments in affiliated issuers, at value (cost $630,720,455)(Notes 2 and 7) 634,520,995 Foreign currency, at value (cost $8,078) (Note 2) 8,020 Receivable for Fund shares sold 6,000,000 Interest receivable 91,423 Receivable for open forward foreign currency contracts (Note 2) 1,858,703 Receivable for variation margin on open futures contracts (Note 2) 1,783,830 Net receivable for open swap contracts (Note 2) 731,962 Periodic payments from open swap contracts (Note 2) 510,531 Receivable for expenses reimbursed by Manager (Note 3) 31,901 --------------- Total assets 667,865,817 --------------- LIABILITIES: Payable for investments purchased 8,500,000 Payable for Fund shares repurchased 300,000 Payable to affiliate for (Note 3): Management fee 135,646 Shareholder service fee 81,388 Trustees fee 815 Payable for open forward foreign currency contracts (Note 2) 1,090,858 Accrued expenses 7,990 --------------- Total liabilities 10,116,697 --------------- NET ASSETS $ 657,749,120 =============== NET ASSETS CONSIST OF: Paid-in capital $ 646,659,112 Accumulated undistributed net investment income 589,236 Accumulated net realized loss (3,631,218) Net unrealized appreciation 14,131,990 --------------- $ 657,749,120 =============== NET ASSETS ATTRIBUTABLE TO: Class III shares $ 657,749,120 =============== SHARES OUTSTANDING: Class III 71,211,981 =============== NET ASSET VALUE PER SHARE: Class III $ 9.24 ===============
See accompanying notes to the financial statements. 11 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends from affiliated issuers (Note 7) $ 420,850 Interest 428,033 ------------ Total income 848,883 ------------ EXPENSES: Management fee (Note 3) 544,653 Shareholder service fee (Note 3) - Class III 326,792 Custodian and transfer agent fees 48,484 Audit and tax fees 29,716 Legal fees 4,784 Trustees fees and related expenses (Note 3) 3,136 Registration fees 9,568 Miscellaneous 1,657 ------------ Total expenses 968,790 Fees and expenses reimbursed by Manager (Note 3) (94,024) Indirectly incurred fees waived or borne by Manager (Note 3) (24,865) Shareholder service fee waived (Note 3) - Class III (9,131) ------------ Net expenses 840,770 ------------ Net investment income 8,113 ------------ REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments in unaffiliated issuers (178,066) Investments in affiliated issuers 48,766 Realized gains distributions from affiliated issuers (Note 7) 323,901 Closed futures contracts (361,233) Closed swap contracts 1,982,733 Foreign currency, forward contracts and foreign currency related transactions (1,447,396) ------------ Net realized gain 368,705 ------------ Change in net unrealized appreciation (depreciation) on: Investments (679,601) Open futures contracts 7,818,851 Open swap contracts 478,818 Foreign currency, forward contracts and foreign currency related transactions 1,390,406 ------------ Net unrealized gain 9,008,474 ------------ Net realized and unrealized gain 9,377,179 ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 9,385,292 ============
See accompanying notes to the financial statements. 12 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 8,113 $ 309,117 Net realized gain 368,705 1,051,240 Change in net unrealized appreciation (depreciation) 9,008,474 5,009,463 -------------- ----------------- Net increase in net assets from operations 9,385,292 6,369,820 -------------- ----------------- Distributions to shareholders from: Net investment income Class III (1,000,065) (1,182,701) -------------- ----------------- Net share transactions (Note 6): Class III 426,491,433 197,466,338 -------------- ----------------- Total increase in net assets 434,876,660 202,653,457 NET ASSETS: Beginning of period 222,872,460 20,219,003 -------------- ----------------- End of period (including accumulated undistributed net investment income of $589,236 and $1,581,188, respectively) $ 657,749,120 $ 222,872,460 ============== =================
See accompanying notes to the financial statements. 13 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ------------------------------------------------------------- (UNAUDITED) 2004(a) 2003(a) 2002(a) 2001(a)(b) 2000(a) ---------------- --------- -------- -------- ---------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.16 $ 8.85 $ 9.04 $ 9.72 $ 9.70 $ 10.47 ---------- --------- -------- -------- -------- --------- Income from investment operations: Net investment income (c)+ 0.00(d) 0.06 0.09 0.50 0.57 0.64 Net realized and unrealized gain (loss) 0.10 0.76 0.32 (0.13) 0.73 (0.16) ---------- --------- -------- -------- -------- --------- Total from investment operations 0.10 0.82 0.41 0.37 1.30 0.48 ---------- --------- -------- -------- -------- --------- Less distributions to shareholders: From net investment income (0.02) (0.51) (0.60) (1.05) (1.18) (1.11) From net realized gains -- -- -- -- (0.10) (0.14) ---------- --------- -------- -------- -------- --------- Total distributions (0.02) (0.51) (0.60) (1.05) (1.28) (1.25) ---------- --------- -------- -------- -------- --------- NET ASSET VALUE, END OF PERIOD $ 9.24 $ 9.16 $ 8.85 $ 9.04 $ 9.72 $ 9.70 ========== ========= ======== ======== ======== ========= TOTAL RETURN (e) 1.06%** 9.53% 4.81% 4.21% 14.06% 4.95% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 657,749 $ 222,872 $ 20,219 $ 17,932 $ 18,102 $ 283,340 Net expenses to average daily net assets 0.39%*(f) 0.38%(f) 0.40%(f) 0.38%(f) 0.40%(f) 0.40% Net investment income to average daily net assets (c) 0.00%*(g) 0.68% 0.97% 5.45% 5.79% 6.34% Portfolio turnover rate 9%** 36% 66% 44% 120% 65% Fees and expenses reimbursed and/or waived by the Manager to average daily net assets: 0.06%* 0.24% 0.51% 0.54% 0.07% 0.08%
See accompanying notes to the financial statements. 14 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS -- (CONTINUED) (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) (a) As a result of recent changes in generally accepted accounting principles, the Fund has reclassified periodic payments made under interest rate swap agreements, previously included within interest income, as a component of realized gain (loss) in the Statement of Operations. The effect of this reclassification was to increase the net investment income ratio for the year ending February 29, 2004 by 0.25% and net investment income per share by $0.02. For consistency, similar reclassifications have been made to prior year amounts resulting in increase (reductions) to the net investment income ratio of (0.05%), less than 0.00%, (0.17%) and (0.17%) for the fiscal years ending February 28/29, 2003, 2002, 2001 and 2000, respectively and to net investment income per share of less than $(0.00), less than $0.00, $(0.02) and $(0.01) for the fiscal years ending February 28/29, 2003, 2002, 2001 and 2000 respectively. (b) Effective March 1, 2000, the Fund adopted the provision 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. (c) Net investment income is affected by the timing of the declaration of dividends by other Funds of the Trust in which the Fund invests (d) Net investment income was less than $0.01 per share. (e) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown. (f) Net expenses exclude expenses incurred indirectly through investment in underlying Funds. (See Note 3). (g) The ratio of net investment income to average daily net assets was less than 0.01%. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 15 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION 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 (excluding Japan), primarily in shares of GMO Short-Duration Collateral Fund and "synthetic" bonds (created by the Manager by combining a futures contract, swap contract, or option, on a fixed income security with cash, a cash equivalent, or another fixed income security). The Fund's benchmark is the J.P. Morgan Non-U.S. Government Bond Index (Hedged) (ex-Japan). Effective January 1, 2004, the Fund changed benchmarks from J.P. Morgan Non-U.S. Government Bond Index (Hedged). At August 31, 2004, less than 0.1% of the Fund was invested in GMO Special Purpose Holding Fund and 93.4% of the Fund was invested in GMO Short-Duration Collateral Fund, separate funds of GMO Trust managed by GMO. Shares of GMO Special Purpose Holding Fund and GMO Short-Duration Collateral Fund are not publicly available for direct purchase. At August 31, 2004, 3.0% of the net assets of the Fund were invested in GMO Emerging Country Debt Fund, a separate fund of GMO Trust managed by GMO. The financial statements of GMO Special Purpose Holding Fund, GMO Short-Duration Collateral Fund and GMO Emerging Country Debt Fund should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request by calling (617)330-7646. 2. SIGNIFICANT ACCOUNTING POLICIES 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. CHANGE IN ACCOUNTING PRINCIPLE For the year ended February 29, 2004, as a result of a FASB Emerging Issues Task Force consensus (and subsequent related SEC staff guidance), the Fund reclassified periodic payments made under interest rate swap agreements, previously included within interest income, as a component of realized gain (loss) in the Statement of Operations. For consistency, similar reclassifications have been made to the per share amounts in all prior year financial highlights presented. Prior year net investment income ratios in the 16 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) financial highlights have also been modified accordingly. This reclassification increased net investment income and decreased net realized gains by $113,003 for the year ended February 29, 2004. This change had no effect on the Fund's net asset value, either in total or per share, or its total increase (decrease) in net assets from operations during any period. 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 funds of the Trust ("underlying funds") and other 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 of 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. 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. As of August 31, 2004, the total value of these securities represented 24.7% of net assets. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and 17 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 the Schedule of Investments and represents the currency exposure the Fund has acquired or hedged through forward currency contracts as of August 31, 2004. 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. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, 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 18 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) on which they are traded. See the Schedule of Investments for all open futures contracts as of August 31, 2004. 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. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying investment increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of August 31, 2004, 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 closing 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 August 31, 2004. 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 19 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 agreements from lenders it acquires direct rights against the borrower on the loan. As of August 31, 2004, the Fund did not hold any loan agreements. 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. See the Schedule of Investments for all indexed securities held as of August 31, 2004. 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 using standard models that incorporate 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 on swap contracts 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 20 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 the Schedule of Investments for a summary of open swap agreements as of August 31, 2004. 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 or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. As of August 31, 2004, there were no open repurchase agreements. 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. The market value of the securities the Fund has sold is determined daily and any additional required collateral is allocated to or sent by the Fund on the next business day. As of August 31, 2004, there were no open reverse repurchase agreements. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of 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. As of August 31, 2004, 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 21 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. 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. 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. 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. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.25% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, 22 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% 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 shareholder service fees as a result of the Fund's investment in GMO Special Purpose Holding Fund and GMO Short-Duration Collateral Fund ("SDCF"). GMO has entered into a binding agreement effective until at least June 30, 2005 to reimburse the Fund to the extent that the Fund's total direct annual operating expenses plus the amount of indirect fees and operating expenses incurred through its investment in underlying funds exceed 0.25% of average daily net assets. For purposes of this calculation, the Fund's total direct annual operating expenses excludes shareholder service fees, fees and expenses of the independent Trustees of the Trust (including legal fees) ("Trustees fees"), and the following investment-related costs: brokerage commissions, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes. Additionally, the indirect fees and operating expenses incurred through investment in underlying funds exclude investment-related expenses and Trustees fees. Through June 29, 2004, the indirect Trustees fees incurred by the Fund through its investment in ECDF were not excluded. The Fund incurs fees and expenses indirectly as a shareholder in GMO Special Purpose Holding Fund, SDCF and ECDF. For the six months ended August 31, 2004, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
INDIRECT INVESTMENT- INDIRECT OPERATING RELATED EXPENSES EXPENSES (EXCLUDING (INCLUDING, BUT NOT MANAGEMENT FEES, LIMITED TO, INTEREST INDIRECT NET SHAREHOLDER SERVICE INDIRECT EXPENSE, FOREIGN AUDIT MANAGEMENT FEES AND INVESTMENT- SHAREHOLDER EXPENSE, AND INVESTMENT- TOTAL INDIRECT FEES RELATED EXPENSES) SERVICE FEES RELATED LEGAL EXPENSE) EXPENSES --------------------------------------------------------------------------------------------------------------- (0.005)% 0.017% 0.004% 0.001% 0.017%
The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $2,584. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 23 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004, were as follows:
PURCHASES SALES ---------------- ------------- U.S. Government securities $ 11,668,001 $ -- Investments (non-U.S. Government securities) 458,022,921 36,178,172
5. PRINCIPAL SHAREHOLDERS AND RELATED PARTIES At August 31, 2004, 61.1% of the outstanding shares of the Fund were held by three 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. At August 31, 2004, 1.5% of the Fund was held by six related parties comprised of certain GMO employee accounts. As of August 31, 2004, substantially all of the Fund's shares were held by accounts for which the Manager has investment discretion. 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 -------------------------- -------------------------- SHARES AMOUNT SHARES AMOUNT ---------- ------------- ---------- ------------- Class III: Shares sold 49,631,137 $ 451,513,297 22,864,308 $ 204,926,687 Shares issued to shareholders in reinvestment of distributions 75,416 686,288 129,636 1,123,946 Shares repurchased (2,837,002) (25,708,152) (936,320) (8,584,295) ---------- ------------- ---------- ------------- Net increase 46,869,551 $ 426,491,433 22,057,624 $ 197,466,338 ========== ============= ========== =============
24 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 7. INVESTMENTS IN AFFILIATED ISSUERS A summary of the Fund's transactions in the shares of these issuers during the six months ended August 31, 2004, is set forth below:
VALUE, REALIZED VALUE, BEGINNING OF SALES DIVIDEND GAINS END OF AFFILIATE PERIOD PURCHASES PROCEEDS INCOME DISTRIBUTIONS PERIOD ------------------------------------------------------------------------------------------------------------------------ GMO Emerging Country Debt Fund, Class III $ 6,112,287 $ 13,075,942 $ -- $ 292,643 $ 83,299 $ 376,589 GMO Short-Duration Collateral Fund 201,155,969 444,874,296 34,100,000 55,524 240,602 614,554,075 GMO Special Purpose Holding Fund 2,190,470 72,683 2,078,172 72,683 -- 96,667* -------------- -------------- -------------- -------------- -------------- -------------- Totals $ 209,458,726 $ 458,022,921 $ 36,178,172 $ 420,850 $ 323,901 $ 634,520,995 ============== ============== ============== ============== ============== ==============
* After effect of return of capital distribution of $84,708 on June 10, 2004. 8. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 25 GMO CURRENCY HEDGED INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees, other expenses and indirect expenses incurred by its investment in underlying funds. The following table, assuming a $1,000 investment in a class of shares, discloses the ending accounts value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the class's actual return and actual expenses, and (2) a hypothetical annualized 5% return and the class's actual expenses: Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * ---------------------------------------------------------------------------------- 1) Actual $ 1,000 $ 1,010.60 $ 2.03 2) Hypothetical 1,000 1,023.19 2.04
*Expenses are calculated using the Class III annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2004 of 0.40%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 26 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
DESCRIPTION % OF NET ASSETS - ------------------------------------------------------------------------------------------------ United States 98.8% Forward Currency Contracts (0.2) Short-Term Investments and Other Assets and Liabilities (net) 1.4 ---------------- 100.0% ================
See accompanying notes to the financial statements. 1 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------------- AFFILIATED ISSUERS -- 98.8% MUTUAL FUNDS -- 98.8% UNITED STATES -- 98.8% 4,212,060 GMO International Growth Fund, Class III 96,371,935 4,537,833 GMO International Intrinsic Value Fund, Class IV 111,857,582 ------------- 208,229,517 ------------- TOTAL AFFILIATED ISSUERS (COST $186,227,858) 208,229,517 ------------- 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 INVESTMENT -- 1.4% CASH EQUIVALENT -- 1.4% 2,900,000 Societe Generale GC Time Deposit, 1.57%, due 09/01/04 2,900,000 ------------- TOTAL SHORT-TERM INVESTMENT (COST $2,900,000) 2,900,000 ------------- TOTAL INVESTMENTS -- 100.2% (Cost $189,127,877) 211,129,518 Other Assets and Liabilities (net) -- (0.2%) (400,827) ------------- TOTAL NET ASSETS -- 100.0% $ 210,728,691 =============
See accompanying notes to the financial statements. 2 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 2). CURRENCY ABBREVIATIONS: AUD - Australian Dollar HKD - Hong Kong Dollar CAD - Canadian Dollar JPY - Japanese Yen CHF - Swiss Franc NOK - Norwegian Krone DKK - Danish Krone NZD - New Zealand Dollar EUR - Euro SEK - Swedish Krona GBP - British Pound SGD - Singapore Dollar At August 31, 2004, the approximate 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 - ---------------- ------------------ ------------------ ----------------- $ 189,360,990 $ 21,768,546 $ (18) $ 21,768,528
At February 29, 2004, GMO Currency Hedged International Equity Fund had capital loss carryforwards available to offset future capital gains, if any, to the extent permitted by the Internal Revenue Code of $2,715,282 and $1,682,281 expiring in 2010 and 2011, respectively. Utilization of the capital loss carryforwards above could be subject to limitations imposed by the Internal Revenue Code related to share ownership activity. At February 29, 2004, the Fund elected to defer to March 1, 2004 post-October currency losses of $5,001,215. See accompanying notes to the financial statements. 3 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) A summary of outstanding financial instruments at August 31, 2004 is as follows: FORWARD CURRENCY CONTRACTS
NET UNREALIZED APPRECIATION SETTLEMENT DATE DELIVER UNITS OF CURRENCY VALUE (DEPRECIATION) ---------------- ------------- --------------------- ------------- ---------------- Sales 11/26/04 AUD 15,606,841 $ 10,927,143 $ (25,738) 11/26/04 CAD 76,221 57,779 552 11/26/04 CHF 10,982,795 8,685,519 (31,473) 11/26/04 DKK 63,019,044 10,286,752 (67,835) 11/26/04 EUR 36,537,502 44,368,676 (211,057) 11/26/04 GBP 25,697,897 45,896,509 (143,420) 11/26/04 HKD 17,010,916 2,185,840 477 11/26/04 JPY 5,327,916,310 48,753,349 71,777 11/26/04 NOK 16,974,561 2,456,376 8,349 11/26/04 NZD 801,886 520,501 (2,715) 11/26/04 SEK 34,881,164 4,639,090 (23,454) 11/26/04 SGD 2,569,800 1,502,404 579 ------------ $ (423,958) ============
See accompanying notes to the financial statements. 4 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments in unaffiliated issuers, at value (cost $2,900,019) (Note 2) $ 2,900,001 Investments in affiliated issuers, at value (cost $186,227,858) (Notes 2 and 7) 208,229,517 Cash 21,967 Foreign currency, at value (cost $43,704) (Note 2) 44,106 Receivable for open forward foreign currency contracts (Note 2) 81,734 Receivable for expenses reimbursed by Manager (Note 3) 126,409 --------------- Total assets 211,403,734 --------------- LIABILITIES: Payable to affiliate for (Note 3): Management fee 94,236 Shareholder service fee 26,177 Trustees fee 255 Payable for open forward foreign currency contracts (Note 2) 505,692 Foreign taxes payable 187 Accrued expenses 48,496 --------------- Total liabilities 675,043 --------------- NET ASSETS $ 210,728,691 =============== NET ASSETS CONSIST OF: Paid-in capital $ 192,999,557 Accumulated undistributed net investment income 1,125,578 Accumulated net realized loss (4,974,529) Net unrealized appreciation 21,578,085 --------------- $ 210,728,691 =============== NET ASSETS ATTRIBUTABLE TO: Class III shares $ 210,728,691 =============== SHARES OUTSTANDING: Class III 28,379,179 =============== NET ASSET VALUE PER SHARE: Class III $ 7.43 ===============
See accompanying notes to the financial statements. 5 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends from affiliated issuers (Note 7) $ 889,026 Interest 30,036 --------------- Total income 919,062 --------------- EXPENSES: Management fee (Note 3) 505,369 Shareholder service fee (Note 3) - Class III 140,380 Custodian fees 35,972 Transfer agent fees 15,180 Audit and tax fees 22,172 Legal fees 2,300 Trustees fees and related expenses (Note 3) 1,158 Registration fees 2,576 Miscellaneous 920 --------------- Total expenses 726,027 Fees and expenses reimbursed by Manager (Note 3) (79,120) Indirectly incurred fees waived or borne by Manager (Note 3) (494,683) Shareholder service fee waived (Note 3) - Class III (107,757) --------------- Net expenses 44,467 --------------- Net investment income 874,595 --------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments in affiliated issuers 2,112,989 Realized gains distributions from affilitated issuers (Note 7) 737,075 Foreign currency, forward contracts and foreign currency related transactions (3,193,917) --------------- Net realized loss (343,853) --------------- Change in net unrealized appreciation (depreciation) on: Investments (3,074,929) Foreign currency, forward contracts and foreign currency related transactions 4,915,758 --------------- Net unrealized gain 1,840,829 --------------- Net realized and unrealized gain 1,496,976 --------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,371,571 ===============
See accompanying notes to the financial statements. 6 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 874,595 $ 2,303,913 Net realized loss (343,853) (4,774,893) Change in net unrealized appreciation (depreciation) 1,840,829 23,395,747 ---------------- ----------------- Net increase in net assets from operations 2,371,571 20,924,767 ---------------- ----------------- Net share transactions (Note 6): Class III 47,771,105 110,738,483 ---------------- ----------------- Total increase in net assets 50,142,676 131,663,250 NET ASSETS: Beginning of period 160,586,015 28,922,765 ---------------- ----------------- End of period (including accumulated undistributed net investment income of $1,125,578 and $250,983, respectively) $ 210,728,691 $ 160,586,015 ================ =================
See accompanying notes to the financial statements. 7 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ------------------------------------------------------------------------ (UNAUDITED) 2004 2003 2002 2001 2000 ---------------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 7.33 $ 5.54 $ 7.14 $ 9.25 $ 10.04 $ 9.28 --------------- ---------- ---------- ---------- ---------- ---------- Income from investment operations: Net investment income + 0.03(a) 0.20(a) 0.22(a) 0.46(a) 0.23 0.23 Net realized and unrealized gain (loss) 0.07 1.59 (1.55) (1.00) 1.34 1.26 --------------- ---------- ---------- ---------- ---------- ---------- Total from investment operations 0.10 1.79 (1.33) (0.54) 1.57 1.49 --------------- ---------- ---------- ---------- ---------- ---------- Less distributions to shareholders: From net investment income -- -- (0.27) (1.53) (0.21) (0.42) From net realized gains -- -- -- (0.04) (2.15) (0.31) --------------- ---------- ---------- ---------- ---------- ---------- Total distributions -- -- (0.27) (1.57) (2.36) (0.73) --------------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 7.43 $ 7.33 $ 5.54 $ 7.14 $ 9.25 $ 10.04 =============== ========== ========== ========== ========== ========== TOTAL RETURN (b) 1.36%** 32.31% (19.53)% (5.38)% 16.69% 15.86% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 210,729 $ 160,586 $ 28,923 $ 37,581 $ 49,332 $ 75,054 Net expenses to average daily net assets 0.05%*(c) 0.04%(c) 0.06%(c) 0.31%(c) 0.69% 0.69% Net investment income to average daily net assets 0.93%*(a) 2.98%(a) 3.32%(a) 5.33%(a) 2.23% 2.25% Portfolio turnover rate 6%** 5% 90% 120% 39% 68% Fees and expenses reimbursed and/or waived by the Manager to average daily net assets: 0.73%* 0.87% 1.32% 0.79% 0.38% 0.33%
(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 and/or waived during the periods shown. (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 3). + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 8 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION 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 investment in other GMO Funds, including International Disciplined Equity Fund, International Intrinsic Value Fund, and International Growth Fund and through management of the Fund's foreign currency positions. The Fund's benchmark is the MSCI EAFE Index (Europe, Australasia, Far East) (Hedged). At August 31, 2004, 53.1% of the Fund's net assets was invested in GMO International Intrinsic Value Fund and 45.7% of the Fund's net assets 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. These financial statements are available, without charge, upon request by calling (617) 346-7646 or by visiting GMO's website at www.gmo.com. 2. SIGNIFICANT ACCOUNTING POLICIES 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. The values of securities which are primarily traded on foreign exchanges are 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 funds of the Trust ("underlying funds") and other mutual funds are valued at their net asset value as reported on each business day. For other assets, and in cases where market prices are not readily available or the Manager believes established valuation 9 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) methodologies are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value. Because many foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, foreign equity securities held by the Fund are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available. 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 the Schedule of Investments and represents the currency exposure the Fund has acquired or hedged through currency contracts as of August 31, 2004. 10 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, 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 August 31, 2004, 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. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying investment increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of August 31, 2004, 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 11 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. As of August 31, 2004, 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 using standard models that incorporate 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 on swap contracts 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 August 31, 2004, 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 12 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) securities fail financially. The Fund receives compensation for lending its securities. As of August 31, 2004, 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. 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. 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. 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. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. 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 13 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.54% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% for Class III shares. As described in Note 1, the Fund invests in certain underlying funds. 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. GMO has entered into a binding agreement effective until at least June 30, 2005 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")) plus 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 0.54% of the Fund's average daily net assets. Because GMO will not reimburse expenses incurred indirectly by the Fund to the extent they exceed 0.54% of the Fund's average daily net assets, 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)) and investment-related expenses incurred indirectly by the Fund through its investment in the underlying funds may exceed 0.54% of the Fund's average daily net assets. The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the six months ended August 31, 2004, these indirect fees and expenses expressed as a percentage of the Fund's average daily net assets were as follows:
INDIRECT INVESTMENT- RELATED EXPENSES INDIRECT OPERATING (INCLUDING, BUT NOT EXPENSES (EXCLUDING LIMITED TO, INTEREST MANAGEMENT FEES, EXPENSE, FOREIGN AUDIT SHAREHOLDER SERVICE INDIRECT EXPENSE, AND INDIRECT NET FEES AND INVESTMENT- SHAREHOLDER INVESTMENT-RELATED TOTAL INDIRECT MANAGEMENT FEES RELATED EXPENSES) SERVICE FEES LEGAL EXPENSE) EXPENSES -------------------------------------------------------------------------------------------------------- 0.457% 0.074% 0.115% 0.000% 0.646%
14 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $697. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004, aggregated $59,626,101 and $10,050,000, respectively. 5. PRINCIPAL SHAREHOLDERS AND RELATED PARTIES At August 31, 2004, 90.2% 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. At August 31, 2004, less than 0.1% of the Fund was held by two related parties comprised of certain GMO employee accounts. As of August 31, 2004, substantially all of the Fund's shares were held by accounts for which the Manager has investment discretion. 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------------------------- ---------------------------------- SHARES AMOUNT SHARES AMOUNT --------------- --------------- --------------- --------------- Class III: Shares sold 7,680,718 $ 56,564,904 18,157,015 $ 120,046,588 Shares issued to shareholders in reinvestment of distributions -- -- -- -- Shares repurchased (1,196,412) (8,793,799) (1,480,507) (9,308,105) --------------- --------------- --------------- --------------- Net increase 6,484,306 $ 47,771,105 16,676,508 $ 110,738,483 =============== =============== =============== ===============
15 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 7. INVESTMENTS IN AFFILIATED ISSUERS A summary of the Fund's transactions in the shares of these issuers during the six months ended August 31, 2004, is set forth below:
VALUE, REALIZED BEGINNING OF SALES DIVIDEND GAINS VALUE, END OF AFFILIATE PERIOD PURCHASES PROCEEDS INCOME DISTRIBUTIONS PERIOD --------------------------------------------------------------------------------------------------------------------- GMO International Growth Fund, Class III $ 72,449,455 $ 31,680,529 $ 5,250,000 $ 343,454 $ 737,075 $ 96,371,935 GMO International Intrinsic Value Fund, Class IV 87,165,900 27,945,572 4,800,000 545,572 -- 111,857,582 ------------- ------------ ------------ ------------ ------------- ------------- Totals $ 159,615,355 $ 59,626,101 $ 10,050,000 $ 889,026 $ 737,075 $ 208,229,517 ============= ============ ============ ============ ============= =============
8. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 16 GMO CURRENCY HEDGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees, other expenses and indirect expenses incurred by its investment in underlying funds. The following table, assuming a $1,000 investment in a class of shares, discloses the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the class's actual return and actual expenses, and (2) a hypothetical annualized 5% return and the class's actual expenses: Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED* --------------------------------------------------------------- 1) Actual $ 1,000.00 $ 1,013.60 $ 3.50 2) Hypothetical 1,000.00 1,021.73 3.52
*Expenses are calculated using the Class III annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2004 of 0.69%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 17 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
DESCRIPTION % OF NET ASSETS - ------------------------------------------------------------------------------------------------- Australia 3.4% Austria 1.2 Belgium 1.6 Brazil 1.6 Canada 1.2 Chile 0.1 China 0.1 Croatia 0.3 Denmark 1.3 Finland 4.2 France 6.7 Germany 7.8 Greece 0.1 Hong Kong 2.1 India 1.0 Indonesia 0.5 Ireland 2.1 Italy 3.4 Japan 19.2 Malaysia 0.0 Mexico 0.6 Netherlands 1.6 New Zealand 0.3 Norway 2.0 Singapore 0.9 South Africa 0.0 South Korea 1.6 Spain 3.0 Sweden 1.6 Switzerland 4.8 Taiwan 0.2 Thailand 0.4 United Kingdom 20.8 Short-Term Investments and Other Assets and Liabilities (net) 4.3 ----------------- 100.0% =================
See accompanying notes to the financial statements. 1 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- COMMON STOCKS -- 94.7% AUSTRALIA -- 3.4% 379,910 Amcor Ltd 1,971,220 2,000,000 Bradken LTS * 4,025,055 1,393,304 Brazin Ltd 1,893,185 480,797 Consolidated Rutile Ltd 133,769 2,986,574 David Jones Ltd (a) 3,979,625 276,587 Foodland Associated (a) 3,347,509 700,000 ION Ltd (a) 820,744 705,372 John Fairfax Holdings Ltd 1,910,805 201,000 Lihir Gold Ltd * 146,805 6,000 Lihir Gold Ltd ADR 144A * 88,140 199,184 National Food Ltd 655,151 3,000,000 Pacific Brands Ltd 5,910,475 1,208,500 Pacifica Group Ltd (a) 3,135,241 825,000 Pasminco Ltd *(b) -- --------------- 28,017,724 --------------- AUSTRIA -- 1.2% 29,000 Boehler Uddeholm (Bearer) 2,428,129 66,400 Erste Bank Der Oesterreichischen Sparkassen AG 2,529,430 20,677 Flughafen Wien AG 1,187,444 11,080 OMV AG 2,536,207 35,000 Wienerberger AG 1,269,638 --------------- 9,950,848 --------------- BELGIUM -- 1.6% 61,070 Almanij NV 3,827,145 37,918 Bekaert SA 2,380,076 167 CIE Francois d' Entreprises 46,225 53,300 KBC Bancassurance Holding 3,214,613 32,964 Omega Pharma SA 1,654,305 17,990 Solvay SA 1,516,538 5,006 Unibra SA 417,178 --------------- 13,056,080 ---------------
See accompanying notes to the financial statements. 2 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- BRAZIL -- 1.4% 190,000 All American Latina Logistica SA * 3,951,585 479,600 Compania de Concessoes Rodoviarias 5,968,428 280,000 Suzano Bahia Sul Papel e Celulose 1,188,544 --------------- 11,108,557 --------------- CANADA -- 1.2% 635,000 Hudson's Bay Co 6,747,116 90,600 KAP Resources Ltd *(b) 688 202,500 Methanex Corp 2,688,012 --------------- 9,435,816 --------------- CHILE -- 0.1% 30,600 CorpBanca SA ADR 144A 769,474 --------------- CHINA -- 0.1% 2,300,000 Guangdong Kelon Electric * 833,401 --------------- CROATIA -- 0.3% 160,000 Pliva D.D. 2,300,800 --------------- DENMARK -- 1.3% 245,800 H. Lundbeck A/S 4,434,765 46,000 Kobenhavns Lufthavne AS 6,553,008 --------------- 10,987,773 --------------- FINLAND -- 4.2% 216,900 Aspocomp Group Oyj 3,331,833 302,150 Jaakko Poyry Group 7,403,104 1,178,160 Rapala VMC Oyj 8,360,528 267,600 Stockmann Oyj AB Class B 6,273,383 249,500 Uponor Oyj (a) 8,590,238 --------------- 33,959,086 ---------------
See accompanying notes to the financial statements. 3 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- FRANCE -- 6.6% 23,271 Bacou Dalloz 1,465,280 52,700 Bail Investissement 1,740,926 22,800 BIC SA 973,503 161,900 Boursorama * 884,935 30,216 Buffalo Grill 426,774 391,900 Canal Plus 2,600,229 3,700 Casino Guichard Perrachon SA 292,574 7,320 Christian Dior SA 421,010 42,444 Clarins (a) 2,853,001 6,450 Damartex SA * 184,105 44,100 Essilor International SA 2,706,743 41,707 Eurazeo (a) 2,690,648 6,300 Gaumont SA 434,831 31,108 Groupe Partouche * 520,174 9,000 Guyenne et Gascogne SA 1,019,563 45,600 Imerys SA 2,847,826 17,700 Klepierre 1,279,461 14,100 Lagardere S.C.A. 849,248 55,200 LISI 2,731,462 75,000 M6-Metropole Television 1,874,813 61,000 Michelin SA Class B 3,239,232 9,407 Natexis Banques Populaires (a) 1,070,625 59,100 Peugeot SA 3,557,023 45,000 Publicis Groupe 1,220,467 34,600 Schneider Electric SA 2,174,054 1,416,000 SCOR SA *(a) 2,041,978 20,350 Seb SA 2,137,709 1,351 Societe de Gerance et d'Armement * 62,391 7,250 SOMFY International SA 1,343,877 25,000 Thales SA 846,566 34,000 Valeo SA 1,342,865 51,872 Virbac SA 1,699,503 30,001 Worms et Cie SA (a) 756,287 99,341 Zodiac SA 3,288,625 --------------- 53,578,308 ---------------
See accompanying notes to the financial statements. 4 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- GERMANY -- 7.1% 178,680 Aareal Bank AG 4,842,332 32,992 Adidas-Salomon AG 4,247,711 59,200 Commerzbank AG * 975,829 111,100 Continental AG 5,776,648 250,200 Deutsche Lufthansa AG * 2,919,996 133,617 Fraport AG 4,213,446 17,700 Fresenius Medical Care AG 1,293,875 137,747 Hannover Rueckversicherungs AG (Registered) 4,496,486 156,520 Heidelberger Druckmaschinen * 4,628,003 375,500 Hochtief AG 8,800,388 179,170 IWKA AG 4,202,702 87,503 Medion AG (a) 1,367,489 7,911 Repower Systems AG 157,948 62,900 Singulus Technologies * 949,108 63,222 Suedzucker AG 1,181,956 405,100 ThyssenKrupp AG 7,583,667 --------------- 57,637,584 --------------- GREECE -- 0.1% 172,640 Lamda Development SA 631,316 --------------- HONG KONG -- 2.1% 711,000 ASM Pacific Technology 2,380,981 383,000 China Resources Peoples Telephone Co Ltd 164,495 1,000,000 Hang Lung Group Co Ltd 1,546,253 1,500,000 Hang Lung Properties Ltd 2,191,629 1,929,000 Hopewell Highway Infrastructure Ltd 1,213,695 700,000 Lee & Man Paper Manufacturing Ltd 554,045 1,009,800 Orient Overseas International Ltd 3,317,616 3,000,000 Oriental Press Group 1,089,238 2,278,000 Pacific Basin Shipping Ltd * 730,133 1,300,000 Shangri-La Asia Ltd 1,207,774 1,200,000 Techtronic Industries Co 1,892,320 9,375 Tom Online Inc ADR *(a) 96,459
See accompanying notes to the financial statements. 5 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- HONG KONG -- CONTINUED 2,900,000 Vedan International Holdings Ltd 611,681 75,000 Wing Lung Bank 547,602 --------------- 17,543,921 --------------- INDIA -- 1.0% 891,984 Arvind Mills Ltd * 1,562,746 289,735 Corporation Bank 1,585,246 200,000 Great Eastern Shipping Co 626,590 111,098 Himatsingka Seide Ltd 848,479 67,209 Jain Irrigation Systems Ltd * 128,265 1,435,450 Mirc Electronics Ltd 603,976 257,806 Raymond Ltd 1,220,955 1,841,000 Sakthi Sugars Ltd * 1,365,728 --------------- 7,941,985 --------------- INDONESIA -- 0.5% 1,131,500 Adira Dinamika Multi Finance PT * 313,803 2,866,000 International Nickel 2,488,134 16,940,126 PT Bank Pan Indonesia Tbk 481,317 9,084,000 Surya Citra Media Tbk 465,108 --------------- 3,748,362 --------------- IRELAND -- 2.1% 1,350,000 C&C Group Plc * 4,183,670 28,000 CRH Plc 636,311 718,000 Grafton Group Plc * 6,134,275 252,113 Greencore Group 905,391 379,440 IFG Group Plc 484,006 141,000 Irish Continental Group Plc * 1,569,564 230,000 Irish Life & Permanent Plc 3,499,718 --------------- 17,412,935 --------------- ITALY -- 3.4% 255,000 Arnoldo Mondadori Editore SPA 2,332,536 708,425 Banca Intesa SPA 2,602,907
See accompanying notes to the financial statements. 6 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- ITALY -- CONTINUED 187,500 Banche Popolari Unite Scrl 3,034,779 174,200 Buzzi Unicem SPA 2,112,543 260,000 CIR-Compagnie Industriali Riunite SPA 507,461 49,700 Davide Campari-Milano SPA (a) 2,503,772 663,800 ERG SPA 4,944,847 357,716 Grouppo Editoriale L'Espresso (a) 1,849,873 30,000 Pagnossin SPA * 24,358 79,552 Riunione Adriatica di Sicurta SPA 1,406,291 600,000 Snam Rete Gas SPA 2,693,956 1,759,364 Telecom Italia Di RISP 3,870,274 --------------- 27,883,597 --------------- JAPAN -- 19.2% 135,520 Arisawa Manufacturing 5,426,882 900,000 Bank of Yokohama 5,340,338 700,000 Brother Industries Ltd 5,991,518 100,000 Cawachi Ltd 4,202,858 875,000 Central Glass Co Ltd 6,572,704 160,000 Dai Nippon Screen (a) 897,960 200,000 Daikin Industries Ltd 5,214,372 475,000 Daito Trust Construction Co Ltd 18,051,172 70,000 Diamond Lease Co Ltd 2,649,062 50,000 Funai Electric Co Ltd 6,975,553 750,000 Gunze Ltd 3,543,310 460,000 Isuzu Motors Ltd *(a) 1,083,524 98,800 Izumi Co Ltd 2,016,667 600,000 JACCS Co 3,225,280 470 Japan Retail Fund Investment Corp 3,391,700 1,100,000 Kobe Steel Ltd 1,590,666 227,500 Koei Co Ltd (a) 5,045,079 16,480 Kose Corp 623,199 1,250,000 Marubeni Corp 2,986,968 300,000 Mitsui Trust Holding Inc 2,169,646 800,000 NHK Spring Co Ltd 5,674,187 350,000 Nippon Electric Glass Co Ltd 7,924,626
See accompanying notes to the financial statements. 7 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- JAPAN -- CONTINUED 700,000 Nippon Mining Holdings Inc 3,227,908 1,300,000 Oki Electric Industry Co Ltd * 4,502,256 300 ORIX JREIT Inc 1,733,598 200,000 Santen Pharmaceutical 3,722,057 230,000 Sanwa Shutter Corp (a) 1,134,634 2,400,000 Showa Denko 5,557,046 750,000 Showa Shell Sekiyu 6,602,648 300,000 Sumitomo Rubber Industries Inc 2,650,511 300,000 Taisei Corp 1,030,485 245,000 TIS Inc 8,942,424 570,000 Toyo Suisan Kaisha 7,041,949 300,000 Victor Co of Japan Ltd (a) 2,760,441 500,000 Yamaha Motor Co Ltd 7,381,005 --------------- 156,884,233 --------------- MALAYSIA -- 0.0% 132,500 E & O Property Development * 19,502 --------------- MEXICO -- 0.6% 500,000 Grupo Bimbo SA de CV 1,091,300 1,346,700 Grupo Imsa SA Class UBC 3,217,271 1,675,000 Sare Holding SA de CV * 904,769 --------------- 5,213,340 --------------- NETHERLANDS -- 1.6% 110,300 Fortis NV * 2,461,261 3,939 Fugro NV 276,708 528,139 Hagemeyer NV *(a) 937,225 49,800 Imtech NV 1,334,037 27,200 Laurus NV * 26,442 37,626 Nutreco Holding NV 1,213,280 5,862 Roto Smeets de Boer NV 231,168
See accompanying notes to the financial statements. 8 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- NETHERLANDS -- CONTINUED 145,239 VNU NV 3,711,260 150,000 Wolters Kluwer NV 2,475,949 --------------- 12,667,330 --------------- NEW ZEALAND -- 0.3% 46,000 Air New Zealand * 58,090 1,207,475 Evergreen Forests Ltd * 335,612 1,927,200 Tourism Holdings Ltd 2,423,982 --------------- 2,817,684 --------------- NORWAY -- 2.0% 405,390 Ekornes ASA 8,348,140 370,550 Prosafe ASA 8,208,024 --------------- 16,556,164 --------------- SINGAPORE -- 0.9% 2,159,000 Allgreen Properties Ltd 1,339,691 2,000,000 ComfortDelgro Corp Ltd 1,470,758 250,000 Elec & Eltek International Co Ltd 727,500 1,000,000 GES International Ltd 398,143 425,000 Hong Leong Finance Ltd 706,873 1,300,000 Parkway Holdings Ltd 974,820 1,409,000 People's Food Holdings Ltd 881,710 1,300,000 Unisteel Technology Ltd 981,348 --------------- 7,480,843 --------------- SOUTH AFRICA -- 0.0% 27,807 Western Areas Ltd * 116,737 --------------- SOUTH KOREA -- 1.6% 111,980 Asia Cement Co Ltd 2,681,658 79,533 FnC Kolon Corp 339,619 525,560 Handsome Corp 4,178,257 464,140 Hotel Shilla Co 2,261,957 62,320 Korea Electric Terminal Co 1,025,265
See accompanying notes to the financial statements. 9 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- SOUTH KOREA -- CONTINUED 320,963 Kortek Corp 994,016 52,600 Sam Yang 974,564 240,000 Woongjin.com Co Ltd 528,502 --------------- 12,983,838 --------------- SPAIN -- 3.0% 192,000 ACS Actividades Cons Y Serv 3,271,066 241,381 Aguas de Barcelona SA Class A 4,233,573 84,400 Altadis SA 2,631,765 270,000 Amadeus Global Travel Distribution Class A 1,842,718 10,649 Bankinter SA 391,456 43,296 Cia de Distribucion Integral Logista SA 1,825,427 37,000 Cortefiel SA 399,321 70,000 Fomento de Construcciones y Contratas SA 2,564,712 106,800 Gas Natural SDG SA 2,547,195 70,000 Red Electrica de Espana 1,185,728 90,000 Union Fenosa SA 2,000,932 383,157 Uralita SA * 1,454,320 --------------- 24,348,213 --------------- SWEDEN -- 1.6% 197,900 Autoliv Inc SDR (a) 8,291,483 221,000 Billerud AB 3,438,534 279,000 Lundin Mining Corp * 1,474,056 --------------- 13,204,073 --------------- SWITZERLAND -- 4.8% 24,000 AFG Arbonia-Forster Holding 3,044,076 1,752 Bank Sarasin & Cie AG Class B (Registered) 2,420,725 2,500 Belimo Holding AG (Registered) 1,185,317 16,470 Bobst Group AG (Registered) 516,375 118,286 Charles Voegele Holding AG 3,800,432 700 Eichhof Holding AG (Registered) 582,867 14,323 Fischer (George) AG (Registered) * 3,529,958 2,719 Forbo Holdings AG (Registered) * 565,958
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) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- SWITZERLAND -- CONTINUED 3,294 Geberit AG (Registered) 2,340,566 17,510 Helvetia Patria Holding (Registered) 2,803,311 1,000 Jelmoli Holding AG (Bearer) 1,231,361 3,250 Jelmoli Holding AG (Registered) 805,280 38,970 Lonza Group AG (Registered) 1,727,612 12,000 Rieter Holding AG (Registered) 3,231,087 9,030 Sarna Kunststoff Holding AG 748,199 1,000 Schaffner Holding AG (Registered) * 139,717 7,248 Sika AG (Bearer) * 3,915,942 39,030 Unique Zurich Airport * 3,117,817 17,908 Valiant Holding (Registered) * 1,461,251 10,650 Valora Holding AG 2,330,046 --------------- 39,497,897 --------------- TAIWAN -- 0.2% 4,319,000 Arima Computer Corp * 1,325,441 --------------- THAILAND -- 0.4% 13,500,000 Asian Property Development Pcl (Foreign Registered) (b) 1,290,036 440,000 Kiatnakin Finance & Securities (Foreign Registered) (b) 322,209 400,000 Siam Panich Leasing Ltd (Foreign Registered) (b) 336,134 3,787,000 Sino Thai Engineering & Construction Pcl (Foreign Registered) (b) 854,689 600,000 Tipco Asphalt Pcl (Foreign Registered) *(b) 378,151 --------------- 3,181,219 --------------- UNITED KINGDOM -- 20.8% 2,484,540 Aggregate Industries Plc 3,933,663 175,000 Alliance & Leicester Plc 2,834,039 168,033 Alliance Unichem Plc 2,042,496 343,173 Anglo Irish Bank Corp 5,719,744 682,342 Balfour Beatty Plc 3,267,112 575,000 BBA Group Plc 2,701,740 687,250 Bodycote International Plc 1,812,828 348,600 BPB Plc 2,537,303 500,000 British Airways Plc * 2,018,602
See accompanying notes to the financial statements. 11 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- UNITED KINGDOM -- CONTINUED 2,300,000 British Insurance Holdings Plc 3,105,258 750,000 Brown (N) Group Plc 1,582,222 1,425,000 Cable & Wireless 2,781,658 814,100 Carphone Warehouse Group Plc 2,066,738 526,434 Cattle's Plc 3,034,184 65,000 Cobham Group Plc 1,590,786 65,000 Computacenter Plc 384,121 463,424 Crest Nicholson 2,913,033 3,700,000 Dimension Data Holdings Plc * 1,940,258 696,493 FKI Plc 1,522,592 2,207,600 Fyffes Plc 4,885,570 250,000 Gallaher Group Plc 2,976,588 333,226 Geest Plc 3,109,203 260,000 Hanson Plc 1,775,071 195,000 Hays Plc 417,201 127,400 Imperial Tobacco Group Plc 2,816,263 1,300,000 iTouch Plc * 671,656 400,000 JJB Sports Plc 1,389,221 850,000 John Wood Group Plc 1,943,954 135,000 Johnson Matthey Plc 2,211,904 445,000 Kelda Group Plc 4,231,056 360,000 Kesa Electricals Plc 1,827,395 1,538,613 Kidde Plc 3,267,492 362,344 Kier Group Plc 4,412,101 60,376 Lonmin Plc 1,176,761 512,200 Matalan Plc 1,903,382 900,000 mmO2 Plc * 1,459,092 600,000 Morrison Supermarkets 1,952,041 100,000 Next Plc 2,685,077 300,300 Northern Rock Plc 3,843,969 866,436 Novar Plc 1,903,610 1,000,000 PD Ports * 1,439,160 400,000 Peninsular & Oriental Steam Navigation Co 1,730,374 274,031 Pennon Group Plc 4,037,162 1,284,614 Photo-Me International Plc * 2,327,364 2,050,000 PHS Group Plc 2,807,927
See accompanying notes to the financial statements. 12 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- UNITED KINGDOM -- CONTINUED 500,000 Premier Foods Plc * 2,008,078 135,000 Provident Financial Plc 1,447,362 300,000 RAC Plc 3,566,077 500,736 Rexam Plc 3,985,495 750,000 RM Plc 1,754,111 1,800,000 Royal & Sun Alliance Insurance Group 2,304,563 755,160 Smith (David S.) Holdings Plc 1,986,256 230,000 Smith (WH) Group Plc 1,265,315 689,300 Somerfield Plc 1,752,887 500,000 SSL International Plc 2,540,747 288,600 Tate & Lyle Plc 1,867,116 550,300 Tomkins Plc 2,576,179 110,000 Travis Perkins Plc 2,700,569 295,000 Trinity Mirror Plc 3,426,879 1,280,000 TT Electronics Plc 3,937,542 230,700 Ultra Electronics Holdings 2,656,321 315,000 Viridian Group Plc 3,481,503 250,000 Warner Chilcott Plc 2,637,576 488,100 Westbury Plc 3,780,695 165,100 William Hill Plc 1,615,865 167,800 Wolseley Plc 2,575,351 100,000 Xstrata Plc 1,455,872 575,000 Yell Group Plc 3,535,980 --------------- 169,847,310 --------------- TOTAL COMMON STOCKS (COST $568,407,228) 772,941,391 --------------- PREFERRED STOCKS -- 1.0% BRAZIL -- 0.2% 890,000 Caemi Mineracao e Metalurgica SA 476,406 800,000 Klabin SA 1,268,326 --------------- 1,744,732 --------------- FRANCE -- 0.1% 6,800 Casino Guichard Perrachon SA 3.74% 484,553 ---------------
See accompanying notes to the financial statements. 13 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- GERMANY -- 0.7% 20,000 Henkel KGaA 1,453,788 150,000 Volkswagen AG 5.30% 3,980,995 --------------- 5,434,783 --------------- ITALY -- 0.0% 10,000 IFI Istituto Finanziario Industries 4.82% 98,590 --------------- TOTAL PREFERRED STOCKS (COST $7,743,445) 7,762,658 --------------- SHORT-TERM INVESTMENTS -- 4.3% CASH EQUIVALENTS -- 4.3% 7,800,000 Societe Generale GC Time Deposit, 1.57%, due 09/01/04 7,800,000 27,366,991 The Boston Global Investment Trust (c) 27,366,991 --------------- 35,166,991 --------------- TOTAL SHORT-TERM INVESTMENTS (COST $35,166,991) 35,166,991 --------------- TOTAL INVESTMENTS -- 100.0% (Cost $611,317,664) 815,871,040 Other Assets and Liabilities (net) -- 0.0% 14,169 --------------- TOTAL NET ASSETS -- 100.0% $ 815,885,209 ===============
See accompanying notes to the financial statements. 14 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 Foreign Registered - Shares issued to foreign investors in markets that have foreign ownership limits. REIT - Real Estate Investment Trust SDR - Swedish Depository Receipt * Non-income producing security. (a) All or a portion of this security is out on loan (Note 2). (b) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 2). (c) Investment of security lending collateral (Note 2). At August 31, 2004, the approximate 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 ---------------- ---------------- ---------------- ---------------- $ 611,576,619 $ 226,364,558 $ (22,070,137) $ 204,294,421
See accompanying notes to the financial statements. 15 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY (SHOWING PERCENTAGE OF EQUITY INVESTMENTS) AUGUST 31, 2004 (UNAUDITED) At August 31, 2004, industry sector diversification of the Fund's equity investments was as follows: INDUSTRY SECTOR Consumer Discretionary 26.2% Industrials 23.3 Financials 17.4 Materials 8.9 Consumer Staples 7.5 Information Technology 5.9 Energy 3.5 Health Care 3.2 Utilities 3.0 Telecommunication Services 1.1 ------ 100.0% ======
See accompanying notes to the financial statements. 16 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments, at value, including securities on loan of $25,873,049 (cost $611,317,664) (Note 2) $ 815,871,040 Cash 71,253 Foreign currency, at value (cost $23,961,845) (Note 2) 24,021,321 Receivable for investments sold 2,222,034 Dividends and interest receivable 1,594,174 Foreign taxes receivable 391,935 Receivable for expenses reimbursed by Manager (Note 3) 68,758 -------------- Total assets 844,240,515 -------------- LIABILITIES: Payable for investments purchased 39,315 Payable upon return of securities loaned (Note 2) 27,366,991 Accrued capital gain and repatriation taxes payable (Note 2) 232,075 Payable to affiliate for (Note 3): Management fee 478,887 Shareholder service fee 88,482 Trustees fee 1,787 Accrued expenses 147,769 -------------- Total liabilities 28,355,306 -------------- NET ASSETS $ 815,885,209 ============== NET ASSETS CONSIST OF: Paid-in capital $ 566,002,605 Accumulated undistributed net investment income 5,062,940 Accumulated net realized gain 40,424,746 Net unrealized appreciation 204,394,918 -------------- $ 815,885,209 ============== NET ASSETS ATTRIBUTABLE TO: Class III shares $ 478,703,719 ============== Class IV shares $ 337,181,490 ============== SHARES OUTSTANDING: Class III 32,936,396 ============== Class IV 23,187,064 ============== NET ASSET VALUE PER SHARE:
See accompanying notes to the financial statements. 17 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) Class III $ 14.53 ============== Class IV $ 14.54 ==============
See accompanying notes to the financial statements. 18 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends (net of withholding taxes of $1,939,675) $ 14,538,024 Interest (including securities lending income of $199,177) 384,542 -------------- Total income 14,922,566 -------------- EXPENSES: Management fee (Note 3) 2,880,442 Shareholder service fee (Note 3) - Class III 363,921 Shareholder service fee (Note 3) - Class IV 168,878 Custodian fees 347,760 Transfer agent fees 21,712 Audit and tax fees 21,344 Legal fees 11,132 Trustees fees and related expenses (Note 3) 5,835 Registration fees 276 Miscellaneous 4,140 -------------- Total expenses 3,825,440 Fees and expenses reimbursed by Manager (Note 3) (406,364) -------------- Net expenses 3,419,076 -------------- Net investment income 11,503,490 -------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (net of foreign capital gains tax and CPMF tax of $61,120 and $792, respectively) (Note 2) 40,935,190 Foreign currency, forward contracts and foreign currency related transactions (245,401) -------------- Net realized gain 40,689,789 -------------- Change in net unrealized appreciation (depreciation) on: Investments (net of foreign capital gains tax accrual of $227,666) (Note 2) (43,031,359) Foreign currency, forward contracts and foreign currency related transactions 230,195 -------------- Net unrealized loss (42,801,164) -------------- Net realized and unrealized loss (2,111,375) --------------
See accompanying notes to the financial statements. 19 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 9,392,115 ==============
See accompanying notes to the financial statements. 20 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED AUGUST 31, 2004 FEBRUARY 29, (UNAUDITED) 2004 ---------------- ---------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 11,503,490 $ 11,199,187 Net realized gain 40,689,789 31,138,742 Change in net unrealized appreciation (depreciation) (42,801,164) 281,445,460 ---------------- ---------------- Net increase in net assets from operations 9,392,115 323,783,389 ---------------- ---------------- Distributions to shareholders from: Net investment income Class III (3,085,467) (9,757,175) Class IV (2,165,071) (6,863,664) ---------------- ---------------- Total distributions from net investment income (5,250,538) (16,620,839) ---------------- ---------------- Net realized gains Class III (11,140,158) -- Class IV (7,735,619) -- ---------------- ---------------- Total distributions from net realized gains (18,875,777) -- ---------------- ---------------- (24,126,315) (16,620,839) ---------------- ---------------- Net share transactions (Note 6): Class III 6,516,519 24,206,541 Class IV 9,405,765 5,270,623 ---------------- ---------------- Increase in net assets resulting from net share transactions 15,922,284 29,477,164 ---------------- ---------------- Total increase in net assets 1,188,084 336,639,714 NET ASSETS: Beginning of period 814,697,125 478,057,411 ---------------- ---------------- End of period (including accumulated undistributed net investment income of $5,062,940 and distributions in excess of net investment income of $1,190,012, respectively) $ 815,885,209 $ 814,697,125 ================ ================
See accompanying notes to the financial statements. 21 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ------------------------------------------------------------- (UNAUDITED) 2004 2003 2002 2001(a) ---------------- ---------- ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 14.79 $ 9.13 $ 9.59 $ 9.68 $ 10.00 ---------------- ---------- ---------- ---------- ---------- Income from investment operations: Net investment income 0.21+ 0.20+ 0.16+ 0.15 0.06 Net realized and unrealized gain (loss) (0.03) 5.77 (0.51)(b) 0.00(b)(c) (0.33)(b) ---------------- ---------- ---------- ---------- ---------- Total from investment operations 0.18 5.97 (0.35) 0.15 (0.27) ---------------- ---------- ---------- ---------- ---------- Less distributions to shareholders: From net investment income (0.10) (0.31) (0.11) (0.24) (0.05) From net realized gains (0.34) -- -- -- -- ---------------- ---------- ---------- ---------- ---------- Total distributions (0.44) (0.31) (0.11) (0.24) (0.05) ---------------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 14.53 $ 14.79 $ 9.13 $ 9.59 $ 9.68 ================ ========== ========== ========== ========== TOTAL RETURN (d) 1.14%** 65.76% (3.64)% 1.59% (2.64)%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 478,704 $ 480,966 $ 275,739 $ 149,566 $ 61,244 Net expenses to average daily net assets 0.85%* 0.85% 0.85% 0.86%(e) 0.85%* Net investment income to average daily net assets 1.40%(f)** 1.71% 1.59% 1.48% 1.08%* Portfolio turnover rate 13%** 31% 24% 17% 16%** Fees and expenses reimbursed by the Manager to average daily net assets: 0.10%* 0.11% 0.15% 0.26% 0.43%*
(a) Period from June 30, 2000 (commencement of operations) to February 28, 2001. (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) Total return would have been lower had certain expenses not been reimbursed during the periods shown. (e) Includes transfer taxes not reimbursed by the Manager, which approximate 0.01% of average daily net assets. (f) The ratio for the six months ended August 31, 2004, has not been annualized since the Fund believes it would not be appropriate because the Fund's dividend income is not earned ratably throughout the fiscal year. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 22 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 --------------------------- (UNAUDITED) 2004 2003(a) ---------------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 14.80 $ 9.13 $ 10.60 ---------------- ---------- ---------- Income from investment operations: Net investment income + 0.21 0.21 0.08 Net realized and unrealized gain (loss) (0.03) 5.77 (1.43) ---------------- ---------- ---------- Total from investment operations 0.18 5.98 (1.35) ---------------- ---------- ---------- Less distributions to shareholders: From net investment income (0.10) (0.31) (0.12) From net realized gains (0.34) -- -- ---------------- ---------- ---------- Total distributions (0.44) (0.31) (0.12) ---------------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 14.54 $ 14.80 $ 9.13 ================ ========== ========== TOTAL RETURN(b) 1.15%** 65.92% (12.76)%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 337,181 $ 333,731 $ 202,319 Net expenses to average daily net assets 0.80%* 0.80% 0.80%* Net investment income to average daily net assets 1.42%(c)** 1.78% 1.13%* Portfolio turnover rate 13%** 31% 24% Fees and expenses reimbursed by the Manager to average daily net assets: 0.10%* 0.11% 0.14%*
(a) Period from June 14, 2002 (commencement of operations) through February 28, 2003. (b) Total return would have been lower had certain expenses not been reimbursed during the periods shown. (c) The ratio for the six months ended August 31, 2004, has not been annualized since the Fund believes it would not be appropriate because the Fund's dividend income is not earned ratably throughout the fiscal year. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 23 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION 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 S&P/Citigroup Extended Market Index ("EMI") World ex-U.S. Index. Throughout the six months ended August 31, 2004, 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 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. 2. SIGNIFICANT ACCOUNTING POLICIES 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. The values of securities which are primarily traded on foreign exchanges are 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. For other assets, and in cases where market prices are not readily available or the Manager believes established valuation methodologies are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value. Because many foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing 24 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, foreign equity securities held by the Fund are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available. 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. As of August 31, 2004, there were no outstanding forward foreign currency contracts. 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 25 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, 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 August 31, 2004, 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. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying investment increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of August 31, 2004, 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 closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. As of August 31, 2004, 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. 26 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 using standard models that incorporate 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 on swap contracts 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 August 31, 2004, 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. As of August 31, 2004, the Fund had loaned securities having a market value of $25,873,049 collateralized by cash in the amount of $27,366,991, 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 27 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) income are generally 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. The Fund has recorded a deferred tax liability in respect of unrealized appreciation on foreign securities of $227,666 for potential capital gains and repatriation taxes at August 31, 2004. The accrual for capital gains and repatriation taxes is included in net unrealized gain in the Statement of Operations. The Fund has incurred $61,912 related to capital gains taxes which is included in net realized gain in the Statement of Operations. The Fund is subject to a Contribuicao Provisoria sobre Movimentacoes Financiera ("CPMF") tax which is applied to foreign exchange transactions representing capital inflows or outflows to the Brazilian market. The CPMF tax has been included in the net realized gain (loss) on investments at year end. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. 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. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. 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 between the classes of shares of the Fund 28 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class's operations. 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. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.70% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of 0.15% for Class III shares and 0.10% for Class IV shares. GMO has entered into a binding agreement effective until at least June 30, 2005 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 0.70% of average daily net assets. The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $3,535. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004 aggregated $101,001,175 and $113,220,854, respectively. 5. PRINCIPAL SHAREHOLDERS AND RELATED PARTIES At August 31, 2004, 45.5% 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. At August 31, 2004, 0.1% of the Fund was held by thirteen related parties comprised of certain GMO employee accounts. 29 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 -------------------------------- -------------------------------- SHARES AMOUNT SHARES AMOUNT -------------- -------------- -------------- -------------- Class III: Shares sold 711,744 $ 10,000,000 1,699,099 $ 16,069,884 Shares issued to shareholders in reinvestment of distributions 921,886 13,671,564 621,212 8,163,813 Shares repurchased (1,210,844) (17,155,045) (2,179) (27,156) -------------- -------------- -------------- -------------- Net increase 422,786 $ 6,516,519 2,318,132 $ 24,206,541 ============== ============== ============== ============== SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 -------------------------------- -------------------------------- SHARES AMOUNT SHARES AMOUNT -------------- -------------- -------------- -------------- Class IV: Shares sold -- $ -- 337,838 $ 5,000,000 Shares issued to shareholders in reinvestment of distributions 634,239 9,405,765 400,379 5,270,623 Shares repurchased -- -- (337,838) (5,000,000) -------------- -------------- -------------- -------------- Net increase 634,239 $ 9,405,765 400,379 $ 5,270,623 ============== ============== ============== ==============
7. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 30 GMO FOREIGN SMALL COMPANIES FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees, 12b-1 fees and other expenses. The following tables, assuming a $1,000 investment in a class of shares, disclose the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the classes' actual return and actual expenses, and (2) a hypothetical annualized 5% return and the classes' actual expenses: Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED* ----------------------------------------------------- 1) Actual $ 1,000.00 $ 1,011.40 $ 4.31 2) Hypothetical 1,000.00 1,020.92 4.33
*Expenses are calculated using the Class III annualized expense ratio for the six months ended August 31, 2004 of 0.85%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. Class IV
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED* ----------------------------------------------------- 1) Actual $ 1,000.00 $ 1,011.50 $ 4.06 2) Hypothetical 1,000.00 1,021.17 4.08
*Expenses are calculated using the Class IV annualized expense ratio for the six months ended August 31, 2004 of 0.80%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 31 GMO GLOBAL GROWTH FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO GLOBAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
DESCRIPTION % OF NET ASSETS - --------------------------------------------------------------------------------------------- Australia 1.3% Austria 1.4 Belgium 2.7 Canada 2.9 France 0.7 Germany 4.5 Greece 0.2 Hong Kong 1.3 Italy 1.7 Japan 14.4 Netherlands 1.6 Norway 1.8 Portugal 0.2 Singapore 2.2 Spain 1.7 Sweden 2.0 Switzerland 2.3 United Kingdom 4.8 United States 50.7 Short-Term Investments and Other Assets and Liabilities (net) 1.6 ----------------- 100.0% =================
See accompanying notes to the financial statements. 1 GMO GLOBAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- COMMON STOCKS -- 98.2% AUSTRALIA -- 1.3% 21,617 BHP Billiton Ltd 201,664 7,391 Commonwealth Bank of Australia 158,481 4,996 National Australia Bank Ltd 94,249 19,507 Telstra Corp Ltd 66,148 11,436 Woodside Petroleum Ltd 146,359 ------------- 666,901 ------------- AUSTRIA -- 1.4% 734 Bank Austria Creditanstalt AG 46,589 5,540 Erste Bank Der Oesterreichischen Sparkassen AG 211,040 545 Mayr-Melnhof Karton AG (Bearer) 72,164 254 Oesterreichische Elektrizitaetswirtschafts AG Class A 46,011 840 OMV AG 192,276 6,472 Telekom Austria AG 90,501 1,229 Wienerberger AG 44,582 ------------- 703,163 ------------- BELGIUM -- 2.7% 2,838 Almanij NV 177,852 10,392 Dexia 179,575 634 Electrabel SA 212,820 13,087 Fortis 292,262 2,984 KBC Bancassurance Holding 179,970 6,112 UCB SA 298,191 ------------- 1,340,670 ------------- CANADA -- 2.9% 6,500 Bank of Nova Scotia 177,497 35,400 Bombardier Inc Class B 81,407 7,900 Canadian Natural Resources 256,078 4,700 Imperial Oil Ltd 219,555 3,400 Manulife Financial Corp 140,634 3,100 Nexen Inc 110,227 1,400 Precision Drilling Corp * 68,746
See accompanying notes to the financial statements. 2 GMO GLOBAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- CANADA -- CONTINUED 3,800 Suncor Energy Inc 105,238 7,600 Talisman Energy Inc 173,388 3,800 Teck Cominco Ltd Class B 74,264 1,700 Toronto-Dominion Bank 58,950 ------------- 1,465,984 ------------- FRANCE -- 0.7% 4,252 Credit Agricole SA 107,506 1,736 LVMH Moet Hennessy Louis Vuitton SA 111,539 917 Peugeot SA 55,191 639 Renault SA 51,421 ------------- 325,657 ------------- GERMANY -- 4.3% 2,029 Allianz AG (Registered) 196,280 2,889 Deutsche Bank AG (Registered) 197,945 10,180 Deutsche Post AG 203,145 4,346 E. On AG 309,681 864 Muenchener Rueckversicherungs AG (Registered) 82,182 4,278 RWE AG 209,944 1,618 SAP AG 235,786 4,629 Schering AG 257,559 4,470 Siemens AG (Registered) 308,192 3,270 Volkswagen AG 126,504 ------------- 2,127,218 ------------- GREECE -- 0.2% 2,680 Coca Cola Hellenic Bottling Co SA 63,731 1,805 National Bank of Greece SA 39,506 ------------- 103,237 ------------- HONG KONG -- 1.3% 24,000 CLP Holdings Ltd 138,910 27,000 Esprit Holdings Ltd 130,246
See accompanying notes to the financial statements. 3 GMO GLOBAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- HONG KONG -- CONTINUED 113,000 Hong Kong & China Gas 203,921 39,500 Hong Kong Electric Holdings Ltd 176,594 ------------- 649,671 ------------- ITALY -- 1.7% 11,907 Banca Intesa SPA 43,749 31,452 ENI SPA 646,170 54,152 Telecom Italia SPA (Savings Shares) 162,461 ------------- 852,380 ------------- JAPAN -- 14.4% 2,060 Acom Co Ltd 135,942 5,000 Aeon Co Ltd 83,740 5,000 Aeon Co Ltd *(a) 81,781 1,400 Aeon Credit Service Co Ltd 91,126 1,000 Aiful Corp 100,231 8,000 Asahi Glass Co Ltd 77,504 8,000 Asahi Kasei Corp 35,919 2,500 Benesse Corp 75,455 3,000 Bridgestone Corp 57,003 3,400 Canon Inc 162,578 9 Central Japan Railway Co 75,091 8,000 Chiba Bank 46,351 7,500 Chubu Electric Power Co Inc 164,785 4,100 Credit Saison Co 136,186 1,700 CSK Corp 73,453 2,900 Daito Trust Construction Co Ltd 110,207 4,000 Daiwa House Industry Co Ltd 41,556 5,000 Denso Corp 123,104 5,000 Eisai Co Ltd 142,805 2,500 FamilyMart 70,683 2,300 Fast Retailing Co Ltd 166,050 17,000 Fuji Heavy Industries Ltd 85,855 700 Hirose Electric Co Ltd 67,726 2,300 Hitachi Chemical Co Ltd 34,184 1,100 Hoya Corp 106,168
See accompanying notes to the financial statements. 4 GMO GLOBAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- JAPAN -- CONTINUED 3,000 Isetan Co Ltd 33,613 1,000 Ito-Yokado Co Ltd 37,011 3,000 JSR Corp 50,246 4,000 Kaneka Corp 38,111 2,000 Kao Corp 49,209 32 KDDI Corp 154,183 600 Keyence Corp 123,266 12,000 Kirin Brewery Co Ltd 108,341 1,100 Kyocera Corp 80,727 6,000 Kyowa Hakko Kogyo Co Ltd 41,526 2,600 Kyushu Electric Power Co Inc 49,612 6,000 Mitsubishi Pharma Corp 67,720 4,000 Mitsui Fudosan Co Ltd 44,311 13,000 Mitsui OSK Lines Ltd 77,396 1,000 Nidec Corp 96,125 10,500 Nippon Mining Holdings Inc 48,419 9,000 Nippon Oil Corp 56,307 11,000 Nippon Yusen Kabushiki Kaisha 57,076 4,000 Nissan Motor Co 43,579 4,000 Nissin Food Products 101,501 3,100 Nitto Denko Corp 136,252 13,000 Nomura Holdings Inc 179,520 3,100 Ono Pharmaceutical Co Ltd 138,150 600 Oriental Land Co Ltd 37,233 1,200 ORIX Corp 123,308 46,000 Osaka Gas Co Ltd 127,230 1,500 Promise Co 95,410 6,000 Sharp Corp 83,913 2,800 Shimano Inc 63,959 9,000 Sumitomo Realty and Development Co Ltd 98,757 4,000 Suzuki Motor Corp 65,264 13,900 Takeda Pharmaceutical Co Ltd 628,421 800 TDK Corp 53,016 10,000 Teijin Ltd 34,775 4,500 Terumo Corp 101,283 18,000 Tobu Railway Co Ltd 67,818
See accompanying notes to the financial statements. 5 GMO GLOBAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- JAPAN -- CONTINUED 2,000 Tokyo Broadcasting System Inc 31,801 6,200 Tokyo Electric Power Co Inc 143,053 11,000 Tokyu Corp 52,889 7,200 Toyota Motor Corp 284,226 4,500 Trend Micro Inc 196,299 22 UFJ Holdings Inc * 111,058 46 Yahoo Japan Corp * 443,805 5,000 Yakult Honsha Co Ltd 76,291 4,000 Yamanouchi Pharmaceutical Co Ltd 138,800 ------------- 7,216,293 ------------- NETHERLANDS -- 1.6% 11,841 ABN Amro Holdings NV 252,155 22,911 ING Groep NV 561,165 ------------- 813,320 ------------- NORWAY -- 1.8% 20,000 DNB Holdings Class A 152,365 2,860 Norsk Hydro ASA 178,497 27,600 Statoil ASA 352,342 8,300 Tandberg ASA 74,347 21,400 Telenor ASA 155,024 ------------- 912,575 ------------- PORTUGAL -- 0.2% 10,482 Portugal Telecom SA 106,891 ------------- SINGAPORE -- 2.2% 11,000 DBS Group Holdings Ltd 100,520 3,800 Flextronics International Ltd * 47,158 23,000 Keppel Corp Ltd 95,685 9,000 Oversea-Chinese Banking Corp 70,060 157,000 Singapore Technologies Engineering Ltd 192,870 436,000 Singapore Telecom Ltd 583,633 ------------- 1,089,926 -------------
See accompanying notes to the financial statements. 6 GMO GLOBAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- SPAIN -- 1.7% 4,791 Altadis SA 149,393 5,891 Gas Natural SDG SA 140,501 10,108 Iberdrola SA 206,565 13,396 Telefonica Moviles SA 138,254 14,169 Telefonica SA 202,229 ------------- 836,942 ------------- SWEDEN -- 2.0% 4,100 Hennes & Mauritz AB Class B 107,178 24,000 Nordea AB 184,424 14,500 Swedish Match AB 147,127 208,000 Telefonaktiebolaget LM Ericsson * 563,974 ------------- 1,002,703 ------------- SWITZERLAND -- 2.3% 571 Nestle SA (Registered) 135,140 3,765 Roche Holding AG (Non Voting) 365,637 291 Serono SA 185,868 1,180 Swisscom AG (Registered) 390,315 1,412 UBS AG (Registered) 95,059 ------------- 1,172,019 ------------- UNITED KINGDOM -- 4.8% 16,551 Barclays Plc 153,175 23,636 BG Group Plc 146,158 13,300 BHP Billiton Plc 125,621 28,462 BP Plc 252,906 14,628 British American Tobacco Plc 220,883 12,944 Cadbury Schweppes Plc 104,073 45,518 Centrica Plc 201,927 31,381 Dixons Group Plc (New Shares) 89,275 12,264 GlaxoSmithKline Plc 250,072 8,739 HBOS Plc 107,151 12,283 Imperial Tobacco Group Plc 271,524 27,689 National Grid Transco Plc 232,010
See accompanying notes to the financial statements. 7 GMO GLOBAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- UNITED KINGDOM -- CONTINUED 2,973 Reckitt Benckiser Plc 78,238 3,099 Royal Bank of Scotland Group 86,496 6,111 Scottish & Southern Energy Plc 81,257 ------------- 2,400,766 ------------- UNITED STATES -- 50.7% 6,600 3M Co 543,576 3,800 Adobe Systems Inc 174,306 2,100 Agilent Technologies Inc * 43,050 1,700 Amazon.com Inc * 64,838 1,300 AMBAC Financial Group Inc 98,150 3,900 AmerisourceBergen Corp 210,990 2,600 Analog Devices Inc 90,272 1,400 Anthem Inc * 113,736 900 Apollo Group Inc Class A * 70,200 8,400 Avon Products Inc 371,112 5,900 Baxter International Inc 180,186 600 Bear Stearns Cos (The) Inc 52,752 2,000 Becton Dickinson & Co 96,240 4,700 Biogen Idec Inc * 278,851 1,400 Boeing Co. (The) 73,108 6,500 Boston Scientific Corp * 232,245 5,900 Broadcom Corp Class A * 160,126 1,700 Burlington Resources Inc 61,591 3,700 Capital One Financial Corp 250,712 4,300 Cardinal Health Inc 194,360 3,600 Carnival Corp 164,844 16,800 Cendant Corp 363,384 41,800 Cisco Systems Inc * 784,168 11,700 Citigroup Inc 544,986 5,000 Coca-Cola Co (The) 223,550 10,200 ConocoPhillips 759,186 8,800 Countrywide Financial Corp 312,840 3,400 Danaher Corp 174,828 5,200 Dell Inc * 181,168 900 Devon Energy Corp 58,329
See accompanying notes to the financial statements. 8 GMO GLOBAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- UNITED STATES -- CONTINUED 5,900 eBay Inc * 510,586 1,300 Electronic Arts Inc * 64,714 10,800 EMC Corp Massachusetts * 116,316 2,800 Estee Lauder Cos Inc (The) Class A 123,060 12,300 Fannie Mae 915,735 1,600 FedEx Corp 131,184 8,100 First Data Corp 342,225 2,900 Forest Laboratories Inc * 132,965 1,900 Fortune Brands Inc 138,985 9,400 Freddie Mac 630,928 15,500 Gap (The) Inc 290,470 6,300 Genentech Inc * 307,314 700 General Dynamics Corp 68,348 11,900 Gillette Co (The) 505,750 1,500 Goldman Sachs Group Inc 134,475 4,300 Guidant Corp 257,140 5,100 Harley Davidson Inc 311,202 18,100 Home Depot Inc 661,736 3,000 Illinois Tool Works Inc 273,870 2,400 International Game Technology 69,240 8,900 Johnson & Johnson 517,090 1,600 Johnson Controls Inc 90,080 1,800 Kimberly Clark Corp 120,060 14,800 King Pharmaceuticals Inc * 184,408 2,300 Lexmark International Inc * 203,435 2,900 Linear Technology Corp 103,733 3,800 Lowe's Cos Inc 188,860 1,100 Marriott International Inc Class A 52,195 3,100 Marsh & McLennan Cos Inc 138,539 3,700 Maxim Integrated Products Inc 160,691 6,900 MBNA Corp 166,566 3,900 McDonald's Corp 105,378 7,800 Merck & Co Inc 350,766 3,400 Metlife Inc 126,650 2,100 MGIC Investment Corp 143,367 50,600 Microsoft Corp 1,381,380 2,200 Molex Inc 54,934
See accompanying notes to the financial statements. 9 GMO GLOBAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------- UNITED STATES -- CONTINUED 900 Moody's Corp 61,704 9,200 Nextel Communications Inc Class A * 213,348 600 Nike Inc Class B 45,186 320 Nippon Television Network Corp 48,278 29,600 Oracle Corp * 295,112 60,200 Pfizer Inc 1,966,734 13,100 Procter & Gamble Co 733,207 900 Progressive Corp (The) 72,270 25,400 Qualcomm Inc 966,470 1,100 Quest Diagnostics Inc 94,160 4,700 Schering-Plough Corp 86,762 2,000 Schlumberger Ltd 123,600 2,400 Staples Inc 68,832 4,300 Starbucks Corp * 185,932 2,000 Stryker Corp 90,600 2,600 Sysco Corp. 83,564 2,400 Target Corp 106,992 14,900 Tenet Healthcare Corp * 155,258 16,000 Time Warner Inc * 261,600 1,600 Transocean Inc * 49,120 2,200 United Parcel Service Class B 160,710 1,500 United Technologies Corp 140,865 4,600 UnitedHealth Group Inc 304,198 3,100 Walgreen Co 112,995 8,500 Wal-Mart Stores Inc 447,695 1,900 Washington Mutual Inc 73,777 2,300 WellPoint Health Networks * 225,814 3,900 Wells Fargo & Co 229,125 3,400 Wyeth 124,338 2,800 Xilinx Inc 76,804 14,700 Yahoo! Inc * 419,097 1,500 Yum! Brands Inc 59,565 3,700 Zimmer Holdings Inc * 263,810 ------------- 25,349,581 ------------- TOTAL COMMON STOCKS (COST $49,867,041) 49,135,897 -------------
See accompanying notes to the financial statements. 10 GMO GLOBAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES / PAR VALUE ($) DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------------- PREFERRED STOCK -- 0.2% GERMANY -- 0.2% 3,858 Volkswagen AG 5.30% 102,391 ------------- TOTAL PREFERRED STOCK (COST $107,313) 102,391 ------------- SHORT-TERM INVESTMENT -- 1.4% CASH EQUIVALENT -- 1.4% 700,000 ING Bank GC Time Deposit, 1.57%, due 09/01/04 700,000 ------------- TOTAL SHORT-TERM INVESTMENT (COST $700,000) 700,000 ------------- TOTAL INVESTMENTS -- 99.8% (Cost $50,674,354) 49,938,288 Other Assets and Liabilities (net) -- 0.2% 103,782 ------------- TOTAL NET ASSETS -- 100.0% $ 50,042,070 =============
NOTES TO SCHEDULE OF INVESTMENTS: * Non-income producing security. (a) When issued security (Note 2). At August 31, 2004, the approximate 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 ---------------- ------------------ ------------------ ---------------- $ 50,674,354 $ 849,000 $ (1,585,066) $ (736,066)
See accompanying notes to the financial statements. 11 GMO GLOBAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY (SHOWING PERCENTAGE OF EQUITY INVESTMENTS) AUGUST 31, 2004 (UNAUDITED) At August 31, 2004, industry sector diversification of the Fund's equity investments was as follows: INDUSTRY SECTOR Financials 18.8% Health Care 18.3 Information Technology 16.0 Consumer Discretionary 11.0 Consumer Staples 9.2 Energy 8.1 Industrials 7.0 Utilities 5.4 Telecommunication Services 4.6 Materials 1.6 -------- 100.0% ========
See accompanying notes to the financial statements. 12 GMO GLOBAL GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments, at value (cost $50,674,354) (Note 2) $ 49,938,288 Cash 24,491 Foreign currency, at value (cost $31,918) (Note 2) 29,460 Dividends and interest receivable 80,721 Foreign taxes receivable 2,085 Receivable for expenses reimbursed by Manager (Note 3) 19,296 --------------- Total assets 50,094,341 =============== LIABILITIES: Payable to affiliate for (Note 3): Management fee 20,325 Shareholder service fee 6,487 Trustees fee 84 Accrued expenses 25,375 --------------- Total liabilities 52,271 --------------- NET ASSETS $ 50,042,070 =============== NET ASSETS CONSIST OF: Paid-in capital $ 50,612,610 Accumulated undistributed net investment income 93,248 Accumulated net realized gain 75,066 Net unrealized depreciation (738,854) --------------- $ 50,042,070 =============== NET ASSETS ATTRIBUTABLE TO: Class III shares $ 50,042,070 =============== SHARES OUTSTANDING: Class III 2,530,631 =============== NET ASSET VALUE PER SHARE: Class III $ 19.77 ===============
See accompanying notes to the financial statements. 13 GMO GLOBAL GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- PERIOD FROM JULY 20, 2004 (COMMENCEMENT OF OPERATIONS) THROUGH AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends (net of withholding taxes of $9,430) $ 122,334 Interest 6,307 --------------- Total income 128,641 --------------- EXPENSES: Management fee (Note 3) 26,703 Shareholder service fee (Note 3) - Class III 8,522 Custodian fees 13,440 Transfer agent fees 3,108 Audit and tax fees 8,022 Legal fees 294 Trustees fees and related expenses (Note 3) 168 Miscellaneous 462 --------------- Total expenses 60,719 Fees and expenses reimbursed by Manager (Note 3) (25,326) --------------- Net expenses 35,393 --------------- Net investment income 93,248 --------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (108,855) Foreign currency, forward contracts and foreign currency related transactions 183,921 --------------- Net realized gain 75,066 --------------- Change in net unrealized appreciation (depreciation) on: Investments (736,066) Foreign currency, forward contracts and foreign currency related transactions (2,788) --------------- Net unrealized loss (738,854) --------------- Net realized and unrealized loss (663,788) --------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (570,540) ===============
See accompanying notes to the financial statements. 14 GMO GLOBAL GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
PERIOD FROM JULY 20, 2004 (COMMENCEMENT OF OPERATIONS) THROUGH AUGUST 31, 2004 (UNAUDITED) ---------------------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 93,248 Net realized gain 75,066 Change in net unrealized appreciation (depreciation) (738,854) -------------- Net decrease in net assets from operations (570,540) -------------- Net share transactions (Note 6): Class III 50,612,610 -------------- Total increase in net assets 50,042,070 NET ASSETS: Beginning of period -- -------------- End of period (including accumulated undistributed net investment income of $93,248) $ 50,042,070 ==============
See accompanying notes to the financial statements. 15 GMO GLOBAL GROWTH FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT THE PERIOD)
PERIOD FROM JULY 20, 2004 (COMMENCEMENT OF OPERATIONS) THROUGH AUGUST 31, 2004 (UNAUDITED) ----------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 20.00 -------- Income from investment operations: Net investment income + 0.04 Net realized and unrealized loss (0.27) -------- Total from investment operations (0.23) -------- NET ASSET VALUE, END OF PERIOD $ 19.77 ======== TOTAL RETURN (a) (1.15)%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 50,042 Net expenses to average daily net assets 0.62%* Net investment income to average daily net assets 1.64%* Portfolio turnover rate 2%** Fees and expenses reimbursed by the Manager to average daily net assets: 0.45%* Purchase premiums and redemption fees consisted of the following per share amounts: $ 0.00(b)
(a) The total return would have been lower had certain expenses not been reimbursed during the period shown. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder. (b) For the period ended August 31, 2004, the Fund received no purchase premiums or redemption fees. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 16 GMO GLOBAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION GMO Global Growth Fund (the "Fund"), which commenced operations on July 20, 2004, 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 through investing primarily in equity securities of both U.S. and non-U.S. issuers. The Fund's benchmark is the S&P/Citigroup (f/k/a Salomon Smith Barney) Primary Market Index ("PMI") World Growth Index. Shares of the Fund are not publicly offered and are principally available only to other GMO funds and certain other accredited investors. 2. SIGNIFICANT ACCOUNTING POLICIES 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. The values of securities which are primarily traded on foreign exchanges are 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. For other assets, and in cases where market prices are not readily available or the Manager believes established valuation methodologies are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value. Because many foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur 17 GMO GLOBAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) after that close but before the close of the NYSE. As a result, foreign equity securities held by the Fund are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available. 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 foreign currency contracts outstanding as of August 31, 2004. 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. 18 GMO GLOBAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, 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. There were no open futures contracts as of August 31, 2004. 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. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying investment increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of August 31, 2004, 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 closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. As of August 31, 2004, 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. 19 GMO GLOBAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 using standard models that incorporate 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 on swap contracts 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 August 31, 2004, there were 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 or enters insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. There were no open repurchase agreements as of August 31, 2004. 20 GMO GLOBAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. As of August 31, 2004, 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 generally withheld in accordance with the applicable country's tax treaty with the United States. The foreign withholding tax rates applicable to a Fund's investments in certain foreign jurisdictions may be higher if a significant portion of the Fund is held by non-U.S. shareholders. As of August 31, 2004, 100% of the Fund was held by a non-U.S. shareholder. 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. 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. 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. 21 GMO GLOBAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. 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. PURCHASE AND REDEMPTION OF FUND SHARES The premium on cash purchases and fee on redemptions of Fund shares are each 0.30%. If the Manager determines that any portion of a cash purchase or redemption is offset by a corresponding cash redemption or purchase occurring on the same day, it will waive the purchase premium or redemption fee with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived in extraordinary circumstances if the Fund will not incur transactions costs. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in-capital. For the period ended August 31, 2004, the Fund received no purchase premiums or redemptions fees. There is no premium for reinvested distributions or in-kind transactions. INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments 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. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.47% 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 0.15% for Class III shares. GMO has entered into a binding agreement effective until at least June 30, 2005 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 0.47% of average daily net assets. 22 GMO GLOBAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) The Fund's portion of the fee paid by the Trust to the independent Trustees during the period ended August 31, 2004 was $84. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the period August 31, 2004 aggregated $51,283,541 and $1,200,332, respectively. 5. PRINCIPAL SHAREHOLDER At August 31, 2004, 100% of the outstanding shares of the Fund was held by one shareholder. Investment activities of this shareholder may have a material effect on the Fund. 6. SHARE TRANSACTIONS The Declaration of Trust permits the Trustees to issue an unlimited number of shares of beneficial interest (without par value). Transactions in Fund shares were as follows:
PERIOD FROM JULY 20, 2004 (COMMENCEMENT OF OPERATIONS) THROUGH AUGUST 31, 2004 (UNAUDITED) ------------------------------ SHARES AMOUNT ------------- ------------- Class III: Shares sold 2,530,631 $ 50,612,610 Shares issued to shareholders in reinvestment of distributions -- -- Shares repurchased -- -- ------------- ------------- Net increase 2,530,631 $ 50,612,610 ============= =============
7. SUBSEQUENT EVENTS Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 23 GMO GLOBAL GROWTH FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees and other expenses. The following table, assuming a $1,000 investment in a class of shares, discloses the ending account value and operating expenses incurred for the period ended August 31, 2004, based on, (1) the class's actual return and actual expenses, and (2) a hypothetical annualized 5% return and the class's actual expenses: Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * ------------------------------------------------------------------- 1) Actual $ 1,000.00 $ 988.50 $ 0.73 2) Hypothetical 1,000.00 1,005.16 0.73
*Expenses are calculated using the Class III annualized expense ratio for the period ended August 31, 2004 of 0.62%, multiplied by the average account value over the period, multiplied by 43 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the period ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 24 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
DESCRIPTION % OF NET ASSETS - ------------------------------------------------------------------------------------- Australia 4.0% Austria 1.0 Belgium 2.8 Canada 5.6 Denmark 0.5 Finland 1.8 France 4.1 Germany 7.8 Greece 0.4 Hong Kong 2.1 Ireland 0.7 Italy 3.1 Japan 23.5 Netherlands 5.4 New Zealand 0.2 Norway 1.8 Singapore 1.2 Spain 2.3 Sweden 1.9 Switzerland 4.4 United Kingdom 18.6 Forward Currency Contracts 0.0 Futures (0.1) Short-Term Investments and Other Assets and Liabilities (net) 6.9 ---------------- 100.0% ================
See accompanying notes to the financial statements. 1 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------------- COMMON STOCKS -- 92.4% AUSTRALIA -- 4.0% 416,584 Aristocrat Leisure Ltd 2,076,934 138,065 Australia and New Zealand Banking Group Ltd 1,795,002 400,097 BHP Billiton Ltd 3,732,484 397,576 BlueScope Steel Ltd 2,221,224 156,174 CSL Ltd 2,864,229 84,000 Macquarie Bank Ltd 2,022,619 150,655 National Australia Bank Ltd 2,842,076 29,394 Perpetual Trustees Australia Ltd 959,661 136,418 QBE Insurance Group Ltd 1,226,079 246,204 Rinker Group Ltd 1,522,257 407,942 Santos Ltd 1,901,913 444,788 Telstra Corp Ltd 1,508,277 202,874 Toll Holdings Ltd 1,573,118 747,033 WMC Resources Ltd 2,649,509 443,463 Woodside Petroleum Ltd 5,675,493 ------------- 34,570,875 ------------- AUSTRIA -- 1.0% 24,610 Bank Austria Creditanstalt AG 1,562,066 52,332 Erste Bank Der Oesterreichischen Sparkassen AG 1,993,526 3,676 Mayr-Melnhof Karton AG (Bearer) 486,740 12,365 OMV AG 2,830,343 50,222 Wienerberger AG 1,821,822 ------------- 8,694,497 ------------- BELGIUM -- 2.8% 61,535 Almanij NV 3,856,285 9,001 Colruyt SA 1,186,717 209,496 Dexia 3,620,113 15,985 Electrabel SA 5,365,817 88,191 Fortis 1,969,502
See accompanying notes to the financial statements. 2 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------------- BELGIUM -- CONTINUED 45,548 KBC Bancassurance Holding 2,747,077 113,677 UCB SA 5,546,057 ------------- 24,291,568 ------------- CANADA -- 5.6% 1,402,100 Bombardier Inc Class B 3,224,319 56,900 Brascan Corp 1,608,626 30,600 Canadian Imperial Bank of Commerce 1,555,546 216,900 Canadian Natural Resources 7,030,813 25,200 EnCana Corp 1,026,284 20,300 Imperial Oil Ltd 948,289 23,400 Magna International Inc Class A 1,746,475 90,300 Manulife Financial Corp 3,735,087 88,500 Nexen Inc 3,146,801 34,600 Petro-Canada 1,614,982 48,800 PetroKazakhstan Inc 1,462,963 48,900 QLT Inc * 755,990 161,500 Research In Motion Ltd * 9,699,070 18,000 Royal Bank of Canada 811,749 55,200 Shoppers Drug Mart Corp * 1,424,408 75,100 Sun Life Financial Inc 2,079,841 137,500 Talisman Energy Inc 3,136,954 115,900 Teck Cominco Ltd Class B 2,265,046 51,400 Toronto-Dominion Bank 1,782,382 ------------- 49,055,625 ------------- DENMARK -- 0.5% 175 AP Moller - Maersk A/S 1,187,414 129,600 H. Lundbeck A/S 2,338,265 68,800 Vestas Wind Systems A/S * 896,100 ------------- 4,421,779 -------------
See accompanying notes to the financial statements. 3 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------------- FINLAND -- 1.8% 1,179,950 Nokia Oyj 13,939,275 84,900 Sampo Oyj Class A 839,320 44,520 Tietoenator Oyj 1,177,615 ------------- 15,956,210 ------------- FRANCE -- 4.1% 16,227 BNP Paribas 986,951 59,892 Bouygues 2,067,617 25,604 Essilor International SA 1,571,507 16,404 Lafarge SA 1,412,990 14,749 Pernod Ricard 1,825,192 68,739 Peugeot SA 4,137,161 19,906 Pinault-Printemps-Redoute SA 1,822,373 6,111 Sanofi-Aventis * 434,462 21,514 Societe Generale 1,845,900 80,948 Total SA 15,837,412 65,527 Veolia Environnement 1,695,444 21,875 Vinci 2,341,119 ------------- 35,978,128 ------------- GERMANY -- 7.0% 13,103 Adidas-Salomon AG 1,687,008 36,607 Allianz AG (Registered) 3,541,270 34,894 Altana AG 1,899,395 15,426 Deutsche Bank AG (Registered) 1,056,938 50,449 Deutsche Post AG 1,006,727 64,238 E. On AG 4,577,379 49,797 Merck KGaA 2,625,731 24,753 Metro AG 1,149,870 64,687 MLP AG 954,147 59,649 Mobilcom AG 807,649 14,175 Puma AG Rudolf Dassler Sport 3,473,924 132,481 RWE AG 6,501,541 18,307 SAP AG 2,667,820 149,055 Schering AG 8,293,468
See accompanying notes to the financial statements. 4 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------------- GERMANY -- CONTINUED 219,652 Siemens AG (Registered) 15,144,295 186,036 T-Online International * 1,792,370 96,417 Volkswagen AG 3,730,003 ------------- 60,909,535 ------------- GREECE -- 0.4% 70,650 Cosmote Mobile Communications SA 1,143,187 116,070 National Bank of Greece SA 2,540,418 ------------- 3,683,605 ------------- HONG KONG -- 2.1% 418,000 Bank of East Asia 1,149,604 1,187,500 BOC Hong Kong Holdings Ltd 2,139,462 227,000 Cheung Kong Holdings 1,961,953 456,000 CLP Holdings Ltd 2,639,298 245,500 Esprit Holdings Ltd 1,184,271 2,902,000 Giordano International Ltd 1,631,902 780,500 Hong Kong Electric Holdings Ltd 3,489,408 468,000 Hong Kong Exchanges and Clearing Ltd 1,026,871 838,000 Li & Fung Ltd 1,076,826 1,045,000 Techtronic Industries Co 1,647,895 ------------- 17,947,490 ------------- IRELAND -- 0.7% 221,251 Anglo Irish Bank Corp 3,692,240 62,649 CRH Plc 1,423,722 53,241 Kerry Group Plc 1,108,305 ------------- 6,224,267 ------------- ITALY -- 3.1% 3 Banca Intesa SPA (Savings Shares) 9 145,748 Bulgari SPA 1,367,832 522,292 Enel SPA 4,042,351 942,764 ENI SPA 19,368,753
See accompanying notes to the financial statements. 5 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------------- ITALY -- CONTINUED 187,842 Parmalat Finanziaria SPA *(a)(b) 2,283 321,880 Telecom Italia Mobile SPA 1,715,367 ------------- 26,496,595 ------------- JAPAN -- 23.5% 63,860 Acom Co Ltd 4,214,207 44,600 Aeon Co Ltd 746,963 44,600 Aeon Co Ltd *(c) 729,482 23,600 Aeon Credit Service Co Ltd 1,536,127 40,550 Aiful Corp 4,064,378 39,400 Benesse Corp 1,189,167 31,300 Canon Inc 1,496,673 216,900 Chubu Electric Power Co Inc 4,765,571 23,700 CSK Corp 1,024,022 93,000 Daiichi Pharmaceuticals Co Ltd 1,613,211 38,000 Denso Corp 935,591 1,287 Dentsu Inc 3,112,743 101,000 Eisai Co Ltd 2,884,670 43,900 FamilyMart 1,241,200 15,700 Fanuc Ltd 839,519 27,000 Fast Retailing Co Ltd 1,949,287 410,000 Fuji Heavy Industries Ltd 2,070,616 39,900 Fuji Soft ABC Inc 1,375,237 785 Fuji Television Network Inc 1,729,145 31,000 Fujisawa Pharmaceutical Co Ltd 739,053 661,000 Furukawa Electric Co Ltd * 2,675,720 372 Goodwill Group (The) Inc 820,559 9,600 Hirose Electric Co Ltd 928,809 68,300 Hitachi Chemical Co Ltd 1,015,119 20,400 Hoya Corp 1,968,933 16,500 Ito En Ltd 710,896 32,000 Ito-Yokado Co Ltd 1,184,349 69,000 JSR Corp 1,155,655 90,000 Kansai Electric Power Co Inc 1,652,019 329 KDDI Corp 1,585,195
See accompanying notes to the financial statements. 6 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------------- JAPAN -- CONTINUED 6,200 Keyence Corp 1,273,753 54,000 Konami Corp 1,210,323 80,400 Kyocera Corp 5,900,402 85,000 Leopalace21 Corp 1,663,064 454,000 Mitsubishi Electric Corp 2,199,892 2,690 Mitsubishi Tokyo Finance Group Inc 24,284,247 316,000 Mitsui Mining & Smelting Co Ltd 1,289,002 244,000 Mitsui OSK Lines Ltd 1,452,663 94,000 Mitsui Sumitomo Insurance Co Ltd 835,613 56,000 Murata Manufacturing Co Ltd 2,778,020 336 NET One Systems Co Ltd 1,214,406 13,900 Nidec Corp 1,336,132 85,000 Nikon Corp 787,597 13,300 Nintendo Co Ltd 1,433,165 463,000 Nippon Mining Holdings Inc 2,135,031 38,300 Nissin Food Products 971,873 50,800 Nitto Denko Corp 2,232,780 398 NTT Data Corp 1,115,551 57,900 Ono Pharmaceutical Co Ltd 2,580,280 28,500 Oriental Land Co Ltd 1,768,568 43,000 ORIX Corp 4,418,538 768,000 Osaka Gas Co Ltd 2,124,187 49,500 Promise Co 3,148,531 210 Rakuten Inc 1,457,873 16,000 Ryohin Keikaku Co Ltd 738,357 19,300 Sammy Corp 965,007 150,000 Sankyo Co Ltd 3,145,825 7,700 SMC Corp 740,977 214,000 Sumitomo Realty and Development Co Ltd 2,348,223 198,000 Taisho Pharmaceutical Co Ltd 3,781,887 90,000 Taiyo Yuden Co Ltd 1,047,802 539,700 Takeda Pharmaceutical Co Ltd 24,399,925 18,000 Takefuji Corp 1,258,844 75,200 Terumo Corp 1,692,554 21,000 TIS Inc 766,493 201,900 Tohoku Electric Power Co Inc 3,448,045
See accompanying notes to the financial statements. 7 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------------- JAPAN -- CONTINUED 57,100 Tokyo Electric Power Co Inc 1,317,476 22,800 Tokyo Electron Ltd 1,170,464 566,000 Tokyo Gas Co 2,081,234 381,000 Tokyu Corp 1,831,895 231,000 Toppan Printing Co Ltd 2,394,297 455,000 Toyota Motor Corp 17,961,490 83,000 Trend Micro Inc 3,620,624 162 Yahoo Japan Corp * 1,562,964 87,000 Yamaha Motor Co Ltd 1,284,295 87,000 Yamanouchi Pharmaceutical Co Ltd 3,018,904 120,000 Yamato Transport Co Ltd 1,829,226 ------------- 203,972,415 ------------- NETHERLANDS -- 5.4% 193,865 ABN Amro Holdings NV 4,128,373 36,089 Akzo Nobel NV 1,217,613 77,972 Heineken NV 2,357,187 1,182,982 ING Groep NV 28,975,107 1,036,057 Koninklijke Ahold NV * 6,429,571 41,869 Royal Dutch Petroleum 2,120,901 44,958 Royal Numico NV * 1,416,110 ------------- 46,644,862 ------------- NEW ZEALAND -- 0.2% 477,085 Telecom Corp of New Zealand 1,793,246 ------------- NORWAY -- 1.8% 164,660 DNB Holdings Class A 1,254,419 75,400 Frontline Ltd 2,820,944 35,820 Norsk Hydro ASA 2,235,579 77,900 Orkla ASA 1,969,439 289,200 Statoil ASA 3,691,932 242,500 Tandberg ASA 2,172,180 191,200 Telenor ASA 1,385,072 ------------- 15,529,565 -------------
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) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------------- SINGAPORE -- 1.2% 276,000 DBS Group Holdings Ltd 2,522,125 363,000 Keppel Corp Ltd 1,510,166 233,000 Oversea-Chinese Banking Corp 1,813,779 549,000 Singapore Press Holdings Ltd 1,388,169 2,395,000 Singapore Telecom Ltd * 3,205,967 ------------- 10,440,206 ------------- SPAIN -- 2.3% 116,631 Altadis SA 3,636,793 102,329 Banco Santander Central Hispano SA 1,006,225 259,823 Endesa SA 4,819,836 61,729 Gamesa Corp Tecnologica SA 872,646 164,834 Gas Natural SDG SA 3,931,314 108,802 Iberdrola SA 2,223,451 171,086 Union Fenosa SA 3,803,683 ------------- 20,293,948 ------------- SWEDEN -- 1.9% 135,800 Assa Abloy AB 1,642,719 154,900 Getinge AB 1,723,197 58,450 Modern Times Group AB * 1,108,658 293,000 Nordea AB 2,251,511 165,300 Securitas AB 2,060,576 216,900 Skanska AB Class B 1,956,474 375,500 Swedish Match AB 3,810,084 46,550 Tele2 AB Class B 1,762,344 ------------- 16,315,563 ------------- SWITZERLAND -- 4.4% 105,282 Compagnie Financiere Richemont AG 2,696,707 3,298 Julius Baer Holding AG 887,859 51,494 Kudelski SA * 1,494,213 34,549 Micronas Semiconductor Holding AG (Registered) * 1,338,282 63,558 Phonak Holding AG 1,920,579 71,019 Roche Holding AG (Non Voting) 6,896,989
See accompanying notes to the financial statements. 9 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------------- SWITZERLAND -- CONTINUED 3,804 Serono SA 2,429,691 16,002 Straumann Holding AG 3,134,714 19,799 Swisscom AG (Registered) 6,549,017 162,503 UBS AG (Registered) 10,940,019 ------------- 38,288,070 ------------- UNITED KINGDOM -- 18.6% 494,924 Allied Domecq Plc 3,968,884 36,283 AstraZeneca Plc 1,672,551 802,872 Barclays Plc 7,430,338 143,963 Barratt Developments Plc 1,534,470 2,089,271 BP Plc 18,564,706 242,121 British American Tobacco Plc 3,656,034 663,719 Cadbury Schweppes Plc 5,336,452 2,558,818 Centrica Plc 11,351,456 54,327 Cobham Group Plc 1,329,579 87,569 Daily Mail & General Trust Plc 1,078,088 2,446,646 Dixons Group Plc (New Shares) 6,960,364 160,756 Enterprise Inns Plc 1,588,532 345,612 Gallaher Group Plc 4,114,978 146,985 GlaxoSmithKline Plc 2,997,133 655,928 Hays Plc 1,403,352 185,217 HBOS Plc 2,270,998 613,873 Imperial Tobacco Group Plc 13,570,079 1,323,144 Lloyds TSB Group Plc 9,951,194 100,232 MAN Group Plc 2,389,950 4,465,796 mmO2 Plc * 7,240,010 410,573 Morrison Supermarkets 1,335,759 1,615,172 National Grid Transco Plc 13,533,767 269,676 Next Plc 7,241,008 145,903 Northern Rock Plc 1,867,621 161,500 Persimmon Plc 1,950,011 358,926 Reuters Group Plc 2,081,704 119,347 Royal Bank of Scotland Group 3,331,102 393,725 Sage Group Plc 1,163,015
See accompanying notes to the financial statements. 10 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES/ PAR VALUE ($) DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------------- UNITED KINGDOM -- CONTINUED 285,141 Scottish & Southern Energy Plc 3,791,451 502,344 Shell Transport & Trading Co Plc (Registered) 3,668,988 122,898 Smith & Nephew Plc 1,107,316 1,017,497 Tesco Plc 4,882,662 173,802 William Hill Plc 1,701,033 170,080 Wolseley Plc 2,610,344 303,837 WPP Group Plc 2,728,073 ------------- 161,403,002 ============= TOTAL COMMON STOCKS (COST $770,942,085) 802,911,051 ============= PREFERRED STOCKS -- 0.8% GERMANY -- 0.8% 18,579 Fresenius AG (Non Voting) 4.08% 1,388,402 6,217 Porsche AG (Non Voting) 0.83% 3,787,894 71,411 Volkswagen AG 5.30% 1,895,245 ------------- 7,071,541 ------------- TOTAL PREFERRED STOCKS (COST $7,428,941) 7,071,541 ------------- SHORT-TERM INVESTMENTS -- 5.9% CASH EQUIVALENTS -- 5.4% 3,900,000 Dresdner GC Time Deposit, 1.57%, due 09/01/04 3,900,000 42,900,000 HBOS Treasury Time Deposit, 1.56%, due 09/01/04 42,900,000 ------------- 46,800,000 ------------- U.S. GOVERNMENT -- 0.5% 4,600,000 U.S. Treasury Bill, 0.96%, due 9/23/04 (d)(e) 4,597,274 ------------- TOTAL SHORT-TERM INVESTMENTS (COST $51,397,274) 51,397,274 -------------
See accompanying notes to the financial statements. 11 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------------- TOTAL INVESTMENTS -- 99.1% (Cost $829,768,300) 861,379,866 Other Assets and Liabilities (net) -- 0.9% 7,749,512 ------------- TOTAL NET ASSETS -- 100.0% $ 869,129,378 =============
NOTES TO SCHEDULE OF INVESTMENTS: * Non-income producing security. (a) Bankrupt issuer. (b) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 2). (c) When issued security (Note 2). (d) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 2). (e) Rate shown represents yield to maturity. CURRENCY ABBREVIATIONS: AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc DKK - Danish Krone EUR - Euro GBP - British Pound HKD - Hong Kong Dollar JPY - Japanese Yen NOK - Norwegian Krone NZD - New Zealand Dollar SEK - Swedish Krona SGD - Singapore Dollar See accompanying notes to the financial statements. 12 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) At August 31, 2004, the approximate 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 ---------------------- ------------------- ------------------- ------------------ $ 831,349,566 $ 60,024,327 $ (29,994,027) $ 30,030,300
A summary of outstanding financial instruments at August 31, 2004 is as follows: FORWARD CURRENCY CONTRACTS
NET UNREALIZED UNITS OF APPRECIATION/ SETTLEMENT DATE DELIVER/RECEIVE CURRENCY VALUE (DEPRECIATION) - ----------------- ------------------- --------------- ---------------- ---------------- Buys 11/26/04 CHF 14,485,912 $ 11,455,887 $ 6,216 11/26/04 JPY 4,505,030,404 41,223,493 (18,309) 11/26/04 NOK 84,051,653 12,163,052 (72,191) 11/26/04 NZD 1,092,973 709,444 3,701 11/26/04 SEK 214,743,760 28,560,276 196,458 11/26/04 SGD 11,853,090 6,929,774 (4,494) ---------------- $ 111,381 ================ Sales 11/26/04 AUD 19,933,017 $ 13,956,119 $ 40,833 11/26/04 CAD 37,993,743 28,800,725 269,323 11/26/04 DKK 19,375,531 3,162,715 (23,371) 11/26/04 EUR 21,103,570 25,626,751 (100,877) 11/26/04 GBP 4,700,938 8,395,887 108,023 11/26/04 HKD 77,583,452 9,969,187 3,767 ---------------- $ 297,698 ================
See accompanying notes to the financial statements. 13 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) FUTURES CONTRACTS
NET UNREALIZED NUMBER OF APPRECIATION CONTRACTS TYPE EXPIRATION DATE CONTRACT VALUE (DEPRECIATION) - ----------------- ------------------- --------------- ---------------- ---------------- Buys 33 CAC 40 September 2004 $ 1,446,784 $ (20,416) 27 DAX September 2004 3,113,143 29,977 22 Hang Seng September 2004 1,807,678 792 20 MIB30 September 2004 3,295,772 (18,921) 316 MSCI September 2004 8,551,164 6,401 169 OMX September 2004 1,543,445 (3,948) 17 SPI 200 September 2004 1,064,203 (5,759) 417 TOPIX September 2004 42,936,808 (496,012) ---------------- $ (507,886) ================ Sales 301 FTSE 100 September 2004 $ 24,225,992 $ (539,464) ================
At August 31, 2004, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. See accompanying notes to the financial statements. 14 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED) At August 31, 2004, industry sector diversification of the Fund's equity investments was as follows: INDUSTRY SECTOR Financials 23.0% Energy 12.3 Consumer Discretionary 12.0 Health Care 11.5 Utilities 10.8 Consumer Staples 8.5 Information Technology 8.3 Industrials 7.0 Telecommunication Services 3.8 Materials 2.8 -------- 100.0% ========
See accompanying notes to the financial statements. 15 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments, at value (cost $829,768,300) (Note 2) $ 861,379,866 Cash 67,086 Foreign currency, at value (cost $324,370) (Note 2) 700,791 Receivable for Fund shares sold 4,491,000 Dividends and interest receivable 2,399,921 Foreign taxes receivable 368,653 Receivable for open forward foreign currency contracts (Note 2) 628,321 Receivable for expenses reimbursed by Manager (Note 3) 49,941 --------------- Total assets 870,085,579 --------------- LIABILITIES: Payable for Fund shares repurchased 897 Payable to affiliate for (Note 3): Management fee 380,443 Shareholder service fee 105,679 Trustees fee 947 Payable for open forward foreign currency contracts (Note 2) 219,242 Payable for variation margin on open futures contracts (Note 2) 199,957 Accrued expenses 49,036 --------------- Total liabilities 956,201 --------------- NET ASSETS $ 869,129,378 =============== NET ASSETS CONSIST OF: Paid-in capital $ 815,839,037 Accumulated undistributed net investment income 7,162,100 Accumulated net realized gain 14,787,135 Net unrealized appreciation 31,341,106 --------------- $ 869,129,378 =============== NET ASSETS ATTRIBUTABLE TO: Class III shares $ 869,129,378 =============== SHARES OUTSTANDING: Class III 37,993,688 =============== NET ASSET VALUE PER SHARE:
See accompanying notes to the financial statements. 16 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) Class III $ 22.88 ===============
See accompanying notes to the financial statements. 17 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends (net of withholding taxes of $1,533,660) $ 11,700,308 Interest 315,983 --------------- Total income 12,016,291 --------------- EXPENSES: Management fee (Note 3) 1,892,011 Shareholder service fee (Note 3) - Class III 525,559 Custodian fees 218,868 Transfer agent fees 16,284 Audit and tax fees 21,712 Legal fees 8,280 Trustees fees and related expenses (Note 3) 4,126 Registration fees 5,612 Miscellaneous 3,036 --------------- Total expenses 2,695,488 Fees and expenses reimbursed by Manager (Note 3) (273,792) --------------- Net expenses 2,421,696 --------------- Net investment income 9,594,595 --------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 16,962,688 Closed futures contracts 418,359 Foreign currency, forward contracts and foreign currency related transactions (1,685,741) --------------- Net realized gain 15,695,306 --------------- Change in net unrealized appreciation (depreciation) on: Investments (36,369,985) Open futures contracts (961,360) Foreign currency, forward contracts and foreign currency related transactions (891,327) --------------- Net unrealized loss (38,222,672) --------------- Net realized and unrealized loss (22,527,366) ---------------
See accompanying notes to the financial statements. 18 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (12,932,771) ===============
See accompanying notes to the financial statements. 19 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 9,594,595 $ 4,037,154 Net realized gain 15,695,306 20,744,983 Change in net unrealized appreciation (depreciation) (38,222,672) 79,870,796 ---------------- ----------------- Net increase (decrease) in net assets from operations (12,932,771) 104,652,933 ---------------- ----------------- Distributions to shareholders from: Net investment income Class III (2,868,750) (4,380,170) Net realized gains Class III (6,156,531) -- ---------------- ----------------- (9,025,281) (4,380,170) ---------------- ----------------- Net share transactions (Note 6): Class III 325,983,293 286,027,335 ---------------- ----------------- Total increase in net assets 304,025,241 386,300,098 NET ASSETS: Beginning of period 565,104,137 178,804,039 ---------------- ----------------- End of period (including accumulated undistributed net investment income of $7,162,100 and $436,255, respectively) $ 869,129,378 $ 565,104,137 ================ =================
See accompanying notes to the financial statements. 20 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ---------------------------------------- (UNAUDITED) 2004 2003 2002(a) ---------------- ---------- ---------- ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 23.67 $ 16.83 $ 19.65 $ 20.00 --------- ---------- ---------- ------------ Income from investment operations: Net investment income + 0.32 0.29 0.25 0.01 Net realized and unrealized gain (loss) (0.83) 6.81 (2.46) (0.36) --------- ---------- ---------- ------------ Total from investment operations (0.51) 7.10 (2.21) (0.35) --------- ---------- ---------- ------------ Less distributions to shareholders: From net investment income (0.09) (0.26) (0.61) -- From net realized gains (0.19) -- -- -- --------- ---------- ---------- ------------ Total distributions (0.28) (0.26) (0.61) -- --------- ---------- ---------- ------------ NET ASSET VALUE, END OF PERIOD $ 22.88 $ 23.67 $ 16.83 $ 19.65 ========= ========== ========== ============ TOTAL RETURN (b) (2.18)%** 42.33% (11.40)% (1.75)%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 869,129 $ 565,104 $ 178,804 $ 84,884 Net expenses to average daily net assets 0.69%* 0.69% 0.69% 0.69%* Net investment income to average daily net assets 1.38%(c)** 1.38% 1.32% 0.36%* Portfolio turnover rate 28%** 63% 78% 15%** Fees and expenses reimbursed by the Manager to average daily net assets: 0.08%* 0.16% 0.22% 0.65%*
(a) Period from November 30, 2001 (commencement of operations) through February 28, 2002. (b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (c) The ratio for the six months ended August 31, 2004, has not been annualized since the Fund believes it would not be appropriate because the Fund's dividend income is not earned ratably throughout the fiscal year. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 21 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION GMO International 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, 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 S&P/Citigroup Primary Market Index ("PMI") Europe, Pacific, Asia Composite ("EPAC") Growth Style Index. 2. SIGNIFICANT ACCOUNTING POLICIES 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. The values of securities which are primarily traded on foreign exchanges are 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. For other assets, and in cases where market prices are not readily available or the Manager believes established valuation methodologies are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value. Because many foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, foreign equity securities held by the Fund are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available. 22 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 in the Schedule of Investments and represents the currency exposure the Fund has acquired or hedged through currency contracts as of August 31, 2004. 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. 23 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, 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 the Schedule of Investments for all open futures contracts as of August 31, 2004. 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. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying investment increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of August 31, 2004, 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 closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. As of August 31, 2004, 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 24 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 using standard models that incorporate 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 on swap contracts 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 August 31, 2004, 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. As of August 31, 2004, 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 generally withheld in accordance with the applicable country's tax treaty with the United States. 25 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. 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. 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. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. 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. 26 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.54% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% for Class III shares. GMO has entered into a binding agreement effective until at least June 30, 2005 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 0.54% of average daily net assets. The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $2,655. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004 aggregated $520,686,427 and $178,217,105, respectively. 5. PRINCIPAL SHAREHOLDERS AND RELATED PARTIES At August 31, 2004, 55.4% 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. Two of the shareholders are other funds of GMO Trust. Investment activities of these shareholders may have a material effect on the Fund. At August 31, 2004, less than 0.1% of the Fund was held by three related parties comprised of certain GMO employee accounts. As of August 31, 2004, substantially all of the Fund's shares were held by accounts for which the Manager has investment discretion. 27 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ------------------------------- ------------------------------- SHARES AMOUNT SHARES AMOUNT -------------- -------------- -------------- -------------- CLASS III: Shares sold 14,114,632 $ 325,865,318 16,620,211 $ 350,493,589 Shares issued to shareholders in reinvestment of distributions 370,256 8,671,400 192,384 4,193,777 Shares repurchased (365,822) (8,553,425) (3,559,625) (68,660,031) -------------- -------------- -------------- -------------- Net increase 14,119,066 $ 325,983,293 13,252,970 $ 286,027,335 ============== ============== ============== ==============
7. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 28 GMO INTERNATIONAL GROWTH FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees and other expenses. The following table, assuming a $1,000 investment in a class of shares, discloses the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the class's actual return and actual expense, and (2) a hypothetical annualized 5% return and the class's actual expense: Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * - ------------------------------------------------------------------------ 1) Actual $ 1,000.00 $ 978.20 $ 3.44 2) Hypothetical 1,000.00 1,021.73 3.52
*Expenses are calculated using the Class III annualized expense ratio for the six months ended August 31, 2004 of 0.69%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 29 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
DESCRIPTION % OF NET ASSETS - ------------------------------------------------------------------------------------------------ Australia 3.3% Austria 2.2 Belgium 3.6 Canada 1.5 Finland 1.6 France 3.8 Germany 7.5 Greece 0.4 Hong Kong 2.2 Ireland 0.8 Italy 4.4 Japan 24.2 Malaysia 0.0 Netherlands 7.3 Norway 3.1 Singapore 1.9 Spain 2.5 Sweden 2.4 Switzerland 3.5 United Kingdom 18.9 Forward Currency Contracts (0.0) Futures (0.2) Short-Term Investments and Other Assets and Liabilities (net) 5.1 --------------- 100.0% ===============
See accompanying notes to financial statements. 1 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ COMMON STOCKS -- 94.4% AUSTRALIA -- 3.3% 1,030,676 Australia and New Zealand Banking Group Ltd 13,399,963 564,966 BlueScope Steel Ltd 3,156,419 310,537 Boral Ltd 1,546,600 393,595 Caltex Australia Ltd 2,552,908 2,184,424 General Property Trust Units 5,504,059 879,229 National Australia Bank Ltd 16,586,477 1,200 National Australia Bank Ltd ADR 112,968 491,390 Rinker Group Ltd 3,038,219 689,013 Santos Ltd 3,212,326 1,163,279 Stockland 4,632,811 3,516,256 Telstra Corp Ltd 11,923,634 785,935 Westfield Group *(a) 8,563,465 525,665 Westpac Banking Corp 6,267,684 580,545 Woodside Petroleum Ltd 7,429,885 --------------- 87,927,418 --------------- AUSTRIA -- 2.2% 115,624 Austrian Airlines * 1,489,391 113,064 Boehler Uddeholm (Bearer) 9,466,688 41,612 Erste Bank Der Oesterreichischen Sparkassen AG 1,585,160 82,171 Flughafen Wien AG 4,718,939 60,426 Generali Holding Vienna AG (a) 1,838,478 22,476 Mayr-Melnhof Karton AG (Bearer) 2,976,052 81,964 OMV AG 18,761,524 165,744 RHI AG * 3,587,747 46,745 VA Technologie AG (Bearer) * 3,045,535 157,795 Voestalpine AG (a) 7,740,055 112,170 Wienerberger AG (a) 4,069,008 --------------- 59,278,577 ---------------
See accompanying notes to financial statements. 2 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ BELGIUM -- 3.6% 168,625 Almanij NV 10,567,418 8,108 Bekaert SA 508,931 26,257 Colruyt SA 3,461,796 164,353 Delhaize Group (a) 9,250,815 821,491 Dexia (a) 14,195,453 33,600 Electrabel SA 11,278,789 925,649 Fortis 20,671,808 277,769 KBC Bancassurance Holding 16,752,719 233,579 UCB SA 11,395,818 --------------- 98,083,547 --------------- CANADA -- 1.5% 130,800 BCE Inc 2,715,073 254,400 Canadian Natural Resources 8,246,375 257,000 EnCana Corp 10,466,469 48,500 Magna International Inc Class A 3,619,832 74,000 Manulife Financial Corp 3,060,868 163,600 National Bank of Canada 5,363,934 90,200 Quebecor Inc Class B 1,855,891 137,600 Royal Bank of Canada 6,205,367 --------------- 41,533,809 --------------- FINLAND -- 1.6% 52,300 Finnair Class A 300,691 353,400 Fortum Oyj 4,964,612 181,300 Kesko Oyj Class B (a) 3,958,585 2,138,450 Nokia Oyj 25,262,462 209,054 Rautaruukki Oyj 1,907,101 563,200 Sampo Oyj Class A (a) 5,567,784 38,100 Stockmann Oyj AB Class A 885,298 9,850 Stockmann Oyj AB Class B (a) 230,915 23,400 Wartsila Oyj Class A 538,008 --------------- 43,615,456 ---------------
See accompanying notes to financial statements. 3 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ FRANCE -- 3.8% 305,480 BNP Paribas 18,579,755 32,081 Bongrain SA 2,030,602 259,829 Cie de Saint-Gobain 13,110,431 7,260 Eurazeo 468,365 5,470 Fromageries Bel Vache qui Rit (a) 866,856 595,567 Havas SA (a) 2,849,354 52,504 Imerys SA 3,278,997 22,001 Pernod Ricard 2,722,629 106,904 Sanofi-Aventis (Foreign Registered) (a) 7,603,671 1,707,322 SCOR SA * (a) 2,462,086 199,030 Societe Generale (a) 17,076,761 663,191 Suez SA 12,912,139 95,693 Total SA 18,722,259 --------------- 102,683,905 --------------- GERMANY -- 6.9% 60,511 Adidas-Salomon AG 7,790,775 83,566 Altana AG (a) 4,548,772 116,288 Bankgesellschaft Berlin AG * 284,642 434,043 Bayer AG 11,213,540 16,771 Celesio AG 1,106,992 460,902 DaimlerChrysler AG (Registered) 19,225,990 42 Degussa AG 1,491 161,141 Deutsche Bank AG (Registered) 11,040,845 42,800 Douglas Holdings AG 1,206,307 545,799 E. On AG 38,891,761 61,767 HeidelbergCement AG 2,719,170 145,276 MAN AG 4,952,620 79,989 Merck KGaA 4,217,717 1,009 Mobilcom AG 13,662 297,870 RWE AG (a) 14,618,051 325,469 Schering AG 18,109,200 55,080 Schwarz Pharma AG (a) 1,968,213 261,021 Siemens AG (Registered) 17,996,553 158,210 Suedzucker AG 2,957,787 277,032 ThyssenKrupp AG 5,186,172
See accompanying notes to financial statements. 4 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ GERMANY -- CONTINUED 276,700 TUI AG (a) 5,116,368 350,279 Volkswagen AG 13,550,949 --------------- 186,717,577 --------------- GREECE -- 0.4% 208,330 Alpha Bank A.E. 5,077,468 41,860 Cosmote Mobile Communications SA 677,336 185,706 National Bank of Greece SA 4,064,537 --------------- 9,819,341 --------------- HONG KONG -- 2.2% 874,000 Cheung Kong Infrastructure Holdings Ltd 2,168,206 2,117,098 CLP Holdings Ltd 12,253,625 809,409 Great Eagle Holdings Ltd 1,544,549 260,000 Guoco Group 2,202,224 2,226,511 Hang Lung Group Co Ltd 3,442,750 835,900 Hong Kong Aircraft Engineering Co Ltd 4,091,028 3,322,469 Hong Kong Electric Holdings Ltd 14,853,874 515,700 Hong Kong Ferry Co Ltd 495,717 1,000 Hong Kong Land Holdings 1,895 285,762 Jardine Matheson Holdings Ltd 3,721,364 978,411 Jardine Strategic Holdings Ltd 5,530,957 1,499,862 Mandarin Oriental International Ltd * 810,525 596,000 Sun Hung Kai Properties Ltd 5,560,823 1,532,400 Yue Yuen Industrial Holdings 3,696,860 --------------- 60,374,397 --------------- IRELAND -- 0.8% 850,481 Bank of Ireland 11,417,961 397,086 CRH Plc 9,023,931 --------------- 20,441,892 --------------- ITALY -- 4.3% 378,200 Banca Popolare di Milano 2,337,798 860,737 Enel SPA 6,661,793
See accompanying notes to financial statements. 5 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ ITALY -- CONTINUED 4,388,215 ENI SPA 90,154,326 107,608 Fiat SPA (Savings Shares) * 529,708 140,222 Fondiaria - Sai SpA - RNC 1,804,133 588,000 Grassetto SPA *(b) (c) 7,146 248,311 Italcementi SPA 2,206,771 24,311 Italmobiliare SPA 1,186,513 88,800 Natuzzi SPA ADR 829,392 1,134,613 Parmalat Finanziaria SPA *(b) (c) 13,789 491,236 SMI (Societa Metallurgica Italy) * 247,396 3,980,991 Telecom Italia SPA 8,757,442 --------------- 114,736,207 --------------- JAPAN -- 24.2% 208,140 Acom Co Ltd 13,735,437 64,200 Aiful Corp 6,434,847 105,800 Autobacs Seven (a) 3,137,395 498,000 Bank of Yokohama 2,954,987 227,000 Canon Sales Co Inc *(a) 2,954,374 169,000 Chiba Bank 979,170 589,500 Chubu Electric Power Co Inc 12,952,071 53,000 Chudenko Corp 721,412 182,200 Chugoku Electric Power Co Inc 3,202,366 243,000 Citizen Watch Co Ltd 2,447,452 1,410,000 Cosmo Oil Co Ltd (a) 4,117,147 665,000 Daido Steel Co Ltd 1,681,688 573,200 Daiichi Pharmaceuticals Co Ltd 9,942,933 29,000 Daio Paper Corp (a) 302,252 310,700 Daito Trust Construction Co Ltd 11,807,366 321,000 Daiwa Kosho Lease Co Ltd (a) 1,745,412 199,000 Denso Corp 4,899,541 1,415 Dentsu Inc 3,422,325 250,000 Eisai Co Ltd 7,140,273 253,000 Ezaki Glico Co Ltd 1,762,523 133,200 FamilyMart 3,766,009 23,700 Fast Retailing Co Ltd 1,711,041 1,784,000 Fuji Heavy Industries Ltd 9,009,706
See accompanying notes to financial statements. 6 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ JAPAN -- CONTINUED 154,400 Fuji Photo Film Co Ltd 4,854,100 189,000 Fukuyama Transporting Co Ltd 887,319 1,408,000 Furukawa Electric Co Ltd * 5,699,568 141,000 Gunze Ltd 666,142 31,000 Hitachi Kokusai Electric Inc 208,422 3,047,000 Hitachi Ltd 19,187,524 280,500 Hokkaido Electric Power 5,105,756 262,000 Honda Motor Co Ltd 13,056,063 192,000 House Foods Corp 2,570,794 1,693,000 Isuzu Motors Ltd *(a) 3,987,838 1,777,000 Itochu Corp * 7,348,493 323,000 Itoham Foods Inc 1,552,401 35,000 Japan Airport Terminal Co Ltd 347,110 166,000 Japan Securities Finance Co 892,884 2,183,000 Kajima Corp (a) 7,561,564 807,000 Kamigumi Co Ltd 6,102,230 341,000 Kandenko Co 1,793,484 71,000 Kaneka Corp 676,465 481,100 Kansai Electric Power Co Inc 8,830,961 779,000 Kao Corp 19,167,065 3,639,000 Kawasaki Heavy Industries Ltd (a) 5,515,102 90,000 Kikkoman Corp 790,747 190,000 Kinden Corp 1,179,624 731,000 Kirin Brewery Co Ltd 6,599,758 146,000 Kissei Pharmaceutical Co Ltd (a) 2,788,134 2,368,000 Kobe Steel Ltd (a) 3,424,271 131,500 Konami Corp (a) 2,947,361 422,000 Kubota Corp 2,121,413 141,800 Kyocera Corp 10,406,430 254,900 Kyushu Electric Power Co Inc 4,863,886 100,000 Leopalace21 Corp (a) 1,956,546 465,000 Maeda Corp 2,028,093 159,000 Maeda Road Construction (a) 1,096,316 191,000 Makita Corp (a) 2,815,260 2,772,000 Marubeni Corp 6,623,899 92,000 Maruichi Steel Tube (a) 1,614,851
See accompanying notes to financial statements. 7 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ JAPAN -- CONTINUED 159,000 Matsushita Electric Works 1,289,099 2,138,000 Mazda Motor Corp (a) 6,938,721 694,000 Mitsubishi Electric Corp 3,362,831 2,577,000 Mitsubishi Materials Corp (a) 5,479,604 629 Mitsubishi Tokyo Finance Group Inc 5,680,167 388,000 Mitsui Mining & Smelting Co Ltd 1,582,699 163,000 Mitsui Sumitomo Insurance Co Ltd 1,448,988 2,866 Mizuho Financial Group Inc 11,636,474 152,000 Nagase & Co 1,200,406 138,000 Nippo Corp 812,341 819,000 Nippon Express Co Ltd 4,213,744 1,230,000 Nippon Light Metal (a) 2,762,847 157,000 Nippon Meat Packers Inc 1,864,172 1,504,500 Nippon Mining Holdings Inc 6,937,697 541,000 Nippon Shinpan Co * 1,806,987 209,000 Nippon Suisan Kaisha Ltd 579,266 1 Nippon Unipac Holding 1,912 807,000 Nishimatsu Construction (a) 2,568,076 218,000 Nisshin Oillio Group Ltd (a) 959,354 396,000 Nisshin Steel Co Ltd 845,850 386,000 Nisshinbo Industries Inc 2,735,173 189,800 Nissin Food Products 4,816,226 1,140,000 Obayashi Corp 5,594,233 169,600 Ono Pharmaceutical Co Ltd 7,558,126 75,000 Onward Kashiyama Co Ltd 1,054,101 82,400 ORIX Corp 8,467,152 2,707,000 Osaka Gas Co Ltd 7,487,205 10,000 PanaHome Corp 55,212 227,250 Promise Co 14,454,620 81,000 Royal Co Ltd 959,025 116,000 Ryosan Co 2,649,163 659,000 Sankyo Co Ltd 13,820,659 399,000 Seino Transportation Co Ltd 3,771,141 441,000 Sekisui Chemical Co Ltd 3,326,698 1,316,000 Shimizu Corp 5,825,084 313,000 Sompo Japan Insurance Inc 2,934,754
See accompanying notes to financial statements. 8 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ JAPAN -- CONTINUED 107,200 Sony Corp 3,714,516 395,000 Sumitomo Chemical Co Ltd 1,770,075 178,000 Sumitomo Forestry Co Ltd 1,786,051 1,491,000 Taiheiyo Cement Corp 3,553,313 1,881,000 Taisei Corp 6,461,139 530,000 Taisho Pharmaceutical Co Ltd 10,123,233 1,801,600 Takeda Pharmaceutical Co Ltd 81,450,629 149,550 Takefuji Corp (a) 10,458,896 227,400 Terumo Corp 5,118,176 9,000 Toagosei Co Ltd 23,653 507,200 Tohoku Electric Power Co Inc 8,661,955 782,500 Tokyo Electric Power Co Inc 18,054,722 762,000 TonenGeneral Sekiyu KK 6,355,923 663,000 Toppan Printing Co Ltd 6,871,944 355,000 Toshiba TEC Corp 1,524,296 34,000 Toyo Ink Manufacturing Co Ltd 122,408 232,000 Toyo Seikan Kaisha Ltd 3,922,025 1,289,100 Toyota Motor Corp 50,888,255 248,000 Wacoal Corp 2,441,820 255,000 Yamato Transport Co Ltd 3,887,105 156,000 Yamazaki Baking Co Ltd 1,404,105 --------------- 654,169,647 --------------- MALAYSIA -- 0.0% 751,000 Promet Berhad *(b) (c) 1,976 234,000 Saship Holdings *(b) (c) 616 --------------- 2,592 --------------- NETHERLANDS -- 7.3% 2,934,562 ABN Amro Holdings NV 62,491,774 1,108,663 Aegon NV 11,875,211 231,833 Akzo Nobel NV 7,821,850 102,164 Corio NV 4,482,198 45,626 DSM NV 2,224,841 13,510 Gamma Holdings NV 508,855 3,428,161 ING Groep NV 83,966,899
See accompanying notes to financial statements. 9 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ NETHERLANDS -- CONTINUED 590,135 Koninklijke Ahold NV * 3,662,264 278,214 Koninklijke Wessanen NV 3,911,060 287,653 OCE NV 4,390,749 274,878 Philips Electronics NV 6,375,420 72,894 Royal Numico NV * 2,296,052 46,605 Wereldhave NV 3,977,636 --------------- 197,984,809 --------------- NORWAY -- 3.1% 175,517 Aker Kvaerner ASA *(a) 2,485,493 2,217,569 DNB Holdings Class A 16,893,965 37,560 Elkem ASA Class A (a) 1,220,800 148,828 Fred Olsen Energy *(a) 1,284,774 46,500 Frontline Ltd 1,739,707 351,917 Norsk Hydro ASA 21,963,656 205,614 Norske Skogindustrier ASA Class A (a) 3,429,371 375,054 Orkla ASA (a) 9,481,979 75,750 Smedvig ASA Class A 893,451 1,360,133 Statoil ASA 17,363,481 196,200 Storebrand 1,315,391 683,000 Telenor ASA 4,947,721 --------------- 83,019,789 --------------- SINGAPORE -- 1.9% 6,263,249 ComfortDelgro Corp Ltd 4,605,863 784,000 DBS Group Holdings Ltd 7,164,298 549,000 Fraser & Neave Ltd 4,501,483 525,193 Haw Par Corp Ltd 1,534,866 741,104 Hotel Properties Ltd 442,165 533,000 Keppel Corp Ltd 2,217,407 734,000 Oversea-Chinese Banking Corp 5,713,794 1,324,000 SembCorp Industries Ltd 1,016,089 179,000 Singapore Land Ltd 454,564 1,005,000 Singapore Press Holdings Ltd 2,541,184 14,270,000 Singapore Telecom Ltd * 19,101,942
See accompanying notes to financial statements. 10 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ SINGAPORE -- CONTINUED 1,946,201 Straits Trading Co Ltd 2,456,660 1,240,960 United Industrial Corp Ltd 664,159 --------------- 52,414,474 --------------- SPAIN -- 2.5% 127,714 Altadis SA 3,982,384 221,719 Banco Bilbao Vizcaya Argentaria SA 2,963,144 628,078 Banco Santander Central Hispano SA 6,176,039 956,752 Endesa SA 17,748,190 529,601 Iberdrola SA 10,822,797 1,109,416 Repsol YPF SA 22,992,643 253,268 Sacyr Vallehermoso SA 3,465,513 --------------- 68,150,710 --------------- SWEDEN -- 2.4% 200,000 Electrolux AB 3,668,962 122,600 Getinge AB 1,363,873 208,800 Holmen AB Class B 5,978,248 4,325,800 Nordea AB 33,240,913 41,317 SAS AB *(a) 320,427 173,400 Skandinaviska Enskilda Banken Class A 2,447,059 363,500 Skanska AB Class B 3,278,830 159,700 Svenska Handelsbanken Class A 3,073,957 1,097,000 Swedish Match AB 11,130,926 --------------- 64,503,195 --------------- SWITZERLAND -- 3.5% 4,137 Banque Cantonale Vaudoise 471,302 196,930 Credit Suisse Group * 6,156,227 34,048 Micronas Semiconductor Holding AG (Registered) * 1,318,876 16,293 Nestle SA (Registered) 3,856,098 1,282 Pargesa Holdings SA (Bearer) 3,487,381 351,238 Roche Holding AG (Non Voting) 34,110,374 2,632 Sika AG (Bearer) * 1,422,014 87,584 Swisscom AG (Registered) 28,970,609 66,898 UBS AG (Registered) 4,503,704
See accompanying notes to financial statements. 11 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ SWITZERLAND -- CONTINUED 11,335 Valora Holding AG 2,479,913 61,252 Zurich Financial Services AG * 8,573,845 --------------- 95,350,343 --------------- UNITED KINGDOM -- 18.9% 288,836 Alliance & Leicester Plc 4,677,557 518,878 Allied Domecq Plc 4,160,976 159,575 AstraZeneca Plc 7,355,989 2,872,204 Aviva Plc 27,560,002 15,538,928 AWG Plc (Redeemable Shares) * 27,115 1,720,576 Barclays Plc 15,923,412 1,164,796 Barratt Developments Plc 12,415,303 442,236 BBA Group Plc 2,077,924 237,950 Berkeley Group Plc 5,212,617 1,351,598 Boots Group Plc 16,518,834 4,345,876 BP Plc 38,616,297 190,953 British American Tobacco Plc 2,883,395 229,372 British Energy Plc * 88,385 511,082 British Energy Plc (Deferred Shares) *(c) -- 3,192,477 BT Group Plc 10,514,479 1,686,328 Centrica Plc 7,480,906 92,203 Cobham Group Plc 2,256,543 406,887 Diageo Plc 5,016,333 5,121,670 Dixons Group Plc (New Shares) 14,570,432 2,941 Friends Provident Plc 7,104 2,404,728 GlaxoSmithKline Plc 49,034,180 349,933 Great Portland Estates Plc 1,731,410 1,089,158 HBOS Plc 13,354,475 934,439 Hilton Group Plc 4,402,058 290,796 HMV Group Plc 1,173,375 326,414 HSBC Holdings Plc 5,082,590 469,860 IMI Plc 2,984,003 748,397 Imperial Tobacco Group Plc 16,543,823 106,071 Inchcape Plc 3,166,961 1,207,108 J Sainsbury Plc 5,671,160 407,038 Kelda Group Plc 3,870,113
See accompanying notes to financial statements. 12 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ UNITED KINGDOM -- CONTINUED 428,706 Land Securities Group Plc 8,883,845 10,123,926 Lloyds TSB Group Plc 76,140,734 1,397,404 National Grid Transco Plc 11,709,057 504,521 Next Plc 13,546,776 2,232,016 Northern Foods Plc 6,260,231 129,172 Pennon Group Plc 1,903,027 461,558 Persimmon Plc 5,573,023 474,960 Provident Financial Plc 5,092,142 321,588 RMC Group Plc 3,693,971 363,277 SABMiller Plc 4,524,430 496,939 Scottish & Newcastle Plc 3,557,547 1,285,340 Scottish & Southern Energy Plc 17,090,856 898,138 Scottish Power Plc 6,515,655 256,287 Severn Trent Plc 4,002,399 708,562 Smith (WH) Group Plc 3,898,061 1,107,565 Somerfield Plc 2,816,533 281,474 Spirent Plc * 271,661 709,842 Tate & Lyle Plc 4,592,368 1,653,669 Taylor Woodrow Plc 8,163,037 3,156,013 Tesco Plc 15,144,757 3,439,241 THUS Group Plc * 931,147 690,821 Whitbread Plc 10,161,490 1,211,664 Wimpey (George) 9,186,878 218,916 Wolseley Plc 3,359,866 --------------- 511,397,242 --------------- TOTAL COMMON STOCKS (COST $2,241,934,162) 2,552,204,927 --------------- PREFERRED STOCKS -- 0.7% GERMANY -- 0.6% 10,945 Porsche AG (Non Voting) 0.83% 6,668,569 74,754 RWE AG 4.35% 3,105,467 9,000 Villeroy & Boch AG (Non Voting) 5.78% 94,112 283,021 Volkswagen AG 5.30% 7,511,367 --------------- 17,379,515 ---------------
See accompanying notes to financial statements. 13 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES/UNITS/ PAR VALUE ($) DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------------------------- ITALY -- 0.1% 102,079 Fiat SPA 4.95% 482,096 159,329 IFI Istituto Finanziario Industries 4.82% 1,570,825 ---------------- 2,052,921 ---------------- TOTAL PREFERRED STOCKS (COST $22,779,936) 19,432,436 ---------------- RIGHTS AND WARRANTS -- 0.0% SPAIN -- 0.0% 253,268 Sacyr Vallehermoso SA Rights, Expires 9/9/04 * 86,183 ---------------- TOTAL RIGHTS AND WARRANTS (COST $70,175) 86,183 ---------------- SHORT-TERM INVESTMENTS -- 9.0% CASH EQUIVALENTS -- 8.0% 97,300,000 Dresdner GC Time Deposit, 1.57%, due 09/01/04 97,300,000 120,598,066 The Boston Global Investment Trust (d) 120,598,066 ---------------- 217,898,066 ---------------- U.S. GOVERNMENT -- 1.0% 26,450,000 U.S. Treasury Bill, 0.96%, due 9/23/04 (e) (f) 26,434,130 ---------------- TOTAL SHORT-TERM INVESTMENTS (COST $244,332,196) 244,332,196 ---------------- TOTAL INVESTMENTS -- 104.1% (Cost $2,509,116,469) 2,816,055,742 Other Assets and Liabilities (net) -- (4.1%) (111,640,912) ---------------- TOTAL NET ASSETS -- 100.0% $ 2,704,414,830 ================
See accompanying notes to financial statements. 14 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) NOTES TO SCHEDULE OF INVESTMENTS: ADR - American Depositary Receipt * Non-income producing security. (a) All or a portion of this security is out on loan (Note 2). (b) Bankrupt issuer. (c) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 2). (d) Investment of security lending collateral (Note 2). (e) All or a portion of this security is held as collateral for open futures contracts (Note 2). (f) Rate shown represents yield to maturity. CURRENCY ABBREVIATIONS: AUD - Australian Dollar HKD - Hong Kong Dollar CAD - Canadian Dollar JPY - Japanese Yen CHF - Swiss Franc NOK - Norwegian Krone DKK - Danish Krone NZD - New Zealand Dollar EUR - Euro SEK - Swedish Krona GBP - British Pound SGD - Singapore Dollar At August 31, 2004, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
GROSS UNREALIZED GROSS UNREALIZED NET UNREALIZED AGGREGATE COST APPRECIATION DEPRECIATION APPRECIATION --------------- ------------------- ------------------- ----------------- $ 2,515,485,482 $ 364,392,602 $ (63,822,342) $ 300,570,260
At February 29, 2004, GMO International Intrinsic Value Fund had capital loss carryforwards available to offset future capital gains, if any, to the extent permitted by the Internal Revenue Code of $27,842,613 and $95,091,208 expiring in 2010 and 2011, respectively. Utilization of the capital loss carryforwards above could be subject to limitations imposed by the Internal Revenue Code related to share ownership activity. See accompanying notes to financial statements. 15 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) A summary of outstanding financial instruments at August 31, 2004 is as follows: FORWARD CURRENCY CONTRACTS
NET UNREALIZED SETTLEMENT APPRECIATION DATE DELIVER/RECEIVE UNITS OF CURRENCY VALUE (DEPRECIATION) - ----------- --------------- ----------------- ------------- ------------------ Buys 11/26/04 CAD 16,577,079 $ 12,566,066 $ (100,421) 11/26/04 CHF 73,173,915 57,868,094 209,688 11/26/04 DKK 19,892,306 3,247,070 23,994 11/26/04 GBP 10,400,701 18,575,677 (259,971) 11/26/04 JPY 10,403,686,867 95,199,424 (25,093) 11/26/04 NOK 198,722,828 28,757,031 (158,364) 11/26/04 NZD 820,727 532,731 2,779 11/26/04 SEK 633,456,444 84,247,806 757,775 11/26/04 SGD 47,776,510 27,931,993 (11,983) ------------------ $ 438,404 ================== Sales 11/26/04 AUD 39,781,494 $ 27,853,046 $ 47,960 11/26/04 EUR 137,007,911 166,373,159 (825,130) 11/26/04 GBP 22,136,525 39,535,888 (169,751) 11/26/04 HKD 89,576,848 11,510,294 2,515 ------------------ $ (944,406) ==================
See accompanying notes to financial statements. 16 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) FUTURES CONTRACTS
NET UNREALIZED NUMBER OF APPRECIATION CONTRACTS TYPE EXPIRATION DATE CONTRACT VALUE (DEPRECIATION) - ----------- --------------- ----------------- --------------- ---------------- Buys 454 DAX September 2004 $ 52,346,920 $ (2,346,097) 654 FTSE 100 September 2004 52,637,205 536,449 11 Hang Seng September 2004 903,839 268 13 IBEX 35 September 2004 1,245,822 21,562 5 MIB 30 September 2004 823,943 (30,389) 1,021 MSCI September 2004 27,628,918 20,680 21 OMX September 2004 191,789 (131) 473 TSE TOPIX September 2004 48,702,902 (967,106) ---------------- $ (2,764,764) ================ Sales 489 S&P Toronto 60 September 2004 $ 34,492,759 $ (430,318) 1,123 SPI 200 September 2004 70,300,022 (1,345,449) ---------------- $ (1,775,767) ================
At August 31, 2004, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. See accompanying notes to financial statements. 17 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY (SHOWING PERCENTAGE OF EQUITY INVESTMENTS) AUGUST 31, 2004 (UNAUDITED) At August 31, 2004, industry sector diversification of the Fund's equity investments was as follows: INDUSTRY SECTOR Financials 29.6% Consumer Discretionary 12.3 Energy 11.1 Health Care 10.8 Utilities 10.5 Consumer Staples 7.8 Industrials 6.8 Materials 4.8 Telecommunication Services 3.4 Information Technology 2.9 -------- 100.0% ========
See accompanying notes to financial statements. 18 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments, at value, including securities on loan of $113,815,688 (cost $2,509,116,469) (Note 2) $ 2,816,055,742 Cash 17,011 Foreign currency, at value (cost $3,052,440) (Note 2) 3,005,070 Receivable for Fund shares sold 3,439,224 Dividends and interest receivable 8,030,820 Foreign taxes receivable 1,403,891 Receivable for open forward foreign currency contracts (Note 2) 1,044,711 Receivable for expenses reimbursed by Manager (Note 3) 159,371 ---------------- Total assets 2,833,155,840 ---------------- LIABILITIES: Payable upon return of securities loaned (Note 2) 120,598,066 Payable for Fund shares repurchased 3,669,883 Payable to affiliate for (Note 3): Management fee 1,212,189 Shareholder service fee 274,949 Administration fee - Class M 1,745 Trustees fee 4,849 Payable for 12b-1 fee - Class M 4,304 Payable for open forward foreign currency contracts (Note 2) 1,550,713 Payable for variation margin on open futures contracts (Note 2) 1,136,578 Accrued expenses 287,734 ---------------- Total liabilities 128,741,010 ---------------- NET ASSETS $ 2,704,414,830 ================ NET ASSETS CONSIST OF: Paid-in capital $ 2,397,333,058 Accumulated undistributed net investment income 39,549,830 Accumulated net realized loss (34,253,341) Net unrealized appreciation 301,785,283 ---------------- $ 2,704,414,830 ================
See accompanying notes to financial statements. 19 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) -- (CONTINUED) NET ASSETS ATTRIBUTABLE TO: Class II shares $ 126,319,241 ================ Class III shares $ 1,190,824,216 ================ Class IV shares $ 1,376,656,829 ================ Class M shares $ 10,614,544 ================ SHARES OUTSTANDING: Class II 5,156,069 ================ Class III 48,310,785 ======-========= Class IV 55,859,403 ================ Class M 434,287 ================ NET ASSET VALUE PER SHARE: Class II $ 24.50 ================ Class III $ 24.65 ================ Class IV $ 24.65 ================ Class M $ 24.44 ================
See accompanying notes to financial statements. 20 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends (net of withholding taxes of $6,845,720) $ 57,651,205 Interest (including securities lending income of $455,330) 1,230,585 ------------------ Total income 58,881,790 ------------------ EXPENSES: Management fee (Note 3) 6,905,463 Shareholder service fee (Note 3) - Class II 122,161 Shareholder service fee (Note 3) - Class III 986,420 Shareholder service fee (Note 3) - Class IV 504,980 12b-1 fee (Note 3) - Class M 11,400 Administration fee (Note 3) - Class M 9,120 Custodian fees 760,012 Transfer agent fees 35,328 Audit and tax fees 33,304 Legal fees 32,936 Trustees fees and related expenses (Note 3) 16,940 Registration fees 12,328 Miscellaneous 12,235 ------------------ Total expenses 9,442,627 Fees and expenses reimbursed by Manager (Note 3) (886,143) ------------------ Net expenses 8,556,484 ------------------ Net investment income 50,325,306 ------------------ REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 99,397,512 Closed futures contracts (4,162,902) Foreign currency, forward contracts and foreign currency related transactions 1,313,859 ------------------ Net realized gain 96,548,469 ------------------ Change in net unrealized appreciation (depreciation) on: Investments (97,563,586) Open futures contracts (1,158,290) Foreign currency, forward contracts and foreign currency related transactions (2,545,919) ------------------ Net unrealized loss (101,267,795) ------------------ Net realized and unrealized loss (4,719,326) ------------------
See accompanying notes to financial statements. 21 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 45,605,980 ==================
See accompanying notes to financial statements. 22 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ------------------ ------------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 50,325,306 $ 37,409,759 Net realized gain 96,548,469 88,446,923 Change in net unrealized appreciation (depreciation) (101,267,795) 618,613,895 ------------------ ------------------- Net increase in net assets from operations 45,605,980 744,470,577 ------------------ ------------------- Distributions to shareholders from: Net investment income Class II (558,753) (3,414,476) Class III (6,454,685) (35,741,088) Class IV (6,268,381) (16,179,208) Class M (47,969) (139,753) ------------------ ------------------- Total distributions from net investment income (13,329,788) (55,474,525) ------------------ ------------------- Net share transactions (Note 6): Class II 39,796,821 (24,037,904) Class III (171,403,978) 57,218,553 Class IV 493,123,729 330,657,748 Class M 3,126,547 6,527,842 ------------------ ------------------- Increase in net assets resulting from net share transactions 364,643,119 370,366,239 ------------------ ------------------- Total increase in net assets 396,919,311 1,059,362,291 NET ASSETS: Beginning of period 2,307,495,519 1,248,133,228 ------------------ ------------------- End of period (including accumulated undistributed net investment income of $39,549,830 and $2,554,312, respectively) $ 2,704,414,830 $ 2,307,495,519 ================== ===================
See accompanying notes to financial statements. 23 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS II SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 --------------------------------------------------------- (UNAUDITED) 2004 2003 2002 2001 2000 ---------------- --------- --------- --------- --------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 24.18 $ 16.04 $ 17.41 $ 20.30 $ 20.85 $ 20.33 ---------------- --------- --------- --------- --------- --------- Income from investment operations: Net investment income + 0.47 0.44 0.37 0.28 0.40 0.41 Net realized and unrealized gain (loss) (0.03) 8.31 (1.05) (2.44) 1.11 1.33 ---------------- --------- --------- --------- --------- --------- Total from investment operations 0.44 8.75 (0.68) (2.16) 1.51 1.74 ---------------- --------- --------- --------- --------- --------- Less distributions to shareholders: From net investment income (0.12) (0.61) (0.69) (0.73) (0.22) (0.56) From net realized gains -- -- -- -- (1.84) (0.66) ---------------- --------- --------- --------- --------- --------- Total distributions (0.12) (0.61) (0.69) (0.73) (2.06) (1.22) ---------------- --------- --------- --------- --------- --------- NET ASSET VALUE, END OF PERIOD $ 24.50 $ 24.18 $ 16.04 $ 17.41 $ 20.30 $ 20.85 ================ ========= ========= ========= ========= ========= TOTAL RETURN (a) 1.82%** 54.99% (4.11)% (10.71)% 7.25% 8.09% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 126,319 $ 85,625 $ 67,896 $ 42,495 $ 15,284 $ 21,162 Net expenses to average daily net assets 0.76%* 0.76% 0.76% 0.76% 0.76% 0.76% Net investment income to average daily net assets 1.93%(b)** 2.15% 2.06% 1.56% 1.88% 1.84% Portfolio turnover rate 27%** 44% 51% 51% 31% 53% Fees and expenses reimbursed by the Manager to average daily net assets: 0.07%* 0.09% 0.10% 0.10% 0.08% 0.09%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) The ratio for the six months ended August 31, 2004, has not been annualized since the Fund believes it would not be appropriate because the Fund's dividend income is not earned ratably throughout the fiscal year. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to financial statements. 24 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ---------------------------------------------------------------- (UNAUDITED) 2004 2003 2002 2001 2000 ---------------- ----------- --------- ----------- ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 24.32 $ 16.13 $ 17.50 $ 20.37 $ 20.91 $ 20.38 ---------------- ----------- --------- ----------- ----------- ----------- Income from investment operations: Net investment income + 0.49 0.45 0.40 0.44 0.44 0.47 Net realized and unrealized gain (loss) (0.03) 8.36 (1.08) (2.59) 1.09 1.28 ---------------- ----------- --------- ----------- ----------- ----------- Total from investment operations 0.46 8.81 (0.68) (2.15) 1.53 1.75 ---------------- ----------- --------- ----------- ----------- ----------- Less distributions to shareholders: From net investment income (0.13) (0.62) (0.69) (0.72) (0.23) (0.56) From net realized gains -- -- -- -- (1.84) (0.66) ---------------- ----------- ------- ----------- ----------- ----------- Total distributions (0.13) (0.62) (0.69) (0.72) (2.07) (1.22) ---------------- ----------- --------- ----------- ----------- ----------- NET ASSET VALUE, END OF PERIOD $ 24.65 $ 24.32 $ 16.13 $ 17.50 $ 20.37 $ 20.91 ================ =========== ========= =========== =========== =========== TOTAL RETURN(a) 1.86%** 55.05% (4.05)% (10.60)% 7.32% 8.20% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 1,190,824 $ 1,350,850 $ 845,997 $ 1,053,104 $ 1,280,603 $ 1,799,929 Net expenses to average daily net assets 0.69%* 0.69% 0.69% 0.69% 0.69% 0.69% Net investment income to average daily net assets 2.01%(b)** 2.22% 2.26% 2.37% 2.07% 2.09% Portfolio turnover rate 27%** 44% 51% 51% 31% 53% Fees and expenses reimbursed by the Manager to average daily net assets: 0.07%* 0.09% 0.10% 0.10% 0.08% 0.09%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) The ratio for the six months ended August 31, 2004, has not been annualized since the Fund believes it would not be appropriate because the Fund's dividend income is not earned ratably throughout the fiscal year. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to financial statements. 25 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ------------------------------------------------------------- (UNAUDITED) 2004 2003 2002 2001 2000 ---------------- --------- --------- --------- --------- --------- NET ASSET VALUE, BEGINNING OF PERIOD $ 24.31 $ 16.12 $ 17.50 $ 20.37 $ 20.90 $ 20.37 ---------------- --------- --------- --------- --------- --------- Income from investment operations: Net investment income + 0.48 0.43 0.38 0.36 0.50 0.55 Net realized and unrealized gain (loss) (0.01) 8.39 (1.05) (2.49) 1.05 1.21 ---------------- --------- --------- --------- --------- --------- Total from investment operations 0.47 8.82 (0.67) (2.13) 1.55 1.76 ---------------- --------- --------- --------- --------- --------- Less distributions to shareholders: From net investment income (0.13) (0.63) (0.71) (0.74) (0.24) (0.57) From net realized gains -- -- -- -- (1.84) (0.66) ---------------- --------- --------- --------- --------- --------- Total distributions (0.13) (0.63) (0.71) (0.74) (2.08) (1.23) ---------------- --------- --------- --------- --------- --------- NET ASSET VALUE, END OF PERIOD $ 24.65 $ 24.31 $ 16.12 $ 17.50 $ 20.37 $ 20.90 ================ ========= ========= ========= ========= ========= TOTAL RETURN (a) 1.92%** 55.15% (4.02)% (10.52)% 7.45% 8.18% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 1,376,657 $ 863,612 $ 334,240 $ 248,579 $ 155,558 $ 291,894 Net expenses to average daily net assets 0.63%* 0.63% 0.63% 0.63% 0.63% 0.63% Net investment income to average daily net assets 1.96%(b)** 2.08% 2.13% 1.97% 2.34% 2.47% Portfolio turnover rate 27%** 44% 51% 51% 31% 53% Fees and expenses reimbursed by the Manager to average daily net assets: 0.07%* 0.09% 0.10% 0.10% 0.08% 0.09%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) The ratio for the six months ended August 31, 2004, has not been annualized since the Fund believes it would not be appropriate because the Fund's dividend income is not earned ratably throughout the fiscal year. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to financial statements. 26 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS M SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PERIOD FROM OCTOBER 2, 2003 SIX MONTHS ENDED (COMMENCEMENT AUGUST 31, 2004 OF OPERATIONS) THROUGH (UNAUDITED) FEBRUARY 29, 2004 ---------------- ----------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 24.15 $ 20.92 ---------------- ------------- Income from investment operations: Net investment income + 0.43 0.01 Net realized and unrealized gain (loss) (0.02) 3.73 ---------------- ------------- Total from investment operations 0.41 3.74 ---------------- ------------- Less distributions to shareholders: From net investment income (0.12) (0.51) ---------------- ------------- Total distributions (0.12) (0.51) ---------------- ------------- NET ASSET VALUE, END OF PERIOD $ 24.44 $ 24.15 ================ ============= TOTAL RETURN (a) 1.69%** 18.06%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 10,615 $ 7,408 Net expenses to average daily net assets 0.99%* 0.99%* Net investment income to average daily net assets 1.78%(b)** 0.12%* Portfolio turnover rate 27%** 44% Fees and expenses reimbursed by the Manager to average daily net assets: 0.07%* 0.09%*
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) The ratio for the six months ended August 31, 2004, has not been annualized since the Fund believes it would not be appropriate because the Fund's dividend income is not earned ratably throughout the fiscal year. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to financial statements. 27 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION 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, 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 S&P/Citigroup Primary Market Index ("PMI") Europe, Pacific, Asia Composite ("EPAC") Value Style Index. Throughout the six months ended August 31, 2004, the Fund had four classes of shares outstanding: Class II, Class III, Class IV and Class M. Class M shares bear an administration fee and a 12b-1 fee while classes II, III, and IV bear a shareholder service fee (See Note 3). 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 classes of shares, except Class M, 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. 2. SIGNIFICANT ACCOUNTING POLICIES 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. The values of securities which are primarily traded on foreign exchanges are 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. For other assets, and in cases where market prices are not readily available or the Manager believes established valuation methodologies are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value. Because many foreign equity securities 28 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, foreign equity securities held by the Fund are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available. 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 in the Schedule of Investments and represents the currency exposure the Fund has acquired or hedged through currency contracts as of August 31, 2004. 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 29 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, 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 the Schedule of Investments for all open futures contracts as of August 31, 2004. 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. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying investment increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of August 31, 2004, 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 closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. As of August 31, 2004, there were no open purchased option contracts. 30 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 using standard models that incorporate 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 on swap contracts 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 August 31, 2004, there were no open swap 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 with the custodian in an amount at least equal to these commitments. As of August 31, 2004, the Fund did not hold any delayed delivery 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 31 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. As of August 31, 2004, the Fund had loaned securities having a market value of $113,815,688 collateralized by cash in the amount of $120,598,066 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 generally 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 are 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. 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. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. 32 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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, 12b-1, and administration fees, which are directly attributable to a class of shares, are charged to that class's 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. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.54% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of 0.22% for Class II shares, 0.15% for Class III shares and 0.09% for Class IV shares. Class M shares of the Fund pay GMO an administration fee monthly at the annual rate of 0.20% 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, 2005 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), administration 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 0.54% of average daily net assets. 33 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $10,408. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004, aggregated $1,073,338,255 and $652,889,031, respectively. 5. RELATED PARTIES At August 31, 2004, less than 0.1% of the Fund was held by eight related parties comprised of certain GMO emloyee accounts. As of August 31, 2004, a significant portion of the Fund's shares was held by accounts for which the Manager has investment discretion. 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------------------- ---------------------------- SHARES AMOUNT SHARES AMOUNT ---------- -------------- ---------- -------------- Class II: Shares sold 2,104,157 $ 51,814,139 4,733,483 $ 96,774,891 Shares issued to shareholders in reinvestment of distributions 18,005 448,145 131,364 2,890,031 Shares repurchased (507,126) (12,465,463) (5,556,343) (123,702,826) ---------- -------------- ---------- -------------- Net increase (decrease) 1,615,036 $ 39,796,821 (691,496) $ (24,037,904) ========== ============== ========== ==============
34 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED)
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ----------------------------- ------------------------------- SHARES AMOUNT SHARES AMOUNT ----------- -------------- ------------- -------------- Class III: Shares sold 5,837,528 $ 143,497,128 25,870,141 $ 542,271,026 Shares issued to shareholders in reinvestment of distributions 170,457 4,268,252 1,134,168 25,047,548 Shares repurchased (13,237,309) (319,169,358) (23,919,014) (510,100,021) ----------- -------------- ------------- -------------- Net increase (decrease) (7,229,324) $ (171,403,978) 3,085,295 $ 57,218,553 =========== ============== ============= ============== SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ----------------------------- ------------------------------- SHARES AMOUNT SHARES AMOUNT ----------- -------------- ------------- -------------- Class IV: Shares sold 22,951,191 $ 556,046,561 15,876,366 $ 351,557,271 Shares issued to shareholders in reinvestment of distributions 219,986 5,506,254 730,043 16,179,208 Shares repurchased (2,829,487) (68,429,086) (1,822,145) (37,078,731) ----------- -------------- ------------- -------------- Net increase 20,341,690 $ 493,123,729 14,784,264 $ 330,657,748 =========== ============== ============= ============== SIX MONTHS ENDED PERIOD FROM OCTOBER 2, 2003 AUGUST 31, 2004 (COMMENCEMENT OF OPERATIONS) (UNAUDITED) FEBRUARY 29, 2004 ----------------------------- ------------------------------- SHARES AMOUNT SHARES AMOUNT ----------- -------------- ------------- -------------- Class M: Shares sold 158,461 $ 3,869,780 386,537 $ 8,370,429 Shares issued to shareholders in reinvestment of distributions 1,931 47,969 6,195 139,753 Shares repurchased (32,903) (791,202) (85,934) (1,982,340) ----------- -------------- ------------- -------------- Net increase 127,489 $ 3,126,547 306,798 $ 6,527,842 =========== ============== ============= ==============
7. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 35 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees, 12b-1 fees and other expenses. The following tables, assuming a $1,000 investment in a class of shares, disclose the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the classes' actual return and actual expenses, and (2) a hypothetical annualized 5% return and the classes' actual expenses: Class II
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * ------------------------------------------------------------ 1) Actual $ 1,000.00 $ 1,018.20 $ 3.87 2) Hypothetical 1,000.00 1,021.37 3.87
*Expenses are calculated using the Class II annualized expense ratio for the six months ended August 31, 2004 of 0.76%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * ------------------------------------------------------------ 1) Actual $ 1,000.00 $ 1,018.60 $ 3.51 2) Hypothetical 1,000.00 1,021.73 3.52
*Expenses are calculated using the Class III annualized expense ratio for the six months ended August 31, 2004 of 0.69%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. Class IV
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * ------------------------------------------------------------ 1) Actual $ 1,000.00 $ 1,019.20 $ 3.21 2) Hypothetical 1,000.00 1,022.03 3.21
*Expenses are calculated using the Class IV annualized expense ratio for the six months ended August 31, 2004 of 0.63%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. 36 GMO INTERNATIONAL INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) FUND EXPENSES -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) Class M
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * ------------------------------------------------------------ 1) Actual $ 1,000.00 $ 1,016.90 $ 5.03 2) Hypothetical 1,000.00 1,020.21 5.04
*Expenses are calculated using the Class M annualized expense ratio for the six months ended August 31, 2004 of 0.99%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 37 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
% OF DESCRIPTION NET ASSETS - ---------------------------------------------------------------------------------------------- Automotive 5.4% Construction 4.6 Consumer Goods 5.9 Financial 27.9 Food & Beverage 1.6 Health Care 9.4 Machinery 0.5 Manufacturing 2.2 Metals & Mining 0.3 Oil & Gas 7.0 Primary Process Industry 0.7 Retail Stores 5.9 Services 2.4 Technology 6.0 Transportation 0.4 Utility 16.1 Mutual Funds 1.7 Futures 0.0 Short-Term Investments and Other Assets and Liabilities (net) 2.0 ------------- 100.0% =============
See accompanying notes to the financial statements. 1 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- COMMON STOCKS -- 96.3% AUTOMOTIVE -- 5.4% 3,800 American Axle & Manufacturing Holdings, Inc. 128,782 5,800 ArvinMeritor, Inc. 110,780 1,600 Cooper Tire & Rubber Co. 36,224 7,000 Dana Corp. 132,090 12,600 Delphi Corp. 115,416 3,300 Eaton Corp. 199,155 83,954 Ford Motor Co. 1,184,591 44,482 General Motors Corp. (a) 1,837,551 2,100 Goodyear Tire & Rubber Co. (The) *(a) 23,058 16,000 Harley-Davidson, Inc. 976,320 6,700 Johnson Controls, Inc. 377,210 8,000 Lear Corp. 431,040 --------------- 5,552,217 --------------- CONSTRUCTION -- 4.6% 17,900 Annaly Mortgage Management, Inc. REIT 319,515 1,900 Beazer Homes USA, Inc. 185,535 8,100 Centex Corp. 370,737 2,700 Crane Co. 72,900 13,350 D.R. Horton, Inc. 413,049 3,400 Georgia-Pacific Corp. 115,532 4,400 Host Marriott Corp. REIT * 58,740 2,300 iStar Financial Inc. REIT 92,552 5,000 KB Home 343,850 4,800 Lafarge North America, Inc. 215,088 8,500 Lennar Corp.-Class A 389,300 2,870 MDC Holdings, Inc. 197,599 200 NVR, Inc. * 100,450 5,000 Prologis Trust REIT 180,750 2,200 Public Storage, Inc. REIT 111,870 9,000 Pulte Homes, Inc. 530,550 1,400 Regency Centers Corp. REIT 64,400 3,300 Ryland Group, Inc. 290,895 2,100 Simon Property Group, Inc. REIT 117,495
See accompanying notes to the financial statements. 2 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- CONSTRUCTION -- CONTINUED 2,500 Standard-Pacific Corp. 126,175 6,600 Toll Brothers, Inc. * 292,974 1,200 Vornado Realty Trust REIT 75,312 600 York International Corp. 19,536 --------------- 4,684,804 --------------- CONSUMER GOODS -- 5.9% 50,400 Altria Group, Inc. 2,467,080 3,700 Brunswick Corp. 145,447 2,700 Callaway Golf Co. 32,643 1,500 Columbia Sportswear Co. * 81,810 28,600 Eastman Kodak Co. (a) 845,988 3,600 Gillette Co. (The) 153,000 13,700 Jones Apparel Group, Inc. 488,953 7,000 Kimberly Clark Corp. 466,900 6,900 Liz Claiborne, Inc. 262,683 5,900 Maytag Corp. 119,357 5,300 Mohawk Industries, Inc. *(a) 407,676 5,100 Reynolds American, Inc. 385,050 3,100 VF Corp. 152,954 1,800 Whirlpool Corp. 110,052 --------------- 6,119,593 --------------- FINANCIAL -- 27.9% 2,800 Aflac, Inc. 112,280 1,300 AG Edwards, Inc. 45,214 4,000 Allmerica Financial Corp. * 116,000 27,800 Allstate Corp. (The) 1,312,438 4,800 AMBAC Financial Group, Inc. 362,400 4,100 American Financial Group, Inc. (a) 120,745 30,100 American International Group, Inc. 2,144,324 400 American National Insurance Co. 38,000 3,700 AmeriCredit Corp. * 77,367 4,900 AmerUs Group Co. 195,314 7,200 AmSouth Bancorp 187,560 3,100 AON Corp. 80,445
See accompanying notes to the financial statements. 3 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- FINANCIAL -- CONTINUED 2,000 Associated Banc Corp. 62,600 6,900 Astoria Financial Corp. 250,746 26,172 Bank of America Corp. 1,177,217 1,400 Banknorth Group, Inc. 47,558 10,600 BB&T Corp. 423,894 4,080 Bear Stearns Cos. (The), Inc. 358,714 9,800 Capital One Financial Corp. 664,048 3,176 Charter One Financial, Inc. 141,237 900 CIT Group, Inc. 32,166 18,900 Citigroup, Inc. 880,362 1,500 City National Corp. 98,970 2,700 CNA Financial Corp. * 65,070 5,900 Colonial BancGroup (The), Inc. 119,062 12,700 Comerica, Inc. 763,905 1,000 Commerce Bancorp, Inc. (a) 52,470 700 Commerce Group, Inc. 33,565 9,598 Countrywide Financial Corp. 341,209 1,100 Cullen/Frost Bankers, Inc. 49,489 2,000 Downey Financial Corp. 107,740 800 East-West Bancorp, Inc. 28,984 800 Erie Indemnity Co.-Class A 39,792 27,100 Fannie Mae 2,017,595 14,937 Fidelity National Financial, Inc. 562,378 10,200 First American Corp. 295,494 2,000 First Horizon National Corp. 90,940 7,900 Flagstar Bancorp, Inc. 170,561 12,000 Freddie Mac 805,440 1,900 GATX Corp. 51,243 4,900 Greater Bay Bancorp 139,503 4,300 Greenpoint Financial Corp. 189,415 11,600 Hartford Financial Services Group, Inc. 709,456 3,400 Hibernia Corp.-Class A 91,290 2,900 Jefferson Pilot Corp. 138,910 41,780 JPMorgan Chase & Co. 1,653,652 16,200 KeyCorp 507,870 4,300 Lincoln National Corp. 194,790
See accompanying notes to the financial statements. 4 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- FINANCIAL -- CONTINUED 13,000 Loews Corp. 738,400 2,500 Marsh & McLennan Cos., Inc. 111,725 2,400 Marshall & Ilsley Corp. 96,192 2,200 MBIA, Inc. 125,994 44,600 MBNA Corp. 1,076,644 5,800 Metlife, Inc. 216,050 10,200 MGIC Investment Corp. 696,354 21,172 National City Corp. 800,090 4,200 Nationwide Financial Services, Inc.-Class A 146,118 11,800 Old Republic International Corp. 277,890 2,700 People's Bank 89,073 6,400 PMI Group (The), Inc. 265,792 6,300 PNC Financial Services Group, Inc. 338,121 2,500 Protective Life Corp. 97,825 12,800 Providian Financial Corp. *(a) 184,832 5,200 Radian Group, Inc. 230,360 10,401 Regions Financial Corp. 335,848 2,900 Ryder System, Inc. 127,049 1,100 SEI Investments Co. 35,948 2,600 Sovereign Bancorp, Inc. 56,836 500 Student Loan Corp. 71,875 4,400 Suntrust Banks, Inc. 299,640 2,800 Synovus Financial Corp. 71,120 400 T. Rowe Price Group, Inc. 19,812 10,900 Torchmark Corp. 561,132 1,300 Trustmark Corp. 38,974 8,700 U.S. Bancorp 256,650 1,900 UnionBanCal Corp. 112,974 1,100 Unitrin, Inc. 46,145 29,000 UnumProvident Corp. 469,220 7,700 Wachovia Corp. 361,207 2,500 Washington Federal, Inc. 64,400 47,700 Washington Mutual, Inc. 1,852,191 2,300 Webster Financial Corp. 113,160 2,000 Wells Fargo & Co. 117,500 1,200 Whitney Holding Corp. 49,440 --------------- 28,702,003 ---------------
See accompanying notes to the financial statements. 5 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- FOOD & BEVERAGE -- 1.6% 5,400 Archer Daniels Midland Co. 86,238 11,600 Coca Cola Enterprises, Inc. 239,540 7,800 ConAgra Foods, Inc. 204,360 1,700 Corn Products International, Inc. 78,455 3,400 Hormel Foods Corp. 90,780 600 Lancaster Colony Corp. 24,768 1,100 McCormick & Co., Inc. 36,905 6,300 PepsiAmericas, Inc. 124,992 2,100 PepsiCo, Inc. 105,000 19,700 Sara Lee Corp. 435,961 16,324 Tyson Foods, Inc.-Class A 269,020 --------------- 1,696,019 --------------- HEALTH CARE -- 9.4% 2,900 Aetna, Inc. 268,685 16,000 AmerisourceBergen Corp. 865,600 1,000 Bard (C.R.), Inc. 56,100 2,200 Bausch & Lomb, Inc. 145,090 10,500 Bristol-Myers Squibb Co. 249,165 15,000 Cigna Corp. 998,400 9,800 Guidant Corp. 586,040 9,800 Health Net, Inc. * 254,212 1,900 Humana, Inc. * 36,100 22,900 Johnson & Johnson 1,330,490 6,500 King Pharmaceuticals, Inc. * 80,990 5,900 Lincare Holdings, Inc. * 189,626 100 Manor Care, Inc. 3,067 7,400 McKesson Corp. 229,030 32,000 Merck & Co., Inc. 1,439,040 700 Pacificare Health Systems, Inc. * 22,827 57,100 Pfizer, Inc. 1,865,457 1,900 Renal Care Group, Inc. * 60,173 18,700 Schering-Plough Corp. 345,202 22,300 Tenet Healthcare Corp. * 232,366 5,400 UnitedHealth Group, Inc. 357,102 --------------- 9,614,762 ---------------
See accompanying notes to the financial statements. 6 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- MACHINERY -- 0.5% 1,100 Caterpillar, Inc. 79,970 3,700 Deere and Co. 234,099 500 Stanley Works (The) 21,630 4,700 Tidewater, Inc. 137,146 --------------- 472,845 --------------- MANUFACTURING -- 2.2% 900 3M Co. 74,124 3,800 American Standard Cos., Inc. * 142,918 2,100 Bemis Co., Inc. 55,503 12,200 General Electric Co. 400,038 10,700 Honeywell International, Inc. 384,986 3,700 Illinois Tool Works, Inc. 337,773 10,600 Owens-IIlinois, Inc. * 170,130 2,400 Pactiv Corp. * 56,760 4,600 Pentair, Inc. 152,904 2,000 Precision Castparts Corp. 110,180 6,400 Smurfit-Stone Container Corp. *(a) 113,536 2,500 Sonoco Products Co. 64,775 4,400 SPX Corp. 160,556 --------------- 2,224,183 --------------- METALS & MINING -- 0.3% 6,500 Alcoa, Inc. 210,470 1,500 Phelps Dodge Corp. 122,340 --------------- 332,810 --------------- OIL & GAS -- 7.0% 5,100 Amerada Hess Corp. 410,550 2,400 Anadarko Petroleum Corp. 142,128 2,100 Apache Corp. 93,849 800 Ashland, Inc. 41,144 5,300 Burlington Resources, Inc. 192,019 11,500 ChevronTexaco Corp. 1,121,250 12,709 ConocoPhillips 945,931 56,100 Exxon Mobil Corp. 2,586,210
See accompanying notes to the financial statements. 7 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- OIL & GAS -- CONTINUED 1,800 Kerr-McGee Corp. 95,004 16,600 Marathon Oil Corp. 602,082 8,700 Occidental Petroleum Corp. 449,355 1,800 Sunoco, Inc. 110,700 2,600 Unocal Corp. 97,084 4,400 Valero Energy Corp. 290,532 --------------- 7,177,838 --------------- PRIMARY PROCESS INDUSTRY -- 0.7% 100 Allegheny Technologies, Inc. 1,881 1,300 Dow Chemical Co. 55,653 3,000 Engelhard Corp. 84,810 1,100 FMC Corp. * 50,853 2,400 Lubrizol Corp. 85,560 1,900 Nucor Corp. 148,751 5,300 Sherwin-Williams Co. (The) 218,890 2,800 Worthington Industries, Inc. 56,980 --------------- 703,378 --------------- RETAIL STORES -- 5.9% 1,800 Abercrombie & Fitch Co.-Class A 50,400 23,900 Albertson's, Inc. (a) 587,462 5,800 Bed Bath & Beyond, Inc. * 217,036 4,500 Blockbuster, Inc.-Class A (a) 36,135 5,000 CVS Corp. 200,000 700 Dillard's, Inc.-Class A 13,300 700 Federated Department Stores 30,380 56,800 Home Depot, Inc. 2,076,608 9,900 JC Penney Co., Inc. Holding Co. 379,368 17,400 Kroger Co. * 287,622 3,700 Limited Brands, Inc. 74,296 3,100 Lowe's Cos., Inc. 154,070 4,300 May Department Stores Co. (The) 105,393 600 Neiman-Marcus Group, Inc.-Class A 31,920 3,100 Nordstrom, Inc. 115,103 3,000 Rent-A-Center, Inc. * 90,300
See accompanying notes to the financial statements. 8 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- RETAIL STORES -- CONTINUED 3,900 Ross Stores, Inc. 82,485 33,500 Safeway, Inc. * 676,700 11,400 Sears Roebuck & Co. 436,392 9,300 Supervalu, Inc. 245,148 9,000 TJX Cos., Inc. 190,440 3,900 Winn-Dixie Stores, Inc. (a) 16,263 --------------- 6,096,821 --------------- SERVICES -- 2.4% 9,350 Applebee's International, Inc. 225,054 7,500 Brinker International, Inc. * 228,375 3,900 Brink's Co. (The) 112,320 4,100 Caesars Entertainment, Inc. * 63,345 100 Catalina Marketing Corp. * 2,250 21,000 Cendant Corp. 454,230 7,800 First Health Group Corp. * 118,950 1,700 Harrah's Entertainment, Inc. 81,923 700 Interpublic Group of Cos., Inc. * 7,385 4,100 Manpower, Inc. 173,143 12,700 McDonald's Corp. 343,154 1,300 MGM Grand, Inc. * 53,742 6,200 Outback Steakhouse, Inc. 242,668 2,000 Regis Corp. 81,860 500 RR Donnelley & Sons Co. 15,365 7,500 Sabre Holdings Corp. 172,500 1,800 Wendy's International, Inc. 61,866 --------------- 2,438,130 --------------- TECHNOLOGY -- 6.0% 2,300 Arrow Electronics, Inc. *(a) 49,772 1,900 Autodesk, Inc. 84,379 2,500 Avnet, Inc. * 39,700 100 AVX Corp. 1,158 12,000 Boeing Co. (The) 626,640 2,800 Computer Associates International, Inc. 67,816 50,400 Dell, Inc. * 1,755,936
See accompanying notes to the financial statements. 9 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- TECHNOLOGY -- CONTINUED 18,700 Electronic Data Systems Corp. (a) 359,414 17,400 First Data Corp. 735,150 3,400 Goodrich Corp. 107,984 1,800 Harris Corp. 86,688 24,387 Hewlett-Packard Co. 436,283 10,000 Ikon Office Solutions, Inc. 112,800 9,800 Ingram Micro, Inc.-Class A * 145,236 2,200 Lexmark International, Inc. * 194,590 2,400 Lockheed Martin Corp. 129,072 29,200 Motorola, Inc. 471,580 2,300 NCR Corp. * 101,591 6,600 Northrop Grumman Corp. 340,890 1,700 Rockwell Automation, Inc. 66,300 900 Tech Data Corp. * 33,894 13,400 Time Warner, Inc. * 219,090 --------------- 6,165,963 --------------- TRANSPORTATION -- 0.4% 4,900 Burlington Northern Santa Fe Corp. 175,420 1,700 CNF, Inc. 69,734 5,400 Norfolk Southern Corp. 153,360 --------------- 398,514 --------------- UTILITY -- 16.1% 9,600 AES Corp. (The) * 96,864 3,300 Allegheny Energy, Inc. *(a) 48,477 2,300 Alliant Energy Corp. 59,777 200 Ameren Corp. 9,358 14,900 American Electric Power Co., Inc. 487,677 61,191 AT&T Corp. 904,403 4,900 AT&T Wireless Services, Inc. * 71,638 63,100 BellSouth Corp. 1,688,556 11,600 Centerpoint Energy, Inc. 126,904 8,200 CMS Energy Corp. *(a) 78,720 4,900 Consolidated Edison, Inc. 206,780 2,200 Constellation Energy Group, Inc. 90,420
See accompanying notes to the financial statements. 10 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- UTILITY -- CONTINUED 5,500 DTE Energy Co. 227,260 27,500 Duke Energy Corp. 608,850 2,300 Duquesne Light Holdings, Inc. 43,217 16,300 Edison International 438,144 51,100 El Paso Corp. 417,998 1,500 Energy East Corp. 36,555 1,000 Equitable Resources, Inc. 52,430 7,600 Exelon Corp. 280,060 4,600 FirstEnergy Corp. 185,104 3,300 FPL Group, Inc. 228,360 1,700 Great Plains Energy, Inc. 51,272 500 Nicor, Inc. 17,925 4,200 NiSource, Inc. 87,360 3,700 OGE Energy Corp. 96,200 25,300 PG&E Corp. * 738,507 1,500 Pinnacle West Capital Corp. 63,315 5,000 PPL Corp. 239,150 3,400 Progress Energy, Inc. 149,226 6,800 Public Service Enterprise Group, Inc. 287,912 3,300 Puget Energy, Inc. 75,603 5,800 Reliant Energy, Inc. * 57,768 142,853 SBC Communications, Inc. 3,684,179 6,400 Sempra Energy 231,360 38,700 Sprint Corp.-FON Group 761,616 7,500 TECO Energy, Inc. (a) 99,450 8,400 TXU Corp. 349,692 75,152 Verizon Communications, Inc. 2,949,716 1,000 Wisconsin Energy Corp. 32,750 7,500 Xcel Energy, Inc. (a) 132,375 --------------- 16,492,928 --------------- TOTAL COMMON STOCKS (COST $92,811,929) 98,872,808 ---------------
See accompanying notes to the financial statements. 11 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES/ UNITS/ PAR VALUE ($) DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- MUTUAL FUNDS -- 1.7% 1,199,374 Dreyfus Cash Management Plus Fund (b) 1,199,374 511,559 Merrimac Cash Series, Premium Class (b) 511,559 --------------- TOTAL MUTUAL FUNDS (COST $1,710,933) 1,710,933 --------------- RIGHTS AND WARRANTS -- 0.0% TECHNOLOGY -- 0.0% 800 Seagate Technology Inc., Rights (c) 8 --------------- TOTAL RIGHTS AND WARRANTS (COST $0) 8 --------------- SHORT-TERM INVESTMENTS -- 5.6% CASH EQUIVALENT -- 2.0% 2,019,311 Harris Trust & Savings Bank Eurodollar Time Deposit, 1.51%, due 9/16/04 (b) 2,019,311 --------------- U.S. GOVERNMENT -- 0.1% 100,000 U.S. Treasury Bill, 1.04%, due 9/23/04 (d)(e) 99,934 --------------- REPURCHASE AGREEMENTS -- 3.5% 3,580,766 Citigroup Global Markets Repurchase Agreement, dated 8/31/04, due 9/01/04, with a maturity value of $3,580,875, and an effective yield of 1.10%, collateralized by a U.S. Treasury Note with a rate of 2.75%, maturity date of 7/31/06, and a market value, including accrued interest of $3,652,819. 3,580,766 36,250 Morgan Stanley Repurchase Agreement, dated 8/31/04, due 9/01/04, with a maturity value of $36,251, and an effective yield of 1.10%, collateralized by a U.S. Treasury Bond with a rate of 8.75%, maturity date of 7/29/35, and a market value, including accrued interest of $37,145. 36,250 --------------- 3,617,016 --------------- TOTAL SHORT-TERM INVESTMENTS (COST $5,736,261) 5,736,261 ---------------
See accompanying notes to the financial statements. 12 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
DESCRIPTION VALUE ($) ----------------------------------------------------------------------------------- TOTAL INVESTMENTS -- 103.6% (Cost $100,259,123) 106,320,010 Other Assets and Liabilities (net) -- (3.6%) (3,651,034) --------------- TOTAL NET ASSETS -- 100.0% $ 102,668,976 ===============
NOTES TO THE SCHEDULE OF INVESTMENTS: REIT - Real Estate Investment Trust * Non-income producing security. (a) All or a portion of this security is out on loan (Note 2). (b) Investment of security lending collateral (Note 2). (c) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 2). (d) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 2). (e) Rate shown represents yield to maturity. At August 31, 2004, the approximate 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 - -------------------- -------------------- ---------------------- ------------------- $ 100,957,157 $ 6,948,772 $ (1,585,919) $ 5,362,853
A summary of outstanding financial instruments at August 31, 2004 is as follows: FUTURES CONTRACTS
NUMBER OF CONTRACT NET UNREALIZED CONTRACTS TYPE EXPIRATION DATE VALUE APPRECIATION - -------------- ---------------- ----------------- ------------ -------------- Buys 10 S&P 500 September 2004 $ 2,760,250 $ 33,424 ==============
At August 31, 2004, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. See accompanying notes to the financial statements. 13 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments, at value, including securities on loan of $3,605,977 (cost $100,259,123) (Note 2) $ 106,320,010 Receivable for investments sold 1,925,484 Receivable for Fund shares sold 28,938,976 Dividends and interest receivable 152,755 Receivable for variation margin on open futures contracts (Note 2) 12,750 Receivable for collateral on open futures contracts (Note 2) 70,000 Receivable for expenses reimbursed by Manager (Note 3) 7,161 --------------- Total assets 137,427,136 --------------- LIABILITIES: Payable for investments purchased 30,969,068 Payable upon return of securities loaned (Note 2) 3,730,244 Payable to affiliate for (Note 3): Management fee 19,826 Shareholder service fee 9,012 Trustees fee 191 Accrued expenses 29,819 --------------- Total liabilities 34,758,160 --------------- NET ASSETS $ 102,668,976 =============== NET ASSETS CONSIST OF: Paid-in capital $ 93,538,379 Accumulated undistributed net investment income 244,737 Accumulated net realized gain 2,791,549 Net unrealized appreciation 6,094,311 --------------- $ 102,668,976 =============== NET ASSETS ATTRIBUTABLE TO: Class III shares $ 102,668,976 =============== SHARES OUTSTANDING: Class III 9,302,003 =============== NET ASSET VALUE PER SHARE:
See accompanying notes to the financial statements. 14 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) Class III $ 11.04 ===============
See accompanying notes to the financial statements. 15 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends $ 842,185 Interest (including securities lending income of $1,466) 5,528 --------------- Total income 847,713 --------------- EXPENSES: Management fee (Note 3) 122,104 Shareholder service fee (Note 3) - Class III 55,502 Custodian and transfer agent fees 18,032 Audit and tax fees 20,332 Legal fees 1,012 Trustees fees and related expenses (Note 3) 522 Registration fees 1,104 Miscellaneous 368 --------------- Total expenses 218,976 Fees and expenses reimbursed by Manager (Note 3) (40,848) --------------- Net expenses 178,128 --------------- Net investment income 669,585 --------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 3,662,686 Closed futures contracts (34,820) --------------- Net realized gain 3,627,866 --------------- Change in net unrealized appreciation (depreciation) on: Investments (5,411,216) Open futures contracts 33,424 --------------- Net unrealized loss (5,377,792) --------------- Net realized and unrealized loss (1,749,926) ---------------
See accompanying notes to the financial statements. 16 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (1,080,341) ===============
See accompanying notes to the financial statements. 17 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 669,585 $ 1,176,192 Net realized gain 3,627,866 1,296,041 Change in net unrealized appreciation (depreciation) (5,377,792) 22,332,711 ---------------- ----------------- Net increase (decrease) in net assets from operations (1,080,341) 24,804,944 ---------------- ----------------- Distributions to shareholders from: Net investment income Class III (601,533) (1,160,172) Net realized gains Class III (299,365) -- ---------------- ----------------- (900,898) (1,160,172) ---------------- ----------------- Net share transactions (Note 6): Class III 32,719,288 (13,637,016) ---------------- ----------------- Total increase in net assets 30,738,049 10,007,756 NET ASSETS: Beginning of period 71,930,927 61,923,171 ---------------- ----------------- End of period (including accumulated undistributed net investment income of $244,737 and $176,685, respectively) $ 102,668,976 $ 71,930,927 ================ =================
See accompanying notes to the financial statements. 18 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ------------------------------------------------------------------ (UNAUDITED) 2004 2003 2002 2001 2000(a) ---------------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 11.36 $ 8.05 $ 10.73 $ 10.84 $ 8.79 $ 10.00 ---------------- ---------- ---------- ---------- ---------- ---------- Income from investment operations: Net investment income 0.10+ 0.17+ 0.15+ 0.18+ 0.20 0.11+ Net realized and unrealized gain (loss) (0.28) 3.31 (2.36) 0.05 2.06 (1.24) ---------------- ---------- ---------- ---------- ---------- ---------- Total from investment operations 0.18 3.48 (2.21) 0.23 2.26 (1.13) ---------------- ---------- ---------- ---------- ---------- ---------- Less distributions to shareholders: From net investment income (0.09) (0.17) (0.15) (0.20) (0.14) (0.08) From net realized gains (0.05) -- (0.32) (0.14) (0.07) -- ---------------- ---------- ---------- ---------- ---------- ---------- Total distributions (0.14) (0.17) (0.47) (0.34) (0.21) (0.08) ---------------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 11.04 $ 11.36 $ 8.05 $ 10.73 $ 10.84 $ 8.79 ================ ========== ========== ========== ========== ========== TOTAL RETURN (b) (1.61)%** 43.68% (21.05)% 2.16% 26.00% (11.36)%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 102,669 $ 71,931 $ 61,923 $ 97,622 $ 50,864 $ 38,650 Net expenses to average daily net assets 0.48%* 0.48% 0.48% 0.48% 0.48% 0.48%* Net investment income to average daily net assets 1.81%* 1.77% 1.56% 1.67% 2.04% 1.94%* Portfolio turnover rate 34%** 65% 114% 61% 89% 26%** Fees and expenses reimbursed by the Manager to average daily net assets: 0.11%* 0.14% 0.15% 0.09% 0.17% 0.25%*
(a) Period from August 2, 1999 (commencement of operations) through February 29, 2000. (b) The total return 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. See accompanying notes to the financial statements. 19 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION 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. 2. SIGNIFICANT ACCOUNTING POLICIES 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 as determined in good faith by the Trustees or other persons acting at their direction. FUTURES CONTRACTS The Fund may purchase and sell futures contracts 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. 20 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, 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 the Schedule of Investments for open futures contracts as of August 31, 2004. 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 using standard models that incorporate 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 on swap contracts 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 August 31, 2004, 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 21 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. See the Schedule of Investments for open repurchase agreements as of August 31, 2004. 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. As of August 31, 2004, the Fund had loaned securities having a market value of $3,605,977 collateralized by cash in the amount of $3,730,244 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. 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. 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. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. In determining the net gain or loss on securities sold, the cost of securities is determined on the identified cost basis. 22 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.33% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% for Class III shares. GMO has entered into a binding agreement effective until at least June 30, 2005 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 0.33% of the average daily net assets. The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $338. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004, aggregated $56,323,656 and $26,017,916, respectively. 5. PRINCIPAL SHAREHOLDERS AND RELATED PARTIES At August 31, 2004, 88.8% of the outstanding shares of the Fund were held by five 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. At August 31, 2004, 0.1% of the Fund was held by two related parties comprised of certain GMO employee accounts. As of August 31, 2004, greater than 10% of the Fund's shares were held by accounts for which the Manager has investment discretion. 23 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------------------------- ---------------------------------- CLASS III: SHARES AMOUNT SHARES AMOUNT --------------- --------------- --------------- --------------- Shares sold 3,470,576 $ 38,277,825 1,132,766 $ 10,691,859 Shares issued to shareholders in reinvestment of distributions 60,637 666,729 77,313 743,095 Shares repurchased (563,892) (6,225,266) (2,568,153) (25,071,970) --------------- --------------- --------------- --------------- Net increase (decrease) 2,967,321 $ 32,719,288 (1,358,074) $ (13,637,016) =============== =============== =============== ===============
7. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 24 GMO INTRINSIC VALUE FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees and other expenses. The following table, assuming a $1,000 investment in a class of shares, discloses the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the class's actual return and actual expense, and (2) a hypothetical annualized 5% return and the class's actual expense: Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * --------------------------------------------------------- 1) Actual $ 1,000.00 $ 983.90 $ 2.40 2) Hypothetical 1,000.00 1,022.79 2.45 ---------------------------------------------------------
*Expenses are calculated using the Class III annualized expense ratio for the six months ended August 31, 2004 of 0.48%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004, on your investment in a particular class of shares by dividing your investment value at August 31, 2004, by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 25 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
DESCRIPTION % OF NET ASSETS - ------------------------------------------------------------------------------------------------- Asset-Backed Securities 73.9% Corporate Debt 2.5 U.S. Government 9.0 U.S. Government Agency 3.3 Call Options Purchased 0.1 Mutual Funds 2.9 Forward Currency Contracts (0.0) Futures (0.0) Swaps 0.2 Short-Term Investments and Other Assets and Liabilities (net) 8.1 ----------------- 100.0% =================
See accompanying notes to the financial statements. 1 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - --------------- ----------------------------------------------------------------- --------------- DEBT OBLIGATIONS -- 88.7% ASSET-BACKED SECURITIES -- 73.9% AIRLINES -- 0.9% 23,000,000 Aircraft Finance Trust Series 99-1A Class A1, Variable Rate, 1 mo. LIBOR + .48%, 2.08%, due 05/15/24 (a) 16,330,000 12,647,809 Continental Airlines Series 99-1A, 6.55%, due 02/02/19 11,920,560 --------------- 28,250,560 --------------- AUTO FINANCING -- 3.2% 488,471 Capital Auto Receivables Asset Trust (GMAC) Series 02-2 Class A3, 3.82%, due 07/15/05 489,139 15,000,000 Capital Auto Receivables Asset Trust (GMAC) Series 03-1 Class A3A, 2.75%, due 04/16/07 15,032,812 13,000,000 Chesapeake Funding LLC Series 04-1A Class A2, 144A, Variable Rate, 1 mo. LIBOR + .16%, 1.63%, due 07/07/16 13,000,000 30,000,000 Daimler Chrysler Master Owner Trust Series 04-B Class A, Variable Rate, 1 mo. LIBOR + .01%, 1.65%, due 08/17/09 29,991,300 18,000,000 Ford Credit Auto Owner Trust Series 03-A Class A4A, 2.70%, due 06/15/07 17,937,000 20,000,000 Volkswagen Credit Auto Master Trust Series 00-1 Class A, Variable Rate, 1 mo. LIBOR +.16%, 1.76%, due 08/20/07 20,020,000 --------------- 96,470,251 --------------- BUSINESS LOANS -- 2.5% 14,571,345 Bayview Commercial Asset Trust Series 04-1 Class A, 144A, Variable Rate, 1 mo. LIBOR + .36%, 1.98%, due 04/25/34 14,574,260 20,000,000 Capitalsource Commercial Loan Trust Series 04-1A Class A2, 144A, Variable Rate, 1 mo. LIBOR + .33%, 1.93%, due 04/20/13 20,000,000 25,000,000 COLTS Trust Series 04-1A Class A, 144A, Variable Rate, 3 mo. LIBOR + .34%, 1.94%, due 09/15/14 25,000,000 9,927,480 GE Business Loan Trust Series 04-1 Class A, 144A, Variable Rate, 1 mo. LIBOR + .29%, 1.89%, due 05/15/32 9,927,480 6,604,837 The Money Store Business Loan Backed Trust Series 99-1 Class AN, Variable Rate, 1 mo. LIBOR +.50%, 2.10%, due 09/15/17 6,556,094 --------------- 76,057,834 ---------------
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) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - --------------- ----------------------------------------------------------------- --------------- CMBS COLLATERALIZED DEBT OBLIGATIONS -- 2.7% 19,981,431 Crest Series 04-1A Class A1, 144A, Variable Rate, 1 mo. LIBOR + .35%, 1.94%, due 06/28/19 19,981,431 20,000,000 J.P. Morgan Chase Commercial Mortgage Securities Corp. Series 04-FL1A Class A1, 144A, 1.77%, due 04/16/19 19,999,400 24,995,411 Lehman Brothers Commercial Mortgage Series 04-LLFA Class A1, 144A, Variable Rate, 1 mo. LIBOR + .13%, 1.73%, due 10/15/17 25,003,234 15,425,029 Morgan Stanley Dean Witter Capital I Series 03-TOP9 Class A1, 3.98%, due 11/13/36 15,386,466 --------------- 80,370,531 --------------- COLLATERALIZED LOAN OBLIGATIONS -- 0.2% 6,000,000 Archimedes Funding IV (Cayman) Ltd 4A A1, 144A, Variable Rate, 1 mo. LIBOR + .48%, 2.23%, due 02/25/13 6,000,000 --------------- CREDIT CARDS -- 12.6% 15,000,000 American Express Credit Account Master Trust Series 01-6 Class A, Variable Rate, 1 mo. LIBOR + .12%, 1.72%, due 12/15/08 15,024,023 15,000,000 American Express Credit Account Master Trust Series 02-6 Class A, Variable Rate, 1 mo. LIBOR + .14%, 1.74%, due 03/15/10 15,040,430 5,000,000 American Express Credit Account Master Trust Series 03-1 A, Variable Rate, 1 mo. LIBOR + .11%, 1.71%, due 09/15/10 5,008,500 20,000,000 Bank One Issuance Trust Series 02-A5 Class A5, Variable Rate, 1 mo. LIBOR + .12%, 1.72%, due 06/15/10 20,043,000 5,000,000 Bank One Issuance Trust Series 03 Class A1, Variable Rate, 1 mo. LIBOR + .12%, 1.72%, due 09/15/10 5,009,950 20,000,000 Capital One Master Trust Series 00-4 Class A, Variable Rate, 1 mo. LIBOR + .14%, 1.74%, due 08/15/08 20,028,906 15,000,000 Capital One Multi-Asset Execution Trust Series 04-A3 Class A3, Variable Rate, 1 mo. LIBOR + .10%, 1.70%, due 02/15/12 14,993,538 25,000,000 Chase Credit Card Master Trust Series 01-6 Class A, Variable Rate, 1 mo. LIBOR + .13%, 1.73%, due 03/16/09 25,056,641 15,650,000 Chase Credit Card Master Trust Series 02-1 Class A, Variable Rate, 1 mo. LIBOR +.10%, 1.70%, due 06/15/09 15,673,842 20,000,000 Citibank Credit Card Issuance Trust Series 04-A3 Class A3, Variable Rate, 3 mo. LIBOR + .07%, 1.73%, due 07/25/11 20,000,000 23,000,000 Discover Card Master Trust I Series 00-5 Class A, Variable Rate, 1 mo. LIBOR + .18%, 1.78%, due 11/15/07 23,028,750
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) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - --------------- ----------------------------------------------------------------- --------------- CREDIT CARDS -- CONTINUED 10,000,000 Discover Card Master Trust I Series 02-3 Class A, Variable Rate, 1 mo. LIBOR + .11%, 1.71%, due 11/17/09 10,016,406 4,000,000 Discover Card Master Trust I Series 03-2 Class A, Variable Rate, 1 mo. LIBOR + .13%, 1.73%, due 08/15/10 4,003,750 12,000,000 Discover Card Master Trust I Series 03-4 Class A1, Variable Rate, 1 mo. LIBOR + .11%, 1.87%, due 05/15/11 12,011,250 GBP 10,000,000 Earls Five Ltd Series EMTN, 3 mo. GBP LIBOR + .14%, 5.10%, due 02/27/08 17,872,568 20,000,000 Gracechurch Card Funding Plc Series 2 Class A, Variable Rate, 1 mo. LIBOR + .12%, 1.88%, due 10/15/09 20,044,531 20,000,000 Gracechurch Card Funding Plc Series 3 Class A, Variable Rate, 1 mo. LIBOR + .11%, 1.71%, due 03/15/10 20,037,500 27,000,000 MBNA Credit Card Master Note Trust Series 03-A3 Class A3, Variable Rate, 1 mo. LIBOR + .12%, 1.72%, due 08/16/10 27,037,800 14,000,000 MBNA Credit Card Master Note Trust Series 04-A7 Class A7, Variable Rate, 1 mo. LIBOR + .10%, 1.62%, due 12/15/11 13,873,125 15,000,000 MBNA Credit Card Master Note Trust Series 04-A8 Class A8, Variable Rate, 1 mo. LIBOR + .15%, 1.78%, due 01/15/14 15,000,000 8,000,000 Neiman Marcus Group Credit Card Master Trust Series 00-1 Class A, 144A, Variable Rate, 1 mo. LIBOR + .27%, 1.87%, due 04/15/08 8,008,000 9,100,000 Nordstrom Credit Card Master Note Trust Series 02-1A Class A, 144A, Variable Rate, 1 mo. LIBOR + .27%, 1.87%, due 10/13/10 9,136,613 18,000,000 World Financial Network Credit Card Master Trust Series 02-A Class A, Variable Rate, 1 mo. LIBOR + .43%, 2.03%, due 08/15/11 18,165,420 25,000,000 World Financial Network Credit Card Master Trust Series 04-A Class A, Variable Rate, 1 mo. LIBOR + .18%, 1.78%, due 03/15/13 25,007,812 --------------- 379,122,355 --------------- EMERGING MARKETS COLLATERALIZED DEBT OBLIGATIONS -- 0.0% 1,304,216 Oasis CBO Ltd, 144A, Variable Rate, 6 mo. LIBOR + .38%, 1.95%, due 05/30/11 1,291,892 --------------- EQUIPMENT LEASES -- 1.1% 12,000,000 Marlin Leasing Receivables LLC Series 04-1A Class A2, 144A, Variable Rate, 1 mo. LIBOR + .22%, 1.82%, due 01/15/07 12,000,000 20,000,000 Navistar Financial Dealer Note Master Trust Series 98-1 Class A, Variable Rate, 1 mo. LIBOR + .16%, 1.78%, due 07/25/11 20,000,000 --------------- 32,000,000 ---------------
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) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - --------------- ----------------------------------------------------------------- --------------- HIGH YIELD COLLATERALIZED DEBT OBLIGATIONS -- 0.9% 6,410,845 Nomura CBO Ltd Series 97-2 Class A2, 144A, Step up, 6.26%, due 10/30/09 6,507,007 598,887 Pacific Life CBO Series 98-1A Class A2A, 144A, 6.56%, due 02/15/10 598,887 15,148,532 Rhyno CBO Delaware Corp Series 97-1 Class A-2, 144A, Step Up, 6.33%, due 09/15/09 15,503,007 4,612,930 SHYPPCO Finance Co Series II Class A-2B, 144A, 6.64%, due 06/15/10 4,405,348 --------------- 27,014,249 --------------- INSURANCE PREMIUMS -- 1.2% 25,000,000 AICCO Premium Finance Master Trust Series 04-1A Class A, Variable Rate, 1 mo. LIBOR + .18%, 1.78%, due 11/17/08 24,986,328 11,000,000 Mellon Bank Premium Finance Loan Master Trust Series 04-1 Class A, Variable Rate, 3 mo. LIBOR + .16%, 1.67%, due 06/15/09 10,999,010 --------------- 35,985,338 --------------- INSURED AUTO FINANCING -- 3.1% 30,000,000 Aesop Funding II LLC Series 03-2A Class A1, 144A, MBIA, 2.74%, due 06/20/07 30,013,770 17,500,000 Aesop Funding II LLC Series 03-5A Class A2, 144A, Variable Rate, 1 mo. LIBOR + .38%, 1.98%, due 12/20/09 17,612,875 9,000,000 Aesop Funding II LLC Series 04-2A Class A2, 144A, FGIC, Variable Rate, 1 mo. LIBOR + .12%, 1.72%, due 04/20/08 9,005,625 4,610,968 Americredit Automobile Receivables Trust Series 00-B Class A4, FSA, Variable Rate, 1 mo. LIBOR + .20%, 1.73%, due 04/05/07 4,611,687 17,000,000 Capital One Auto Finance Trust Series 04-A Class A4, AMBAC, Variable Rate, 1 mo. LIBOR + .10%, 1.70%, due 03/15/11 17,005,270 15,000,000 Rental Car Finance Corp Series 04-1A Class A, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .20%, 1.82%, due 06/25/09 14,989,410 --------------- 93,238,637 --------------- INSURED BUSINESS LOANS -- 0.8% 11,180,660 CNL Commercial Mortgage Loan Trust Series 03-2A Class A1, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .44%, 2.06%, due 10/25/30 11,238,799 12,000,000 Golden Securites Corp Series 03-A Class A1, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .30%, 1.79%, due 12/02/13 12,005,880 --------------- 23,244,679 ---------------
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) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - --------------- ----------------------------------------------------------------- --------------- INSURED COLLATERALIZED LOAN OBLIGATIONS -- 0.2% 6,617,844 PAM Capital Funding Corp Series 98-1W Class A, 144A, FSA, Variable Rate, 3 mo. LIBOR + 17%, 1.86%, due 05/01/10 6,532,275 --------------- INSURED CREDIT CARDS -- 0.8% 25,000,000 Cabela's Master Credit Card Trust Series 04-2A Class A, 144A, 1.72%, due 03/15/11 25,000,000 --------------- INSURED EMERGING MARKETS COLLATERALIZED DEBT OBLIGATIONS -- 0.8% 14,332,273 Anfield Road I Ltd Series 1 Class A, CapMAC, PTE, Variable Rate, 6 mo. LIBOR + .25%, 2.18%, due 11/06/06 14,147,243 9,619,844 Starvest Emerging Markets CBO-I Series 1A, Class A, CapMAC, Variable Rate, 6 mo. LIBOR + .19%, 1.36%, due 07/30/11 9,446,013 --------------- 23,593,256 --------------- INSURED HIGH YIELD COLLATERALIZED DEBT OBLIGATIONS -- 2.7% 2,819,710 Cigna CBO Ltd Series 96-1 Class A2, 144A, Step Up, 6.46%, due 11/15/08 2,897,252 4,321,458 Clydesdale CBO 1 Ltd Series 1A Class A2 144A, FSA, 6.83%, due 03/25/11 4,407,887 4,537,706 DLJ CBO Ltd Series 1A Class A2, 144A, FSA, 6.68%, due 04/15/11 4,605,772 4,147,560 FC CBO Series 03-1AW Class A1, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .38%, 1.65%, due 06/03/09 4,137,191 10,000,000 GSC Partners CDO Fund Ltd Series 03-4A Class A3, 144A, AMBAC, Variable Rate, 3 mo. LIBOR + .46%, 1.71%, due 12/16/15 10,018,800 8,394,043 GSC Partners CDO Fund Ltd Series 1A Class A, 144A, FSA, Variable Rate, 6 mo. LIBOR + .40%, 1.79%, due 05/09/12 8,375,996 21,405,638 GSC Partners CDO Fund Ltd Series 2A Class A, 144A, FSA, Variable Rate, 6 mo. LIBOR + .52%, 2.09%, due 05/22/13 21,439,031 11,855,398 Northstar CBO Ltd Series 97-2I Class A2, 144A, Variable Rate, Step Up, 4.12%, due 07/15/09 11,855,398 13,939,248 Spirit CBO Series 03-4AW, Variable Rate, 6 mo. LIBOR + .55%, 1.77%, due 09/09/10 13,939,248 --------------- 81,676,575 ---------------
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) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - --------------- ----------------------------------------------------------------- --------------- INSURED INSURANCE PREMIUMS -- 0.8% 25,000,000 PFS Financing Corp Series 01-FA Class A, MBIA, 144A, Variable Rate, 1 mo. LIBOR + .33%, 1.93%, due 06/15/08 25,000,000 833,333 Polaris Funding Company Series EMTN, Variable Rate, 1 mo. LIBOR + .45%, 2.01%, due 01/07/05 832,583 --------------- 25,832,583 --------------- INSURED PERPETUAL LOAN COLLATERALIZED DEBT OBLIGATIONS -- 1.1% 35,000,000 Augusta Funding Ltd Series 10A Class F-1, 144A, CapMAC, Variable Rate, 3 mo. LIBOR + .25%, 1.84%, due 06/30/17 34,475,000 --------------- INSURED RESIDENTIAL HOME EQUITY (EUROPEAN) -- 1.9% GBP 16,500,000 RMAC Series 03-NS1A Class A2A, 144A, AMBAC, Variable Rate, 3 mo. GBP LIBOR + .45%, 5.26%, due 06/12/35 29,840,364 GBP 15,500,000 RMAC Series 03-NS2A Class A2A, 144A, AMBAC, Variable Rate, 3 mo. GBP LIBOR + .40%, 5.21%, due 09/12/35 27,952,319 --------------- 57,792,683 --------------- INSURED RESIDENTIAL HOME EQUITY (UNITED STATES) -- 2.5% 17,900,141 Accredited Mortgage Loan Trust Series 04-1 Class A2, AMBAC, Variable Rate, 1 mo. LIBOR + .30%, 1.92%, due 04/25/34 17,894,547 15,213,044 Citigroup Mortgage Loan Trust Inc Series 03-HE3 Class A, Variable Rate, 1 mo. LIBOR + .38%, 2.00%, due 12/25/33 15,262,183 13,338,431 Quest Trust Series 03-X4 Class A, 144A, AMBAC, Variable Rate, 1 mo LIBOR + .43%, 2.05%, due 12/25/33 13,338,418 8,321,874 Quest Trust Series 04-X1 Class A, Variable Rate, 1 mo. LIBOR + .33%, 1.95%, due 03/25/34 8,321,874 14,538,953 Residential Asset Securities Corp Series 02-KS3 Class A1B, AMBAC, Variable Rate, 1 mo. LIBOR + .25%, 1.87%, due 05/25/32 14,542,588 6,633,939 Residential Asset Securities Corp Series 02-KS5 Class AIB3, Variable Rate, 1 mo. LIBOR + .27%, 1.89%, due 08/25/32 6,631,866 --------------- 75,991,476 --------------- INSURED RESIDENTIAL PRIME MORTGAGES (UNITED STATES) -- 3.1% 10,267,017 Chevy Chase Mortgage Funding Corp Series 03-4, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .34%, 1.44%, due 10/25/34 10,281,455 8,674,610 GreenPoint Home Equity Loan Trust Series 04-1 Class A, AMBAC, Variable Rate, 1 mo. LIBOR + .23%, 1.85%, due 07/25/29 8,661,598
See accompanying notes to the financial statements. 7 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - --------------- ----------------------------------------------------------------- --------------- INSURED RESIDENTIAL PRIME MORTGAGES (UNITED STATES) -- CONTINUED 10,000,000 GreenPoint Home Equity Loan Trust Series 04-4 Class A, Variable Rate, 1 mo. LIBOR + .28%, 1.93%, due 08/15/30 10,000,000 21,201,190 Lehman ABS Corporation Series 04-2 Class A, AMBAC, Variable Rate, 1 mo. LIBOR + .22%, 1.84%, due 06/25/34 21,197,882 5,238,182 Residential Funding Mortgage Securities II Series 03-HS1 Class AII, Variable Rate, 1 mo. LIBOR + .29%, 1.91%, due 12/25/32 5,232,420 17,870,185 Wachovia Asset Securitization Inc Series 02-HE1 Class A, AMBAC, Variable Rate, 1 mo. LIBOR + .37%, 1.99%, due 09/27/32 17,896,096 20,000,000 Wachovia Asset Securitization Inc Series 04-HE1 Class A1, MBIA, 1.84%, due 04/25/34 20,000,000 --------------- 93,269,451 --------------- INSURED TIME SHARE MORTGAGE -- 0.5% 16,477,801 Cendant Timeshare Receivables Funding LLC Series 04-1A Class A2, 144A, MBIA, Variable Rate, 1 mo. LIBOR + .18%, 1.78%, due 05/20/16 16,484,409 --------------- INSURED TRANSPORTATION -- 0.5% 14,500,000 GE Seaco Finance Series 04-1A Class A, 144A, Variable Rate, 1 mo. LIBOR + .30%, 1.90%, due 04/17/19 14,500,000 --------------- INVESTMENT GRADE CORPORATE CDO -- 0.7% 20,000,000 Counts Trust Series 04-2, 144A, Variable Rate, 3 mo. LIBOR + .95%, 2.58%, due 09/23/09 20,070,000 --------------- RATE REDUCTION BOND -- 0.8% 22,824,579 California Infrastructure PG&E Series 97-1 Class A7, 6.42%, due 09/25/08 23,695,658 --------------- RESIDENTIAL HOME EQUITY (UNITED STATES) -- 16.3% 21,704,000 ACE Securities Corp. Series 04-OP1 Class A2B, Variable Rate, 1 mo. LIBOR + .22%, 1.84%, due 04/25/34 21,656,522 20,749,605 Aegis Asset Backed Securities Trust Series 04-1 Class A, Variable Rate, 1 mo. LIBOR + .35%, 1.97%, due 04/25/34 20,749,605 25,000,000 AmeriQuest Mortgage Securities Inc Series 04-FRI Class A-2, Variable Rate, 1 mo. LIBOR + .13%, 1.75%, due 05/25/34 24,929,687
See accompanying notes to the financial statements. 8 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - --------------- ----------------------------------------------------------------- --------------- RESIDENTIAL HOME EQUITY (UNITED STATES) -- CONTINUED 18,000,000 AmeriQuest Mortgage Securities Inc Series 04-R2 Class A3, Variable Rate, 1 mo. LIBOR + .20%, 1.82%, due 04/25/34 17,990,859 22,000,000 Argent Securities Inc Series 04-W8 Class A5, Variable Rate, 1 mo. LIBOR + .52%, 2.14%, due 05/25/34 21,993,125 10,000,000 Asset Backed Funding Certificates Series 04-AHL1, Variable Rate, 1 mo. LIBOR +.19%, 1.81%, due 02/25/30 9,976,953 10,400,000 Bayview Commercial Asset Trust Series 04-B Class A2, 144A, Variable Rate, 1 mo. LIBOR + .65%, 2.11%, due 05/28/39 10,406,500 10,000,000 Bayview Financial Acquisition Trust Series 04-B Class A1, 144A, Variable Rate, 1 mo. LIBOR + .50%, 1.96%, due 05/28/39 10,006,250 17,270,000 Centex Home Equity Series 04-B Class AV3, Variable Rate, 1 mo. LIBOR + .20%, 1.82%, due 03/25/34 17,224,127 23,778,380 Centex Home Equity Series 04-C Class AV3, Variable Rate, 1 mo. LIBOR + .13%, 1.75%, due 11/25/28 23,769,091 6,298,423 Chase Funding Mortgage Loan Trust Series 03-3 Class 2A2, Variable Rate, 1 mo. LIBOR + .27%, 1.89%, due 04/25/33 6,302,360 17,000,000 CIT Group Home Equity Loan Trust Series 03-1 Class A3, 2.79%, due 03/20/29 16,974,330 10,551,327 Citifinancial Mortgage Securities Inc Series 04-1 Class AF1, Variable Rate, 1 mo. LIBOR + .09%, 1.71%, due 04/25/34 10,551,327 10,000,000 Citigroup Mortgage Loan Trust Inc Series 04-OPT1 Class A1B, Variable Rate, 1 mo. LIBOR + .41%, 2.08%, due 10/25/34 10,000,000 14,960,183 Countrywide Asset-Backed Certificates Series 04-2 Class 3A1, Variable Rate, 1 mo. LIBOR +.08%, 1.70%, due 04/25/23 14,951,805 18,000,000 Credit Based Asset Servicing and Securities Series 04-CB6 Class AV 1, Variable Rate, 1 mo. LIBOR + .33%, 1.91%, due 07/25/35 18,000,000 16,487,296 Deutsche Mortgage Securities Inc Series 04-3 Class 1A1, Variable Rate, 1 mo. LIBOR + .18%, 1.80%, due 03/25/34 16,482,143 14,458,152 Equity One ABS Inc Series 04-1 Class AV2, Variable Rate, 1 mo. LIBOR + .30%, 1.92%, due 04/25/34 14,458,152 17,093,504 Equity One ABS Inc Series 04-2 Class AF1, Variable Rate, 1 mo. LIBOR + .11%, 1.73%, due 07/25/34 17,088,376 16,097,992 First Franklin Mortgage Loan Asset Backed Certificate Series 04-FF2 Class A2, Variable Rate, 1 mo. LIBOR + .09%, 1.71%, due 03/25/34 16,090,446 20,000,000 Household Mortgage Loan Trust Series 04-HC1 Class A, Variable Rate, 1 mo. LIBOR + .35%, 1.98%, due 02/20/34 20,000,000 16,697,290 Master Asset Backed Securities Trust Series 04-Opt1 Class A3, Variable Rate, 1 mo. LIBOR + .26%, 1.88%, due 02/25/34 16,671,200
See accompanying notes to the financial statements. 9 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - --------------- ----------------------------------------------------------------- --------------- RESIDENTIAL HOME EQUITY (UNITED STATES) -- CONTINUED 16,015,868 Meritage Mortgage Loan Trust Series 04-1 Class 2A1, Variable Rate, 1 mo. LIBOR + .09%, 1.71%, due 07/25/34 16,008,360 15,000,000 Morgan Stanley ABS Capital I Series 04-HE5, Variable Rate, 1 mo. LIBOR + .53%, 2.15%, due 06/25/34 14,995,312 25,000,000 Morgan Stanley ABS Capital I Series 04-NC4 Class A3, Variable Rate, 1 mo. LIBOR + .23%, 1.85%, due 04/25/34 24,992,188 18,270,020 Morgan Stanley ABS Capital I Series 04-SD1 Class A, Variable Rate, 1 mo. LIBOR + .40%, 2.02%, due 08/25/34 18,264,311 13,859,727 Option One Mortgage Loan Trust Series 04-2 Class A2, Variable Rate, 1 mo. LIBOR + .11%, 1.73%, due 05/25/34 13,816,415 15,146,475 Residential Asset Mortgage Products Inc Series 03-RS11 Class AI1, Variable Rate, 1 mo. LIBOR + .19%, 1.81%, due 03/25/23 15,145,566 13,163,236 Saxon Asset Securities Trust Series 04-1 Class A, Variable Rate, 1 mo. LIBOR + .27%, 1.89%, due 03/25/35 13,157,066 20,000,000 Wells Fargo Home Equity Trust Series 04-2 Class A1A, Variable Rate, 1 mo. LIBOR + .17%, 1.87%, due 09/25/34 20,000,000 --------------- 492,652,076 --------------- RESIDENTIAL PRIME MORTGAGES (AUSTRALIAN) -- 4.0% 26,244,400 Australian Mortgage Securities II Series G3 Class A1A, Variable Rate, 3 mo. LIBOR + .21%, 1.80%, due 01/10/35 26,254,898 22,738,287 Interstar Millennium Trust Series 03-3G Class A2, Variable Rate, 3 mo. LIBOR + .25%, 1.84%, due 09/27/35 22,773,816 21,802,860 Interstar Millennium Trust Series 03-5G Class A2, Variable Rate, 3 mo. LIBOR + .25%, 1.88%, due 01/20/36 21,835,224 20,389,560 Interstar Millennium Trust Series 04-2G Class A, Variable Rate, 3 mo. LIBOR + .20%, 1.72%, due 03/14/36 20,384,781 15,225,446 Medallion Trust Series 03-1G Class A, Variable Rate, 3 mo. LIBOR + .19%, 1.74%, due 12/21/33 15,242,194 12,981,831 Medallion Trust Series 04-1G Class A1, Variable Rate, 3 mo. LIBOR + .13%, 1.88%, due 05/25/35 12,981,831 --------------- 119,472,744 --------------- RESIDENTIAL PRIME MORTGAGES (EUROPEAN) -- 2.4% 19,000,000 Lothian Mortgages Plc Series 3A Class A1, 144A, Variable Rate, 3 mo. LIBOR + .14%, 1.80%, due 07/24/19 19,000,000 14,000,000 Paragon Mortgages Plc Series 6A Class A2A, 144A, Variable Rate, 3 mo. LIBOR + .35%, 1.87%, due 03/15/30 14,047,578
See accompanying notes to the financial statements. 10 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - --------------- ----------------------------------------------------------------- --------------- RESIDENTIAL PRIME MORTGAGES (EUROPEAN) -- CONTINUED 20,000,000 Paragon Mortgages Plc Series 7A Class A1A, 144A, Variable Rate, 3 mo. LIBOR, 1.76%, due 05/15/34 20,000,000 20,000,000 Permanent Financing Plc Series 5 Class 2A, Variable Rate, 3 mo. LIBOR + .11%, 1.60%, due 06/10/11 20,006,250 --------------- 73,053,828 --------------- RESIDENTIAL PRIME MORTGAGES (UNITED STATES) -- 2.0% 25,197,155 CC Mortgage Funding Corp Series 04-1A, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .33%, 1.42%, due 01/25/38 25,205,029 18,207,091 Impac Secured Assets CMN Owner Trust Series 04-1 Class A1, Variable Rate, 1 mo. LIBOR + .15%, 1.77%, due 03/25/34 18,196,167 18,070,758 Mellon Residential Funding Corp Series 04-TBC1 Class A, 144A, Variable Rate, 1 mo. LIBOR + .25%, 1.88%, due 02/26/34 18,028,405 --------------- 61,429,601 --------------- STUDENT LOANS -- 2.9% 22,000,000 College Loan Corporation Trust Series 04-1 Class A2, Variable Rate, 1 mo. LIBOR + .11%, 1.77%, due 04/25/16 22,013,750 25,000,000 National Collegiate Student Loan Trust Series 04-1 Class A1, Variable Rate, 3 mo. LIBOR +.12%, 1.59%, due 06/25/14 25,007,813 20,000,000 Nelnet Student Loan Corporation Series 04-2A Class A3, Variable Rate, 3 mo. LIBOR + .10%, 1.32%, due 11/25/15 20,000,000 4,932,000 SMS Student Loan Trust Series 95-A Certificates, Variable Rate, 1 mo. LIBOR + .65%, 2.27%, due 04/25/25 4,938,905 12,772,863 SMS Student Loan Trust Series 97-A Class A, Variable Rate, 3 mo. U.S. Treasury Bill + .60%, 2.14%, due 10/27/25 12,763,922 2,180,531 Student Loan Marketing Association Series 96-4 Class A2, Variable Rate, 3 mo. U.S. Treasury Bill + .64%, 2.18%, due 07/25/09 2,171,329 --------------- 86,895,719 --------------- TRADE RECEIVABLE -- 0.7% 20,000,000 Alliant Master Trust Series 00-1A Class A, 144A, Variable Rate, 1 mo. LIBOR + .39%, 1.99%, due 06/20/06 20,007,000 --------------- Total Asset-Backed Securities 2,231,470,660 ---------------
See accompanying notes to the financial statements. 11 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - --------------- ----------------------------------------------------------------- --------------- CORPORATE DEBT -- 0.3% 10,000,000 General Motors Acceptance Corp, 7.50%, due 07/15/05 10,396,900 --------------- INSURED CORPORATE DEBT -- 2.2% 11,750,000 Banco Santander Series MBIA, 6.50%, due 11/01/05 12,173,212 28,650,000 Pemex Finance Ltd, Series 1A1 Class A2, AMBAC, 144A, 6.30%, due 05/15/10 30,780,844 20,500,000 Westralia Airports Corp, 144A, MBIA, 6.48%, due 04/01/10 22,800,100 --------------- 65,754,156 --------------- U.S. GOVERNMENT -- 9.0% 31,700,430 U.S. Treasury Inflation Indexed Note, 3.63%, due 01/15/08 (b) 34,855,615 137,000,000 U.S. Treasury Note, 2.00%, due 11/30/04 (a) 137,149,851 100,000,000 U.S. Treasury Note, 2.00%, due 08/31/05 (a) 100,031,250 --------------- 272,036,716 --------------- U.S. GOVERNMENT AGENCY -- 3.3% 950,000 Agency for International Development Floater (Support of Belize), Variable Rate, 6 mo. U.S. Treasury Bill + .50%, 2.29%, due 01/01/14 939,313 3,544,375 Agency for International Development Floater (Support of C.A.B.E.I.), Variable Rate, 6 mo. U.S. Treasury Bill + .40%, 2.19%, due 10/01/12 3,500,070 1,502,923 Agency for International Development Floater (Support of Honduras), Variable Rate, 3 mo. U.S. Treasury Bill x 117%, 1.16%, due 10/01/11 1,497,287 15,000,000 Agency for International Development Floater (Support of India), Variable Rate, 3 mo. LIBOR + .10%, 1.89%, due 02/01/27 14,831,250 4,716,502 Agency for International Development Floater (Support of Jamaica), Variable Rate, 6 mo. U.S. Treasury Bill + .75%, 2.54%, due 03/30/19 4,698,816 20,000,000 Agency for International Development Floater (Support of Morocco), Variable Rate, 6 mo. LIBOR - .015%, 1.92%, due 02/01/25 19,650,000 15,000,000 Agency for International Development Floater (Support of Morocco), Variable Rate, 6 mo. LIBOR + .15%, 2.08%, due 10/29/26 14,989,500 1,176,840 Agency for International Development Floater (Support of Morocco), Variable Rate, 6 mo. U.S. Treasury Bill + .45%, 2.24%, due 11/15/14 1,160,659
See accompanying notes to the financial statements. 12 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE ($)/ PRINCIPAL AMOUNT/ SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- U.S. GOVERNMENT AGENCY -- CONTINUED 2,185,126 Agency for International Development Floater (Support of Peru), Series A, Variable Rate, 6 mo. U.S. Treasury Bill +.35%, 2.14%, due 05/01/14 2,176,932 20,625,000 Agency for International Development Floater (Support of Portugal), Variable Rate, 6 mo. LIBOR, 1.98%, due 01/01/21 20,599,219 13,395,000 Agency for International Development Floater (Support of Tunisia), Variable Rate, 6 mo. LIBOR, 1.94%, due 07/01/23 13,227,563 1,250,001 Agency for International Development Floater (Support of Zimbabwe), Variable Rate, 3 mo. U.S. Treasury Bill x 115%, 1.14%, due 01/01/12 1,240,626 1,072,310 Small Business Administration Series 95-10C Class 1, 6.88%, due 09/01/05 1,105,751 --------------- 99,616,986 --------------- TOTAL DEBT OBLIGATIONS (COST $2,672,344,521) 2,679,275,418 --------------- CALL OPTIONS PURCHASED -- 0.1% OPTIONS ON BONDS -- 0.1% 25,000,000 Bellsouth Telecommunications, 7.00%, due 12/01/95, Expires 10/26/06, Strike 100.00 1,178,612 --------------- TOTAL CALL OPTIONS PURCHASED (COST $2,281,250) 1,178,612 --------------- MUTUAL FUNDS -- 2.9% 8,341,574 Dreyfus Cash Management Plus Fund (c) 8,341,574 78,983,427 Merrimac Cash Series, Premium Class (c) 78,983,427 --------------- TOTAL MUTUAL FUNDS (COST $87,325,001) 87,325,001 ---------------
See accompanying notes to the financial statements. 13 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 11.1% CASH EQUIVALENT -- 0.5% 14,044,190 Harris Trust & Savings Bank Eurodollar Time Deposit, 1.51%, due 9/16/04 (c) 14,044,190 --------------- COMMERCIAL PAPER -- 10.6% 89,000,000 BMW US Capital Corp., 1.56%, due 09/01/04 88,996,144 75,000,000 Koch Industries LLC, 1.50%, due 09/16/04 74,950,000 68,850,000 Rabobank USA, 1.5%, due 09/01/04 68,847,131 88,600,000 UBS Finance (Delaware) Inc, 1.47%, due 09/01/04 88,596,382 --------------- 321,389,657 --------------- TOTAL SHORT-TERM INVESTMENTS (COST $335,433,847) 335,433,847 --------------- TOTAL INVESTMENTS -- 102.8% (Cost $3,097,384,619) 3,103,212,878 Other Assets and Liabilities (net)--(2.8%) (83,888,114) --------------- TOTAL NET ASSETS -- 100.0% $ 3,019,324,764 ===============
See accompanying notes to the financial statements. 14 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. CapMAC - Insured as to the payment of principal and interest by Capital Markets Assurance Corporation. CBO - Collateralized Bond Obligation CDO - Collateralized Debt Obligation EMTN - Euromarket Medium Term Note FGIC - Insured as to the payment of principal and interest by Financial Guaranty Insurance Corporation. FSA - Insured as to the payment of principal and interest by Financial Security Assurance. MBIA - Insured as to the payment of principal and interest by MBIA Insurance Corp. (a) All or a portion of this security is out on loan (Note 2). (b) Indexed security in which price and/or coupon is linked to prices of other securities, securities indices, or other financial indicators (Note 2). (c) All or a portion of this security represents investment of security lending collateral (Note 2). CURRENCY ABBREVIATIONS: GBP - British Pound See accompanying notes to the financial statements. 15 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) At August 31, 2004, the approximate 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 - ------------------- ------------------- ------------------- ------------------- $ 3,098,050,626 $ 13,076,509 $ (7,914,257) $ 5,162,252
At February 29, 2004, GMO Short-Duration Collateral Fund elected to defer to March 1, 2004 post-October losses of $2,353,728. A summary of outstanding financial instruments at August 31, 2004 is as follows: FORWARD CURRENCY CONTRACTS
SETTLEMENT NET UNREALIZED DATE DELIVER UNITS OF CURRENCY VALUE DEPRECIATION - ------------- ------------ ------------------- -------------- ---------------- Sales 11/16/04 GBP 42,000,000 $ 75,079,678 $ (319,678) ================
FUTURES CONTRACTS
NUMBER OF CONTRACT NET UNREALIZED CONTRACTS TYPE EXPIRATION DATE VALUE DEPRECIATION - -------------- ----------------------------- ----------------- ------------- ---------------- Sales 368 U.S. Treasury Note 5 Yr. December 2004 $ 40,727,250 $ (284,492) =============
At August 31, 2004, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. See accompanying notes to the financial statements. 16 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) - ----------------- ----------- ------------------------------------------------ ---------------- INTEREST RATE SWAPS 100,000,000 USD 1/18/06 Agreement with Goldman Sachs International $ 4,087,897 dated 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. 50,000,000 USD 1/9/08 Agreement with JP Morgan Chase Bank dated (218,054) 1/07/03 to pay the notional amount multiplied by 3.43375% and to receive the notional amount multiplied by the 3 month Floating Rate LIBOR. 45,000,000 USD 3/4/08 Agreement with JP Morgan Chase Bank dated 422,075 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. 40,000,000 USD 1/24/11 Agreement with Goldman Sachs International 349,838 dated 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. 38,100,000 USD 2/24/13 Agreement with JP Morgan Chase Bank dated 13,444 12/09/03 to pay the notional amount multiplied by 4.54% and to receive the notional amount multiplied by the 3 month Floating Rate LIBOR. TOTAL RETURN SWAPS 55,000,000 USD 9/30/04 Agreement with Citibank N.A. dated 6/29/04 to 1,312,822 receive the notional amount multiplied by the return on the Lehman Brothers AAA CMBS Index and to pay initial market value multiplied by the 1 month LIBOR adjusted by a specified spread.
See accompanying notes to the financial statements. 17 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) - ----------------- ----------- ------------------------------------------------ --------------- 15,000,000 USD 1/31/05 Agreement with Citibank N.A. dated 7/30/04 to $ 555,991 receive the notional amount multiplied by the return on the Lehman Brothers AAA CMBS 8.5+ Index and to pay initial market value multiplied by the 1 month LIBOR adjusted by a specified spread. 50,000,000 USD 3/1/05 Agreement with JP Morgan Chase Bank dated -- 8/30/04 to receive the notional amount multiplied by the return on the Lehman Brothers AAA CMBS 8.5+ Index and to pay initial market value multiplied by the 1 month LIBOR adjusted by a specified spread. -------------- $ 6,524,013 ==============
See accompanying notes to the financial statements. 18 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments, at value, including securities on loan of $25,369,763 (cost $3,097,384,619) (Note 2) $ 3,103,212,878 Receivable for Fund shares sold 18,350,000 Interest receivable 7,069,502 Receivable for expenses reimbursed by Manager (Note 3) 44,187 --------------- Total assets 3,128,676,567 --------------- LIABILITIES: Payable for investments purchased 74,005,310 Payable upon return of securities loaned (Note 2) 25,943,625 Due to custodian 1,153 Payable to affiliate for (Note 3): Trustees fee 3,736 Payable for open forward foreign currency contracts (Note 2) 319,678 Interest payable for open swap contracts (Note 2) 1,451,181 Periodic payments from open swap contracts (Note 2) 7,409,606 Payable for variation margin on open futures contracts (Note 2) 120,751 Accrued expenses 96,763 --------------- Total liabilities 109,351,803 --------------- NET ASSETS $ 3,019,324,764 =============== NET ASSETS CONSIST OF: Paid-in capital $ 2,994,180,525 Accumulated undistributed net investment income 19,827,781 Accumulated net realized loss (4,127,655) Net unrealized appreciation 9,444,113 --------------- $ 3,019,324,764 =============== NET ASSETS $ 3,019,324,764 =============== SHARES OUTSTANDING: 119,152,915 =============== NET ASSET VALUE PER SHARE: $ 25.34 ===============
See accompanying notes to the financial statements. 19 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Interest (including securities lending income of $17,753) $ 25,178,975 --------------- Total income 25,178,975 --------------- EXPENSES: Custodian and transfer agent fees 103,224 Audit and tax fees 33,304 Legal fees 36,156 Trustees fees and related expenses (Note 3) 21,863 Miscellaneous 10,948 --------------- Total expenses 205,495 Fees and expenses reimbursed by Manager (Note 3) (184,431) --------------- Net expenses 21,064 --------------- Net investment income 25,157,911 --------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (1,072,783) Closed futures contracts 478,109 Closed swap contracts (6,453,618) Foreign currency, forward contracts and foreign currency related transactions 373,169 --------------- Net realized loss (6,675,123) =============== Change in net unrealized appreciation (depreciation) on: Investments (6,711,179) Open futures contracts (284,492) Open swap contracts 6,839,424 Foreign currency, forward contracts and foreign currency related transactions (1,380,718) --------------- Net unrealized loss (1,536,965) --------------- Net realized and unrealized loss (8,212,088) ---------------
See accompanying notes to the financial statements. 20 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 16,945,823 ===============
See accompanying notes to the financial statements. 21 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 25,157,911 $ 31,521,757 Net realized loss (6,675,123) (13,894,459) Change in net unrealized appreciation (depreciation) (1,536,965) 13,375,195 ---------------- ----------------- Net increase in net assets from operations 16,945,823 31,002,493 ---------------- ----------------- Distributions to shareholders from: Net investment income (316,332) (21,843,050) Net realized gains (1,370,773) -- ---------------- ----------------- (1,687,105) (21,843,050) ---------------- ----------------- Net share transactions (Note 6): 1,252,530,862 595,422,052 ---------------- ----------------- Total increase in net assets 1,267,789,580 604,581,495 NET ASSETS: Beginning of period 1,751,535,184 1,146,953,689 ---------------- ----------------- End of period (including accumulated undistributed net investment income of $19,827,781 and distributions in excess of net investment income of $5,013,798, respectively) $ 3,019,324,764 $ 1,751,535,184 ================ =================
See accompanying notes to the financial statements. 22 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29 AUGUST 31, 2004 -------------------------------- (UNAUDITED) 2004 2003(a)(b) ----------------- ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 25.18 $ 25.01 $ 25.00 ----------------- ------------ ------------ Income from investment operations: Net investment income 0.24 0.56 0.18 Net realized and unrealized gain (loss) (0.07) 0.06(c) (0.12) ----------------- ------------ ------------ Total from investment operations 0.17 0.62 0.06 ----------------- ------------ ------------ Less distributions to shareholders: From net investment income 0.00(d) (0.45) (0.05) From net realized gains (0.01) -- -- ----------------- ------------ ------------ Total distributions (0.01) (0.45) (0.05) ----------------- ------------ ------------ NET ASSET VALUE, END OF PERIOD $ 25.34 $ 25.18 $ 25.01 ================= ============ ============ TOTAL RETURN (e) 0.70%** 2.48% 0.24%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 3,019,325 $ 1,751,535 $ 1,146,954 Net operating expenses to average daily net assets 0.00%(f)* 0.00%(f) 0.00%* Interest expense to average daily net assets -- 0.00%(g) -- Total net expenses to average daily net assets 0.00%(h)* 0.00%(h) 0.00%* Net investment income to average daily net assets 2.06%* 2.51% 2.94%* Portfolio turnover rate 19%** 33% 15%** Fees and expenses reimbursed by the Manager to average daily net assets: 0.02%* 0.02% 0.05%*
(a) Period from November 26, 2002 (commencement of operations) through February 28, 2003. (b) As a result of recent changes in generally accepted accounting principles, the Fund has reclassified periodic payments made under interest rate swap agreements, previously included within interest income, as a component of realized gain (loss) in the Statement of Operations. The effect of this reclassification was to increase the net investment income ratio for the year ending February 29, 2004 by 0.71% and net investment income per share by $0.06. For consistency, similar reclassifications have been made to prior year amounts, resulting in an increase to the net investments income ratio of 0.60% and to the net investment income per share of $0.03 in the period ended February 28, 2003. (c) 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. (d) Distributions from net investment income were less than $0.01. (e) The total returns would have been lower had certain expenses not been reimbursed during the period shown. (f) Net operating expenses were less than 0.01% to average daily net assets. (g) Interest expense was less than 0.01% to average daily net assets. (h) Total net expenses were less than 0.01% to average daily net assets. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 23 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION GMO Short-Duration Collateral Fund (the "Fund"), is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks total return in excess of its benchmark. 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 certain other accredited investors. On January 23, 2004, the trustees of the Trust approved a transaction pursuant to which GMO Alpha LIBOR Fund contributed $214,143,316 in net assets to the Fund in exchange for 8,491,012 shares of the Fund. The transaction, which was structured as a tax-free reorganization, was consummated after the close of business on March 31, 2004 and the shares received by GMO Alpha LIBOR Fund were then distributed to its shareholders. 2. SIGNIFICANT ACCOUNTING POLICIES 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. CHANGE IN ACCOUNTING PRINCIPLE For the year ended February 29, 2004, as a result of a FASB Emerging Issues Task Force consensus (and subsequent related SEC staff guidance), the Fund reclassified periodic payments made under interest rate swap agreements, previously included within interest income, as a component of realized gain (loss) in the Statement of Operations. For consistency, similar reclassifications have been made to the per share amounts in all prior year financial highlights presented. Prior year net investment income ratios in the financial highlights have also been modified accordingly. This reclassification increased net investment income and decreased net realized gains by $9,007,309 for the year ended February 29, 2004. This change had no effect on the Fund's net asset value, either in total or per share, or its total increase (decrease) in net assets from operations during any period. 24 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 as determined in good faith by the Trustees or other persons acting at their direction. A security's value or exchange rate 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 the 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 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. As of August 31, 2004, the total value of these securities represented 25.8% of net assets. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. 25 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 the Schedule of Investments and represents the currency exposure the Fund has acquired or hedged through forward currency contracts as of August 31, 2004. 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. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, 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 the Schedule of Investments for all open futures contracts as of August 31, 2004. 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 26 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying investment increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of August 31, 2004, 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 closing 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 August 31, 2004. 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. As of August 31, 2004, the Fund did not hold any loan assignments. As of August 31, 2004, the Fund did not hold any loan assignments. 27 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. See the Schedule of Investments for all indexed securities held as of August 31, 2004. 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 using standard models that incorporate 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 on swap contracts 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 interest rates. See the Schedule of Investments for a summary of open swap agreements as of August 31, 2004. 28 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. As of August 31, 2004, the Fund held no open repurchase agreements. 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. The market value of the securities the Fund has sold is determined daily and any additional required collateral is allocated to or sent by the fund on the next business day. As of August 31, 2004, 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. As of August 31, 2004, the Fund had loaned securities having a market value of $25,369,763 collateralized by cash in the amount of $25,943,625, 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. Generally, no provision for U.S. federal income or excise tax is necessary. The Fund's policy is to declare and pay distributions from net investment income semi-annually, and from net realized short-term and long-term capital gains at least annually. All distributions are paid in shares of 29 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. 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. 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. 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. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO does not charge the Fund any management or service fees for its services. In addition, effective until at least June 30, 2005, GMO has contractually agreed to reimburse all of the Fund's 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, fees and expenses of the independent 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 six months ended August 31, 2004 was $16,987. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 30 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 4. PURCHASES AND SALES OF SECURITIES For the six months ended August 31, 2004, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
PURCHASES SALES --------------------- --------------------- U.S. Government securities $ 31,797,206 $ 2,322,401 Investments (non-U.S. Government securities) 1,486,839,368 405,923,258
5. PRINCIPAL SHAREHOLDERS At August 31, 2004, 61.8% of the outstanding shares of the Fund were held by three shareholders, each holding in excess of 10% of the Fund's outstanding shares. Three of the shareholders are other funds of GMO Trust. Investment activities of these shareholders may have a material effect on the Fund. 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------------------------- ---------------------------------- SHARES AMOUNT SHARES AMOUNT --------------- --------------- --------------- --------------- Shares sold 56,826,936 $ 1,435,043,316 55,814,806 $ 1,405,255,000 Shares issued to shareholders in reinvestment of distributions 66,763 1,687,105 871,388 21,843,050 Shares repurchased (7,293,913) (184,199,559) (32,984,732) (831,675,998) --------------- --------------- --------------- --------------- Net increase 49,599,786 $ 1,252,530,862 23,701,462 $ 595,422,052 =============== =============== =============== ===============
7. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 31 GMO SHORT-DURATION COLLATERAL FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as custodian and transfer agent fees, audit and tax fees and other expenses. The following table, assuming a $1,000 investment in a class of shares, discloses the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the class's actual return and actual expenses, and (2) a hypothetical annualized 5% return and the class's actual expenses:
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * -------------------------------------------------------- 1) Actual $ 1,000.00 $ 1,007.00 $ 0.01 2) Hypothetical 1,000.00 1,025.21 0.01
*Expenses are calculated using the annualized expense ratio for the six months ended August 31, 2004 of less than 0.01%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 32 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
DESCRIPTION % OF NET ASSETS - -------------------------------------------------------------------------------- Argentina 0.1% Australia 1.4 Austria 1.4 Belgium 3.4 Brazil 0.6 Canada 0.5 China 0.3 Denmark 0.0 Finland 1.5 France 4.2 Germany 8.7 Greece 0.2 Hong Kong 1.4 Hungary 0.1 India 0.1 Indonesia 0.2 Ireland 1.1 Italy 3.3 Japan 24.9 Malaysia 0.3 Mexico 0.3 Netherlands 6.5 New Zealand 0.0 Norway 3.1 Philippines 0.1 Poland 0.0 Russia 0.2 Singapore 1.7 South Africa 0.4 South Korea 1.2 Spain 2.2 Sweden 3.1 Switzerland 3.7 Taiwan 0.6 Thailand 0.1 Turkey 0.4 United Kingdom 21.0 Short-Term Investments and Other Assets and Liabilities (net) 1.7 ---------- 100.0% ==========
See accompanying notes to the financial statements. 1 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- COMMON STOCKS -- 96.8% ARGENTINA -- 0.1% 9,800 Petrobras Energia Participaciones SA ADR * 92,218 3,400 Tenaris SA ADR 131,070 -------------- 223,288 -------------- AUSTRALIA -- 1.4% 84,857 Australia and New Zealand Banking Group Ltd 1,103,238 133,455 BHP Billiton Ltd 1,244,995 40,507 Boral Ltd 201,741 156,685 General Property Trust Units 394,797 59,778 National Australia Bank Ltd 1,127,700 85,328 Santos Ltd 397,817 53,447 Westfield Group * 582,353 46,802 Woodside Petroleum Ltd 598,978 -------------- 5,651,619 -------------- AUSTRIA -- 1.4% 10,735 Austrian Airlines * 138,281 5,970 Boehler Uddeholm (Bearer) 499,860 6,941 Flughafen Wien AG 398,610 684 Generali Holding Vienna AG 20,811 394 Immofinanz Immobilien Anlagen AG * 3,192 446 Lenzing AG 90,390 2,287 Mayr-Melnhof Karton AG (Bearer) 302,822 313 Oesterreichische Elektrizitaetswirtschafts AG Class A 56,699 9,884 OMV AG 2,262,443 7,996 VA Technologie AG (Bearer) * 520,956 15,029 Voestalpine AG 737,192 14,696 Wienerberger AG 533,103 -------------- 5,564,359 -------------- BELGIUM -- 3.4% 23,176 Almanij NV 1,452,397 1,196 Bekaert SA 75,072
See accompanying notes to the financial statements. 2 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- BELGIUM -- CONTINUED 800 CMB SA 120,751 6,470 Colruyt SA 853,023 18,354 Delhaize Group 1,033,078 115,924 Dexia 2,003,179 4,276 Electrabel SA 1,435,360 171 Exmar NV 9,641 111,595 Fortis 2,492,165 26,912 KBC Bancassurance Holding 1,623,108 45,552 UCB SA 2,222,384 -------------- 13,320,158 -------------- BRAZIL -- 0.1% 7,953 Banco do Brasil SA 65,755 766 Banco do Brasil SA (Receipt Shares) * 6,020 9,061 Compania Siderurgica Nacional SA 140,101 6,200 Petroleo Brasileiro SA (Petrobras) 191,094 3,200 Petroleo Brasileiro SA (Petrobras) ADR 98,400 -------------- 501,370 -------------- CANADA -- 0.5% 18,600 Canadian Natural Resources 602,919 18,300 EnCana Corp 745,278 15,700 National Bank of Canada 514,754 -------------- 1,862,951 -------------- CHINA -- 0.2% 10,300 China Telecom Corp Ltd ADR 331,969 324,000 CNOOC Ltd 151,936 258,000 PetroChina Co Ltd Class H 130,529 6,999 Weiqiao Textile Co 11,203 166,000 Zhejiang Expressway Co Ltd 113,006 -------------- 738,643 -------------- DENMARK -- 0.0% 1,600 DFDS A/S 60,241 --------------
See accompanying notes to the financial statements. 3 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- FINLAND -- 1.5% 30,100 Finnair Class A 173,055 46,600 Fortum Oyj 654,643 15,500 Kemira Oyj 192,744 239,750 Nokia Oyj 2,832,274 5,000 Orion-Yhtymae Oyj Class B 143,999 37,700 Rautaruukki Oyj 343,919 59,100 Sampo Oyj Class A 584,261 17,100 Tietoenator Oyj 452,318 26,700 UPM-Kymmene Oyj 511,217 -------------- 5,888,430 -------------- FRANCE -- 4.2% 2,804 Air Liquide 440,388 50,797 Arcelor 869,616 28,847 Axa 592,977 20,433 BNP Paribas 1,242,766 4,173 Bongrain SA 264,135 5,024 Chargeurs SA 157,942 33,019 Cie de Saint-Gobain 1,666,070 3,385 Eiffage SA 309,869 1,821 Eramet 109,758 2,228 Esso S.A.F. 302,719 78,769 Havas SA 376,852 29,498 Peugeot SA 1,775,382 13,901 Societe Generale 1,192,705 91,057 Suez SA 1,772,854 786 Total Gabon 317,462 21,367 Total SA 4,180,437 30,868 Vivendi Universal SA * 766,866 -------------- 16,338,798 -------------- GERMANY -- 7.7% 7,958 Adidas-Salomon AG 1,024,590 11,825 Bankgesellschaft Berlin AG * 28,944 40,788 Bayer AG 1,053,762
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) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- GERMANY -- CONTINUED 9,400 Continental AG 488,753 40,072 DaimlerChrysler AG (Registered) 1,671,557 709 Degussa AG 25,164 14,791 Deutsche Bank AG (Registered) 1,013,430 71,370 E. On AG 5,085,581 10,800 IWKA AG 253,330 2,000 Krones AG 175,802 48,800 MAN AG 1,663,646 30,200 Merck KGaA 1,592,407 8,096 Metro AG 376,090 17,600 Mobilcom AG 238,304 7,343 Puma AG Rudolf Dassler Sport 1,799,578 42,800 RWE AG 2,100,422 8,500 SAP AG 1,238,677 58,900 Schering AG 3,277,215 46,827 Siemens AG (Registered) 3,228,570 21,341 Suedzucker AG 398,977 65,849 ThyssenKrupp AG 1,232,725 52,730 Volkswagen AG 2,039,921 -------------- 30,007,445 -------------- GREECE -- 0.2% 29,915 National Bank of Greece SA 654,748 -------------- HONG KONG -- 1.5% 392,500 BOC Hong Kong Holdings Ltd 707,149 92,000 China Mobile Ltd 269,124 269,400 CLP Holdings Ltd 1,559,270 272,000 Hang Lung Group Co Ltd 420,581 443,000 Hong Kong Electric Holdings Ltd 1,980,535 4,000 Hong Kong Land Holdings 7,578 102,000 Sun Hung Kai Properties Ltd 951,684 -------------- 5,895,921 -------------- HUNGARY -- 0.1% 14,900 OTP Bank 324,889 --------------
See accompanying notes to the financial statements. 5 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- INDIA -- 0.1% 8,300 Mahanagar Telephone Nigam 54,448 11,783 Reliance Industries Ltd GDR 144A 251,449 -------------- 305,897 -------------- INDONESIA -- 0.2% 279,999 Astra International Tbk 190,876 508,227 Bank Central Asia Tbk 98,018 920,000 Indah Kiat Pulp & Paper * 69,323 577,000 Indonesian Satellite Corp Tbk PT 258,630 1,433,000 PT Bank Mandiri 191,686 743,000 PT Matahari Putra Prima Tbk 39,953 -------------- 848,486 -------------- IRELAND -- 1.1% 37,632 Allied Irish Banks Plc 594,357 42,104 Anglo Irish Bank Corp 702,632 125,098 Bank of Ireland 1,679,478 51,677 CRH Plc 1,174,380 32,149 Greencore Group 115,454 -------------- 4,266,301 -------------- ITALY -- 3.3% 100,547 Enel SPA 778,197 482,760 ENI SPA 9,918,134 3,111 Fiat SPA (Savings Shares) * 15,314 118,184 Parmalat Finanziaria SPA * (a) (b) 1,436 1,064,895 Telecom Italia SPA 2,342,572 -------------- 13,055,653 -------------- JAPAN -- 24.8% 27,190 Acom Co Ltd 1,794,304 99,000 AIOI Insurance Co Ltd 433,315 6,900 Aoki International 90,527 74,000 Chubu Electric Power Co Inc 1,625,875 19,900 Chugoku Electric Power Co Inc 349,764
See accompanying notes to the financial statements. 6 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- JAPAN -- CONTINUED 216,000 Cosmo Oil Co Ltd 630,712 21,700 Daewoo Motor Sales 129,797 87,700 Daiichi Pharmaceuticals Co Ltd 1,521,276 18,000 Daio Paper Corp 187,605 37,200 Daito Trust Construction Co Ltd 1,413,692 60,000 Daiwa House Industry Co Ltd 623,342 25,000 Denso Corp 615,520 55,000 Eisai Co Ltd 1,570,860 34,000 Ezaki Glico Co Ltd 236,861 10,000 Fast Retailing Co Ltd 721,958 308,000 Fuji Heavy Industries Ltd 1,555,487 37,000 Fuji Photo Film Co Ltd 1,163,223 304,000 Furukawa Electric Co Ltd * 1,230,589 302,000 Hitachi Ltd 1,901,750 30,500 Honda Motor Co Ltd 1,519,885 12,600 Hoya Corp 1,216,105 28,000 Hyundai Marine & Fire Insurance Co 81,285 349,000 Ishikawajima-Harima Heavy Industries * 519,827 426,000 Isuzu Motors Ltd * 1,003,437 285,000 Itochu Corp * 1,178,571 57,000 Itoham Foods Inc 273,953 23,000 Ito-Yokado Co Ltd 851,251 12,000 Izumiya Co Ltd 76,174 37,000 JACCS Co 198,892 272,000 Kajima Corp 942,165 140,000 Kamigumi Co Ltd 1,058,627 55,000 Kandenko Co 289,272 67,000 Kansai Electric Power Co Inc 1,229,837 90,000 Kansai Paint Co 579,384 130,000 Kao Corp 3,198,612 116 KDDI Corp 558,914 90,000 Kirin Brewery Co Ltd 812,556 58,000 Kubota Corp 291,569 28,800 Kyocera Corp 2,113,577 46,000 Kyudenko Corp 214,416 34,700 Kyushu Electric Power Co Inc 662,130
See accompanying notes to the financial statements. 7 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- JAPAN -- CONTINUED 31,000 Maeda Road Construction 213,747 357,000 Marubeni Corp 853,078 54,000 Marui Co Ltd 715,609 297,000 Mazda Motor Corp 963,892 79 Millea Holdings Inc 1,091,380 241,000 Mitsubishi Electric Corp 1,167,784 34,000 Mitsubishi Motors Corp * 29,320 72,000 Mitsubishi Paper Mills Ltd 105,819 328 Mitsubishi Tokyo Finance Group Inc 2,961,053 82,000 Mitsui OSK Lines Ltd 488,190 825 Mizuho Financial Group Inc 3,349,648 34,000 Mizuno Corp 144,127 7,000 MOS Food Services 86,012 59,000 Nagase & Co 465,947 3,900 Nintendo Co Ltd 420,251 43,000 Nippo Corp 253,121 124,000 Nippon Express Co Ltd 637,978 34,000 Nippon Flour Mills Co Ltd 152,662 27,000 Nippon Paint Co 103,073 55,000 Nippon Suisan Kaisha Ltd 152,438 50,000 Nisshin Seifun Group Inc 498,929 404,000 Nisshin Steel Co Ltd 862,938 77,000 Nisshinbo Industries Inc 545,617 1,000 NOF Corp 3,690 32,000 Okumura Corp 152,488 25,200 Ono Pharmaceutical Co Ltd 1,123,024 16,100 ORIX Corp 1,654,383 29,600 Promise Co 1,882,758 87 Rakuten Inc 603,976 13,200 Ryosan Co 301,456 96,000 Sankyo Co Ltd 2,013,328 67,000 Seino Transportation Co Ltd 633,249 43,000 Sharp Corp 601,375 167,000 Shimizu Corp 739,201 128,000 Sumitomo Heavy Industries Ltd * 393,082 630,000 Sumitomo Metal Industries Ltd 730,787
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) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- JAPAN -- CONTINUED 259,000 Taiheiyo Cement Corp 617,242 213,000 Taisei Corp 731,644 78,000 Taisho Pharmaceutical Co Ltd 1,489,834 6,000 Takara Holdings Inc 38,932 239,500 Takeda Pharmaceutical Co Ltd 10,827,834 23,850 Takefuji Corp 1,667,968 6,200 TDK Corp 410,876 30,000 TOA Corp 51,901 64,500 Tohoku Electric Power Co Inc 1,101,530 82,300 Tokyo Electric Power Co Inc 1,898,918 96,000 TonenGeneral Sekiyu KK 800,746 123,000 Toppan Printing Co Ltd 1,274,885 121,000 Toshiba Corp 447,244 33,000 Toyo Ink Manufacturing Co Ltd 118,808 41,000 Toyo Seikan Kaisha Ltd 693,117 184,300 Toyota Motor Corp 7,275,390 26,000 Trend Micro Inc 1,134,171 120 Yahoo Japan Corp * 1,157,751 19,500 Yamanouchi Pharmaceutical Co Ltd 676,651 20,000 Yamato Transport Co Ltd 304,871 46,000 Yodogawa Steel Works 199,097 -------------- 96,681,716 -------------- MALAYSIA -- 0.3% 72,000 IOI Corp Berhad 163,925 60,000 Kuala Lumpur Kepong Berhad 102,437 49,000 Malakoff Berhad 81,414 49,000 Malaysian International Shipping Berhad (Foreign Registered) 161,121 254,000 Malaysian Plantations Berhad 149,345 104,700 Maxis Communications Berhad 235,288 28,000 Proton Holdings Berhad * 57,105 316,000 Time Engineering Berhad * 59,799 -------------- 1,010,434 --------------
See accompanying notes to the financial statements. 9 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- MEXICO -- 0.3% 5,500 America Movil SA de CV Class L ADR 188,375 63,000 Carso Global Telecom Class A * 92,296 52,150 Cemex SA de CV CPO 295,801 48,000 Grupo Mexico SA Class B * 171,165 41,000 Organizacion Soriana SA de CV Class B 120,636 11,900 Telefonos de Mexico Class L ADR 385,441 -------------- 1,253,714 -------------- NETHERLANDS -- 6.5% 354,893 ABN Amro Holdings NV 7,557,480 97,972 Aegon NV 1,049,406 43,981 Akzo Nobel NV 1,483,882 4,187 Boskalis Westminster NV 101,932 14,782 DSM NV 720,808 2,671 Gamma Holdings NV 100,603 411,806 ING Groep NV 10,086,479 292,851 Koninklijke Ahold NV * 1,817,377 2,003 Koninklijke Ten Cate 102,120 23,011 Koninklijke Wessanen NV 323,483 62,265 Philips Electronics NV 1,444,152 4,088 Van Ommeren Vopak NV 69,674 7,502 Wereldhave NV 640,280 -------------- 25,497,676 -------------- NEW ZEALAND -- 0.0% 4,424 Fletcher Building Ltd 15,024 -------------- NORWAY -- 3.1% 21,806 Aker Kvaerner ASA * 308,794 242,860 DNB Holdings Class A 1,850,165 24,004 Frontline Ltd 898,063 45,861 Norsk Hydro ASA 2,862,252 28,603 Norske Skogindustrier ASA Class A 477,060 68,300 Orkla ASA 1,726,736 149,115 Statoil ASA 1,903,605
See accompanying notes to the financial statements. 10 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- NORWAY -- CONTINUED 72,182 Tandberg ASA 646,566 198,823 Telenor ASA 1,440,294 -------------- 12,113,535 -------------- PHILIPPINES -- 0.1% 6,000 Globe Telecom Inc 93,518 12,240 Philippine Long Distance Telephone * 276,375 33,000 San Miguel Corp Class B 40,477 -------------- 410,370 -------------- POLAND -- 0.0% 2,750 BRE Bank SA * 74,602 13,300 Polski Koncern Naftowy Orlen 117,653 -------------- 192,255 -------------- RUSSIA -- 0.2% 4,150 Lukoil ADR 489,700 7,100 Surgutneftegaz ADR 244,950 -------------- 734,650 -------------- SINGAPORE -- 1.7% 30,550 Creative Technology Ltd 327,265 109,000 DBS Group Holdings Ltd 996,057 67,500 Fraser & Neave Ltd 553,461 148,000 Keppel Corp Ltd 615,715 145,000 Oversea-Chinese Banking Corp 1,128,747 2,180,100 Singapore Telecom Ltd * 2,918,300 -------------- 6,539,545 -------------- SOUTH AFRICA -- 0.5% 27,771 ABSA Group Ltd 230,342 81,000 African Bank Investments Ltd 144,585 10,000 Bidvest Group Ltd 90,090 104,000 FirstRand Ltd 167,362 17,278 Iscor Ltd 119,591
See accompanying notes to the financial statements. 11 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- SOUTH AFRICA -- CONTINUED 12,000 Remgro Ltd 146,216 118,900 Sanlam Ltd 160,552 19,000 Sasol Ltd 324,884 19,000 Standard Bank Investment Corp * 126,770 8,681 Telkom SA Ltd 103,629 10,000 Tiger Brands Ltd 143,660 -------------- 1,757,681 -------------- SOUTH KOREA -- 1.2% 12,700 Daewoo Shipbuilding & Marine Engineering Co Ltd 143,478 11,500 Dongkuk Steel Mill 117,678 27,900 Dongwon Financial Holding Co Ltd 146,631 3,200 Hankuk Electric Glass Co Ltd 125,270 8,000 Hyundai Department Store Co Ltd 92,655 2,900 Hyundai Mobis 142,977 6,610 Hyundai Motor Co 287,747 20,600 INI Steel Co 215,118 25,800 KIA Motors Corp 227,070 8,800 Korea Express Co Ltd * 145,768 6,000 KT Freetel 94,318 5,600 KT&G Corp 142,855 11,600 LG Cable & Machinery Ltd 166,884 928 LG Home Shopping Inc 37,449 21,700 LG Insurance Co Ltd 92,111 16,400 Poongsan Corp 155,772 2,900 POSCO 415,915 3,090 Samsung Electronics 1,216,043 1,100 Shinsegae Co Ltd 288,960 900 SK Telecom Co Ltd 135,492 5,500 SK Telecom Co Ltd ADR 103,950 -------------- 4,494,141 -------------- SPAIN -- 2.2% 30,971 Altadis SA 965,739 54,234 Banco Santander Central Hispano SA 533,296
See accompanying notes to the financial statements. 12 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- SPAIN -- CONTINUED 151,873 Endesa SA 2,817,314 90,075 Iberdrola SA 1,840,751 114,883 Repsol YPF SA 2,380,950 8,620 Tableros Defibras Class B * 11,556 -------------- 8,549,606 -------------- SWEDEN -- 3.1% 31,500 Electrolux AB 577,862 22,700 Holmen AB Class B 649,934 419,300 Nordea AB 3,222,043 130,100 Skanska AB Class B 1,173,524 4,100 SSAB Swedish Steel Class B 68,614 7,200 Svenska Handelsbanken Class B 138,480 164,000 Swedish Match AB 1,664,058 1,627,500 Telefonaktiebolaget LM Ericsson * 4,412,824 -------------- 11,907,339 -------------- SWITZERLAND -- 3.7% 6,497 Bobst Group AG (Registered) 203,697 38,400 Credit Suisse Group * 1,200,422 18,215 Micronas Semiconductor Holding AG (Registered) * 705,572 263 Movenpick Holdings (Bearer) * 66,009 2,881 Nestle SA (Registered) 681,852 50,961 Roche Holding AG (Non Voting) 4,949,062 3,215 Straumann Holding AG 629,803 10,353 Swisscom AG (Registered) 3,424,515 13,955 UBS AG (Registered) 939,478 1,491 Valora Holding AG 326,206 8,199 Zurich Financial Services AG * 1,147,668 -------------- 14,274,284 -------------- TAIWAN -- 0.6% 77,000 Asustek Computer Inc 172,615 313,120 Cheng Loong Corp 105,726 307,000 China Bills Finance Corp 91,865
See accompanying notes to the financial statements. 13 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- TAIWAN -- CONTINUED 350,000 China Development Financial Holding Corp * 155,984 146,000 Chunghwa Telecom Co Ltd 232,046 37,949 Hon Hai Precision Industry Co Ltd 124,659 200,550 International Bank of Taipei 133,330 178,000 Inventec Co Ltd 95,657 145,200 Lite-On Technology Corp 136,094 254,000 Mitac International Corp 100,403 210,000 Taiwan Cellular Corp 198,152 173,664 Taiwan Semiconductor Manufacturing Co Ltd 241,729 5,174 Taiwan Semiconductor Manufacturing Co Ltd ADR 39,064 535,000 United Microelectronics Corp * 362,024 306,000 Walsin Lihwa Corp * 150,850 528,000 Waterland Financial Holdings 186,114 -------------- 2,526,312 -------------- THAILAND -- 0.1% 105,000 Advanced Info Service Pcl (Foreign Registered) (b) 238,235 2,800 Bangkok Dusit Medical Service Pcl (Foreign Registered) (b) 867 15,000 PTT Exploration & Production Pcl (Foreign Registered) (b) 100,840 -------------- 339,942 -------------- TURKEY -- 0.4% 28,434,120 Ak Enerji Elektrik Uretim * 124,900 47,858,928 Akbank TAS 204,063 13,027,450 Aksa Akrilik Kimya Sanayii * 110,718 35,588,598 Aksigorta AS 107,805 18,995,000 Tupras Turkiye Petrol Rafine 146,435 73,101,411 Turkcell Iletisim Hizmet AS 267,285 74,767,105 Turkiye Garanti Bankasi Class C * 244,998 40,816,326 Vestel Elektronik Sanayi * 148,104 106,449,000 Yapi ve Kredi Bankasi * 254,481 -------------- 1,608,789 --------------
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) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- UNITED KINGDOM -- 21.0% 37,237 Abbey National Plc 401,530 48,229 Alliance & Leicester Plc 781,045 106,800 Allied Domecq Plc 856,448 26,522 AstraZeneca Plc 1,222,595 357,351 Aviva Plc 3,428,933 24,859 AWG Plc * 283,906 12,970,244 AWG Plc (Redeemable Shares) * 22,633 56,634 BAA Plc 566,575 369,935 BAE Systems Plc 1,339,907 248,853 Barclays Plc 2,303,059 155,491 Barratt Developments Plc 1,657,344 188,417 BBA Group Plc 885,311 44,828 Berkeley Group Plc 982,018 272,627 BG Group Plc 1,685,847 190,423 BHP Billiton Plc 1,798,585 129,004 Boots Group Plc 1,576,649 750,953 BP Plc 6,672,768 453,690 BT Group Plc 1,494,236 19,005 Carnival Plc 916,294 378,473 Centrica Plc 1,678,986 511,915 Corus Group Plc * 407,502 1,267 De Vere Group Plc 9,520 654,853 Dixons Group Plc (New Shares) 1,862,965 22,980 Enterprise Inns Plc 227,080 83,917 Gallaher Group Plc 999,145 320,978 GlaxoSmithKline Plc 6,544,978 36,679 Great Portland Estates Plc 181,482 63,857 GUS Plc 977,396 148,163 HBOS Plc 1,816,669 77,797 HSBC Holdings Plc 1,211,376 164,360 Imperial Chemical Industries Plc 655,956 127,471 Imperial Tobacco Group Plc 2,817,833 26,429 Inchcape Plc 789,090 7,793 ITV Plc (Convertible Shares) * 5,818 149,076 J Sainsbury Plc 700,380 100,619 Kelda Group Plc 956,685
See accompanying notes to the financial statements. 15 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- UNITED KINGDOM -- CONTINUED 67,837 Kingfisher Plc 339,258 24,796 Laird Group 143,206 56,225 Land Securities Group Plc 1,165,121 961,188 Lloyds TSB Group Plc 7,228,970 3 Mitchells & Butlers Plc 14 963,637 mmO2 Plc * 1,562,262 199,623 National Grid Transco Plc 1,672,671 57,543 Next Plc 1,545,074 289,754 Northern Foods Plc 812,686 67,314 Provident Financial Plc 721,687 40,739 Reckitt Benckiser Plc 1,072,092 48,100 RMC Group Plc 552,508 332,882 Rolls-Royce Group Plc 1,393,736 93,335 SABMiller Plc 1,162,440 58,547 Scottish & Newcastle Plc 419,133 153,945 Scottish & Southern Energy Plc 2,046,970 119,841 Scottish Power Plc 869,402 48,832 Severn Trent Plc 762,603 145,230 Tate & Lyle Plc 939,575 286,900 Taylor Woodrow Plc 1,416,230 416,417 Tesco Plc 1,998,260 83,384 Whitbread Plc 1,226,520 176,315 Wimpey (George) 1,336,826 44,488 Wolseley Plc 682,790 -------------- 81,788,578 -------------- TOTAL COMMON STOCKS (COST $334,702,726) 377,204,788 -------------- PREFERRED STOCKS -- 1.5% BRAZIL -- 0.4% 3,000 Banco Bradesco SA 145,960 1,424,000 Banco Itau Holding Financeira SA 144,196 7,988,000 Compania Energetica de Minas Gerais 2.88% 147,069 27,731,000 Compania Paranaense de Energia 94,548
See accompanying notes to the financial statements. 16 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES / PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- BRAZIL -- CONTINUED 9,000 Compania Vale do Rio Doce Class A 147,105 8,000 Gerdau Metalurgica SA 165,019 13,812 Gerdau SA 228,159 119,825 Investimentos Itau SA 2.68% 146,666 12,181 Petroleo Brasileiro SA (Petrobras) 3.01% 340,553 67,401 Sadia SA 114,901 -------------- 1,674,176 -------------- GERMANY -- 1.0% 2,100 Porsche AG (Non Voting) 0.83% 1,279,488 45,900 ProSieben Sat.1 Media AG 2.00% 805,887 7,491 RWE AG 4.35% 311,195 24,807 Villeroy & Boch AG (Non Voting) 5.78% 259,405 39,240 Volkswagen AG 5.30% 1,041,428 -------------- 3,697,403 -------------- ITALY -- 0.0% 5,517 Fiat SPA 4.95% 26,056 -------------- SOUTH KOREA -- 0.1% 4,200 Hyundai Motor Co 5.05% 92,756 2,700 LG Electronics Inc 71,484 1,000 Samsung Electronics (Non Voting) 4.08% 259,059 -------------- 423,299 -------------- TOTAL PREFERRED STOCKS (COST $5,180,332) 5,820,934 -------------- SHORT-TERM INVESTMENTS -- 0.6% CASH EQUIVALENT -- 0.5% 1,900,000 Societe Generale GC Time Deposit, 1.57%, due 09/01/04 1,900,000 --------------
See accompanying notes to the financial statements. 17 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- U.S. GOVERNMENT -- 0.1% 650,000 U.S. Treasury Bill, 0.96%, due 9/23/04 (c) 649,597 -------------- TOTAL SHORT-TERM INVESTMENTS (COST $2,549,597) 2,549,597 -------------- TOTAL INVESTMENTS -- 98.9% (Cost $342,432,655) 385,575,319 Other Assets and Liabilities (net) -- 1.1% 4,118,284 -------------- TOTAL NET ASSETS -- 100.0% $ 389,693,603 ============== 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 Foreign Registered - Shares issued to foreign investors in markets that have foreign ownership limits. GDR - Global Depository Receipt * Non-income producing security. (a) Bankrupt issuer. (b) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 2). (c) Rate shown represents yield to maturity.
See accompanying notes to the financial statements. 18 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) At August 31, 2004, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
GROSS GROSS UNREALIZED UNREALIZED NET UNREALIZED AGGREGATE COST APPRECIATION DEPRECIATION APPRECIATION ----------------- ----------------- ---------------- ---------------- $ 342,524,571 $ 48,555,912 $ (5,505,164) $ 43,050,748
At February 29, 2004, GMO Tax-Managed International Equities Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Internal Revenue Code, of $667,336, $6,951,109 and $4,807,000 expiring in 2009, 2010 and 2011, respectively. Utilization of the capital loss carryforwards above could be subject to limitations imposed by the Internal Revenue Code related to share ownership activity. At February 29, 2004, the Fund elected to defer to March 1, 2004 post-October capital losses of $322,816. See accompanying notes to the financial statements. 19 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY (SHOWING PERCENTAGE OF EQUITY INVESTMENTS) AUGUST 31, 2004 (UNAUDITED) At August 31, 2004, industry sector diversification of the Fund's equity investments was as follows: INDUSTRY SECTOR Financials 23.5% Consumer Discretionary 13.3 Energy 10.5 Health Care 10.4 Utilities 9.4 Industrials 8.3 Consumer Staples 8.2 Information Technology 5.9 Materials 5.9 Telecommunication Services 4.6 ------- 100.0% =======
See accompanying notes to the financial statements. 20 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments, at value (cost $342,432,655) (Note 2) $ 385,575,319 Cash 80,865 Foreign currency, at value (cost $3,690,440) (Note 2) 2,915,327 Receivable for investments sold 137,072 Dividends and interest receivable 1,115,810 Foreign taxes receivable 191,863 Receivable for variation margin on closed futures contracts (Note 2) 113 Receivable for expenses reimbursed by Manager (Note 3) 49,228 --------------- Total assets 390,065,597 --------------- LIABILITIES: Payable for investments purchased 63,722 Payable to affiliate for (Note 3): Management fee 173,966 Shareholder service fee 48,324 Trustees fee 497 Accrued expenses 85,485 --------------- Total liabilities 371,994 --------------- NET ASSETS $ 389,693,603 =============== NET ASSETS CONSIST OF: Paid-in capital $ 357,130,655 Accumulated undistributed net investment income 4,648,701 Accumulated net realized loss (14,445,497) Net unrealized appreciation 42,359,744 --------------- $ 389,693,603 =============== NET ASSETS ATTRIBUTABLE TO: Class III shares $ 389,693,603 =============== SHARES OUTSTANDING: Class III 29,680,862 =============== NET ASSET VALUE PER SHARE: Class III $ 13.13 ===============
See accompanying notes to the financial statements. 21 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends (net of withholding taxes of $908,490) $ 6,864,691 Interest 59,623 --------------- Total income 6,924,314 --------------- EXPENSES: Management fee (Note 3) 907,608 Shareholder service fee (Note 3) - Class III 252,113 Custodian fees 199,916 Transfer agent fees 13,984 Audit and tax fees 22,448 Legal fees 4,048 Trustees fees and related expenses (Note 3) 2,193 Registration fees 5,336 Miscellaneous 1,565 --------------- Total expenses 1,409,211 Fees and expenses reimbursed by Manager (Note 3) (246,192) --------------- Net expenses 1,163,019 --------------- Net investment income 5,761,295 --------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (net of CPMF tax of $280) (Note 2) (1,387,962) Closed futures contracts (572,186) Foreign currency, forward contracts and foreign currency related transactions 349,953 --------------- Net realized loss (1,610,195) --------------- Change in net unrealized appreciation (depreciation) on: Investments 145,397 Foreign currency, forward contracts and foreign currency related transactions (796,092) --------------- Net unrealized loss (650,695) --------------- Net realized and unrealized loss (2,260,890) --------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 3,500,405 ===============
See accompanying notes to the financial statements. 22 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED AUGUST 31, 2004 FEBRUARY 29, (UNAUDITED) 2004 --------------- --------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 5,761,295 $ 2,701,898 Net realized gain (loss) (1,610,195) 3,031,620 Change in net unrealized appreciation (depreciation) (650,695) 55,866,455 --------------- --------------- Net increase in net assets from operations 3,500,405 61,599,973 --------------- --------------- Distributions to shareholders from: Net investment income Class III (1,601,234) (3,864,362) --------------- --------------- Net share transactions (Note 6): Class III 96,434,143 138,915,936 --------------- --------------- Total increase in net assets 98,333,314 196,651,547 NET ASSETS: Beginning of period 291,360,289 94,708,742 --------------- --------------- End of period (including accumulated undistributed net investment income of $4,648,701 and $488,640, respectively) $ 389,693,603 $ 291,360,289 =============== ===============
See accompanying notes to the financial statements. 23 GMO TAX-MANAGED INTERNATIONAL EQUITY FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ------------------------------------------------------------------- (UNAUDITED) 2004 2003 2002 2001 2000 ----------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 13.19 $ 8.73 $ 9.70 $ 10.79 $ 10.43 $ 9.71 ----------- ---------- ---------- ---------- ---------- ---------- Income from investment operations: Net investment income + 0.23 0.21 0.19 0.25 0.23 0.15 Net realized and unrealized gain (loss) (0.23) 4.55 (0.90) (1.03) 0.29 0.70 ----------- ---------- ---------- ---------- ---------- ---------- Total from investment operations -- 4.76 (0.71) (0.78) 0.52 0.85 ----------- ---------- ---------- ---------- ---------- ---------- Less distributions to shareholders: From net investment income (0.06) (0.30) (0.26) (0.31) (0.16) (0.13) ----------- ---------- ---------- ---------- ---------- ---------- Total distributions (0.06) (0.30) (0.26) (0.31) (0.16) (0.13) ----------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 13.13 $ 13.19 $ 8.73 $ 9.70 $ 10.79 $ 10.43 =========== ========== ========== ========== ========== ========== TOTAL RETURN (a) (0.01)%** 54.99% (7.47)% (7.16)% 5.03% 8.65% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 389,694 $ 291,360 $ 94,709 $ 75,287 $ 75,538 $ 112,623 Net expenses to average daily net assets 0.69%* 0.69% 0.70% 0.69% 0.69% 0.69% Net investment income to average daily net assets 1.73%(b)** 1.87% 1.98% 2.49% 2.11% 1.36% Portfolio turnover rate 22%** 36% 48% 50% 56% 5% Fees and expenses reimbursed by the Manager to average daily net assets: 0.15%* 0.26% 0.45% 0.41% 0.34% 0.34%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) The ratio for the six months ended August 31, 2004, has not been annualized since the Fund believes it would not be appropriate because the Fund's dividend income is not earned ratably throughout the fiscal year. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 24 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION 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 the maximum historical applicable individual federal tax rate to the MSCI EAFE Index's dividend yield and to its estimated short-term and long-term realized capital gains (losses) (arising from changes in the constituents of the MSCI EAFE Index). 2. SIGNIFICANT ACCOUNTING POLICIES 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. The values of securities which are primarily traded on foreign exchanges are 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. For other assets, and in cases where market prices are not readily available or the Manager believes established valuation methodologies are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value. Because many foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, foreign equity securities held by the Fund are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available. 25 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. As of August 31, 2004, there were no outstanding forward foreign currency contracts. 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. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of 26 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, 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 August 31, 2004, 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. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying investment increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of August 31, 2004, 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 closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. As of August 31, 2004, 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 27 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 using standard models that incorporate 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 on swap contracts 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 August 31, 2004, 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. As of August 31, 2004, 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 generally 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 are paid in shares of 28 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. The Fund is subject to a Contribuicao Provisoria sobre Movimentacoes Financiera ("CPMF") tax which is applied to foreign exchange transactions representing capital inflows or outflows to the Brazilian market. The CPMF tax has been included in the net realized gain (loss) on investments at period end. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. 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. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. 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. 29 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.54% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% for Class III shares. GMO has entered into a binding agreement effective until at least June 30, 2005 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 0.54% of average daily net assets. The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $1,365. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the August 31, 2004, aggregated $171,566,683 and $73,118,872, respectively. 5. PRINCIPAL SHAREHOLDERS AND RELATED PARTIES At August 31, 2004, 46.1% 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. At August 31, 2004, 0.9% of the Fund was held by two related parties comprised of certain GMO employee accounts. 30 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ------------------------------ ------------------------------ SHARES AMOUNT SHARES AMOUNT ------------- ------------- ------------- ------------- Class III: Shares sold 7,598,972 $ 96,624,285 12,008,797 $ 146,663,950 Shares issued to shareholders in reinvestment of distributions 50,263 669,509 200,502 2,362,450 Shares repurchased (65,098) (859,651) (963,205) (10,110,464) ------------- ------------- ------------- ------------- Net increase 7,584,137 $ 96,434,143 11,246,094 $ 138,915,936 ============= ============= ============= =============
7. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 31 GMO TAX-MANAGED INTERNATIONAL EQUITIES FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees and other expenses. The following table, assuming a $1,000 investment in a class of shares, discloses the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the class's actual return and actual expenses, and (2) a hypothetical annualized 5% return and the class's actual expenses: CLASS III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * ------------------------------------------------------- 1) Actual $ 1,000.00 $ 999.90 $ 3.48 2) Hypothetical 1,000.00 1,021.73 3.52
*Expenses are calculated using the Class III annualized expense ratio for the six months ended August 31, 2004 of 0.69%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 32 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
DESCRIPTION % OF NET ASSETS - ----------------------------------------------------------------------------------------- Corporate Debt 5.9% Foreign Government Obligations 0.4 U.S. Government 4.8 U.S. Government Agency 5.8 Mutual Funds 87.7 Preferred Stocks 0.5 Put Options Purchased 0.1 Forward Currency Contracts 0.1 Futures 0.0 Swaps 0.9 Short-Term Investments and Other Assets and Liabilities (net) (6.2) ----------------- 100.0% =================
See accompanying notes to the financial statements. 1 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 16.9% ALBANIA -- 0.5% FOREIGN GOVERNMENT OBLIGATIONS USD 15,681,227 Republic of Albania Par Bond, Zero Coupon, 0.00%, due 08/31/25 (a) (b) 4,674,205 -------------- AUSTRIA -- 0.7% CORPORATE DEBT USD 4,175,000 Bank Austria Creditanstalt, AG, Series EMTN, 144A, 7.25%, due 02/15/17 5,003,737 GBP 500,000 Bank Austria Creditanstalt AG, 8.38%, due 11/04/11 1,025,671 -------------- 6,029,408 -------------- Total Austria 6,029,408 -------------- BRAZIL -- 0.4% FOREIGN GOVERNMENT OBLIGATIONS USD 10,000,000 Brazil Discount Bond, Principal Strip, Series D1A, Zero Coupon, 0.00%, due 04/15/24 (a) 3,214,373 -------------- CANADA -- 0.4% FOREIGN GOVERNMENT OBLIGATIONS CAD 4,000,000 Government of Canada (Cayman), 7.25%, due 06/01/08 3,371,281 -------------- LUXEMBOURG -- 0.9% CORPORATE DEBT USD 8,000,000 Tyco International Group SA, 5.80%, due 08/01/06 8,397,120 -------------- MEXICO -- 0.4% CORPORATE DEBT USD 3,000,000 Pemex Finance Ltd, Series 1A1 Class A2, AMBAC, 144A, 6.30%, due 05/15/10 3,223,125 --------------
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) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE / PRINCIPAL AMOUNT DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------------- UNITED STATES -- 13.6% CORPORATE DEBT -- 3.0% USD 5,000,000 Wells Fargo & Co, 5.00%, due 11/15/14 5,046,600 USD 10,000,000 General Electric Capital Corp, Series MTNA, 5.88%, due 02/15/12 10,867,200 USD 750,000 Banco Santander Series MBIA, 6.50%, due 11/01/05 777,014 USD 5,000,000 Target Corp, 4.00%, due 06/15/13 4,761,000 USD 5,000,000 Verizon Global Funding Corp, 4.38%, due 06/01/13 4,766,150 -------------- 26,217,964 -------------- U.S. GOVERNMENT -- 4.8% USD 10,100,000 U.S. Treasury 0.00% Receipts, 0.00%, due 02/15/10 (a) 8,001,619 USD 10,100,000 U.S. Treasury 0.00% Receipts, 0.00%, due 02/15/12 (a) 7,122,220 USD 10,100,000 U.S. Treasury 0.00% Receipts, 0.00%, due 08/15/12 (a) 6,905,089 USD 17,611,350 U.S. Treasury Inflation Indexed Note, 3.63%, due 01/15/08 (c) (d) 19,364,231 -------------- 41,393,159 -------------- U.S. GOVERNMENT AGENCY -- 5.8% USD 50,000,000 Fannie Mae, TBA, 5.50%, due 09/01/34 50,812,500 -------------- Total United States 118,423,623 -------------- TOTAL DEBT OBLIGATIONS (COST $140,018,683) 147,333,135 -------------- PUT OPTIONS PURCHASED -- 0.1% CROSS CURRENCY OPTIONS -- 0.1% JPY 13,440,000,000 JPY Put/USD Call, Expires 11/19/2004, Strike 112.40 836,506 -------------- TOTAL PUT OPTIONS PURCHASED (COST $3,429,444) 836,506 --------------
See accompanying notes to the financial statements. 3 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- PREFERRED STOCKS -- 0.5% UNITED STATES -- 0.5% 10,000 Home Ownership Funding 2 Preferred 144A, 13.338% 4,462,480 -------------- TOTAL PREFERRED STOCKS (COST $4,935,814) 4,462,480 -------------- MUTUAL FUNDS -- 87.7% 2,422,224 GMO Emerging Country Debt Fund, Class III (e) 26,281,129 28,869,814 GMO Short-Duration Collateral Fund (e) 731,561,093 93,858 GMO Special Purpose Holding Fund (e) 1,650,963 3,913,697 Merrimac Cash Series, Premium Class 3,913,697 -------------- TOTAL MUTUAL FUNDS (COST $756,330,632) 763,406,882 -------------- TOTAL INVESTMENTS -- 105.2% (Cost $904,714,573) 916,039,003 -------------- Other Assets and Liabilities (net)-- (5.2%) (45,618,416) -------------- TOTAL NET ASSETS -- 100.0% $ 870,420,587 ==============
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 2) See accompanying notes to the financial statements. 4 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) (a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 2). (b) Security is backed by U.S. Government guaranteed. (c) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts and open swap contracts (Note 2). (d) Indexed security in which price and/or coupon is linked to prices of other securities, securities indices, or other financial indicators (Note 2). (e) Affiliated issuer. CURRENCY ABBREVIATIONS: AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc EUR - Euro GBP - British Pound JPY - Japanese Yen NOK - Norwegian Krone NZD - New Zealand Dollars USD - United States Dollar At August 31, 2004, the approximate 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 ---------------- ---------------- ---------------- --------------- $ 905,890,227 $ 13,445,921 $ (3,297,145) $ 10,148,776
See accompanying notes to the financial statements. 5 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) A summary of outstanding financial instruments at August 31, 2004 is as follows: FORWARD CURRENCY CONTRACTS
NET UNREALIZED SETTLEMENT APPRECIATION DATE DELIVER/RECEIVE UNITS OF CURRENCY VALUE (DEPRECIATION) ------------ -------------------- ------------------- ------------- --------------- Buys 10/12/04 AUD 67,900,000 $ 47,751,495 $ 192,102 9/07/04 CHF 9,700,000 7,650,842 (178,621) 9/14/04 EUR 72,600,000 88,217,712 (788,396) 11/16/04 GBP 79,900,000 142,830,149 598,629 9/21/04 NZD 51,700,000 33,841,297 186,495 ----------- $ 10,209 =========== Sales 10/12/04 AUD 13,500,000 $ 9,494,038 $ (39,448) 11/02/04 CAD 4,700,000 3,564,065 (25,335) 9/07/04 CHF 65,800,000 51,899,525 426,004 9/14/04 EUR 112,200,000 136,336,464 157,492 9/28/04 JPY 6,810,000,000 62,127,109 105,283 ----------- $ 623,996 ===========
FORWARD CROSS CURRENCY CONTRACTS
NET UNREALIZED SETTLEMENT APPRECIATION DATE DELIVER/UNITS OF CURRENCY RECEIVE/IN EXCHANGE FOR (DEPRECIATION) ------------ ---------------------------- -------------------------- -------------- 10/05/04 CHF 63,869,055 EUR 41,800,000 $ 354,630 10/12/04 NOK 174,966,750 EUR 20,700,000 (176,462) 10/12/04 EUR 25,400,000 NOK 212,224,930 (140,726) 11/09/04 EUR 65,300,000 SEK 599,023,090 373,373 ----------- $ 410,815 ===========
See accompanying notes to the financial statements. 6 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) FUTURES CONTRACTS
NET UNREALIZED NUMBER OF CONTRACT APPRECIATION CONTRACTS TYPE EXPIRATION DATE VALUE (DEPRECIATION) ----------- ------------------------------------- ----------------- --------------- -------------- Buys 1,013 Canadian Government Bond 10 Yr. December 2004 $ 84,247,526 $ 387,891 11 Euro BOBL September 2004 1,500,859 463 18 Euro Bund September 2004 2,541,484 2,459 857 Euro Euribor 3 Month March 2005 254,428,387 1,007,267 3 Japanese Government Bond 10 Yr. (LIF) September 2004 3,766,367 94 629 U.S. Long Bond December 2004 70,015,562 1,095,125 832 U.S. Treasury Note 10 Yr. December 2004 93,444,000 637,462 228 U.S. Treasury Note 5 Yr. December 2004 25,233,187 127,620 8 UK Gilt Long Bond December 2004 1,540,045 (340) ------------ $ 3,258,041 ============ Sales 305 Australian Government Bond 10 Yr. September 2004 $ 22,290,471 $ (262,449) 627 Australian Government Bond 3 Yr. September 2004 45,063,583 (119,715) 857 Euro Euribor 3 Month March 2006 252,488,571 (1,352,958) 49 Japanese Government Bond 10 Yr. September 2004 61,459,292 (1,110,205) 17 Swiss Federal Bond September 2004 1,711,999 (5,985) ------------ $ (2,851,312) ============
At August 31, 2004, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. See accompanying notes to the financial statements. 7 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ---------------- ---------- ---------------------------------------------------- --------------- CREDIT DEFAULT SWAPS 5,000,000 USD 4/2/07 Agreement with Lehman Brothers Special Financing $ 38,194 Inc. dated 3/27/02 to receive 0.52% per year times the notional amount. In exchange for that periodic payment, upon a default event by General Electric Capital Corporation, the Fund agrees to pay Lehman Brothers Special Financing Inc. the notional amount of the swap. To receive that payment, Lehman Brothers Special Financing Inc. must deliver a bond (with par value equal to the notional of the swap) issue by General Electric Capital Corporation. 3,000,000 USD 4/17/07 Agreement with Bear Stearns dated 4/12/02 to receive 67,864 1.28% per year times the notional amount. In exchange for that periodic payment, upon a default event by National Rural Utilities Cooperative Finance Corp., the Fund agrees to pay Bear Stearns the notional amount of the swap. To receive that payment, Bear Stearns must deliver a bond (with par value equal to the notional of the swap) issue by National Rural Utilities Cooperative Finance Corp. 3,000,000 USD 4/17/07 Agreement with UBS Warburg dated 4/12/02 to receive 23,891 0.47% per year times the notional amount. In exchange for that periodic payment, upon a default event by Goldman Sachs Group, Inc., the Fund agrees to pay UBS Warburg the notional amount of the swap. To receive that payment, UBS Warburg must deliver a bond (with par value equal to the notional of the swap) issue by Goldman Sachs Group, Inc. 3,000,000 USD 4/17/07 Agreement with UBS Warburg dated 4/12/02 to receive 31,784 0.80% per year times the notional amount. In exchange for that periodic payment, upon a default event by Equity Office Property Trust, the Fund agrees to pay UBS Warburg the notional amount of the swap. To receive that payment, UBS Warburg must deliver a bond (with par value equal to the notional of the swap) issue by Equity Office Property Trust.
See accompanying notes to the financial statements. 8 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ---------------- ---------- ---------------------------------------------------- -------------- 10,000,000 USD 12/20/07 Agreement with Citibank N.A. dated 12/13/02 to $ 691,708 receive 2.41% per year times the notional amount. In exchange for that periodic payment, upon a default event by AOL Time Warner Inc., the Fund agrees to pay Citibank N.A. the notional amount of the swap. To receive that payment, Citibank N.A. must deliver a bond (with par value equal to the notional of the swap) issue by AOL Time Warner Inc. 5,000,000 USD 6/20/08 Agreement with Deutsche Bank AG dated 6/04/03 to 11,141 receive 0.40% per year times the notional amount. In exchange for that periodic payment, upon a default event by Norfolk Southern Corporation, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional of the swap) issue by Norfolk Southern Corporation. 5,000,000 USD 6/20/08 Agreement with Deutsche Bank AG dated 6/04/03 to 12,918 receive 0.40% per year times the notional amount. In exchange for that periodic payment, upon a default event by Washington Mutual, Inc., the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional of the swap) issue by Washington Mutual, Inc. 5,000,000 USD 6/20/08 Agreement with Deutsche Bank AG dated 6/04/03 to 57,057 receive 0.48% per year times the notional amount. In exchange for that periodic payment, upon a default event by Household Finance Corporation, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional of the swap) issue by Household Finance Corporation.
See accompanying notes to the financial statements. 9 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ---------------- ---------- ---------------------------------------------------- -------------- 5,000,000 USD 6/20/08 Agreement with Deutsche Bank AG dated 6/04/03 to $ 74,945 receive 0.65% per year times the notional amount. In exchange for that periodic payment, upon a default event by Kraft Foods, Inc., the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional of the swap) issue by Kraft Foods, Inc. 5,000,000 USD 6/20/08 Agreement with Lehman Brothers Special Financing 1,383 Inc. dated 6/04/03 to receive 0.50% per year times the notional amount. In exchange for that periodic payment, upon a default event by Dominion Resources, the Fund agrees to pay Lehman Brothers Special Financing Inc. the notional amount of the swap. To receive that payment, Lehman Brothers Special Financing Inc. must deliver a bond (with par value equal to the notional of the swap) issue by Dominion Resources. 10,000,000 USD 9/20/08 Agreement with Deutsche Bank AG dated 10/03/03 to 94,742 receive 0.32% per year times the notional amount. In exchange for that periodic payment, upon a default event by American International Group, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional of the swap) issue by American International Group. 10,000,000 USD 12/20/08 Agreement with Lehman Brothers Special Financing 55,973 Inc. dated 10/03/03 to receive 0.27% per year times the notional amount. In exchange for that periodic payment, upon a default event by Freddie Mac, the Fund agrees to pay Lehman Brothers Special Financing Inc. the notional amount of the swap. To receive that payment, Lehman Brothers Special Financing Inc. must deliver a bond (with par value equal to the notional of the swap) issue by Freddie Mac.
See accompanying notes to the financial statements. 10 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ---------------- ---------- ---------------------------------------------------- -------------- 5,000,000 USD 5/20/09 Agreement with JP Morgan Chase Bank dated 4/26/04 to $ 50,295 receive 1.13% per year times the notional amount. In exchange for that periodic payment, upon a default event in the United Mexican States, the Fund agrees to pay JP Morgan Chase Bank the notional amount of the swap. To receive that payment, JP Morgan Chase Bank must deliver a bond (with par value equal to the notional amount of the swap) issued by the United Mexican States. 5,000,000 USD 6/20/09 Agreement with Barclays Bank PLC dated 5/05/04 to 28,568 receive 0.91% per year times the notional amount. In exchange for that periodic payment, upon a default event by Sprint Capital Corporation, the Fund agrees to pay Barclays Bank PLC the notional amount of the swap. To receive that payment, Barclays Bank PLC must deliver a bond (with par value equal to the notional of the swap) issue by Sprint Capital Corporation. 5,000,000 USD 6/20/09 Agreement with Citibank N.A. dated 4/27/04 to 6,920 receive 0.25% per year times the notional amount. In exchange for that periodic payment, upon a default event by ConocoPhillips Company, the Fund agrees to pay Citibank N.A. the notional amount of the swap. To receive that payment, Citibank N.A. must deliver a bond (with par value equal to the notional of the swap) issue by ConocoPhillips Company. 5,000,000 USD 6/20/09 Agreement with Lehman Brothers Special Financing (32,978) Inc. dated 4/19/04 to receive 1.73% per year times the notional amount. In exchange for that periodic payment, upon a default event by General Motors Corp., the Fund agrees to pay Lehman Brothers Special Financing Inc. the notional amount of the swap. To receive that payment, Lehman Brothers Special Financing Inc. must deliver a bond (with par value equal to the notional of the swap) issue by General Motors Corp.
See accompanying notes to the financial statements. 11 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ---------------- ---------- ---------------------------------------------------- -------------- 5,000,000 USD 6/20/09 Agreement with Lehman Brothers Special Financing $ 11,162 Inc. dated 4/19/04 to receive 1.81% per year times the notional amount. In exchange for that periodic payment, upon a default event by Ford Motor Credit Co., the Fund agrees to pay Lehman Brothers Special Financing Inc. the notional amount of the swap. To receive that payment, Lehman Brothers Special Financing Inc. must deliver a bond (with par value equal to the notional of the swap) issue by Ford Motor Credit Co. 5,000,000 USD 6/20/09 Agreement with Lehman Brothers Special Financing (41,194) Inc. dated 4/27/04 to receive 0.67% per year times the notional amount. In exchange for that periodic payment, upon a default event by Wyeth, the Fund agrees to pay Lehman Brothers Special Financing Inc. the notional amount of the swap. To receive that payment, Lehman Brothers Special Financing Inc. must deliver a bond (with par value equal to the notional of the swap) issue by Wyeth. 5,000,000 USD 9/20/09 Agreement with Barclays Bank PLC dated 7/01/04 to 22,969 receive 0.54% per year times the notional amount. In exchange for that periodic payment, upon a default event by Duke Energy Corporation, the Fund agrees to pay Barclays Bank PLC the notional amount of the swap. To receive that payment, Barclays Bank PLC must deliver a bond (with par value equal to the notional of the swap) issue by Duke Energy Corporation. 5,000,000 USD 9/20/09 Agreement with Citibank N.A. dated 7/30/04 to 12,710 receive 0.25% per year times the notional amount. In exchange for that periodic payment, upon a default event by International Business Machines Corporation, the Fund agrees to pay Citibank N.A. the notional amount of the swap. To receive that payment, Citibank N.A. must deliver a bond (with par value equal to the notional of the swap) issue by International Business Machines Corporation.
See accompanying notes to the financial statements. 12 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ---------------- ---------- ---------------------------------------------------- -------------- 5,000,000 USD 9/20/09 Agreement with Citibank N.A. dated 7/30/04 to $ 5,901 receive 0.30% per year times the notional amount. In exchange for that periodic payment, upon a default event by Coca-Cola Enterprises, the Fund agrees to pay Citibank N.A. the notional amount of the swap. To receive that payment, Citibank N.A. must deliver a bond (with par value equal to the notional of the swap) issue by Coca-Cola Enterprises. 5,000,000 USD 9/20/09 Agreement with Citibank N.A. dated 7/30/04 to (15,372) receive 0.69% per year times the notional amount. In exchange for that periodic payment, upon a default event by Comcast Cable Communications, Inc., the Fund agrees to pay Citibank N.A. the notional amount of the swap. To receive that payment, Citibank N.A. must deliver a bond (with par value equal to the notional of the swap) issue by Comcast Cable Communications, Inc. 5,000,000 USD 9/20/09 Agreement with UBS AG dated 7/26/04 to receive 0.59% 32,886 per year times the notional amount. In exchange for that periodic payment, upon a default event by Capital One Bank, the Fund agrees to pay UBS AG the notional amount of the swap. To receive that payment, UBS AG must deliver a bond (with par value equal to the notional of the swap) issue by Capital One Bank. 5,000,000 USD 9/20/09 Agreement with UBS AG dated 7/30/04 to receive 0.53% (11,578) per year times the notional amount. In exchange for that periodic payment, upon a default event by Kinder Morgan Energy Partners, L.P., the Fund agrees to pay UBS AG the notional amount of the swap. To receive that payment, UBS AG must deliver a bond (with par value equal to the notional of the swap) issue by Kinder Morgan Energy Partners, L.P. 5,000,000 USD 9/20/09 Agreement with UBS AG dated 7/30/04 to receive 0.62% 9,470 per year times the notional amount. In exchange for that periodic payment, upon a default event by Devon Energy Corporation, the Fund agrees to pay UBS AG the notional amount of the swap. To receive that payment, UBS AG must deliver a bond (with par value equal to the notional of the swap) issue by Devon Energy Corporation.
See accompanying notes to the financial statements. 13 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ---------------- ---------- ---------------------------------------------------- -------------- INTEREST RATE SWAPS 163,100,000 EUR 3/13/06 Agreement with Citibank N.A. dated 3/09/04 to pay $ 225,908 the notional amount multiplied by 2.34% and to receive the notional amount multiplied by the 6 month Floating Rate EURIBOR. 59,900,000 EUR 6/5/06 Agreement with Citibank N.A. dated 6/01/04 to pay (420,446) the notional amount multiplied by 2.824% and to receive the notional amount multiplied by the 6 month Floating Rate EURIBOR. 72,600,000 USD 6/5/06 Agreement with Citibank N.A. dated 6/01/04 to 411,537 receive the notional amount multiplied by 2.9835% and to pay the notional amount multiplied by the 3 month LIBOR. 52,200,000 CAD 6/8/06 Agreement with JP Morgan Chase Bank dated 6/08/04 to 253,868 receive the notional amount multiplied by 3.41% and to pay the notional amount multiplied by the 3 month Floating Rate Canadian Dollar Offering Rate. 52,200,000 CAD 6/10/06 Agreement with JP Morgan Chase Bank dated 6/10/04 to 272,428 receive the notional amount multiplied by 3.44% and to pay the notional amount multiplied by the 3 month Floating Rate Canadian Dollar Offering Rate. 52,200,000 CAD 6/14/06 Agreement with JP Morgan Chase Bank dated 6/14/04 to 363,462 receive the notional amount multiplied by 3.5725% and to pay the notional amount multiplied by the 3 month Floating Rate Canadian Dollar Offering Rate. 43,600,000 GBP 7/1/06 Agreement with JP Morgan Chase Bank dated 7/01/04 to (252,550) pay the notional amount multiplied by 5.3375% and to receive the notional amount multiplied by the 6 month Floating Rate British LIBOR. 78,400,000 USD 7/6/06 Agreement with JP Morgan Chase Bank dated 7/01/04 to 620,278 receive the notional amount multiplied by 3.129% and to pay the notional amount multiplied by the 3 month LIBOR.
See accompanying notes to the financial statements. 14 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ---------------- ---------- ---------------------------------------------------- -------------- 46,900,000 GBP 8/4/06 Agreement with Deutsche Bank AG dated 8/04/04 to pay $ (389,230) the notional amount multiplied by 5.42% and to receive the notional amount multiplied by the 6 month Floating Rate British LIBOR. 84,700,000 USD 8/6/06 Agreement with JP Morgan Chase Bank dated 8/04/04 to 498,883 receive the notional amount multiplied by 3.04% and to pay the notional amount multiplied by the 3 month LIBOR. 154,000,000 SEK 8/30/07 Agreement with Deutsche Bank AG dated 8/26/04 to 34,468 receive the notional amount multiplied by 3.60% and to pay the notional amount multiplied by the 3 month Floating Rate Swedish LIBOR. 68,500,000 EUR 3/11/09 Agreement with Citibank N.A. dated 3/09/04 to (158,370) receive the notional amount multiplied by 3.21% and to pay the notional amount multiplied by the 6 month Floating Rate EURIBOR. 15,100,000 SEK 5/22/09 Agreement with Citibank N.A. dated 5/21/04 to 21,777 receive the notional amount multiplied by 4.3775% and to pay the notional amount multiplied by the 3 month Floating Rate Swedish LIBOR. 10,100,000 USD 2/15/10 Agreement with JP Morgan Chase Bank dated 9/03/02 to (178,936) 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). 120,500,000 SEK 7/15/11 Agreement with Citibank N.A. dated 7/13/04 to 166,374 receive the notional amount multiplied by 4.615% and to pay the notional amount multiplied by the 3 month Floating Rate Swedish LIBOR. 10,100,000 USD 2/15/12 Agreement with JP Morgan Chase Bank dated 9/03/02 to (143,673) 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).
See accompanying notes to the financial statements. 15 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ---------------- ---------- ---------------------------------------------------- -------------- 10,100,000 USD 8/15/12 Agreement with JP Morgan Chase Bank dated 9/04/02 to $ (135,271) 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). 5,600,000 CHF 10/23/13 Agreement with JP Morgan Chase Bank dated 10/21/03 (89,821) to pay the notional amount multiplied by 3.0275% and to receive the notional amount multiplied by the 6 month Floating Rate Swiss LIBOR. 8,500,000 USD 10/24/13 Agreement with JP Morgan Chase Bank dated 10/22/03 (139,894) to pay the notional amount multiplied by 4.704% and to receive the notional amount multiplied by the 3 month LIBOR. 18,000,000 CHF 2/26/14 Agreement with Deutsche Bank AG dated 2/24/04 to pay 50,836 the notional amount multiplied by 2.77% and to receive the notional amount multiplied by the 6 month Floating Rate Swiss LIBOR. 22,200,000 CHF 4/21/14 Agreement with JP Morgan Chase Bank dated 4/19/04 to 22,661 pay the notional amount multiplied by 2.81% and to receive the notional amount multiplied by the 6 month Floating Rate Swiss LIBOR. 14,200,000 SEK 5/21/14 Agreement with Citibank N.A. dated 5/18/04 to 51,240 receive the notional amount multiplied by 5.0725% and to pay the notional amount multiplied by the 3 month Floating Rate Swedish LIBOR. 67,200,000 SEK 6/4/14 Agreement with JP Morgan Chase Bank dated 6/02/04 to 260,116 receive the notional amount multiplied by 5.1% and to pay the notional amount multiplied by the 3 month Floating Rate Swedish LIBOR. 18,300,000 EUR 6/18/14 Agreement with Citibank N.A. dated 6/18/04 to pay (597,364) the notional amount multiplied by 4.4725% and to receive the notional amount multiplied by the 6 month Floating Rate EURIBOR.
See accompanying notes to the financial statements. 16 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ---------------- ---------- ---------------------------------------------------- -------------- 22,000,000 USD 6/18/14 Agreement with JP Morgan Chase Bank dated 6/16/04 to $ 1,192,925 receive the notional amount multiplied by 5.229% and to pay the notional amount multiplied by the 3 month LIBOR. 22,700,000 USD 7/19/14 Agreement with JP Morgan Chase Bank dated 7/15/04 to 743,312 receive the notional amount multiplied by 4.9675% and to pay the notional amount multiplied by the 3 month LIBOR. 32,200,000 AUD 7/21/14 Agreement with Citibank N.A. dated 7/15/04 to pay (315,812) the notional amount multiplied by 6.1225% and to receive the notional amount multiplied by the 6 month Floating Rate Australian BBSW. 33,800,000 CAD 8/16/14 Agreement with JP Morgan Chase Bank dated 8/16/04 to 143,172 receive the notional amount multiplied by 4.9825% and to pay the notional amount multiplied by the 3 month Floating Rate Canadian Dollar Offering Rate. 35,800,000 AUD 8/17/14 Agreement with Deutsche Bank AG dated 8/16/04 to pay (167,394) the notional amount multiplied by 6.0475% and to receive the notional amount multiplied by the 6 month Floating Rate Australian BBSW. 28,400,000 USD 8/25/14 Agreement with Citibank N.A. dated 8/20/04 to 181,156 receive the notional amount multiplied by 4.6525% and to pay the notional amount multiplied by the 3 month LIBOR. 10,000,000 USD 4/15/24 Agreement with JP Morgan Chase Bank dated 9/17/02 to 29,767 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). 15,680,000 USD 8/31/25 Agreement with JP Morgan Chase Bank dated 9/05/02 to 33,022 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). 7,200,000 CAD 6/8/34 Agreement with JP Morgan Chase Bank dated 6/08/04 to (444,725) pay the notional amount multiplied by 5.9775% and to receive the notional amount multiplied by the 3 month Floating Rate Canadian Dollar Offering Rate.
See accompanying notes to the financial statements. 17 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ---------------- ---------- ---------------------------------------------------- -------------- 15,700,000 USD 6/10/34 Agreement with Citibank N.A. dated 6/08/04 to pay $ (1,453,490) the notional amount multiplied by 5.89% and to receive the notional amount multiplied by the 3 month LIBOR. 7,200,000 CAD 6/10/34 Agreement with JP Morgan Chase Bank dated 6/10/04 to (332,293) pay the notional amount multiplied by 5.96% and to receive the notional amount multiplied by the 3 month Floating Rate Canadian Dollar Offering Rate. 7,200,000 CAD 6/14/34 Agreement with JP Morgan Chase Bank dated 6/14/04 to (348,505) pay the notional amount multiplied by 5.98% and to receive the notional amount multiplied by the 3 month Floating Rate Canadian Dollar Offering Rate. TOTAL RETURN SWAPS 28,000,000 USD 9/1/04 Agreement with Lehman Brothers Special Financing 403,506 Inc. dated 8/26/03 to receive the notional amount multiplied by the change in market value 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. 65,000,000 USD 10/1/04 Agreement with UBS AG dated 3/11/04 to receive the 938,334 notional amount multiplied by the return on the Lehman Brothers MBS Fixed Rate Index and to pay the notional amount multiplied by the 1 month LIBOR adjusted by a specified spread. 75,000,000 USD 11/1/04 Agreement with Lehman Brothers Special Financing 1,376,134 Inc. dated 11/24/03 to receive the notional amount multiplied by the return on the Lehman Brothers U.S. Government Bond Index and to pay the notional amount multiplied by the 1 month LIBOR adjusted by a specified spread. 55,000,000 USD 12/1/04 Agreement with UBS AG dated 11/20/03 to receive the 793,058 notional amount multiplied by the change in market value 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.
See accompanying notes to the financial statements. 18 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ---------------- ---------- ---------------------------------------------------- -------------- 28,000,000 USD 12/1/04 Agreement with Lehman Brothers Special Financing $ -- Inc. dated 8/30/04 to receive the notional amount multiplied by the change in market value 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. 10,000,000 USD 1/31/05 Agreement with Citibank N.A. dated 7/30/04 to 370,661 receive the notional amount multiplied by the return on the Lehman Brothers AAA CMBS Index and to pay initial market value multiplied by the 1 month LIBOR adjusted by a specified spread. 25,000,000 USD 2/1/05 Agreement with Lehman Brothers Special Financing 555,654 Inc. dated 1/30/04 to receive the notional amount multiplied by the change in market value of the Lehman Brothers US Credit Index and to pay initial market value multiplied by the 1 month LIBOR adjusted by a specified spread. 135,000,000 USD 2/1/05 Agreement with UBS AG dated 7/19/04 to receive the 1,943,223 notional amount multiplied by the change in market value 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. ------------- $ 7,631,345 =============
See accompanying notes to the financial statements. 19 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments in unaffiliated issuers, at value (cost $152,297,638) (Note 2) $ 156,545,818 Investments in affiliated issuers, at value (cost $752,416,935) (Notes 2 and 7) 759,493,185 Receivable for Fund shares sold 200,000 Interest receivable 479,143 Receivable for open forward foreign currency contracts (Note 2) 2,394,008 Receivable for variation margin on open futures contracts (Note 2) 835,383 Net receivable for open swap contracts (Note 2) 4,885,151 Periodic payments from open swap contracts (Note 2) 1,208,051 Receivable for expenses reimbursed by Manager (Note 3) 47,595 --------------- Total assets 926,088,334 --------------- LIABILITIES: Payable for investments purchased 53,939,062 Foreign currency due to custodian 24,900 Payable to affiliate for (Note 3): Management fee 180,279 Shareholder service fee 108,167 Trustees fee 1,206 Payable for open forward foreign currency contracts (Note 2) 1,348,988 Accrued expenses 65,145 --------------- Total liabilities 55,667,747 --------------- NET ASSETS $ 870,420,587 =============== NET ASSETS CONSIST OF: Paid-in capital $ 838,539,235 Accumulated undistributed net investment income 2,609,870 Accumulated net realized gain 8,857,233 Net unrealized appreciation 20,414,249 --------------- $ 870,420,587 =============== NET ASSETS ATTRIBUTABLE TO: Class III shares $ 870,420,587 =============== SHARES OUTSTANDING: Class III 83,192,569 =============== NET ASSET VALUE PER SHARE: Class III $ 10.46 ===============
See accompanying notes to the financial statements. 20 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Interest $ 2,862,299 Dividends from affiliated issuers (Note 7) 1,849,161 Dividends 165,533 --------------- Total income 4,876,993 --------------- EXPENSES: Management fee (Note 3) 928,437 Shareholder service fee (Note 3) - Class III 557,062 Custodian and transfer agent fees 130,364 Audit and tax fees 23,828 Legal fees 11,500 Trustees fees and related expenses (Note 3) 4,609 Registration fees 6,072 Miscellaneous 3,405 --------------- Total expenses 1,665,277 Fees and expenses reimbursed by Manager (Note 3) (172,868) Indirectly incurred fees waived or borne by Manager (Note 3) (43,582) Shareholder service fee waived (Note 3) - Class III (16,018) --------------- Net expenses 1,432,809 --------------- Net investment income 3,444,184 --------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments in unaffiliated issuers 356,040 Investments in affiliated issuers (2,982,363) Realized gains distributions from affiliated issuers (Note 7) 491,070 Closed futures contracts 3,566,404 Closed swap contracts 2,284,124 Foreign currency, forward contracts and foreign currency related transactions 6,695,673 --------------- Net realized gain 10,410,948 --------------- Change in net unrealized appreciation (depreciation) on: Investments (8,729,156) Open futures contracts 720,177 Open swap contracts 7,097,421 Foreign currency, forward contracts and foreign currency related transactions 297,080 --------------- Net unrealized loss (614,478) --------------- Net realized and unrealized gain 9,796,470 --------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 13,240,654 ===============
See accompanying notes to the financial statements. 21 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 3,444,184 $ 9,201,321 Net realized gain 10,410,948 19,739,355 Change in net unrealized appreciation (depreciation) (614,478) 16,386,520 ----------------- ----------------- Net increase in net assets from operations 13,240,654 45,327,196 ----------------- ----------------- Distributions to shareholders from: Net investment income Class III -- (12,402,034) Net realized gains Class III (4,133,869) (15,951,420) ----------------- ----------------- (4,133,869) (28,353,454) ----------------- ----------------- Net share transactions (Note 6): Class III 258,489,665 299,820,381 ----------------- ----------------- Total increase in net assets 267,596,450 316,794,123 NET ASSETS: Beginning of period 602,824,137 286,030,014 ----------------- ----------------- End of period (including accumulated undistributed net investment income of $2,609,870 and distributions in excess of net investment income of $834,314, respectively) $ 870,420,587 $ 602,824,137 ================= =================
See accompanying notes to the financial statements. 22 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ------------------------------------------------------------------------ (UNAUDITED) 2004(a) 2003(a) 2002(a) 2001(a)(b) 2000(a) ---------------- ----------- --------- ----------- --------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.40 $ 9.95 $ 10.39 $ 10.17 $ 9.64 $ 10.23 Income from investment operations: Net investment income+ 0.05(c) 0.25(c) 0.20(c) 0.77(c) 0.62(c) 0.66 Net realized and unrealized gain (loss) 0.06 0.91 0.44 0.07 0.73 (0.44) ----------- ----------- --------- ----------- --------- ---------- Total from investment operations 0.11 1.16 0.64 0.84 1.35 0.22 ----------- ----------- --------- ----------- --------- ---------- Less distributions to shareholders: From net investment income -- (0.28) (0.47) (0.62) (0.82) (0.70) From net realized gains (0.05) (0.43) (0.61) --(d) -- (0.11) ----------- ----------- --------- ----------- --------- ---------- Total distributions (0.05) (0.71) (1.08) (0.62) (0.82) (0.81) ----------- ----------- --------- ----------- --------- ---------- NET ASSET VALUE, END OF PERIOD $ 10.46 $ 10.40 $ 9.95 $ 10.39 $ 10.17 $ 9.64 =========== =========== ========= =========== ========= ========== TOTAL RETURN (b) 1.10%** 11.99% 6.45% 8.53% 14.52% 2.26% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 870,421 $ 602,824 $ 286,030 $ 340,039 $ 156,412 $ 120,276 Net operating expenses to average daily net assets 0.39%(f)* 0.39%(f) 0.38%(f) 0.38%(f) 0.39%(f) 0.40% Interest expense to average daily net assets -- -- -- -- -- 0.01%(g) Total net expenses to average daily net assets 0.39%* 0.39% 0.38% 0.38% 0.39% 0.41% Net investment income to average daily net assets 0.93%(c)* 2.43%(c) 1.91%(c) 7.38%(c) 6.29%(c) 6.59% Portfolio turnover rate 38%** 114% 108% 113% 181% 40% Fees and expenses reimbursed and/or waived by the Manager to average daily net assets: 0.06%* 0.09% 0.09% 0.09% 0.12% 0.10%
See accompanying notes to the financial statements. 23 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS -- (CONTINUED) (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) (a) As a result of recent changes in generally accepted accounting principles, the Fund has reclassified periodic payments made under interest rate swap agreements, previously included within interest income, as a component of realized gain (loss) in the Statement of Operations. The effect of this reclassification was to increase the net investment income ratio for the year ending February 29, 2004 by 0.51% and net investment income per share by $0.05. For consistency, similar reclassifications have been made to prior year amounts, resulting in increases (reductions) to the net investment income ratio of 0.06%, (0.01%), (0.05%) and 0.40% and to net investment income per share of $0.01, less than $(0.01), less than $(0.01) and $0.04 in the fiscal years ending February 28/29, 2003, 2002, 2001 and 2000, respectively. (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 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. (c) Net investment income is affected by the timing of the declaration of dividends by other Funds of the Trust in which the Fund invests. (d) The distribution from net realized gains was less than $0.01 per share. (e) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown. (f) Net expenses exclude expenses incurred indirectly through investment in underlying funds. (See Note 3). (g) 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. + Calculated using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 24 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION 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 through direct and indirect investment in U.S. securities, with additional return sought through exposure to foreign bond and currency markets. The Fund achieves U.S. bond market exposure by investing in GMO Short-Duration Collateral Fund, "synthetic" bonds (created by the Manager by combining a futures contract, swap contract, or option, on a fixed income security with cash, a cash equivalent or another fixed income security) and/or directly in U.S. Government securities and other high-quality U.S. dollar denominated fixed income securities. The Fund's benchmark is the Lehman Brothers U.S. Aggregate Bond Index. At August 31, 2004, 84.1% of the Fund was invested in the GMO Short-Duration Collateral Fund and 0.2% of the Fund was invested in the GMO Special Purpose Holding Fund, separate funds of GMO Trust managed by GMO. Shares of the GMO Short-Duration Collateral Fund and the GMO Special Purpose Holding Fund are not publicly available for direct purchase. At August 31, 2004, 3.0% 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 Short-Duration Collateral Fund, the GMO Special Purpose Holding Fund and the GMO Emerging Country Debt Fund should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request by calling (617) 346-7646. 2. SIGNIFICANT ACCOUNTING POLICIES 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. CHANGE IN ACCOUNTING PRINCIPLE For the year ended February 29, 2004, as a result of a FASB Emerging Issues Task Force consensus (and subsequent related SEC staff guidance), the Fund has reclassified periodic payments made under interest rate swap agreements, previously included within interest income, as a component of realized gain (loss) in the Statement of Operations. For consistency, similar reclassifications have been made to the per share 25 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) amounts in prior year financial highlights. Prior year net investment income ratios in the financial highlights have also been modified accordingly. This reclassification increased net investment income and decreased net realized gains by $1,949,248 for the year ended February 29, 2004. This change had no effect on the Fund's net asset value, either in total or per share, or its total increase (decrease) in net assets from operations during any period. 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 funds of the Trust ("underlying funds") and other 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 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. As of August 31, 2004, the total value of these securities represented 22.3% of net assets. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and 26 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 in the Schedule of Investments and represents the currency exposure the Fund has acquired or hedged through forward currency contracts as of August 31, 2004. 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. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, or if counterparties do not perform under the contract terms. 27 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. See the Schedule of Investments for all open futures contracts as of August 31, 2004. 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. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying investment increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of August 31, 2004 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 closing 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 August 31, 2004. 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. See the Schedule of Investments for all indexed securities held as of August 31, 2004. 28 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 using standard models that incorporate 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 on swap contracts 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 interest rates. See the Schedule of Investments for a summary of open swap agreements as of August 31, 2004. 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 29 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) segregated account for the benefit of the Fund and the counterparty. In connection with transactions in repurchase agreements, if the seller defaults or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. As of August 31, 2004, there were no open repurchase agreements. 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. The market value of the securities the Fund has sold is determined daily and any additional required collateral is allocated to or sent by the fund on the next business day. As of August 31, 2004, there were no open reverse repurchase agreements. DELAYED DELIVERY COMMITMENTS The Fund may purchase or sell securities on a when-issued or forward commitment basis. Payment and delivery may take place a month or more after the date of the transaction. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. Collateral consisting of liquid securities or cash and cash equivalents is maintained in an amount at least equal to these commitments with the custodian. As of August 31, 2004, the Fund held no delayed delivery 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 August 31, 2004, 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 generally withheld in accordance with the applicable country's tax treaty with the United States. 30 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. 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. 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. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.25% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% 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 31 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 GMO Special Purpose Holding Fund and GMO Short-Duration Collateral Fund ("SCDF"). GMO has entered into a binding agreement effective until at least June 30, 2005 to reimburse the Fund to the extent that the Fund's total direct annual operating expenses plus the amount of indirect fees and operating expenses incurred through its investment in underlying funds exceed 0.25% of the average daily net assets. For purposes of this calculation, the Fund's total direct annual operating expenses excludes shareholder service fees, fees and expenses of the independent Trustees of the Trust (including legal fees) ("Trustees fees"), and the following investment-related costs: brokerage commissions, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes. Additionally, the indirect fees and operating expenses incurred through investment in underlying funds excludes investment-related expenses and Trustees fees. Through June 29, 2004, the indirect Trustees fees incurred by the Fund through its investment in ECDF were not excluded. The Fund incurs fees and expenses indirectly as a shareholder in GMO Special Purpose Holding Fund, SDCF and ECDF. For the six months ended August 31, 2004, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
INDIRECT OPERATING INDIRECT INVESTMENT-RELATED EXPENSES (EXCLUDING EXPENSES (INCLUDING, BUT NOT MANAGEMENT FEES, LIMITED TO, INTEREST EXPENSE, INDIRECT NET SHAREHOLDER SERVICE INDIRECT FOREIGN AUDIT EXPENSE, MANAGEMENT FEES AND INVESTMENT- SHAREHOLDER AND INVESTMENT-RELATED TOTAL INDIRECT FEES RELATED EXPENSES) SERVICE FEES LEGAL EXPENSE) EXPENSES ------------------------------------------------------------------------------------------------------- (0.006%) 0.019% 0.004% 0.002% 0.019%
The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $2,953. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES For the six months ended August 31, 2004, cost of purchases and proceeds from sales of investments, other than short-term obligations, were as follows:
PURCHASES SALES ---------------- ----------------- U.S. Government securities $ 224,676,563 $ 225,970,703 Investments (non-U.S. Government securities) 343,560,106 70,844,270
32 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 5. PRINCIPAL SHAREHOLDERS AND RELATED PARTIES At August 31, 2004, 68.0% of the outstanding shares of the Fund were held by two shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. At August 31, 2004, less than 0.1% of the Fund was held by six related parties comprised of certain GMO employee accounts. As of August 31, 2004, a significant portion of the Fund's shares was held by accounts for which the Manager has investment discretion. 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ------------- ------------- ----------- ------------- SHARES AMOUNT SHARES AMOUNT ------------- ------------- ----------- ------------- Class III: Shares sold 27,365,040 $ 280,283,047 30,208,958 $ 310,054,758 Shares issued to shareholders in reinvestment of distributions 378,285 3,877,417 2,784,885 28,056,898 Shares repurchased (2,532,470) (25,670,799) (3,748,190) (38,291,275) ------------- ------------- ----------- ------------- Net increase 25,210,855 $ 258,489,665 29,245,653 $ 299,820,381 ============= ============= =========== =============
33 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 7. INVESTMENTS IN AFFILIATED ISSUERS A summary of the Fund's transactions in the securities of these issuers during the six months ended August 31, 2004, is set forth below:
VALUE, CAPITAL BEGINNING OF SALES DIVIDEND GAINS VALUE, END OF AFFILIATE PERIOD PURCHASES PROCEEDS INCOME DISTRIBUTIONS PERIOD ------------------------------------------------------------------------------------------------------- GMO Emerging Country Debt Fund, Class III $ 16,591,948 $ 8,779,926 $ -- $ 529,272 $ 150,654 $ 26,281,129 GMO Short-Duration Collateral Fund 429,364,263 330,441,650 32,000,000 78,559 340,416 731,561,093 GMO Special Purpose Holding Fund 37,410,592 1,241,330 35,492,670 1,241,330 -- 1,650,963* -------------- ------------- ------------ ----------- ------------- ------------- Totals $ 483,366,803 $ 340,432,906 $ 67,492,670 $ 1,849,161 $ 491,070 $ 759,493,195 ============== ============= ============ =========== ============= =============
* After effect of return of capital distribution of $1,446,729 on June 10, 2004. 8. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 34 GMO CORE PLUS BOND FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees and other expenses. The following table, assuming a $1,000 investment in a class of shares, discloses the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the class's actual return and actual expenses, and (2) a hypothetical annualized 5% return and the class's actual expenses: Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * ----------------------------------------------------------------------------------- 1) Actual $ 1,000.00 $ 1,011.00 $ 2.08 2) Hypothetical 1,000.00 1,023.14 2.09
*Expenses are calculated using the Class III annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2004 of 0.41%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 35 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
DESCRIPTION % OF NET ASSETS ------------------------------------------------------------------------------------------------- Australia 2.1% Austria 0.7 Belgium 1.5 Brazil 0.6 Canada 0.5 China 0.1 Chile 0.1 Denmark 1.0 Finland 2.2 France 4.9 Germany 9.7 Hong Kong 2.5 India 0.9 Indonesia 0.3 Ireland 1.4 Italy 3.6 Japan 24.2 Malaysia 0.1 Mexico 0.1 Netherlands 3.2 New Zealand 0.7 Norway 2.3 Singapore 1.0 South Africa 0.0 South Korea 0.7 Spain 4.2 Sweden 1.2 Switzerland 3.3 Taiwan 0.2 Thailand 0.4 United Kingdom 21.2 Short Term Investments and Other Assets and Liabilities (net) 5.1 ----------------- 100.0% =================
See accompanying notes to the financial statements. 1 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------------ COMMON STOCKS -- 93.2% AUSTRALIA -- 2.1% 2,535,830 Amcor Ltd 13,157,532 440,100 Commonwealth Bank of Australia 9,436,794 958,218 Foodland Associated 11,597,233 4,910,800 Foster's Group Ltd 16,246,462 4,724,980 John Fairfax Holdings Ltd 12,799,653 824,550 Lihir Gold Ltd * 602,227 76,000 Lihir Gold Ltd ADR 144A * 1,116,440 273,050 National Australia Bank Ltd 5,151,033 10,946,321 Pasminco Ltd *(a) (b) -- 1,390,827 Westpac Banking Corp 16,583,307 862,185 Woolworths Ltd 7,722,729 ------------------ 94,413,410 ------------------ AUSTRIA -- 0.7% 223,100 Erste Bank Der Oesterreichischen Sparkassen AG 8,498,732 29,330 Flughafen Wien AG 1,684,371 43,740 OMV AG 10,012,067 452,000 Telekom Austria AG 6,320,535 29,344 VA Technologie AG (Bearer) * 1,911,824 131,530 Wienerberger AG (b) 4,771,299 ------------------ 33,198,828 ------------------ BELGIUM -- 1.5% 77,694 Almanij NV 4,868,940 185,620 Belgacom SA * 6,190,025 25,192 CIE Francois d' Entreprises 6,973,097 378,020 Dexia (b) 6,532,226 35,733 Electrabel SA 11,994,791 182,795 Fortis 4,082,220 48,985 Groupe Bruxelles Lambert SA 3,073,276 252,480 KBC Bancassurance Holding 15,227,496 68,262 Solvay SA 5,754,413 95,759 UCB SA 4,671,876 ------------------ 69,368,360 ------------------
See accompanying notes to the financial statements. 2 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------------ BRAZIL -- 0.2% 533,600 Compania de Concessoes Rodoviarias 6,640,436 1,000,000 Suzano Bahia Sul Papel e Celulose 4,244,801 ------------------ 10,885,237 ------------------ CANADA -- 0.5% 1,590,100 Hudson's Bay Co 16,895,416 220,100 KAP Resources Ltd *(a) 1,670 504,500 Methanex Corp 6,696,801 ------------------ 23,593,887 ------------------ CHILE -- 0.1% 124,500 CorpBanca SA ADR 144A 3,130,702 ------------------ CHINA -- 0.1% 4,173,000 China Shipping Container Lines Co Ltd 1,564,885 10,640,000 China Telecom Corp Ltd 3,428,148 ------------------ 4,993,033 ------------------ DENMARK -- 1.0% 1,020,500 Danske Bank A/S 24,690,749 550,000 H. Lundbeck A/S (b) 9,923,194 203,200 Novo-Nordisk A/S Class B 10,867,980 ------------------ 45,481,923 ------------------ FINLAND -- 2.2% 1,142,700 Huhtamaki Oyj (b) 15,845,333 152,600 Jaakko Poyry Group 3,738,917 3,326,100 Nokia Oyj 39,292,700 662,800 Rapala VMC Oyj 4,703,400 555,250 Stockmann Oyj AB Class B 13,016,802 714,200 Uponor Oyj (b) 24,589,773 ------------------ 101,186,925 ------------------
See accompanying notes to the financial statements. 3 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------------ FRANCE -- 4.9% 45,660 Accor SA 1,932,760 214,600 Arcelor 3,673,833 107,640 Assurances Generales de France 6,169,924 427,040 Axa (b) 8,778,212 104,405 BIC SA 4,457,832 357,671 BNP Paribas 21,754,091 6,082 Cap Gemini SA * 173,281 28,610 Casino Guichard Perrachon SA 2,262,310 37,120 Christian Dior SA 2,134,958 225,560 Cie de Saint-Gobain 11,381,288 176,517 Credit Agricole SA 4,462,983 306,192 France Telecom SA 7,247,612 102,276 Groupe Danone 8,201,685 17,475 Guyenne et Gascogne SA 1,979,652 90,792 Imerys SA (b) 5,670,171 24,078 Lafarge SA 2,074,005 121,766 Lagardere S.C.A. 7,334,014 75,100 M6-Metropole Television 1,877,313 155,004 Michelin SA Class B 8,231,049 28,583 Pernod Ricard 3,537,153 251,772 Peugeot SA 15,153,280 68,400 Publicis Groupe (b) 1,855,110 65,083 Sanofi-Aventis * 4,627,079 68,600 Sanofi-Aventis (Foreign Registered) 4,879,255 96,864 Schneider Electric SA 6,086,345 1,338,620 Suez SA (b) 26,062,548 24,310 Technip SA 3,650,169 106,114 Thales SA (b) 3,593,299 198,000 Total SA (b) 38,738,542 109,031 Wendel Investissement (b) 5,325,855 24,831 Worms et Cie SA 625,958 ------------------ 223,931,566 ------------------
See accompanying notes to the financial statements. 4 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------------ GERMANY -- 9.2% 86,930 Aareal Bank AG 2,355,854 269,020 Adidas-Salomon AG 34,636,253 283,591 Allianz AG (Registered) 27,433,889 656,400 BASF AG 35,682,864 141,420 Bayerische Vereinsbank * 2,325,903 429,210 Commerzbank AG * 7,074,926 633,120 Continental AG 32,919,094 1,285,117 DaimlerChrysler AG (Registered) 53,607,159 731,600 Depfa Bank Plc 9,691,604 112,500 Deutsche Bank AG (Registered) 7,708,125 2,261,923 Deutsche Lufthansa AG * 26,398,106 2,859,223 Deutsche Telekom (Registered) * 50,122,798 374,670 Fraport AG (b) 11,814,751 72,087 Fresenius Medical Care AG (b) 5,269,581 8,400 Hannover Rueckversicherungs AG (Registered) 274,202 299,618 Heidelberger Druckmaschinen * 8,859,143 36,310 Koelnische Rueckversicherungs-Gesellschaft AG (New Shares) * 3,311,649 117,410 Koelnische Rueckversicherungs-Gesellschaft AG (Registered) * 10,756,178 101,490 MG Technologies AG * 1,296,472 242,274 Muenchener Rueckversicherungs AG (Registered) 23,044,561 89,770 Repower Systems AG (b) 1,792,308 386,200 Siemens AG (Registered) 26,627,240 1,113,600 ThyssenKrupp AG 20,847,128 396,850 Volkswagen AG 15,352,602 ------------------ 419,202,390 ------------------ HONG KONG -- 2.5% 1,885,000 China Mobile Ltd 5,514,120 6,313,000 China Resources Peoples Telephone Co Ltd 2,711,370 7,700,000 China Resources Power Holdings Co 4,086,949 2,020,500 CLP Holdings Ltd 11,694,522 1,264,400 Dah Sing Financial Services 9,100,334 2,532,000 Hang Lung Group Co Ltd 3,915,114 6,386,000 Hang Lung Properties Ltd 9,330,497 5,049,000 Hong Kong Land Holdings 9,565,835
See accompanying notes to the financial statements. 5 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------------ 6,696,000 Hopewell Highway Infrastructure Ltd 4,213,013 HONG KONG -- CONTINUED 940,000 Hysan Development Co Ltd 1,633,911 2,685,500 Jardine Strategic Holdings Ltd 15,181,131 1,489,500 Kerry Properties Ltd 2,701,550 947,500 Swire Pacific Ltd Class A 6,740,716 10,700,000 Swire Pacific Ltd Class B 13,126,515 1,927,000 Wharf Holdings Ltd 6,388,392 2,488,000 Yue Yuen Industrial Holdings (b) 6,002,211 ------------------ 111,906,180 ------------------ INDIA -- 0.9% 106,639 Corporation Bank 583,461 350,000 Gujarat Ambuja Cement * 2,450,125 390,000 Hero Honda Motors Ltd 3,731,410 160,000 Hindalco Industries Ltd 4,082,420 254,700 Hindalco Industries Ltd GDR 144A 6,533,055 850,000 ICICI Bank Ltd 4,951,706 384,000 ITC Ltd GDR 8,632,320 3,724,562 Mirc Electronics Ltd 1,567,137 146,664 Oil & Natural Gas Corp Ltd 2,263,406 143,945 Reliance Industries Ltd GDR 144A 3,071,786 483,333 Satyam Computer Services Ltd 3,543,788 ------------------ 41,410,614 ------------------ INDONESIA -- 0.3% 9,523,915 Astra International Tbk 6,492,473 7,677,000 Indocement Tunggal Prakarsa * 1,314,608 51,178,000 PT Bank Mandiri 6,845,859 ------------------ 14,652,940 ------------------ IRELAND -- 1.4% 1,843,690 Allied Irish Banks Plc 29,119,087 1,892,770 Bank of Ireland 25,411,000 179,682 CRH Plc 4,083,342 425,300 Grafton Group Plc * 3,633,576 224,000 Irish Life & Permanent Plc 3,408,421 ------------------
See accompanying notes to the financial statements. 6 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------------ 65,655,426 ------------------ ITALY -- 3.6% 704,100 Alleanza Assicurazioni SPA 7,384,628 236,431 Assicurazioni Generali SPA 6,182,377 1,318,428 Banca Intesa SPA 4,844,190 842,623 Banca Intesa SPA (Savings Shares) 2,394,614 769,124 Banca Monte dei Paschi di Siena SPA 2,251,171 310,183 Banca Nazionale Del Lavoro SPA * 719,438 231,854 Buzzi Unicem SPA 2,811,720 1,401,160 CIR-Compagnie Industriali Riunite SPA 2,734,745 178,447 Danieli and Co SPA (Savings Shares) 512,673 2,173,557 Edison SPA *(b) 3,608,850 2,122,435 Enel SPA (b) 16,426,879 2,156,921 ENI SPA 44,313,179 727,710 Fiat SPA *(b) 5,226,279 198,546 Grouppo Editoriale L'Espresso (b) 1,026,750 449,770 Italcementi SPA 3,997,162 58,000 Pagnossin SPA * 47,093 515,071 Riunione Adriatica di Sicurta SPA 9,105,236 650,500 Snam Rete Gas SPA 2,920,697 841,906 Telecom Italia Mobile SPA (Savings Shares) (b) 4,397,475 8,212,676 Telecom Italia SPA 18,066,364 6,378,098 Telecom Italia SPA (Savings Shares) 19,134,865 1,421,282 UniCredito Italiano SPA 6,824,845 ------------------ 164,931,230 ------------------ JAPAN -- 23.4% 380,500 Aeon Co Ltd 6,372,635 380,500 Aeon Co Ltd *(c) 6,223,495 823,400 Aisin Seiki Co Ltd 19,871,223 732,000 Ajinomoto Co Inc 8,245,162 153,000 Alps Electric Co Ltd 1,897,738 345,071 Arisawa Manufacturing 13,818,327 371,000 Asahi Glass Co Ltd 3,594,243 1,799,000 Asahi Kasei Corp 8,077,242 627,900 Bandai Co 14,599,220 915,000 Bank of Fukuoka Ltd (b) 4,773,606
See accompanying notes to the financial statements. 7 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------------ JAPAN -- CONTINUED 1,086,000 Canon Inc 51,929,296 1,135,500 Chubu Electric Power Co Inc 24,948,390 1,070,000 Daikin Industries Ltd 27,896,891 1,476,000 Daimaru Inc 11,826,396 2,437,000 Daiwa Securities Co Ltd 15,871,739 1,292,500 Denso Corp 31,822,393 4,592 East Japan Railway Co 25,819,756 656,700 Eisai Co Ltd 18,756,068 139,500 Fanuc Ltd 7,459,423 982,000 Fujikura Ltd 4,458,309 666,800 Honda Motor Co Ltd 33,228,180 743,000 Isetan Co Ltd 8,324,840 2,572,000 Isuzu Motors Ltd *(b) 6,058,310 3,279,000 Itochu Corp * 13,559,768 930,800 JFE Holdings Inc 25,426,436 391,000 JSR Corp 6,548,712 520,000 Kaneka Corp 4,954,389 1,322,000 Kao Corp 32,527,419 5,425 KDDI Corp 26,138,859 1,279,000 Komatsu Ltd 7,870,816 1,912,000 Konica Minolta Holdings Inc 24,730,825 36,180 Kose Corp 1,368,163 669,700 Marui Co Ltd 8,874,873 3,151,000 Matsushita Electric Industrial Co Ltd 42,447,893 2,608,000 Mitsubishi Corp 27,023,162 5,226,000 Mitsubishi Electric Corp 25,322,988 2,163,000 Mitsubishi Rayon Co Ltd 7,178,852 3,402 Mitsubishi Tokyo Finance Group Inc 30,711,899 1,007,000 Mitsui Fudosan Co Ltd 11,155,280 2,398,000 Mitsui Mining & Smelting Co Ltd 9,781,729 1,151,000 Mitsui OSK Lines Ltd 6,852,523 280,800 Namco Ltd 7,078,668 210,900 NEC Electronics Corp (b) 10,719,968 2,337,000 Nippon Express Co Ltd 12,023,833 2,392,500 Nippon Mining Holdings Inc 11,032,528 3,442,800 Nissan Motor Co 37,508,127
See accompanying notes to the financial statements. 8 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------------ JAPAN -- CONTINUED 275,300 Nissin Food Products 6,985,812 1,810,000 NTN Corp (b) 9,863,254 806,600 Omron Corp 17,271,949 147,700 ORIX Corp 15,177,164 1,484,000 Ricoh Company Ltd 29,189,921 232,000 Rinnai Corp 6,706,179 157,000 Seino Transportation Co Ltd 1,483,883 581,000 Sekisui Chemical Co Ltd 4,382,793 607,000 Sekisui House Ltd 6,117,508 565,000 Sharp Corp 7,901,793 95,800 Stanley Electric Co Ltd 1,440,054 414,000 Sumitomo Corp 3,022,316 2,134,000 Sumitomo Electric Industries Ltd 19,566,648 3,305 Sumitomo Mitsui Financial Group Inc (b) 20,008,840 833,000 Sumitomo Trust & Banking 5,048,145 2,266,000 Taisei Corp 7,783,595 182,400 Takeda Pharmaceutical Co Ltd 8,246,334 412,500 Tokyo Broadcasting System Inc 6,559,045 3,937,000 Tokyo Gas Co 14,476,709 1,935,000 Toray Industries Inc 9,184,216 1,159,000 Toto Ltd 11,485,007 1,766,200 Toyota Motor Corp 69,722,160 612,000 Ushio Inc 10,007,961 2,241 West Japan Railway Co 9,278,331 474,800 Yamanouchi Pharmaceutical Co Ltd 16,475,584 678,000 Yokogawa Electric Corp (b) 7,459,019 ------------------ 1,071,554,812 ------------------ MALAYSIA -- 0.1% 1,020,000 Malaysian International Shipping Berhad (Foreign Registered) 3,353,948 1,547,400 Proton Holdings Berhad * 3,155,882 ------------------ 6,509,830 ------------------ MEXICO -- 0.1% 1,517,000 Alfa SA de CV Class A 4,983,163 ------------------
See accompanying notes to the financial statements. 9 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------------ NETHERLANDS -- 3.2% 205,257 ABN Amro Holdings NV 4,370,967 534,270 Aegon NV 5,722,721 300,302 Akzo Nobel NV 10,131,937 370,750 Fortis NV * 8,273,006 26,608 Fugro NV 1,869,165 1,164,954 Hagemeyer NV *(b) 2,067,305 139,274 Hal Trust (Participating Units) 4,571,197 1,054,840 ING Groep NV 25,836,489 210,213 Koninklijke Ahold NV * 1,304,541 537,600 Koninklijke KPN NV 4,134,500 118,631 Koninklijke Wessanen NV 1,667,684 214,320 Laurus NV *(b) 208,344 1,144,832 Philips Electronics NV 26,552,817 92,391 Philips Electronics NV ADR 2,143,471 299,670 Royal Dutch Petroleum 15,179,978 131,807 TPG NV 3,062,706 93,823 Unilever NV 5,624,269 38,434 Univar NV 728,490 112,010 Van Ommeren Vopak NV 1,909,041 358,805 VNU NV 9,168,464 55,587 Wereldhave NV 4,744,231 527,747 Wolters Kluwer NV 8,711,164 ------------------ 147,982,487 ------------------ NEW ZEALAND -- 0.7% 394,478 Air New Zealand * 498,157 8,368,343 Telecom Corp of New Zealand 31,454,553 8,100,237 Trans Tasman Properties Ltd * 2,078,685 ------------------ 34,031,395 ------------------ NORWAY -- 2.3% 938,098 Ekornes ASA 19,318,121 461,200 Norsk Hydro ASA 28,784,169 1,168,820 Prosafe ASA 25,890,441 2,397,420 Statoil ASA 30,605,505 ------------------
See accompanying notes to the financial statements. 10 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------------ 104,598,236 ------------------ SINGAPORE -- 1.0% 4,641,940 Allgreen Properties Ltd 2,880,391 8,506,000 ComfortDelgro Corp Ltd 6,255,135 2,039,580 DBS Group Holdings Ltd 18,637,958 1,850,000 Parkway Holdings Ltd 1,387,243 6,040,000 People's Food Holdings Ltd 3,779,651 414,000 Singapore Airlines Ltd 2,692,348 4,911,000 Singapore Telecom Ltd * 6,573,906 7,125,000 Unisteel Technology Ltd 5,378,544 ------------------ 47,585,176 ------------------ SOUTH AFRICA -- 0.0% 153,500 Allied Technologies Ltd 774,320 255,341 Western Areas Ltd * 1,071,947 ------------------ 1,846,267 ------------------ SOUTH KOREA -- 0.7% 19,865 Hansol Paper Co 153,817 289,650 Korea Electric Power Corp 5,110,404 1,459,100 KT Corp ADR 25,563,432 8,420 SK Telecom Co Ltd 1,267,602 ------------------ 32,095,255 ------------------ SPAIN -- 4.2% 446,340 ACS Actividades Cons Y Serv 7,604,207 384,760 Altadis SA 11,997,604 900,000 Amadeus Global Travel Distribution Class A 6,142,394 13,475 Antena 3 Television SA * 666,084 1,488,392 Banco Bilbao Vizcaya Argentaria SA 19,891,482 136,863 Banco Popular Espanol 7,416,936 1,087,932 Banco Santander Central Hispano SA 10,697,891 1,178,318 Endesa SA 21,858,342 337,600 Gas Natural SDG SA 8,051,808 1,182,923 Iberdrola SA 24,173,925 174,100 Inditex SA 4,007,480 167,250 Red Electrica de Espana 2,833,043
See accompanying notes to the financial statements. 11 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------------ SPAIN -- CONTINUED 1,179,129 Repsol YPF SA 24,437,445 2,492,463 Telefonica SA 35,573,939 141,477 Transportes Azkar SA 1,054,266 289,290 Union Fenosa SA 6,431,662 ------------------ 192,838,508 ------------------ SWEDEN -- 1.2% 900,790 Autoliv Inc SDR 37,740,701 755,700 Billerud AB 11,757,921 915,100 Lundin Mining Corp * 4,834,799 ------------------ 54,333,421 ------------------ SWITZERLAND -- 3.3% 331,116 ABB Ltd * 1,880,602 117,270 Baloise Holding Ltd 4,442,823 1,620 Bank Sarasin & Cie AG Class B (Registered) 2,238,341 2,822 Banque Cantonale Vaudoise 321,492 2,666 Belimo Holding AG (Registered) 1,264,022 20,560 Bobst Group AG (Registered) 644,607 90,460 Converium Holding AG (b) 1,824,794 250,950 Credit Suisse Group * 7,844,946 9,335 Energiedienst Holding AG (Registered) 2,717,850 28,283 Fischer (George) AG (Registered) * 6,970,454 6,697 Forbo Holdings AG (Registered) * 1,393,977 11,768 Geberit AG (Registered) 8,361,803 130,105 Holcim Ltd 6,985,460 880 Jelmoli Holding AG (Bearer) 1,083,598 4,836 Jelmoli Holding AG (Registered) 1,198,257 32,499 Lonza Group AG (Registered) 1,440,741 81,810 Nestle SA (Registered) 19,362,141 585,184 Novartis AG (Registered) 27,155,851 28,010 Rieter Holding AG (Registered) 7,541,897 1,674 Sulzer AG (Registered) 469,697 504 Swiss National Insurance Co (Registered) 231,025 128,226 Swiss Reinsurance Co 7,270,815
See accompanying notes to the financial statements. 12 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------------ SWITZERLAND -- CONTINUED 34,730 Swisscom AG (Registered) (b) 11,487,820 174,640 UBS AG (Registered) 11,757,106 59,970 Unique Zurich Airport * 4,790,558 18,941 Valora Holding AG 4,143,981 28,841 Zurich Financial Services AG * 4,037,064 ------------------ 148,861,722 ------------------ TAIWAN -- 0.2% 431,100 Chunghwa Telecom Co Ltd ADR (b) 7,354,566 582,431 Compal Electronics GDR 144A 2,737,426 646,070 Standard Foods Corp 196,093 ------------------ 10,288,085 ------------------ THAILAND -- 0.4% 786,000 Siam Cement Pcl (Foreign Registered) 4,566,915 813,500 Siam Cement Pcl (Foreign Registered) NVDR 4,453,253 16,559,000 Sino Thai Engineering & Construction Pcl (Foreign Registered) (a) 3,737,205 3,117,000 Thai Airways International (Foreign Registered) (a) 4,003,830 1,528,800 Tipco Asphalt Pcl (Foreign Registered) *(a) 963,529 ------------------ 17,724,732 ------------------ UNITED KINGDOM -- 21.2% 954,588 Abbey National Plc 10,293,405 4,110,200 Aggregate Industries Plc 6,507,498 1,542,891 Allied Domecq Plc 12,372,720 551,000 Amvescap Plc 2,896,151 727,100 Associated British Foods Plc 8,184,914 437,700 AstraZeneca Plc 20,176,821 1,942,406 Aviva Plc 18,638,200 209,372 AWG Plc * 2,391,161 69,511,504 AWG Plc (Redeemable Shares) * 121,296 852,428 BAA Plc 8,527,810 5,876,410 BAE Systems Plc 21,284,392 5,545,094 Barclays Plc 51,318,172 896,942 BBA Group Plc 4,214,441
See accompanying notes to the financial statements. 13 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------------ UNITED KINGDOM -- CONTINUED 2,436,846 BG Group Plc 15,068,751 521,047 BHP Billiton Plc 4,921,397 592,990 Boots Group Plc 7,247,350 4,948,751 BP Plc 43,973,283 454,033 BPB Plc 3,304,703 501,600 British Energy Plc (Deferred Shares) *(a) -- 544,476 British Sky Broadcasting Plc 4,698,982 7,408,601 BT Group Plc 24,400,358 487,820 Bunzl Co 3,741,757 1,869,001 Cable & Wireless 3,648,366 666,100 Cadbury Schweppes Plc 5,355,595 835,021 Cattle's Plc 4,812,774 5,011,064 Centrica Plc 22,230,136 175,900 Cobham Group Plc 4,304,912 1,548,472 Diageo Plc 19,090,436 1,903,594 Dixons Group Plc (New Shares) 5,415,458 526,698 FKI Plc 1,151,406 1,728,913 Gallaher Group Plc 20,585,044 2,517,213 GlaxoSmithKline Plc 51,327,832 704,089 GUS Plc 10,776,791 626,658 Hanson Plc 4,278,316 1,101,900 Hays Plc 2,357,505 3,086,022 HBOS Plc 37,838,590 1,717,091 Hilton Group Plc 8,089,062 2,590,186 HSBC Holdings Plc 40,331,765 692,020 Imperial Chemical Industries Plc 2,761,831 1,053,118 Imperial Tobacco Group Plc 23,279,887 270,416 Intercontinental Hotels Group Plc 2,761,953 1,185,940 International Power Plc * 2,920,049 391,360 International Power Plc (Fully-paid Shares) * 957,490 1,081,727 J Sainsbury Plc 5,082,103 1,504,500 John Wood Group Plc 3,440,799 343,370 Johnson Matthey Plc 5,625,938 283,803 Kesa Electricals Plc 1,440,612 942,973 Kidde Plc 2,002,555 1,486,434 Kingfisher Plc 7,433,777
See accompanying notes to the financial statements. 14 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------------ UNITED KINGDOM -- CONTINUED 8,024,144 Legal & General Group Plc 14,427,816 4,126,020 Lloyds TSB Group Plc 31,031,261 64,438 Lonmin Plc 1,255,932 838,869 Marks & Spencer Group Plc 5,328,423 1,255,000 Matalan Plc 4,663,694 277,128 Mitchells & Butlers Plc 1,287,927 1,922,501 mmO2 Plc * 3,116,785 1,936,944 National Grid Transco Plc 16,229,943 180,132 Next Plc 4,836,683 604,000 Northern Rock Plc 7,731,459 971,100 Pearson Plc 10,855,437 1,240,017 Peninsular & Oriental Steam Navigation Co 5,364,233 1,102,500 Photo-Me International Plc * 1,997,424 1,101,472 Prudential Plc 8,749,283 312,990 Reed Elsevier Plc 2,782,216 2,425,620 Rentokil Initial Plc 6,570,662 621,169 Reuters Group Plc 3,602,665 625,836 Rexam Plc 4,981,200 178,941 RMC Group Plc 2,055,434 2,335,681 Royal Bank of Scotland Group 65,191,354 1,140,400 SABMiller Plc 14,203,101 1,474,921 Scottish & Newcastle Plc 10,558,844 543,760 Scottish & Southern Energy Plc 7,230,246 1,480,700 Scottish Power Plc 10,741,924 739,063 Severn Trent Plc 11,541,847 5,289,150 Shell Transport & Trading Co Plc (Registered) 38,630,561 597,432 Smith (David S.) Holdings Plc 1,571,392 140,434 Standard Chartered Plc 2,390,774 226,228 TI Automotive Ltd Class A *(a) -- 948,246 Tomkins Plc 4,439,126 205,125 Travis Perkins Plc 5,035,948 340,847 Trinity Mirror Plc 3,959,463 787,532 Unilever Plc 6,778,490 503,784 United Utilities Plc 4,975,671 194,657 United Utilities Plc Class A 1,280,287 402,580 Viridian Group Plc 4,449,471
See accompanying notes to the financial statements. 15 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES/ PAR VALUE DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------------ UNITED KINGDOM -- CONTINUED 21,279,362 Vodafone Group Plc 48,440,155 313,844 Whitbread Plc 4,616,424 621,321 Wolseley Plc 9,535,874 493,600 WPP Group Plc 4,431,906 ------------------ 970,455,879 ------------------ TOTAL COMMON STOCKS (COST $3,633,467,633) 4,273,631,619 CONVERTIBLE SECURITIES -- 0.8% JAPAN -- 0.8% JPY 1,866,000,000 SMFG Finance, 144A, 2.25%, due 07/11/05 35,938,502 ------------------ TOTAL CONVERTIBLE SECURITIES (COST $16,035,135) 35,938,502 ------------------ PREFERRED STOCKS -- 0.9% BRAZIL -- 0.3% 112,300 Ultrapar Participacoes SA ADR 1,545,248 76,800 Unibanco - Uniao de Bancos Brasileiros SA GDR 1,758,720 274,400 Votorantim Celulose e Papel SA ADR 9,639,672 ------------------ 12,943,640 ------------------ FRANCE -- 0.0% 21,058 Casino Guichard Perrachon SA 3.74% (b) 1,500,546 ------------------ GERMANY -- 0.5% 96,100 Henkel KGaA (b) 6,985,452 635,299 Volkswagen AG 5.30% 16,860,813 ------------------ 23,846,265 ------------------
See accompanying notes to the financial statements. 16 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES/ PAR VALUE DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------------ ITALY -- 0.0% 165,933 Fiat SPA 4.95% 783,665 57,871 IFI Istituto Finanziario Industries 4.82% 570,550 ------------------ 1,354,215 ------------------ TOTAL PREFERRED STOCKS (COST $38,789,343) 39,644,666 ------------------ DEBT OBLIGATIONS -- 0.0% UNITED KINGDOM -- 0.0% GBP 102,000 BG Transco Holdings Plc, 7.00%, due 12/16/24 209,259 GBP 102,000 BG Transco Holdings Plc, 5.96%, due 12/14/09 186,025 GBP 102,000 BG Transco Holdings Plc Index Linked, 4.19%, due 12/14/22 233,513 ------------------ 628,797 ------------------ TOTAL DEBT OBLIGATIONS (COST $381,364) 628,797 ------------------ SHORT-TERM INVESTMENTS -- 5.0% CASH EQUIVALENTS -- 1.9% 144,755,535 The Boston Global Investment Trust (d) 144,755,535 ------------------ CASH EQUIVALENTS -- 1.9% 85,300,000 ING Bank GC Time Deposit, 1.57%, due 09/01/04 85,300,000 ------------------ TOTAL SHORT-TERM INVESTMENTS (COST $230,055,535) 230,055,535 ------------------ TOTAL INVESTMENTS -- 99.9% (Cost $3,918,729,010) 4,579,899,119 Other Assets and Liabilities (net) -- 0.1% 4,026,438 ------------------ TOTAL NET ASSETS -- 100.0% $ 4,583,925,557 ==================
See accompanying notes to the financial statements. 17 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 Foreign Registered - Shares issued to foreign investors in markets that have foreign ownership limits. GDR - Global Depository Receipt NVDR - Non-Voting Depository Receipt SDR - Swedish Depository Receipt * Non-income producing security. (a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 2). (b) All or a portion of this security is out on loan (Note 2). (c) When issued security (Note 2). (d) Investment of security lending collateral (Note 2). CURRENCY ABBREVIATIONS: GBP - British Pound JPY - Japanese Yen At August 31, 2004, the approximate 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 - -------------------------- --------------------------- --------------------------- ------------------------- $ 3,923,965,026 $ 755,582,441 $ (99,648,348) $ 655,934,093
At February 29, 2004, GMO Foreign Fund had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Internal Revenue Code of $9,653,648 expiring in 2011. Utilization of the capital loss carryforward above could be subject to limitations imposed by the Internal Revenue Code related to share ownership activity. See accompanying notes to the financial statements. 18 GMO FOREIGN FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY (SHOWING PERCENTAGE OF EQUITY INVESTMENTS) AUGUST 31, 2004 (UNAUDITED) At August 31, 2004, industry sector diversification of the Fund's equity investments was as follows:
INDUSTRY SECTOR --------------------------------------------------------------------------------------- Financials 22.8% Consumer Discretionary 18.4 Industrials 12.8 Telecommunication Services 8.2 Energy 7.9 Materials 7.4 Consumer Staples 7.1 Utilities 6.3 Information Technology 4.8 Health Care 4.3 ------- 100.0% =======
See accompanying notes to the financial statements. 19 GMO FOREIGN FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments, at value, including securities on loan of $135,216,588 (cost $3,918,729,010) (Note 2) $ 4,579,899,119 Cash 748,622 Foreign currency, at value (cost $126,904,195) (Note 2) 126,437,335 Receivable for investments sold 11,856,440 Receivable for Fund shares sold 27,858,978 Dividends and interest receivable 10,960,129 Foreign taxes receivable 1,280,637 Receivable for expenses reimbursed by Manager (Note 3) 214,644 --------------- Total assets 4,759,255,904 --------------- LIABILITIES: Payable for investments purchased 18,270,373 Payable upon return of securities loaned (Note 2) 144,755,535 Payable for Fund shares repurchased 9,018,892 Payable to affiliate for (Note 3): Management fee 2,294,519 Shareholder service fee 570,261 Administration fee - Class M 1,737 Trustees fee 8,123 Payable for 12b-1 fee - Class M 4,363 Accrued expenses 406,544 --------------- Total liabilities 175,330,347 --------------- NET ASSETS $ 4,583,925,557 =============== NET ASSETS CONSIST OF: Paid-in capital $ 3,754,918,617 Accumulated undistributed net investment income 54,065,155 Accumulated net realized gain 114,318,823 Net unrealized appreciation 660,622,962 --------------- $ 4,583,925,557 ===============
See accompanying notes to the financial statements. 20 GMO FOREIGN FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) -- (CONTINUED) NET ASSETS ATTRIBUTABLE TO: Class II shares $ 802,874,179 ================== Class III shares $ 2,793,096,761 ================== Class IV shares $ 977,550,923 ================== Class M shares $ 10,403,694 ================== SHARES OUTSTANDING: Class II 61,053,850 ================== Class III 211,692,335 ================== Class IV 74,052,907 ================== Class M 794,167 ================== NET ASSET VALUE PER SHARE: Class II $ 13.15 ================== Class III $ 13.19 ================== Class IV $ 13.20 ================== Class M $ 13.10 ==================
See accompanying notes to the financial statements. 21 GMO FOREIGN FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends (net of withholding taxes of $10,153,708) $ 79,747,187 Interest (including securities lending income of $1,920,362) 3,933,189 ---------------- Total income 83,680,376 ---------------- EXPENSES: Management fee (Note 3) 13,175,008 Shareholder service fee (Note 3) - Class II 882,268 Shareholder service fee (Note 3) - Class III 1,965,220 Shareholder service fee (Note 3) - Class IV 431,391 12b-1 fee (Note 3) - Class M 13,336 Administration fee (Note 3) - Class M 10,669 Custodian fees 1,106,852 Transfer agent fees 39,836 Audit and tax fees 36,800 Legal fees 56,580 Trustees fees and related expenses (Note 3) 29,270 Registration fees 23,552 Miscellaneous 21,160 ---------------- Total expenses 17,791,942 Fees and expenses reimbursed by Manager (Note 3) (1,280,732) ---------------- Net expenses 16,511,210 ---------------- Net investment income 67,169,166 ---------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (net of CPMF tax of $10,561) (Note 2) 132,160,143 Foreign currency, forward contracts and foreign currency related transactions (2,664,776) ---------------- Net realized gain 129,495,367 ---------------- Change in net unrealized appreciation (depreciation) on: Investments (214,952,402) Foreign currency, forward contracts and foreign currency related transactions (585,707) ---------------- Net unrealized loss (215,538,109) ---------------- Net realized and unrealized loss (86,042,742) ----------------
See accompanying notes to the financial statements. 22 GMO FOREIGN FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (18,873,576) ================
See accompanying notes to the financial statements. 23 GMO FOREIGN FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------- ---------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 67,169,166 $ 47,464,607 Net realized gain 129,495,367 77,909,980 Change in net unrealized appreciation (depreciation) (215,538,109) 1,083,884,832 --------------- ----------------- Net increase (decrease) in net assets from operations (18,873,576) 1,209,259,419 --------------- ----------------- Distributions to shareholders from: Net investment income Class II (5,314,684) (12,221,276) Class III (18,816,274) (42,896,461) Class IV (6,771,947) (5,965,746) Class M (63,924) (157,180) --------------- ----------------- Total distributions from net investment income (30,966,829) (61,240,663) --------------- ----------------- Net share transactions (Note 6): Class II 31,905,700 255,214,331 Class III 564,708,814 216,601,466 Class IV 61,990,059 593,330,028 Class M (2,431,355) 5,137,787 --------------- ----------------- Increase in net assets resulting from net share transactions 656,173,218 1,070,283,612 --------------- ----------------- Total increase in net assets 606,332,813 2,218,302,368 NET ASSETS: Beginning of period 3,977,592,744 1,759,290,376 --------------- ----------------- End of period (including accumulated undistributed net investment income of $54,065,155 and $17,862,818, respectively) $ 4,583,925,557 $ 3,977,592,744 =============== =================
See accompanying notes to the financial statements. 24 GMO FOREIGN FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS II SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ------------------------------------------------------------ (UNAUDITED) 2004 2003 2002 2001 2000 ---------------- -------- -------- -------- -------- -------- NET ASSET VALUE, BEGINNING OF PERIOD $ 13.29 $ 8.88 $ 9.94 $ 11.21 $ 13.14 $ 11.79 Income from investment operations: Net investment income + 0.20 0.17 0.15 0.16 0.20 0.17 Net realized and unrealized gain (loss) (0.25) 4.46 (1.03) (1.20) (0.41) 2.89 ---------------- -------- -------- -------- -------- -------- Total from investment operations (0.05) 4.63 (0.88) (1.04) (0.21) 3.06 ---------------- -------- -------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.09) (0.22) (0.18) (0.11) (0.29) (0.21) From net realized gains -- -- -- (0.12) (1.43) (1.50) ---------------- -------- -------- -------- -------- -------- Total distributions (0.09) (0.22) (0.18) (0.23) (1.72) (1.71) ---------------- -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 13.15 $ 13.29 $ 8.88 $ 9.94 $ 11.21 $ 13.14 ================ ======== ======== ======== ======== ======== TOTAL RETURN (a) (0.40)%** 52.49% (9.00)% (9.37)% (1.84)% 25.63% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 802,874 $781,448 $305,423 $100,127 $ 61,681 $ 60,278 Net expenses to average daily net assets 0.82%* 0.82% 0.82% 0.82% 0.82% 0.82% Net investment income to average daily net assets 1.53%(b)** 1.47% 1.54% 1.56% 1.63% 1.28% Portfolio turnover rate 13%** 25% 22% 22% 38% 35% Fees and expenses reimbursed by the Manager to average daily net assets: 0.06%* 0.08% 0.09% 0.09% 0.09% 0.10%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) The ratio for the six months ended August 31, 2004, has not been annualized since the Fund believes it would not be appropriate because the Fund's dividend income is not earned ratably throughout the fiscal year. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 25 GMO FOREIGN FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ------------------------------------------------------------------ (UNAUDITED) 2004 2003 2002 2001 2000 ---------------- ------------ ------------ ------------ ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 13.34 $ 8.90 $ 9.95 $ 11.22 $ 13.16 $ 11.81 Income from investment operations: Net investment income+ 0.20 0.19 0.17 0.19 0.21 0.20 Net realized and unrealized gain (loss) (0.26) 4.47 (1.04) (1.23) (0.43) 2.86 ---------------- ------------ ------------ ------------ ----------- ----------- Total from investment operations (0.06) 4.66 (0.87) (1.04) (0.22) 3.06 ---------------- ------------ ------------ ------------ ----------- ----------- Less distributions to shareholders: From net investment income (0.09) (0.22) (0.18) (0.11) (0.29) (0.21) From net realized gains -- -- -- (0.12) (1.43) (1.50) ---------------- ------------ ------------ ------------ ----------- ----------- Total distributions (0.09) (0.22) (0.18) (0.23) (1.72) (1.71) ---------------- ------------ ------------ ------------ ----------- ----------- NET ASSET VALUE, END OF PERIOD $ 13.19 $ 13.34 $ 8.90 9.95 $ 11.22 $ 13.16 ================ ============ ============ ============ =========== =========== TOTAL RETURN (a) (0.46)%** 52.76% (8.89)% (9.33)% (1.85)% 25.65% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 2,793,097 $ 2,260,046 $ 1,241,562 $ 1,049,456 $ 1,019,541 $ 1,022,498 Net expenses to average daily net assets 0.75%* 0.75% 0.75% 0.75% 0.75% 0.75% Net investment income to average daily net assets 1.53%(b)** 1.67% 1.77% 1.88% 1.71% 1.48% Portfolio turnover rate 13%** 25% 22% 22% 38% 35% Fees and expenses reimbursed by the Manager to average daily net assets: 0.06%* 0.08% 0.09% 0.09% 0.09% 0.10%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) The ratio for the six months ended August 31, 2004, has not been annualized since the Fund believes it would not be appropriate because the Fund's dividend income is not earned ratably throughout the fiscal year. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 26 GMO FOREIGN FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ---------------------------------------------------------------------- (UNAUDITED) 2004 2003 2002 2001 2000 ---------------- ---------- ------------ ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 13.34 $ 8.90 $ 9.96 $ 11.22 $ 13.16 $ 11.81 ---------------- ---------- ------------ ------------ ------------ ------------ Income from investment operations: Net investment income + 0.21 0.19 0.18 0.20 0.22 0.21 Net realized and unrealized gain (loss) (0.26) 4.48 (1.05) (1.22) (0.43) 2.86 ---------------- ---------- ------------ ------------ ------------ ------------ Total from investment operations (0.05) 4.67 (0.87) (1.02) (0.21) 3.07 ---------------- ---------- ------------ ------------ ------------ ------------ Less distributions to shareholders: From net investment income (0.09) (0.23) (0.19) (0.12) (0.30) (0.22) From net realized gains -- -- -- (0.12) (1.43) (1.50) ---------------- ---------- ------------ ------------ ------------ ------------ Total distributions (0.09) (0.23) (0.19) (0.24) (1.73) (1.72) ---------------- ---------- ------------ ------------ ------------ ------------ NET ASSET VALUE, END OF PERIOD $ 13.20 $ 13.34 $ 8.90 $ 9.96 $ 11.22 $ 13.16 ================ ========== ============ ============ ============ ============ TOTAL RETURN (a) (0.37)%** 52.84% (8.92)% (9.19)% (1.79)% 25.74% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 977,551 $ 923,221 $ 207,858 $ 134,357 $ 144,425 $ 141,175 Net expenses to average daily net assets 0.69%* 0.70% 0.69 % 0.69% 0.69% 0.69% Net investment income to average daily net assets 1.59%(b)** 1.65% 1.79 % 1.97% 1.77% 1.55% Portfolio turnover rate 13%** 25% 22 % 22% 38% 35% Fees and expenses reimbursed by the Manager to average daily net assets: 0.06%* 0.09% 0.09 % 0.09% 0.09% 0.10%
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) The ratio for the six months ended August 31, 2004, has not been annualized since the Fund believes it would not be appropriate because the Fund's dividend income is not earned ratably throughout the fiscal year. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 27 GMO FOREIGN FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS M SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ---------------------------------- (UNAUDITED) 2004 2003 2002(a) --------------- -------- -------- -------- NET ASSET VALUE, BEGINNING OF PERIOD $ 13.25 $ 8.86 $ 9.93 $ 9.85 --------------- -------- -------- -------- Income from investment operations: Net investment income + 0.19 0.14 0.05 0.00(b) Net realized and unrealized gain (loss) (0.26) 4.45 (0.93) 0.08 --------------- -------- -------- -------- Total from investment operations (0.07) 4.59 (0.88) 0.08 --------------- -------- -------- -------- Less distributions to shareholders: From net investment income (0.08) (0.20) (0.19) -- --------------- -------- -------- -------- Total distributions (0.08) (0.20) (0.19) -- --------------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 13.10 $ 13.25 $ 8.86 $ 9.93 =============== ======== ======== ======== TOTAL RETURN (c) (0.52)%** 52.10% (9.09)% 0.81%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 10,404 $ 12,878 $ 4,449 $ 1 Net expenses to average daily net assets 1.05%* 1.05% 1.06% 1.05%* Net investment income to average daily net asset 1.43%(d)** 1.23% 0.55% 0.35%* Portfolio turnover rate 13%** 25% 22% 22% Fees and expenses reimbursed by the Manager to average daily net assets: 0.06%* 0.08% 0.10% 0.09%*
(a) Period from January 25, 2002 (commencement of operations) to February 28, 2002. (b) Net investment income earned was less than $.01 per share. (c) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (d) The ratio for the six months ended August 31, 2004, has not been annualized since the Fund believes it would not be appropriate because the Fund's dividend income is not earned ratably throughout the fiscal year. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 28 GMO FOREIGN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION 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 MSCI EAFE Index (Europe, Australasia, and Far East). Throughout the six months ended August 31, 2004, the Fund had four classes of shares outstanding: Class II, Class III, Class IV, and Class M. Class M shares bear an administration fee and a 12b-1 fee while classes II, III, and IV bear a shareholder service fee (See Note 3). 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, except Class M, 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. 2. SIGNIFICANT ACCOUNTING POLICIES 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. The values of securities which are primarily traded on foreign exchanges are 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. For other assets, and in cases where market prices are not readily available or the Manager believes established valuation methodologies are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect that security's value. Because many foreign equity 29 GMO FOREIGN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) securities markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after the close but before the close of the NYSE. As a result, foreign equity securities held by the Fund are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available. 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. As of August 31, 2004 there were no outstanding forward foreign currency contracts. 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 30 GMO FOREIGN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, 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 August 31, 2004, 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. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying investment increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of August 31, 2004, 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 closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. As of August 31, 2004, 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. 31 GMO FOREIGN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 using standard models that incorporate 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 on swap contracts 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 August 31, 2004, 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. As of August 31, 2004, the Fund had loaned securities having a market value of $135,216,588, collateralized by cash in the amount of $144,755,535, 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 32 GMO FOREIGN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) income are generally 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. The Fund is subject to a Contribuicao Provisoria sobre Movimentacoes Financiera ("CPMF") tax which is applied to foreign exchange transactions representing capital inflows or outflows to the Brazilian market. The CPMF tax has been included in the net realized gain (loss) on investments throughout the period. The Fund has incurred $10,561 related to the CPMF tax which is included in net realized gain in the Statement of Operations. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ U.S. GAAP. 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's operations. 33 GMO FOREIGN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.60% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of 0.22% for Class II shares, 0.15% for Class III shares and 0.09% for Class IV shares. Class M shares of the Fund pay GMO an administration fee monthly at the annual rate of 0.20% 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, 2005 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), administration 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 0.60% of average daily net assets. The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $17,954. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004 aggregated $1,151,880,657 and $517,565,473, respectively. 34 GMO FOREIGN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 5. RELATED PARTIES At August 31, 2004, less than 0.1% of the Fund was held by eleven related parties comprised of certain GMO employee accounts. 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 -------------------------------------- --------------------------------------- CLASS II: SHARES AMOUNT SHARES AMOUNT -------------- ----------------- ---------------- ------------------ Shares sold 6,297,159 $ 83,495,965 36,379,827 $ 400,113,008 Shares issued to shareholders in reinvestment of distributions 344,862 4,617,698 923,501 10,828,541 Shares repurchased (4,370,206) (56,207,963) (12,916,787) (155,727,218) -------------- ----------------- ---------------- ------------------ Net increase 2,271,815 $ 31,905,700 24,386,541 $ 255,214,331 ============== ================= ================ ==================
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ------------------------------------ --------------------------------------- CLASS III: SHARES AMOUNT SHARES AMOUNT -------------- ----------------- --------------- ------------------ Shares sold 46,601,571 $ 623,235,712 80,433,342 $ 866,883,356 Shares issued to shareholders in reinvestment of distributions 973,961 13,080,298 2,637,614 30,890,205 Shares repurchased (5,363,649) (71,607,196) (53,040,942) (681,172,095) -------------- ------------------ ---------------- ------------------ Net increase 42,211,883 $ 564,708,814 30,030,014 $ 216,601,466 ============== ================== ================ ==================
35 GMO FOREIGN FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED)
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ------------------------------------- --------------------------------------- CLASS IV: SHARES AMOUNT SHARES AMOUNT -------------- ----------------- ---------------- ------------------ Shares sold 4,451,167 $ 56,705,954 46,117,020 $ 597,114,492 Shares issued to shareholders in reinvestment of distributions 406,183 5,459,105 312,385 3,665,536 Shares repurchased (12,963) (175,000) (564,544) (7,450,000) -------------- ----------------- --------------- ------------------ Net increase 4,844,387 $ 61,990,059 45,864,861 $ 593,330,028 ============== ================= =============== ==================
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ------------------------------------ ---------------------------------------- CLASS M: SHARES AMOUNT SHARES AMOUNT -------------- ----------------- --------------- ------------------ Shares sold 248,639 $ 3,256,695 2,646,118 $ 27,978,088 Shares issued to shareholders in reinvestment of distributions 4,792 63,924 13,702 157,180 Shares repurchased (430,864) (5,751,974) (2,190,315) (22,997,481) -------------- ----------------- --------------- ------------------ Net increase (decrease) (177,433) $ (2,431,355) 469,505 $ 5,137,787 ============== ================= =============== ==================
7. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 36 GMO FOREIGN FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees, 12b-1 fees and other expenses. The following tables, assuming a $1,000 investment in a class of shares, disclose the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the classes' actual return and actual expenses, and (2) a hypothetical annualized 5% return and the classes' actual expenses: Class II
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * -------------------------------------------------------------- 1) Actual $ 1,000.00 $ 996.00 $ 4.13 2) Hypothetical 1,000.00 1,021.07 4.18
*Expenses are calculated using the Class II annualized expense ratio for the six months ended August 31, 2004 of 0.82%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * -------------------------------------------------------------- 1) Actual $ 1,000.00 $ 995.40 $ 3.77 2) Hypothetical 1,000.00 1,021.42 3.82
*Expenses are calculated using the Class III annualized expense ratio for the six months ended August 31, 2004 of 0.75%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. Class IV
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * --------------------------------------------------------------- 1) Actual $ 1,000.00 $ 996.30 $ 3.47 2) Hypothetical 1,000.00 1,021.73 3.52
*Expenses are calculated using the Class IV annualized expense ratio for the six months ended August 31, 2004 of 0.69%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. 37 GMO FOREIGN FUND (A SERIES OF GMO TRUST) FUND EXPENSES -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) Class M
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * - --------------------------------------------------------------------------- 1) Actual $ 1,000.00 $ 994.80 $ 5.28 2) Hypothetical 1,000.00 1,019.91 5.35
*Expenses are calculated using the Class M annualized expense ratio for the six months ended August 31, 2004 of 1.05%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 38 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
DESCRIPTION % OF NET ASSETS - ------------------------------------------------------------------------------------------------ Asset-Backed Securities 2.7% Foreign Government Obligations 2.4 Foreign Government Agency 0.3 U.S. Government 1.7 Mutual Funds 91.9 Put Options Purchased 0.1 Forward Currency Contracts (0.1) Futures 0.4 Swaps 0.6 Short-Term Investments and Other Assets and Liabilities (net) 0.0 ------------------ 100.0% ==================
See accompanying notes to the financial statements. 1 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 7.1% AUSTRALIA -- 0.4% ASSET-BACKED SECURITIES -- 0.4% USD 1,332,227 Medallion Trust Series 03-1G Class A, Variable Rate, 3 mo. LIBOR + .19%, 1.74%, due 12/21/33 1,333,692 ------------- CANADA -- 2.2% FOREIGN GOVERNMENT OBLIGATIONS -- 2.2% GBP 1,500,000 Province of Quebec, 8.63%, due 11/04/11 3,171,999 CAD 2,000,000 Government of Canada (Cayman), 7.25%, due 06/01/08 1,685,641 CAD 2,000,000 Province of British Columbia, 7.88%, due 11/30/23 1,910,291 ------------- 6,767,931 ------------- Total Canada 6,767,931 ------------- JAPAN -- 0.3% FOREIGN GOVERNMENT AGENCY -- 0.3% USD 1,030,000 Japan Highway Public Corp, 7.63%, due 09/22/04 1,033,605 ------------- SUPRA NATIONAL -- 0.2% FOREIGN GOVERNMENT OBLIGATIONS -- 0.2% CAD 700,000 European Investment Bank, 8.50%, due 08/30/05 560,754 ------------- UNITED KINGDOM -- 2.3% ASSET-BACKED SECURITIES -- 2.3% GBP 2,000,000 RMAC Series 03-NS1A Class A2A, 144A, AMBAC, Variable Rate, 3 mo. GBP LIBOR + .45%, 5.26%, due 06/12/35 3,617,014 GBP 2,000,000 RMAC Series 03-NS2A Class A2A, 144A, AMBAC, Variable Rate, 3 mo. GBP LIBOR + .40%, 5.21%, due 09/12/35 3,606,751 ------------- 7,223,765 ------------- Total United Kingdom 7,223,765 -------------
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) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE / PRINCIPAL AMOUNT/ SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- UNITED STATES -- 1.7% U.S. GOVERNMENT -- 1.7% USD 4,696,360 U.S. Treasury Inflation Indexed Note, 3.63%, due 01/15/08 (a) (b) 5,163,795 ------------- TOTAL DEBT OBLIGATIONS (COST $19,912,185) 22,083,542 ------------- PUT OPTIONS PURCHASED -- 0.1% CROSS CURRENCY OPTIONS -- 0.1% JPY 5,300,000,000 JPY Put/USD Call, Expires 11/19/2004, Strike 112.40 329,872 ------------- TOTAL PUT OPTIONS PURCHASED (COST $1,352,385) 329,872 ------------- MUTUAL FUNDS -- 91.9% 922,134 GMO Emerging Country Debt Fund, Class III (c) 10,005,156 10,758,103 GMO Short-Duration Collateral Fund (c) 272,610,322 37,466 GMO Special Purpose Holding Fund (c) 659,025 1,201,141 Merrimac Cash Series, Premium Class 1,201,141 ------------- TOTAL MUTUAL FUNDS (COST $281,454,775) 284,475,644 ------------- TOTAL INVESTMENTS -- 99.1% (Cost $302,719,345) 306,889,058 Other Assets and Liabilities (net) -- 0.9% 2,676,828 ------------- TOTAL NET ASSETS -- 100.0% $ 309,565,886 =============
See accompanying notes to the financial statements. 3 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 Variable rates - The rates shown on Variable rate notes are the current interest rates at August 31, 2004, 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 margin requirements on open financial futures contracts and open swap contracts (Note 2). (b) Indexed security in which price and/or coupon is linked to prices of other securities, securities indices, or other financial indicators (Note 2). (c) Affiliated issuer. CURRENCY ABBREVIATIONS: AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc EUR - Euro GBP - British Pound JPY - Japanese Yen NOK - Norwegian Krone NZD - New Zealand Dollars SEK - Swedish Krona USD - United States Dollar At August 31, 2004, the approximate 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 ------------------- ------------------- ------------------ ----------------- $ 303,065,617 $ 4,845,953 $ (1,022,512) $ 3,823,441
At February 29, 2004, GMO International Bond Fund (the "Fund") had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Internal Revenue Code, of $2,589,333 expiring in 2012. Utilization of the capital loss carryforward above could be subject to limitations imposed by the Internal Revenue Code related to share ownership activity. At February 29, 2004, the Fund elected to defer to March 1, 2004 post-October losses of $248,598. See accompanying notes to the financial statements. 4 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) A summary of outstanding financial instruments at August 31, 2004 is as follows: FUTURES CONTRACTS
NET UNREALIZED NUMBER OF CONTRACT APPRECIATION CONTRACTS TYPE EXPIRATION DATE VALUE (DEPRECIATION) --------- ---------------------------------- --------------- ------------- -------------- Buys 381 Canadian Government Bond 10 Yr. December 2004 $ 31,686,384 $ 145,861 218 Euro BOBL September 2004 29,744,297 485,216 252 Euro Bund September 2004 35,580,776 838,523 377 Euro Euribor 3 Month March 2005 111,924,740 443,103 1000 Federal Fund 30 Day October 2004 409,595,265 15,085 21 Japanese Government Bond 10 Yr. September 2004 26,339,697 358,469 2 Japanese Government Bond 10 Yr. (LIF) September 2004 2,510,912 63 58 UK Gilt Long Bond December 2004 11,165,327 42,007 ------------ $ 2,328,327 ============ Sales 104 Australian Government Bond 10 Yr. September 2004 $ 7,600,685 $ (85,792) 216 Australian Government Bond 3 Yr. September 2004 15,524,296 (39,907) 377 Euro Euribor 3 Month March 2006 111,071,402 (595,176) 4 Swiss Federal Bond September 2004 402,823 (8,890) 43 U.S. Long Bond December 2004 4,786,438 (63,011) 37 U.S. Treasury Note 10 Yr. December 2004 4,155,563 (29,809) 229 U.S. Treasury Note 5 Yr. December 2004 25,343,859 (171,663) ------------ $ (994,248) ============
At August 31, 2004, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. See accompanying notes to the financial statements. 5 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) FORWARD CURRENCY CONTRACTS
NET UNREALIZED SETTLEMENT APPRECIATION DATE DELIVER/RECEIVE UNITS OF CURRENCY VALUE (DEPRECIATION) ------------ ----------------- ------------------- ------------- -------------- Buys 10/12/04 AUD 27,700,000 $ 19,480,360 $ 67,544 11/02/04 CAD 4,500,000 3,412,402 24,256 9/07/04 CHF 18,100,000 14,276,313 (333,304) 9/14/04 EUR 116,400,000 141,439,968 (337,302) 11/16/04 GBP 35,100,000 62,745,159 267,159 9/28/04 JPY 12,040,000,000 109,840,000 (575,057) 9/21/04 NZD 18,800,000 12,305,926 67,620 ----------- $ (819,084) =========== Sales 10/12/04 AUD 6,500,000 $ 4,571,203 $ (18,993) 9/07/04 CHF 19,100,000 15,065,060 108,585 9/14/04 EUR 11,200,000 13,609,344 56,987 9/28/04 JPY 1,660,000,000 15,144,053 15,791 ----------- $ 162,370 ===========
FORWARD CROSS CURRENCY CONTRACTS
NET UNREALIZED SETTLEMENT APPRECIATION DATE DELIVER/UNITS OF CURRENCY RECEIVE/IN EXCHANGE FOR (DEPRECIATION) ------------ --------------------------- ------------------------- --------------- 10/05/04 CHF 39,709,936 EUR 26,000,000 $ 234,185 10/12/04 NOK 65,084,250 EUR 7,700,000 (65,641) 10/12/04 EUR 9,500,000 NOK 79,378,630 (52,176) 11/09/04 EUR 27,200,000 SEK 249,481,845 150,914 ------------ $ 267,282 ============
See accompanying notes to the financial statements. 6 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ------------------------------------------------- -------------- INTEREST RATE SWAPS 71,800,000 EUR 3/13/06 Agreement with Citibank N.A. dated 3/09/04 to pay $ 99,449 the notional amount multiplied by 2.34% and to receive the notional amount multiplied by the 6 month Floating Rate EURIBOR. 23,600,000 EUR 6/5/06 Agreement with Citibank N.A. dated 6/01/04 to pay (165,651) the notional amount multiplied by 2.824% and to receive the notional amount multiplied by the 6 month Floating Rate EURIBOR. 28,700,000 USD 6/5/06 Agreement with Citibank N.A. dated 6/01/04 to 162,688 receive the notional amount multiplied by 2.9835% and to pay the notional amount multiplied by the 3 month LIBOR. 20,800,000 CAD 6/8/06 Agreement with JP Morgan Chase Bank dated 6/08/04 101,786 to receive the notional amount multiplied by 3.41% and to pay the notional amount multiplied by the 3 month Floating Rate Canadian Dollar Offering Rate. 20,800,000 CAD 6/10/06 Agreement with JP Morgan Chase Bank dated 6/10/04 109,185 to receive the notional amount multiplied by 3.44% and to pay the notional amount multiplied by the 3 month Floating Rate Canadian Dollar Offering Rate. 20,800,000 CAD 6/14/06 Agreement with JP Morgan Chase Bank dated 6/14/04 145,487 to receive the notional amount multiplied by 3.5725% and to pay the notional amount multiplied by the 3 month Floating Rate Canadian Dollar Offering Rate. 16,600,000 GBP 7/1/06 Agreement with JP Morgan Chase Bank dated 7/01/04 (96,154) to pay the notional amount multiplied by 5.3375% and to receive the notional amount multiplied by the 6 month Floating Rate British LIBOR.
See accompanying notes to the financial statements. 7 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ------------------------------------------------- -------------- 29,800,000 USD 7/6/06 Agreement with JP Morgan Chase Bank dated 7/01/04 $ 235,769 to receive the notional amount multiplied by 3.129% and to pay the notional amount multiplied by the 3 month LIBOR. 17,200,000 GBP 8/4/06 Agreement with Deutsche Bank AG dated 8/04/04 to (142,745) pay the notional amount multiplied by 5.42% and to receive the notional amount multiplied by the 6 month Floating Rate British LIBOR. 31,400,000 USD 8/6/06 Agreement with JP Morgan Chase Bank dated 8/04/04 184,946 to receive the notional amount multiplied by 3.04% and to pay the notional amount multiplied by the 3 month LIBOR. 35,000,000 SEK 8/30/07 Agreement with Deutsche Bank AG dated 8/26/04 to 7,834 receive the notional amount multiplied by 3.60% and to pay the notional amount multiplied by the 3 month Floating Rate Swedish LIBOR. 30,200,000 EUR 3/11/09 Agreement with Citibank N.A. dated 3/09/04 to (69,822) receive the notional amount multiplied by 3.21% and to pay the notional amount multiplied by the 6 month Floating Rate EURIBOR. 6,000,000 SEK 5/22/09 Agreement with Citibank N.A. dated 5/21/04 to 8,653 receive the notional amount multiplied by 4.3775% and to pay the notional amount multiplied by the 3 month Floating Rate Swedish LIBOR. 43,900,000 SEK 7/15/11 Agreement with Citibank N.A. dated 7/13/04 to 60,613 receive the notional amount multiplied by 4.615% and to pay the notional amount multiplied by the 3 month Floating Rate Swedish LIBOR.
See accompanying notes to the financial statements. 8 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ------------------------------------------------- -------------- 2,400,000 CHF 10/23/13 Agreement with JP Morgan Chase Bank dated $ (38,495) 10/21/03 to pay the notional amount multiplied by 3.0275% and to receive the notional amount multiplied by the 6 month Floating Rate Swiss LIBOR. 7,500,000 CHF 2/26/14 Agreement with Deutsche Bank AG dated 2/24/04 to 21,182 pay the notional amount multiplied by 2.77% and to receive the notional amount multiplied by the 6 month Floating Rate Swiss LIBOR. 7,100,000 CHF 4/21/14 Agreement with JP Morgan Chase Bank dated 4/19/04 7,248 to pay the notional amount multiplied by 2.81% and to receive the notional amount multiplied by the 6 month Floating Rate Swiss LIBOR. 17,200,000 SEK 5/21/14 Agreement with Citibank N.A. dated 5/18/04 to 62,065 receive the notional amount multiplied by 5.0725% and to pay the notional amount multiplied by the 3 month Floating Rate Swedish LIBOR. 27,300,000 SEK 6/4/14 Agreement with JP Morgan Chase Bank dated 6/02/04 105,672 to receive the notional amount multiplied by 5.1% and to pay the notional amount multiplied by the 3 month Floating Rate Swedish LIBOR. 6,600,000 EUR 6/18/14 Agreement with Citibank N.A. dated 6/18/04 to pay (215,443) the notional amount multiplied by 4.4725% and to receive the notional amount multiplied by the 6 month Floating Rate EURIBOR. 7,900,000 USD 6/18/14 Agreement with JP Morgan Chase Bank dated 6/16/04 428,368 to receive the notional amount multiplied by 5.229% and to pay the notional amount multiplied by the 3 month LIBOR.
See accompanying notes to the financial statements. 9 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ------------------------------------------------- -------------- 8,100,000 USD 7/19/14 Agreement with JP Morgan Chase Bank dated 7/15/04 $ 265,235 to receive the notional amount multiplied by 4.9675% and to pay the notional amount multiplied by the 3 month LIBOR. 11,700,000 AUD 7/21/14 Agreement with Citibank N.A. dated 7/15/04 to pay (114,165) the notional amount multiplied by 6.1225% and to receive the notional amount multiplied by the 6 month Floating Rate Australian BBSW. 11,500,000 CAD 8/16/14 Agreement with JP Morgan Chase Bank dated 8/16/04 48,712 to receive the notional amount multiplied by 4.9825% and to pay the notional amount multiplied by the 3 month Floating Rate Canadian Dollar Offering Rate. 11,900,000 AUD 8/17/14 Agreement with Deutsche Bank AG dated 8/16/04 to (55,642) pay the notional amount multiplied by 6.0475% and to receive the notional amount multiplied by the 6 month Floating Rate Australian BBSW. 11,300,000 USD 8/25/14 Agreement with Citibank N.A. dated 8/20/04 to 72,079 receive the notional amount multiplied by 4.6525% and to pay the notional amount multiplied by the 3 month LIBOR. 5,000,000 EUR 3/21/30 Agreement with UBS AG dated 3/17/00 to receive 936,520 the notional amount multiplied by 5.895% and to pay the notional amount multiplied by the 3 month Floating Rate EURIBOR. 2,800,000 CAD 6/8/34 Agreement with JP Morgan Chase Bank dated 6/08/04 (172,687) to pay the notional amount multiplied by 5.9775% and to receive the notional amount multiplied by the 3 month Floating Rate Canadian Dollar Offering Rate.
See accompanying notes to the financial statements. 10 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ------------------------------------------------- -------------- 6,200,000 USD 6/10/34 Agreement with Citibank N.A. dated 6/08/04 to pay $ (574,852) the notional amount multiplied by 5.89% and to receive the notional amount multiplied by the 3 month LIBOR. 2,800,000 CAD 6/10/34 Agreement with JP Morgan Chase Bank dated 6/10/04 (129,480) to pay the notional amount multiplied by 5.96% and to receive the notional amount multiplied by the 3 month Floating Rate Canadian Dollar Offering Rate. 2,800,000 CAD 6/14/34 Agreement with JP Morgan Chase Bank dated 6/14/04 (135,774) to pay the notional amount multiplied by 5.98% and to receive the notional amount multiplied by the 3 month Floating Rate Canadian Dollar Offering Rate. TOTAL RETURN SWAPS 33,000,000 USD 7/26/05 Agreement with JP Morgan Chase Bank dated 7/01/03 157,590 to receive the notional amount multiplied by the return on the JP Morgan Non-U.S. Hedged Traded Total Return Government Bond Index and to pay the notional amount multiplied by the 1 month LIBOR adjusted by a spread of (0.01%). 112,000,000 USD 7/21/06 Agreement with JP Morgan Chase Bank dated 6/16/04 534,601 to receive the notional amount multiplied by the return on the JP Morgan Non-U.S. Hedged Traded Total Return Government Bond Index and to pay the notional amount multiplied by the 1 month LIBOR adjusted by a specified spread. ------------- $ 1,844,772 =============
See accompanying notes to the financial statements. 11 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments in unaffiliated issuers, at value (cost $22,465,711) (Note 2) $ 23,614,555 Investments in affiliated issuers, at value (cost $280,253,634) (Notes 2 and 7) 283,274,503 Interest receivable 536,385 Receivable for open forward foreign currency contracts (Note 2) 993,041 Receivable for variation margin on open futures contracts (Note 2) 282,557 Net receivable for open swap contracts (Note 2) 1,844,772 Periodic payments from open swap contracts (Note 2) 526,256 Receivable for expenses reimbursed by Manager (Note 3) 22,498 --------------- Total assets 311,094,567 --------------- LIABILITIES: Payable to affiliate for (Note 3): Management fee 65,404 Shareholder service fee 39,242 Trustees fee 534 Payable for open forward foreign currency contracts (Note 2) 1,382,473 Accrued expenses 41,028 --------------- Total liabilities 1,528,681 --------------- NET ASSETS $ 309,565,886 =============== NET ASSETS CONSIST OF: Paid-in capital $ 300,987,278 Accumulated undistributed net investment income 2,963,753 Accumulated net realized loss (1,271,293) Net unrealized appreciation 6,886,148 --------------- $ 309,565,886 =============== NET ASSETS ATTRIBUTABLE TO: Class III shares $ 309,565,886 =============== SHARES OUTSTANDING: Class III 31,103,800 =============== NET ASSET VALUE PER SHARE:
See accompanying notes to the financial statements. 12 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) Class III $ 9.95 ===============
See accompanying notes to the financial statements. 13 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends from affilliated issuers (Note 7) $ 731,871 Interest 741,341 --------------- Total income 1,473,212 --------------- EXPENSES: Management fee (Note 3) 367,655 Shareholder service fee (Note 3) - Class III 220,593 Custodian and transfer agent fees 56,764 Audit and tax fees 24,840 Legal fees 4,784 Trustees fees and related expenses (Note 3) 2,079 Registration fees 6,072 Miscellaneous 1,472 --------------- Total expenses 684,259 Fees and expenses reimbursed by Manager (Note 3) (92,920) Indirectly incurred fees waived or borne by Manager (Note 3) (17,442) Shareholder service fee waived (Note 3) - Class III (6,413) --------------- Net expenses 567,484 --------------- Net investment income 905,728 --------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments in unaffiliated issuers 791,742 Investments in affiliated issuers (1,108,438) Realized gains distributions from affiliated issuers (Note 7) 193,405 Closed futures contracts 273,378 Closed swap contracts 2,376,061 Foreign currency, forward contracts and foreign currency related transactions (651,211) --------------- Net realized gain 1,874,937 --------------- Change in net unrealized appreciation (depreciation) on: Investments (5,978,244) Open futures contracts (534,975) Open swap contracts 611,627 Foreign currency, forward contracts and foreign currency related transactions 1,726,981 --------------- Net unrealized loss (4,174,611) ---------------
See accompanying notes to the financial statements. 14 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) Net realized and unrealized loss (2,299,674) --------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (1,393,946) ===============
See accompanying notes to the financial statements. 15 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 905,728 $ 3,366,138 Net realized gain 1,874,937 24,589,945 Change in net unrealized appreciation (depreciation) (4,174,611) 6,805,458 ---------------- ----------------- Net increase (decrease) in net assets from operations (1,393,946) 34,761,541 ---------------- ----------------- Distributions to shareholders from: Net investment income Class III (10,726,041) (12,911,222) Net realized gains Class III -- (13,545,144) ---------------- ----------------- (10,726,041) (26,456,366) ---------------- ----------------- Net share transactions (Note 6): Class III 50,671,315 140,188,880 ---------------- ----------------- Total increase in net assets 38,551,328 148,494,055 ---------------- ----------------- NET ASSETS: Beginning of period 271,014,558 122,520,503 ---------------- ----------------- End of period (including accumulated undistributed net investment income of $2,963,753 and $12,784,066, respectively) $ 309,565,886 $ 271,014,558 ================ =================
See accompanying notes to the financial statements. 16 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ----------------------------------------------- (UNAUDITED) 2004(a) 2003(a) 2002(a) ------------------- ----------- ----------- ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 10.38 $ 9.94 $ 9.05 $ 9.44 Income from investment operations: Net investment income (c)+ 0.03 0.20 0.20 0.44 Net realized and unrealized gain (loss) (0.10) 1.94 2.00 (0.80) ---------- ----------- ----------- ------------ Total from investment operations (0.07) 2.14 2.20 (0.36) ---------- ----------- ----------- ------------ Less distributions to shareholders: From net investment income (0.36) (0.71) (1.31) (0.03) From net realized gains -- (0.99) -- -- ---------- ----------- ----------- ------------ Total distributions (0.36) (1.70) (1.31) (0.03) ---------- ----------- ----------- ------------ NET ASSET VALUE, END OF PERIOD $ 9.95 $ 10.38 $ 9.94 $ 9.05 ========== =========== =========== ============ TOTAL RETURN (d) (0.66)%* 23.17% 25.17% (3.80)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 309,566 $ 271,015 $ 122,521 $ 135,048 Net operating expenses to average daily net assets 0.39%*(e) 0.39%(e) 0.38%(e) 0.38%(e) Interest expense to average daily net assets -- -- -- -- Total net expenses to average daily net assets 0.39%* 0.39% 0.38% 0.38% Net investment income to average daily net assets (c) 0.62%* 1.98% 1.96% 4.73% Portfolio turnover rate 14%** 26% 40% 36% Fees and expenses reimbursed and/or waived by the Manager to average daily net assets: 0.08%* 0.12% 0.11% 0.11% YEAR ENDED FEBRUARY 28/29, ------------------------------ 2001(a)(b) 2000(a) ------------- ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 9.19 $ 10.06 Income from investment operations: Net investment income (c)+ 0.61 0.72 Net realized and unrealized gain (loss) (0.32) (1.01) ------------ ------------ Total from investment operations 0.29 (0.29) ------------ ------------ Less distributions to shareholders: From net investment income -- (0.39) From net realized gains (0.04) (0.19) ------------ ------------ Total distributions (0.04) (0.58) ------------ ------------ NET ASSET VALUE, END OF PERIOD $ 9.44 $ 9.19 ============ ============ TOTAL RETURN (d) 3.20% (2.98)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 212,591 $ 145,373 Net operating expenses to average daily net assets 0.39%(e) 0.40% Interest expense to average daily net assets -- 0.03%(f) Total net expenses to average daily net assets 0.39% 0.43% Net investment income to average daily net assets (c) 6.63% 6.72% Portfolio turnover rate 114% 39% Fees and expenses reimbursed and/or waived by the Manager to average daily net assets: 0.04% 0.98%
See accompanying notes to the financial statements. 17 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS -- (CONTINUED) (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) (a) As a result of recent changes in generally accepted accounting principles, the Fund has reclassified periodic payments made under interest rate swap agreements, previously included within interest income, as a component of realized gain (loss) in the Statement of Operations. The effect of this reclassification was to decrease the net investment income ratio for the year ending February 29, 2004 by 0.16% and net investment income per share by $0.02. For consistency, similar reclassifications have been made to prior year amounts, resulting in increases (reductions) to the net investment income ratio of (0.46%), (0.12%) and (0.19)% and 0.21% to net investment income per share of $(0.04), $(0.01), $(0.02) and $0.02 in the fiscal years ending February 28/29, 2003, 2002, 2001 and 2000, respectively. (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 $0.01, 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. (c) Net investment income is affected by the timing of the declaration of the dividends by other funds of the Trust in which the Fund invests. (d) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown. (e) Net expenses exclude expenses incurred indirectly through investment in underlying funds (See Note 3). (f) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 18 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION 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, primarily by investing in GMO Short-Duration Collateral Fund and "synthetic" bonds (created by the Manager by combining a futures contract, swap contract, or option, on a fixed income security with cash, a cash equivalent, or another fixed income security). The Fund's benchmark is the J.P. Morgan Non-U.S. Government Bond Index. At August 31, 2004, 88.1% of the Fund was invested in the GMO Short-Duration Collateral Fund and 0.2% of the Fund was invested in the GMO Special Purpose Holding Fund, separate funds of GMO Trust managed by GMO. Shares of the GMO Short-Duration Collateral Fund and the GMO Special Purpose Holding Fund are not publicly available for direct purchase. At August 31, 2004, 3.2% 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 Short-Duration Collateral Fund, the GMO Special Purpose Holding Fund and the GMO Emerging Country Debt Fund should be read in conjunction with the Fund's financial statements. These financial statements are available, upon request, without charge by calling (617) 346-7646. 2. SIGNIFICANT ACCOUNTING POLICIES 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. CHANGE IN ACCOUNTING PRINCIPLE For the year ended February 29, 2004, as a result of a FASB Emerging Issues Task Force consensus (and subsequent related SEC staff guidance), the Fund has reclassified periodic payments made under interest rate swap agreements, previously included within interest income, as a component of realized gain (loss) in the Statement of Operations. For consistency, similar reclassifications have been made to the per share amounts in all prior year financial highlights presented. Prior year net investment income ratios in the financial highlights have also been modified accordingly. This reclassification decreased net investment income and increased net realized gains by $258,714 for the year ended February 29, 2004. This change 19 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) had no effect on the Fund's net asset value, either in total or per share, or its total increase (decrease) in net assets from operations during any period. 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 funds of the Trust ("underlying funds") and other 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. As of August 31, 2004, the total value of these securities represented 23.4% of net assets. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from changes in the market value of investments. Such fluctuations are included with net realized and unrealized gain or loss on investments. Net realized gains and losses on foreign currency transactions 20 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 in the Schedule of Investments and represents the currency exposure the Fund has acquired or hedged through forward currency contracts as of August 31, 2004. 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. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, 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 the Schedule of Investments for all open futures contracts as of August 31, 2004. 21 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying investment increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of August 31, 2004, 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 closing 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 August 31, 2004. 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. See the Schedule of Investments for all indexed securities held as of August 31, 2004. 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 22 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 using standard models that incorporate 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 on swap contracts 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 interest rates. See the Schedule of Investments for a summary of open swap agreements as of August 31, 2004. 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 or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. As of August 31, 2004, there were no open repurchase agreements. 23 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. The market value of the securities the Fund has sold is determined daily and any additional required collateral is allocated to or sent by the fund on the next business day. As of August 31, 2004, there were no open reverse repurchase agreements. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of 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 August 31, 2004, 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 generally 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. 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. Interest income on inflation indexed securities is accrued daily based upon an inflation adjusted principal. 24 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) Additionally, any increase in the principal or face amount of these securities is recorded as interest income. 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. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.25% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% 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 GMO Special Purpose Holding Fund and GMO Short-Duration Collateral Fund ("SDCF"). GMO has entered into a binding agreement effective until at least June 30, 2005 to reimburse the Fund to the extent that the Fund's total direct annual operating expenses plus the amount of indirect fees and operating expenses incurred through its investment in underlying funds exceed 0.25% of the average daily net assets. For purposes of this calculation, the Fund's total direct annual operating expenses excludes shareholder service fees, fees and expenses of the independent Trustees of the Trust (including legal fees) ("Trustees fees"), and the following investment-related costs: brokerage commissions, hedging transaction fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes. Additionally, the indirect fees and operating expenses incurred through investment in underlying funds excludes investment-related expenses and Trustees fees. Through June 29, 2004, the indirect Trustees fees incurred by the Fund through its investment in ECDF were not excluded. 25 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) The Fund incurs fees and expenses as a shareholder in GMO Special Purpose Holding Fund, SDCF and ECDF. For the six months ended August 31, 2004, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
INDIRECT OPERATING INDIRECT INVESTMENT-RELATED EXPENSES (EXCLUDING EXPENSES (INCLUDING, BUT NOT MANAGEMENT FEES, LIMITED TO, INTEREST EXPENSE, SHAREHOLDER SERVICE FEES INDIRECT FOREIGN AUDIT EXPENSE, AND TOTAL INDIRECT NET AND INVESTMENT-RELATED SHAREHOLDER INVESTMENT-RELATED LEGAL INDIRECT MANAGEMENT FEES EXPENSES) SERVICE FEES EXPENSE) EXPENSES ---------------------------------------------------------------------------------------------------------------- (0.006%) 0.019% 0.004% 0.002% 0.019%
The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $1,251. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004, aggregated $86,493,113 and $40,365,468, respectively. 5. PRINCIPAL SHAREHOLDERS AND RELATED PARTIES At August 31, 2004, 56.4% of the outstanding shares of the Fund were held by three shareholders, each holding in excess of 10% of the Fund's outstanding shares. Investment activities of these shareholders may have a material effect on the Fund. At August 31, 2004, 6.1% of the Fund was held by twelve related parties comprised of certain GMO employee accounts. As of August 31, 2004, greater than 10% of the Fund's shares were held by accounts for which the Manager has investment discretion. 26 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 -------------------------- ----------------------------- CLASS III: SHARES AMOUNT SHARES AMOUNT --------- ------------- ----------- -------------- Shares sold 4,143,994 $ 42,278,058 13,829,268 $ 141,970,903 Shares issued to shareholders in reinvestment of distributions 999,955 9,959,547 2,558,984 25,199,403 Shares repurchased (154,941) (1,566,290) (2,594,462) (26,981,426) --------- ------------ ------------ -------------- Net increase 4,989,008 $ 50,671,315 13,793,790 $ 140,188,880 ========= ============ ============ ==============
7. INVESTMENTS IN AFFILIATED ISSUERS A summary of the Fund's transactions in the securities of these issuers during the six months ended August 31, 2004, is set forth below:
VALUE, BEGINNING SALES DIVIDEND CAPITAL GAIN VALUE, END AFFILIATE OF PERIOD PURCHASES PROCEEDS INCOME DISTRIBUTIONS OF PERIOD --------------------- -------------- ------------- ------------ --------- ------------- ------------- GMO Emerging Country Debt Fund, Class III $ 8,077,693 $ 1,563,620 $ -- $ 205,209 $ 58,411 $ 10,005,156 GMO Short-Duration Collateral Fund 208,816,182 84,733,983 22,500,000 31,152 134,994 272,610,322 GMO Special Purpose Holding Fund 14,933,426 495,510 14,167,837 495,510 -- 659,025* -------------- ------------- ------------ --------- ------------- ------------- Totals $ 231,827,301 $ 86,793,113 $ 36,667,837 $ 731,871 $ 193,405 $ 283,274,503 ============== ============= ============ ========= ============= =============
* After effect of return of capital distribution of $577,500 on June 10, 2004. 8. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 27 GMO INTERNATIONAL BOND FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees, 12b-1 fees and other expenses. The following table, assuming a $1,000 investment in a class of shares, discloses the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the class's actual return and actual expenses, and (2) a hypothetical annualized 5% return and the class's actual expenses: Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * ---------------------------------------------------------- 1) Actual $ 1,000.00 $ 993.40 $ 2.06 2) Hypothetical 1,000.00 1,023.14 2.09
*Expenses are calculated using the Class III annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2004 of 0.41%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 28 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
DESCRIPTION % OF NET ASSETS - ----------------------------------------------------------------------------------------------- Argentina 0.1% Australia 4.1 Austria 1.4 Belgium 1.8 Brazil 0.7 Canada 2.9 China 0.3 Denmark 0.3 Finland 2.3 France 2.7 Germany 10.5 Hong Kong 2.4 Hungary 0.1 India 0.1 Indonesia 0.3 Ireland 1.0 Italy 2.8 Japan 18.0 Malaysia 0.4 Mexico 0.4 Netherlands 5.9 Norway 0.6 Philippines 0.2 Poland 0.1 Portugal 0.1 Singapore 2.6 South Africa 0.5 South Korea 1.6 Spain 0.5 Sweden 2.4 Switzerland 4.0 Taiwan 0.8 Thailand 0.1 Turkey 0.5 United Kingdom 22.9 Forward Currency Contracts (0.1) Futures (0.3) Short-Term Investments and Other Assets and Liabilities (net) 5.0 --------------- 100.0% ===============
See accompanying notes to the financial statements. 1 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ COMMON STOCKS -- 92.5% ARGENTINA -- 0.1% 93,550 Petrobras Energia Participaciones SA ADR * 880,306 26,300 Tenaris SA ADR 1,013,865 ---------------- 1,894,171 ---------------- AUSTRALIA -- 4.1% 263,295 Ansell Ltd 1,573,657 847,393 Aristocrat Leisure Ltd (a) 4,224,789 285,026 Australian Gas Light Co Ltd 2,689,908 192,635 Australian Stock Exchange Ltd (a) 2,130,095 1,017,406 BlueScope Steel Ltd 5,684,163 268,361 Boral Ltd 1,336,547 348,496 Centro Properties Group 1,122,935 3,741,094 CFS Gandel Retail Trust 4,009,420 1,493,429 Commonwealth Property Office Fund 1,281,426 324,323 CSL Ltd 5,948,079 2,403,055 CSR Ltd 3,923,103 2,259,221 Deutsche Diversified Trust (a) 2,036,463 3,398,719 Deutsche Office Trust 2,870,647 1,901,772 Investa Property Group 2,686,544 438,250 Lion Nathan Ltd 2,205,006 1,106,715 Macquarie Goodman Industrial Trust 1,407,806 733,346 Mirvac Group Ltd 2,355,399 293,410 Origin Energy Ltd 1,228,542 61,627 Perpetual Trustees Australia Ltd 2,012,011 822,130 Promina Group Ltd 2,494,088 2,171,209 Santos Ltd 10,122,641 204,363 Sonic Healthcare Ltd 1,354,676 1,021,808 Southcorp Ltd * (a) 2,482,131 165,111 Toll Holdings Ltd 1,280,298 ---------------- 68,460,374 ----------------
See accompanying notes to the financial statements. 2 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ AUSTRIA -- 1.4% 78,087 Austrian Airlines * (a) 1,005,864 58,688 Boehler Uddeholm (Bearer) 4,913,863 106 BWT AG 2,369 54,843 Flughafen Wien AG 3,149,539 24,262 Mayr-Melnhof Karton AG (Bearer) 3,212,537 59,748 RHI AG * 1,293,324 83,347 VA Technologie AG (Bearer) * (a) 5,430,233 92,850 Voestalpine AG (a) 4,554,416 ---------------- 23,562,145 ---------------- BELGIUM -- 1.8% 16,723 CMB SA (a) 2,524,156 5,529 Cofinimmo SA 771,818 30,441 Colruyt SA 4,013,426 146,772 Delhaize Group (a) 8,261,246 39,674 Mobistar SA * 2,718,075 16,207 Sofina SA 800,496 38,655 Tessenderlo Chemie 1,470,384 181,642 UCB SA 8,861,923 20,858 Umicore 1,406,294 ---------------- 30,827,818 ---------------- BRAZIL -- 0.1% 14,836,016 Compania Saneamento Basico SAO PA 704,774 64,429 Compania Siderurgica Nacional SA 996,200 ---------------- 1,700,974 ---------------- CANADA -- 2.9% 30,593 Cameco Corp 1,991,006 254,284 Canadian Tire Corp Class A 9,348,449 32,540 CP Ships Ltd 380,078 80,244 Dofasco Inc 2,436,066 11,706 Fairfax Financial Holdings Ltd (a) 1,538,323 314,102 Hudson's Bay Co 3,337,453 25,566 Masonite International Corp * 640,314 47,103 Molson Inc Class A 1,161,845
See accompanying notes to the financial statements. 3 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ CANADA -- CONTINUED 61,300 Norbord Inc 599,694 134,966 Onex Corp 1,713,708 59,956 Penn West Petroleum Ltd 3,028,288 64,386 PetroKazakhstan Inc 1,930,212 57,351 QLT Inc * 886,642 276,871 Quebecor Inc Class B 5,696,701 201,056 Quebecor World Inc 4,409,926 61,378 Rogers Communications Inc 1,090,978 179,410 Sears Canada Inc 2,269,858 47,904 Sobeys Inc 1,047,082 207,693 Teck Cominco Ltd Class B 4,058,967 39,138 TransAlta Corp 475,264 ---------------- 48,040,854 ---------------- CHINA -- 0.3% 1,799,000 China Petroleum & Chemical Corp Class H 706,712 42,000 China Telecom Corp Ltd ADR 1,353,660 2,660,000 PetroChina Co Ltd Class H 1,345,764 73,999 Weiqiao Textile Co 118,447 796,000 Yanzhou Coal Mining Co Ltd Class H 868,176 ---------------- 4,392,759 ---------------- DENMARK -- 0.3% 471,699 GN Store Nord 4,216,587 ---------------- FINLAND -- 2.3% 25,084 Amer Group Class A 1,173,276 43,576 Elcoteq Network Corp 778,391 116,086 Finnair Class A 667,418 199,703 Kemira Oyj 2,483,321 260,179 Kesko Oyj Class B (a) 5,680,864 70,752 Metso Oyj 911,294 436,819 M-real Oyj Class B (a) 3,009,799 44,974 Nokian Renkaat Oyj 4,613,644 85,929 OKO Bank 956,418 129,124 Orion-Yhtymae Oyj Class B (a) 3,718,747
See accompanying notes to the financial statements. 4 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ FINLAND -- CONTINUED 531,064 Pohjola Group Plc Class D (a) 5,580,340 327,739 Rautaruukki Oyj 2,989,808 191,830 Sponda Oyj (a) 1,560,579 1,200 Stockmann Oyj AB Class A 27,883 14,973 Stockmann Oyj AB Class B 351,014 5,700 Wartsila Oyj Class A 131,053 140,801 Wartsila Oyj Class B (a) 3,313,856 ---------------- 37,947,705 ---------------- FRANCE -- 2.7% 5,441,952 Alstom * 2,922,552 193,975 Altran Technologies SA * (a) 1,287,129 53,346 CNP Assurances 3,234,075 28,861 Eiffage SA 2,641,990 20,566 Eurazeo 1,326,777 1,135,502 Havas SA (a) 5,432,550 4,514 Hermes International 853,771 28,130 Imerys SA (a) 1,756,784 112,816 JC Decaux SA * 2,208,163 32,396 Michelin SA Class B 1,720,298 85,917 Publicis Groupe (a) 2,330,197 38,051 Remy Cointreau SA 1,326,473 28,669 Sagem SA (a) 2,692,278 2,778,911 SCOR SA * (a) 4,007,398 15,688 Vallourec (a) 1,538,552 20,978 Wendel Investissement 1,024,716 239,188 Zodiac SA 7,918,177 ---------------- 44,221,880 ---------------- GERMANY -- 8.8% 236,511 Aareal Bank AG 6,409,586 25,891 Adidas-Salomon AG 3,333,459 199,287 Aixtron AG * (a) 944,022 23,652 AMB Aachener & Muenchener AG 1,664,187 17 AVA Allg Handels der Verbrau 626
See accompanying notes to the financial statements. 5 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ GERMANY -- CONTINUED 52,791 AWD Holding AG 1,757,668 81,857 Bankgesellschaft Berlin AG * 200,364 73,564 Bilfinger & Berger (a) 2,493,780 37,705 Celesio AG 2,488,769 140,534 Comdirect Bank AG * (a) 948,727 67,313 Continental AG 3,499,942 86,663 Douglas Holdings AG (a) 2,442,575 6,212 Epcos AG * 93,717 65,089 GPC Biotech AG * (a) 847,229 59,008 Hannover Rueckversicherungs AG (Registered) 1,926,203 88,984 HeidelbergCement AG 3,917,345 35,351 Heidelberger Druckmaschinen * 1,045,263 205,946 Hochtief AG 4,826,644 218,722 Hypo Real Estate Holding AG * 6,993,297 32,687 IKB Deutsche Industriebank AG 766,862 50,637 IVG Immobilien AG 563,446 100,551 IWKA AG 2,358,575 233,870 KarstadtQuelle AG (a) 3,707,480 13,053 Krones AG 1,147,370 395,968 MAN AG 13,498,988 286,312 Merck KGaA 15,096,862 572,917 MG Technologies AG * 7,318,661 143,299 MLP AG (a) 2,113,691 318,306 Mobilcom AG 4,309,870 66,985 Puma AG Rudolf Dassler Sport (a) 16,416,282 152,916 Salzgitter AG 2,037,295 161,505 Schwarz Pharma AG (a) 5,771,173 18,477 Singulus Technologies * 278,803 88,643 Software AG * 2,661,879 1,419 Springer (Axel) AG 153,279 182,852 Suedzucker AG (a) 3,418,478 40,207 Techem AG * 1,025,739 714,192 TUI AG (a) 13,205,887 125,872 United Internet AG 2,584,451 2,029,324 WCM Beteiligungs & Grundbesitz * 2,473,143 ---------------- 146,741,617 ----------------
See accompanying notes to the financial statements. 6 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ HONG KONG -- 2.4% 388,000 Asia Satellite Telecommunications Holdings Ltd 693,355 495,000 ASM Pacific Technology 1,657,645 6,482,000 Chaoda Modern Agriculture 1,792,534 294,800 Dah Sing Financial Services 2,121,780 8,146,000 First Pacific Co * 1,992,754 6,394,000 Giordano International Ltd 3,595,582 2,554,115 Global Bio-Chem Technology Group Co Ltd 1,863,894 1,007,000 Great Eagle Holdings Ltd 1,921,601 419,000 Guoco Group 3,548,969 2,316,000 Hang Lung Group Co Ltd 3,581,123 2,169,600 HKR International Ltd 782,619 120,300 Hong Kong Aircraft Engineering Co Ltd 588,767 926,000 Hong Kong Exchanges and Clearing Ltd 2,031,800 28,000 Mandarin Oriental International Ltd * 15,131 4,670,000 New World Development Co Ltd 4,423,476 978,000 Oriental Press Group 355,092 22,212 SCMP Group Ltd 8,425 6,123,000 Shun Tak Holdings Ltd 3,223,231 1,180,000 Techtronic Industries Co 1,860,781 455,500 Wing Hang Bank Ltd 2,982,814 64,300 Wing Lung Bank 469,477 ---------------- 39,510,850 ---------------- HUNGARY -- 0.1% 51,600 OTP Bank 1,125,120 ---------------- INDIA -- 0.1% 27,900 ITC Ltd GDR 627,192 43,200 Mahanagar Telephone Nigam 283,392 ---------------- 910,584 ---------------- INDONESIA -- 0.3% 1,488,000 Astra International Tbk 1,014,373 2,797,853 Bank Central Asia Tbk 539,601 5,170,000 Indah Kiat Pulp & Paper * 389,566
See accompanying notes to the financial statements. 7 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ INDONESIA -- CONTINUED 6,825,000 Indofood Sukses Makmur Tbk 493,846 2,835,000 Indonesian Satellite Corp Tbk PT 1,270,736 7,570,000 PT Bank Mandiri 1,012,606 1,018,000 Telekomunikasi Indonesia Tbk PT 833,576 ---------------- 5,554,304 ---------------- IRELAND -- 1.0% 368,517 DCC Plc 6,454,495 1,285,470 Fyffes Plc 2,842,324 145,364 Grafton Group Plc * 1,241,926 410,130 Independent News & Media Plc 988,588 261,987 Kerry Group Plc 5,453,718 ---------------- 16,981,051 ---------------- ITALY -- 2.4% 1,110,419 Banca Popolare di Milano 6,863,922 110,341 Benetton Group SPA 1,206,635 3,711,920 Beni Stabili SPA 3,160,474 438,173 Bulgari SPA (a) 4,112,215 157,306 Buzzi Unicem SPA 1,907,668 50,087 e.Biscom * (a) 2,450,607 57,337 Fondiaria - Sai SpA (a) 1,248,075 47,941 Fondiaria - Sai SpA - RNC 616,821 102,000 Fornara SPA * (b) (c) -- 213,400 Grassetto SPA * (b) (c) 2,593 661,650 Grouppo Editoriale L'Espresso (a) 3,421,620 1,055,469 IFIL SPA (a) 3,411,628 281,593 Italcementi SPA 2,502,552 73,709 Lottomatica SPA 1,960,292 1,385,568 Parmalat Finanziaria SPA * (b) (c) 16,839 6,061,267 Pirelli & Co (a) 5,873,854 391,849 RCS MediaGroup SPA 1,711,513 ---------------- 40,467,308 ----------------
See accompanying notes to the financial statements. 8 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ JAPAN -- 18.0% 131,300 Aderans Co Ltd (a) 2,519,367 169,000 AIOI Insurance Co Ltd 739,699 348,000 Amada Co Ltd 1,975,233 125,900 Aoyama Trading 3,049,578 28,100 Arrk Corp 1,095,676 34,400 Autobacs Seven (a) 1,020,098 358,000 Calsonic Kansei Corp (a) 2,536,346 146,000 Canon Sales Co Inc * 1,900,170 31,300 Chudenko Corp 426,042 76,600 Coca-Cola West Japan Co Ltd 1,855,925 1,380,000 Cosmo Oil Co Ltd (a) 4,029,548 623,000 Daido Steel Co Ltd 1,575,476 1,210,000 Daiei Inc * (a) 2,455,172 82,500 Daiichikosho Co Ltd 2,419,075 2,185,000 Dainippon Ink and Chemicals Inc 5,124,691 314,000 Dainippon Pharmaceutical Co Ltd 2,624,213 126,000 FamilyMart 3,562,441 349,000 Fuji Electric Holdings Co Ltd 886,202 75,800 Fuji Soft ABC Inc 2,612,606 1,712,000 Furukawa Electric Co Ltd * 6,930,156 109,200 Futaba Industrial Co Ltd (a) 1,906,092 19,200 H I S Co Ltd 616,008 178,000 Hanwa Co Ltd 677,441 863,400 Haseko Corp * (a) 1,757,235 153,000 Hiroshima Bank Ltd (The) 676,270 69,000 Hisamitsu Pharmaceutical Co Inc 1,263,777 40,600 Hitachi Maxell Ltd 574,747 2,075,000 Hitachi Zosen Corp * (a) 3,056,292 126,100 Isetan Co Ltd 1,412,870 2,508,000 Ishikawajima-Harima Heavy Industries * 3,735,603 2,870,000 Isuzu Motors Ltd * (a) 6,760,245 33,400 Ito En Ltd 1,439,026 359,000 Itoham Foods Inc 1,725,423 152,000 Izumiya Co Ltd 964,869 146,000 Japan Securities Finance Co 785,308 815,000 Kamigumi Co Ltd (a) 6,162,723
See accompanying notes to the financial statements. 9 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ JAPAN -- CONTINUED 347,000 Kandenko Co 1,825,041 1,438,000 Kanebo Ltd * (a) 1,343,998 5,027,000 Kawasaki Heavy Industries Ltd (a) 7,618,691 220,000 Kawasaki Kisen Kaisha Ltd 1,414,484 1,133,000 Kenwood Corp * (a) 2,447,505 386,000 Kikkoman Corp (a) 3,391,424 119,000 Kissei Pharmaceutical Co Ltd (a) 2,272,520 102,000 Konami Corp 2,286,166 274,000 Kurabo Industries Ltd 540,981 106,000 Kyudenko Corp 494,089 568,700 Leopalace21 Corp (a) 11,126,878 46,000 Lintec Corp (a) 645,620 372,000 Maeda Corp 1,622,475 196,000 Maeda Road Construction (a) 1,351,434 442,000 Maruha Group Inc * 753,146 95,800 Matsui Securities Co Ltd (a) 2,758,654 63,900 Meitec Corp 2,310,131 1,155,000 Mitsubishi Gas Chemical Co Inc 4,903,950 3,379,000 Mitsubishi Materials Corp 7,184,937 736,000 Mitsubishi Rayon Co Ltd 2,442,735 898,000 Mitsui Engineering & Shipbuilding 1,372,847 532,000 Mitsui Mining & Smelting Co Ltd 2,170,092 61,400 Mitsumi Electric Co Ltd 638,793 196,000 Nagase & Co 1,547,892 8,000 Nagoya Railroad Co Ltd 27,307 761 NET One Systems Co Ltd (a) 2,750,486 116,000 NGK Insulators Ltd 948,669 195,000 Nippo Corp 1,147,873 2,392,000 Nippon Light Metal (a) 5,372,951 119,000 Nippon Meat Packers Inc 1,412,971 194,000 Nippon Sanso Corp 1,002,318 1,134,000 Nippon Shinpan Co * (a) 3,787,658 276,000 Nippon Soda Co Ltd (a) 786,571 429,000 Nippon Suisan Kaisha Ltd 1,189,020 48,000 Nipro Corp (a) 715,407 674,000 Nishimatsu Construction (a) 2,144,837
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) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ JAPAN -- CONTINUED 592,000 Nissan Chemical Industries Ltd 4,736,132 254,000 Nissan Shatai Co Ltd 1,570,871 680,000 Nisshin Seifun Group Inc 6,785,434 2,350,000 Nisshin Steel Co Ltd 5,019,565 105,000 Nissin Food Products 2,664,403 9,000 NOF Corp 33,209 6,000 Noritake Co Ltd 24,195 225,000 Okasan Securities Co Ltd 1,264,487 381,000 Oki Electric Industry Co Ltd * 1,319,507 1,128,000 Orient Corp * (a) 3,020,607 98,000 Q.P. Corp 818,151 1,439 Round One Corp (a) 3,004,963 15,000 Royal Co Ltd 177,597 83,200 Ryohin Keikaku Co Ltd 3,839,457 132,700 Ryosan Co 3,030,551 4,000 Sanden Corp 27,368 67,000 Sanki Engineering 447,953 626,000 Sankyo-Tateyama Holdings Inc 1,863,376 88,900 Santen Pharmaceutical 1,654,455 145,000 Sanyo Securities Co Ltd * (b) (c) 1,321 138,000 Sanyo Shokai Ltd 842,427 408,000 Seino Transportation Co Ltd 3,856,204 12,230 SFCG Co Ltd (a) 2,553,396 11,700 Shimachu Co 281,211 197,000 Shimadzu Corp 964,169 54,200 Shinko Electric Industries 1,772,107 934,000 Shinko Securities Co Ltd 2,915,527 160,000 Snow Brand Milk Products Co Ltd * (a) 481,123 398,690 Sojitz Holdings Corp * (a) 1,457,803 290,000 Sumitomo Bakelite Co Ltd 1,789,932 134,000 Sumitomo Forestry Co Ltd 1,344,555 2,217,000 Sumitomo Heavy Industries Ltd * (a) 6,808,298 310,000 Sumitomo Rubber Industries Inc 2,738,861 191,000 Sumitomo Warehouse (a) 800,178 112,100 Suzuken Co Ltd 3,046,024 2,569,600 Taiheiyo Cement Corp (a) 6,123,806
See accompanying notes to the financial statements. 11 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ JAPAN -- CONTINUED 124,000 Taiyo Yuden Co Ltd 1,443,638 230,000 Takara Holdings Inc (a) 1,492,403 221,000 THK Co Ltd (a) 3,770,390 56,000 TIS Inc 2,043,983 607,000 Toda Corp 2,404,290 128,400 Toho Co Ltd 1,840,227 1,030,000 Toho Gas Co Ltd 3,265,807 286,100 Tokyo Steel Manufacturing Co (a) 4,818,103 653,000 Tokyo Tatemono Co Ltd 3,636,342 1,110,000 Tokyu Land Corp (a) 3,302,249 53,000 Toshiba TEC Corp 227,571 298,000 Toyo Tire & Rubber Co Ltd 1,005,630 166,000 Tsumura & Co (a) 2,552,089 1,563,000 Ube Industries Ltd * 2,133,274 55,000 Ushio Inc 899,408 181,000 Wacoal Corp 1,782,134 23,600 World Company Ltd 720,943 250,000 Yakult Honsha Co Ltd (a) 3,814,531 62,300 Yamada Denki Co Ltd 2,250,595 714,000 Yaskawa Electric Corp (a) 3,617,948 277,000 Yodogawa Steel Works 1,198,908 843,000 Yokohama Rubber Co 3,396,025 ---------------- 299,297,905 ---------------- MALAYSIA -- 0.4% 225,000 IOI Corp Berhad 512,266 280,000 Malakoff Berhad 465,220 310,000 Malaysian International Shipping Berhad (Foreign Registered) 1,019,337 1,474,000 Malaysian Plantations Berhad 866,673 667,800 Maxis Communications Berhad 1,500,722 357,000 Promet Berhad * (b) (c) 940 448,000 Proton Holdings Berhad * 913,684 312,000 Rekapacific Berhad * (b) (c) 821 341,000 Telekom Malaysia Berhad 950,861 ---------------- 6,230,524 ----------------
See accompanying notes to the financial statements. 12 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ MEXICO -- 0.4% 237,000 Alfa SA de CV Class A 778,517 527,000 Carso Global Telecom Class A * 772,066 692,000 Controladora Comercial Mexicana SA de CV 753,660 165,000 Fomento Economico Mexicano SA de CV 713,592 286,000 Grupo Financiero Banorte SA de CV 1,126,366 339,000 Grupo Mexico SA Class B * 1,208,853 276,000 Grupo Modelo SA de CV Class C 658,153 313,000 Organizacion Soriana SA de CV Class B 920,952 ---------------- 6,932,159 ---------------- NETHERLANDS -- 5.9% 158,058 Amstelland NV 1,262,113 60,780 ASM International NV * (a) 834,737 49,164 Boskalis Westminster NV 1,196,892 996,518 Buhrmann NV (a) 8,039,314 211,739 Corio NV (a) 9,289,535 275,840 CSM 6,222,442 72,115 DSM NV 3,516,513 4,011,645 Getronics NV * (a) 6,841,094 4,187,202 Hagemeyer NV * (a) 7,430,529 126,964 Hunter Douglas NV 5,584,819 30,184 Imtech NV 808,566 300,507 Koninklijke Wessanen NV 4,224,449 80,825 Nutreco Holding NV 2,606,267 366,084 OCE NV 5,587,923 248,918 Qiagen NV * (a) 2,233,855 176,154 Randstad Holdings NV (a) 5,381,392 53,421 Rodamco Europe NV 3,452,711 246,251 Royal Numico NV * 7,756,540 86,367 Royal P&O Nedlloyd NV 3,284,035 56,563 Stork NV 1,260,930 223,716 Van der Moolen Holding NV * (a) 1,357,018 81,676 Van Ommeren Vopak NV 1,392,044 52,564 Vastned NV 2,903,342 78,190 Wereldhave NV 6,673,348 ---------------- 99,140,408 ----------------
See accompanying notes to the financial statements. 13 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ NORWAY -- 0.6% 143,835 Aker Kvaerner ASA * (a) 2,036,845 35,809 Prosafe ASA 793,202 38,548 Schibsted ASA 753,211 510,969 Tandberg ASA (a) 4,576,975 236,541 Tandberg Television ASA * (a) 1,633,757 ---------------- 9,793,990 ---------------- PHILIPPINES -- 0.2% 543,600 Bank of the Philippine Islands 401,660 26,000 Globe Telecom Inc 405,243 88,882 Philippine Long Distance Telephone * 2,006,925 ---------------- 2,813,828 ---------------- POLAND -- 0.1% 17,125 BRE Bank SA * 464,568 113,000 Polski Koncern Naftowy Orlen 999,611 ---------------- 1,464,179 ---------------- PORTUGAL -- 0.1% 1,489 Banco BPI SA 5,235 114,919 PT Multimedia Servicos de Telecomunicacoes e Multimedia SGPS SA 2,484,500 ---------------- 2,489,735 ---------------- SINGAPORE -- 2.6% 1,538,000 Asia Food & Properties Ltd * 355,569 944,000 CapitaMall Trust 927,931 6,379,797 ComfortDelgro Corp Ltd 4,691,570 508,950 Creative Technology Ltd 5,452,091 1,935,000 Datacraft Asia Ltd * 1,464,989 592,000 Elec & Eltek International Co Ltd 1,724,792 8,335,000 GES International Ltd 3,318,522 89,000 Hotel Properties Ltd 53,100 4,246,000 Keppel Land Ltd 4,482,171 6,195,000 MobileOne Ltd 5,831,971 17,778,100 Pacific Century Region Developments Ltd * (a) 3,229,739
See accompanying notes to the financial statements. 14 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ SINGAPORE -- CONTINUED 917,000 Parkway Holdings Ltd 687,623 4,027,000 SembCorp Industries Ltd 3,090,475 2,276,000 Singapore Exchange Ltd 2,370,964 1,586,000 STATS ChipPAC Ltd * 1,046,744 811,000 United Overseas Land 1,053,834 3,229,000 Want Want Holdings Ltd 3,234,489 258,000 Wheelock Properties (Singapore) Ltd 343,704 ---------------- 43,360,278 ---------------- SOUTH AFRICA -- 0.5% 126,764 ABSA Group Ltd 1,051,422 568,000 African Bank Investments Ltd 1,013,879 543,000 FirstRand Ltd 873,825 10,990 Impala Platinum Holdings Ltd 921,181 86,000 Remgro Ltd 1,047,884 675,000 Sanlam Ltd 911,459 167,000 Standard Bank Investment Corp * 1,114,244 41,497 Telkom SA Ltd 495,370 69,900 Tiger Brands Ltd 1,004,187 ---------------- 8,433,451 ---------------- SOUTH KOREA -- 1.5% 91,100 Daewoo Heavy Industries & Machinery Ltd * 710,344 64,500 Daewoo Shipbuilding & Marine Engineering Co Ltd 728,688 100,700 Dongkuk Steel Mill 1,030,446 68,700 Dongwon Financial Holding Co Ltd 361,060 46,200 Hana Bank 1,042,949 18,500 Hankuk Electric Glass Co Ltd 724,216 159,600 Hanwha Chemical Corp 1,099,531 74,000 Hyundai Department Store Co Ltd 857,061 72,700 Hyundai Industrial Development 794,707 4,900 Hyundai Merchant Marine * 44,999 22,300 Hyundai Mobis 1,099,446 40,260 Hyundai Motor Co 1,752,601 97,000 INI Steel Co 1,012,932
See accompanying notes to the financial statements. 15 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ SOUTH KOREA -- CONTINUED 155,000 KIA Motors Corp 1,364,181 48,200 Korea Express Co Ltd * 798,413 44,000 KT Freetel 691,662 42,600 KT&G Corp 1,086,720 64,400 LG Cable & Machinery Ltd 926,497 17,900 LG Chemicals Ltd 683,051 17,500 LG Electronics Inc 839,501 7,360 LG Home Shopping Inc 297,013 187,200 LG Insurance Co Ltd 794,614 115,100 Poongsan Corp 1,093,253 51,900 Samsung Corp 629,587 11,800 Samsung SDI Co Ltd 1,216,330 68,800 Shinhan Financial Group Co Ltd 1,169,362 5,600 Shinsegae Co Ltd 1,471,067 33,900 SK Corp 1,291,333 ---------------- 25,611,564 ---------------- SPAIN -- 0.5% 133,150 Aguas de Barcelona SA Class A 2,335,313 49,450 Corp Financiera Alba 1,422,498 382,034 Sacyr Vallehermoso SA 5,227,442 ---------------- 8,985,253 ---------------- SWEDEN -- 2.4% 52,452 Billerud AB 816,100 31,956 Custos AB * 718,153 160,688 D Carnegie AB 1,429,648 317,855 Getinge AB 3,536,002 90,838 Holmen AB Class B 2,600,824 329,917 Kinnevik Investment AB (a) 2,667,669 44,819 Lundbergforetagen AB Class B 1,422,198 51,614 Modern Times Group AB * 978,995 4,550 Nobel Biocare AB * (c) 328,253 1,300 SAAB AB Class B 18,401 1,058,102 Skanska AB Class B 9,544,255
See accompanying notes to the financial statements. 16 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ SWEDEN -- CONTINUED 72,220 SSAB Swedish Steel Class A 1,268,112 1,211,252 Swedish Match AB 12,290,206 121,359 Trelleborg AB Class B 1,826,709 ---------------- 39,445,525 ---------------- SWITZERLAND -- 4.0% 28,307 Actelion Ltd * (a) 2,637,876 155,709 Baloise Holding Ltd 5,899,100 153,835 Clariant AG 1,875,682 183,948 Converium Holding AG 3,710,671 9,647 Fischer (George) AG (Registered) * 2,377,540 3,509 Forbo Holdings AG (Registered) * 730,396 8,169 Geberit AG (Registered) 5,804,518 4,909 Helvetia Patria Holding (Registered) 785,920 1,644 Intershop Holdings 261,889 328 Jelmoli Holding AG (Bearer) 403,886 190 Jelmoli Holding AG (Registered) 47,078 13,256 Julius Baer Holding AG 3,568,665 66,989 Kudelski SA * 1,943,835 6,478 Kuoni Reisen Holdings AG (Registered) 2,346,369 439 Lindt & Spruengli AG 509,427 60 Lindt & Spruengli AG (Registered) 734,112 150,224 Micronas Semiconductor Holding AG (Registered) * 5,819,043 69 Motor-Columbus (Bearer) 224,185 886 Movenpick Holdings (Bearer) * 222,373 157 Pargesa Holdings SA (Bearer) 427,082 195,762 Phonak Holding AG 5,915,484 23,667 Saurer AG * 1,198,113 45 SIG Holding AG (Registered) 8,197 24,137 Straumann Holding AG 4,728,320 18,087 Sulzer AG (Registered) 5,074,918 37,614 Unaxis Holding AG 3,228,771 18,935 Valora Holding AG 4,142,668 96,743 Vontobel Holdings AG 1,896,531 ---------------- 66,522,649 ----------------
See accompanying notes to the financial statements. 17 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ TAIWAN -- 0.8% 563,526 Acer Inc 753,315 541,337 Asustek Computer Inc 1,213,544 28,600 Benq Corp 29,364 1,731,430 Cheng Loong Corp 584,622 1,538,000 China Bills Finance Corp 460,221 1,833,406 China Development Financial Holding Corp * 817,094 570,000 China Motor Corp Ltd 667,193 671,842 Delta Electronics Inc 864,426 1,183,121 Far Eastern Textile Co Ltd 705,034 547,560 Formosa Chemicals & Fibre Co 879,675 506,680 Formosa Plastics Corp 761,882 372,382 GigaByte Technology Co Ltd 465,165 1,547,645 Inventec Co Ltd 831,700 1,853,000 Mitac International Corp 732,468 296,800 Nan Ya Plastic Corp 411,234 367,323 Quanta Computer Inc 628,088 937,000 Taiwan Cellular Corp 884,135 1,895,000 Waterland Financial Holdings 667,965 1,721,000 Yageo Corp * 718,159 876,800 Yulon Motor Co Ltd 868,588 ---------------- 13,943,872 ---------------- THAILAND -- 0.1% 337,000 Advanced Info Service Pcl (Foreign Registered) (c) 764,622 106,000 Bangkok Dusit Medical Service Pcl (Foreign Registered) (c) 32,831 121,700 PTT Exploration & Production Pcl (Foreign Registered) (c) 818,151 ---------------- 1,615,604 ---------------- TURKEY -- 0.5% 220,061,010 Ak Enerji Elektrik Uretim * 966,640 290,008,776 Akbank TAS 1,236,550 68,341,000 Aksa Akrilik Kimya Sanayii * 580,818 268,714,794 Aksigorta AS 813,992 289,822,413 Trakya Cam Sanayii 739,741 189,921,699 Tupras Turkiye Petrol Rafine 1,464,135
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) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ TURKEY -- CONTINUED 312,429,184 Turkcell Iletisim Hizmet AS 1,142,353 324,467,476 Turkiye Garanti Bankasi Class C * 1,063,222 334,331,000 Yapi ve Kredi Bankasi * 799,264 ---------------- 8,806,715 ---------------- UNITED KINGDOM -- 22.8% 413,007 Aggreko Plc 1,132,894 1,173,496 AMEC 6,721,617 809,447 Arriva Plc 6,290,588 857,323 Associated British Ports 6,653,401 270,295 Atkins (WS) Plc 3,142,227 567,518 AWG Plc * 6,481,415 226,842,594 AWG Plc (Redeemable Shares) * 395,836 1,958,533 Barratt Developments Plc 20,875,570 1,563,807 BBA Group Plc 7,347,825 141,896 Bellway Plc 1,963,438 819,316 Berkeley Group Plc 17,948,226 1,133,303 Bradford & Bingley Plc 5,827,986 780,139 Britannic Group Plc 4,994,530 244,100 British Energy Plc * 94,060 648,784 British Insurance Holdings Plc 875,931 548,963 Bunzl Co 4,210,746 241,317 Capita Group Plc 1,381,187 72,632 Carpetright Plc 1,425,803 399,870 Charter Plc (Registered) * 1,156,061 77,170 Close Brothers Group Plc 972,566 500,035 Cobham Group Plc 12,237,674 267,749 Computacenter Plc 1,582,276 7,597,538 Cookson Group Plc * 4,558,142 12,747,447 Corus Group Plc * 10,147,419 576,539 Countrywide Plc 2,961,106 90,025 Crest Nicholson 565,887 779,742 De La Rue Plc 4,375,916 71,987 De Vere Group Plc 540,887 818,998 EMI Group Plc 3,296,443
See accompanying notes to the financial statements. 19 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ UNITED KINGDOM -- CONTINUED 414,079 Enterprise Inns Plc 4,091,776 463,525 First Choice Holidays Plc 1,029,231 1,884,768 FKI Plc 4,120,261 120,791 Go-Ahead Group Plc 2,465,756 406,171 Great Portland Estates Plc 2,009,666 904,043 Hays Plc 1,934,192 385,312 HMV Group Plc 1,554,751 920,011 ICAP Plc 3,735,291 628,621 IMI Plc 3,992,267 331,121 Inchcape Plc 9,886,278 4,290,510 International Power Plc * 10,564,192 25,326,500 Invensys Plc * 6,747,600 173,535 Johnson Matthey Plc 2,843,280 1,135,656 Kelda Group Plc 10,797,806 691,809 Kesa Electricals Plc 3,511,690 145,020 Laird Group 837,541 1,750,701 LogicaCMG Plc 5,101,751 158,002 Lonmin Plc 3,079,545 241,877 Manchester United Plc 1,137,851 712,760 MFI Furniture Group Plc 1,594,697 643,357 Michael Page International Plc 1,930,373 313,814 Mitchells & Butlers Plc 1,458,422 744,504 Morgan Crucible Co * 1,822,688 202,485 Mothercare Plc 1,145,890 155,891 National Express Group Plc 1,887,558 183,081 NHP Plc 689,765 2,620,897 Northern Foods Plc 7,350,942 436,546 Novar Plc 959,117 440,577 Paragon Group Cos Plc 2,525,464 386,902 Peninsular & Oriental Steam Navigation Co 1,673,713 176,183 Pennon Group Plc 2,595,616 790,783 Persimmon Plc 9,548,209 506,714 Pilkington 812,103 180,391 Premier Oil Plc * 1,875,206 583,749 Provident Financial Plc 6,258,491 208,879 RAC Plc 2,482,928
See accompanying notes to the financial statements. 20 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ UNITED KINGDOM -- CONTINUED 518,209 RMC Group Plc 5,952,488 3,667,812 Royal & Sun Alliance Insurance Group 4,695,946 816,292 Sage Group Plc 2,411,225 892,121 Signet Group Plc 1,683,039 289,025 Singer & Friedlander Group 1,453,913 522,366 Slough Estates Plc 4,331,125 177,136 Smith (David S.) Holdings Plc 465,911 1,843,462 Smith (WH) Group Plc 10,141,565 573,101 Somerfield Plc 1,457,393 1,933,377 Spirent Plc * 1,865,973 2,122,599 Stagecoach Holdings Plc * 3,403,384 416,735 T&F Informa Group Plc 2,687,172 570,622 Tate & Lyle Plc 3,691,676 2,821,065 Taylor Woodrow Plc 13,925,676 239,453 TDG Plc 998,683 9,793,917 THUS Group Plc * 2,651,624 92,809 Travis Perkins Plc 2,278,519 506,836 Trinity Mirror Plc 5,887,681 672,480 United Business Media Plc 5,760,262 787,695 Whitbread Plc 11,586,438 773,007 William Hill Plc 7,565,564 228,700 Wilson Bowden Plc 4,541,870 1,855,303 Wimpey (George) 14,066,972 ---------------- 379,713,663 ---------------- TOTAL COMMON STOCKS (COST $1,310,240,343) 1,541,157,403 ---------------- PREFERRED STOCKS -- 2.8% BRAZIL -- 0.6% 23,209 Banco Bradesco SA 1,129,193 11,766,000 Banco Itau Holding Financeira SA 1,191,443 82,069,000 Centrais Electricas Brasileiras SA Class B 9.83% 1,063,567 3,238,000 Companhia de Bebidas das Americas 1.67% 704,356 57,725,000 Compania Energetica de Minas Gerais 2.88% 1,062,786
See accompanying notes to the financial statements. 21 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES/UNITS DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ BRAZIL -- CONTINUED 72,150 Compania Vale do Rio Doce Class A 1,179,295 5 Embratel Participacoes SA -- 20,400 Empresa Brasileira de Aeronautica SA ADR 541,620 86,000 Gerdau SA 1,420,627 947,394 Investimentos Itau SA 2.68% 1,159,613 239,822,000 Tele Centro Oeste Celular Participacoes SA 6.78% 749,801 ---------------- 10,202,301 ---------------- GERMANY -- 1.7% 121,918 Fresenius AG (Non Voting) 4.08% 9,110,889 185,730 Hugo Boss AG 8.17% (a) 4,330,935 6,585 Porsche AG (Non Voting) 0.83% 4,012,109 413,011 ProSieben Sat.1 Media AG 2.00% 7,251,416 97,230 Rheinmetall AG (Non Voting) 3.92% 3,898,950 ---------------- 28,604,299 ---------------- ITALY -- 0.4% 1,396,445 Compagnia Assicuratrice Unipol 4.56% 3,314,945 311,821 IFI Istituto Finanziario Industries 4.82% 3,074,243 ---------------- 6,389,188 ---------------- SOUTH KOREA -- 0.1% 48,200 Hyundai Motor Co 5.05% 1,064,489 22,100 LG Electronics Inc 585,109 ---------------- 1,649,598 ---------------- TOTAL PREFERRED STOCKS (COST $38,270,495) 46,845,386 ---------------- RIGHTS AND WARRANTS -- 0.1% HONG KONG -- 0.0% 307,764 Global Bio-Chem Technology Group Co Ltd Warrants, Expires 5/31/07 * (c) -- ----------------
See accompanying notes to the financial statements. 22 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
UNITS / PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------ SPAIN -- 0.0% 382,034 Sacyr Vallehermoso SA Rights, Expires 9/9/04 * 130,000 ---------------- UNITED KINGDOM -- 0.1% 1,415,868 International Power Rights, Expires 9/10/04 * 1,356,318 ---------------- TOTAL RIGHTS AND WARRANTS (COST $1,227,275) 1,486,318 ---------------- SHORT-TERM INVESTMENTS -- 16.5% CASH EQUIVALENTS -- 15.8% 52,600,000 HBOS Treasury Time Deposit, 1.56%, due 09/01/04 52,600,000 211,014,090 The Boston Global Investment Trust (d) 211,014,090 ---------------- 263,614,090 ---------------- U.S. GOVERNMENT -- 0.7% 10,500,000 U.S. Treasury Bill, 0.96%, due 9/23/04 (e) (f) 10,493,650 ---------------- TOTAL SHORT-TERM INVESTMENTS (COST $274,107,740) 274,107,740 ---------------- TOTAL INVESTMENTS -- 111.9% (Cost $1,623,845,853) 1,863,596,847 Other Assets and Liabilities (net) -- (11.9%) (197,270,050) ---------------- TOTAL NET ASSETS -- 100.0% $ 1,666,326,797 ================
See accompanying notes to the financial statements. 23 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) NOTES TO SCHEDULE OF INVESTMENTS: ADR - American Depositary Receipt Foreign Registered - Shares issued to foreign investors in markets that have foreign ownership limits. GDR - Global Depository Receipt * Non-income producing security. (a) All or a portion of this security is out on loan (Note 2). (b) Bankrupt issuer. (c) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 2). (d) Investment of security lending collateral (Note 2). (e) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 2). (f) Rate shown represents yield to maturity. CURRENCY ABBREVIATIONS: AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc DKK - Danish Krone EUR - Euro GBP - British Pound HKD - Hong Kong Dollar JPY - Japanese Yen NOK - Norwegian Krone NZD - New Zealand Dollar SEK - Swedish Krona SGD - Singapore Dollar At August 31, 2004, the approximate 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 ---------------------- ----------------------- ---------------------- -------------------- $ 1,625,151,030 $ 308,958,749 $ (70,512,932) $ 238,445,817
See accompanying notes to the financial statements. 24 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) A summary of outstanding financial instruments at August 31, 2004 is as follows: FORWARD CURRENCY CONTRACTS
NET UNREALIZED APPRECIATION/ SETTLEMENT DATE DELIVER/RECEIVE UNITS OF CURRENCY VALUE (DEPRECIATION) ------------------ ----------------- ----------------- -------------- -------------- Buys 11/26/04 CAD 106,245,487 $ 80,538,183 $ (753,134) 11/26/04 GBP 3,256,975 5,816,966 (119,578) 11/26/04 JPY 17,622,863,923 161,258,846 (320,315) 11/26/04 NOK 313,147,885 45,315,395 (249,551) 11/26/04 NZD 73,742 47,866 250 11/26/04 SEK 299,050,207 39,772,780 357,740 -------------- $ (1,084,588) ============== Sales 11/26/04 AUD 37,961,670 $ 26,578,895 $ (62,424) 11/26/04 CAD 5,242,400 3,973,942 6,408 11/26/04 CHF 4,588,554 3,628,764 (9,374) 11/26/04 DKK 18,624,600 3,040,139 (22,465) 11/26/04 EUR 78,046,370 94,774,244 (470,035) 11/26/04 GBP 77,279,517 138,021,411 (592,607) 11/26/04 HKD 85,675,712 11,009,012 2,406 11/26/04 NOK 20,388,600 2,950,419 58,359 11/26/04 SGD 1,124,305 657,312 253 -------------- $ (1,089,479) ==============
See accompanying notes to the financial statements. 25 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) FUTURES CONTRACTS
NET UNREALIZED APPRECIATION NUMBER OF CONTRACTS TYPE EXPIRATION DATE CONTRACT VALUE (DEPRECIATION) --------------------- ---------------- ----------------- -------------- -------------- Sells 261 CAC 40 September 2004 $ 11,442,748 $ (123,218) 89 DAX September 2004 10,261,842 (544,772) 693 FTSE 100 September 2004 55,776,121 (718,865) 577 MSCI September 2004 15,613,992 11,687 875 SPI 200 September 2004 54,775,173 (1,180,478) 1,081 TSE TOPIX September 2004 111,306,210 (2,258,674) -------------- $ (4,814,320) ==============
At August 31, 2004, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. See accompanying notes to the financial statements. 26 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY (SHOWING PERCENTAGE OF EQUITY INVESTMENTS) AUGUST 31, 2004 (UNAUDITED) At August 31, 2004, industry sector diversification of the Fund's equity investments was as follows:
INDUSTRY SECTOR ------------------------------------------------------------------------ Consumer Discretionary 23.0% Industrials 20.4 Financials 17.8 Materials 10.6 Consumer Staples 8.4 Information Technology 6.7 Health Care 6.0 Utilities 2.9 Energy 2.1 Telecommunication Services 2.1 ------ 100.0% ======
See accompanying notes to the financial statements. 27 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments, at value, including securities on loan of $198,010,825 (cost $1,623,845,853) (Note 2) $ 1,863,596,847 Cash 40,305 Foreign currency, at value (cost $2,032,243) (Note 2) 2,058,602 Receivable for investments sold 638,655 Receivable for Fund shares sold 14,000,000 Dividends and interest receivable 2,763,765 Foreign taxes receivable 468,032 Receivable for open forward foreign currency contracts (Note 2) 425,416 Receivable for expenses reimbursed by Manager (Note 3) 165,106 ------------------ Total assets 1,884,156,728 ------------------ LIABILITIES: Payable for investments purchased 313,255 Payable upon return of securities loaned (Note 2) 211,014,090 Payable for Fund shares repurchased 1,988,000 Payable to affiliate for (Note 3): Management fee 839,196 Shareholder service fee 209,799 Trustees fee 4,034 Payable for open forward foreign currency contracts (Note 2) 2,599,483 Payable for variation margin on open futures contracts (Note 2) 491,991 Accrued expenses 370,083 ------------------ Total liabilities 217,829,931 ------------------ NET ASSETS $ 1,666,326,797 ================== NET ASSETS CONSIST OF: Paid-in capital $ 1,300,738,670 Accumulated undistributed net investment income 10,894,926 Accumulated net realized gain 121,911,096 Net unrealized appreciation 232,782,105 ------------------ $ 1,666,326,797 ================== NET ASSETS ATTRIBUTABLE TO: Class III shares $ 1,666,326,797 ================== SHARES OUTSTANDING: Class III 102,539,658 ================== NET ASSET VALUE PER SHARE: Class III $ 16.25 ==================
See accompanying notes to the financial statements. 28 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends (net of withholding taxes of $2,755,859) $ 26,798,345 Interest (including securities lending income of $948,364) 1,538,226 ------------------ Total income 28,336,571 ------------------ EXPENSES: Management fee (Note 3) 5,245,619 Shareholder service fee (Note 3) - Class III 1,311,404 Custodian fees 778,412 Transfer agent fees 16,836 Audit and tax fees 29,623 Legal fees 23,552 Trustees fees and related expenses (Note 3) 10,908 Registration fees 6,256 Miscellaneous 8,741 ------------------ Total expenses 7,431,351 Fees and expenses reimbursed by Manager (Note 3) (863,420) ------------------ Net expenses 6,567,931 ------------------ Net investment income 21,768,640 ------------------ REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (net of CPMF tax of $1,345) (Note 2) 121,833,483 Closed futures contracts 3,291,310 Foreign currency, forward contracts and foreign currency related transactions (2,933,166) ------------------ Net realized gain 122,191,627 ------------------ Change in net unrealized appreciation (depreciation) on: Investments (170,577,706) Open futures contracts (8,739,855) Foreign currency, forward contracts and foreign currency related transactions (500,444) ------------------ Net unrealized loss (179,818,005) ------------------ Net realized and unrealized loss (57,626,378) ------------------ NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (35,857,738) ==================
See accompanying notes to the financial statements. 29 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 21,768,640 $ 16,709,887 Net realized gain 122,191,627 118,398,318 Change in net unrealized appreciation (depreciation) (179,818,005) 482,847,394 ----------------- ----------------- Net increase (decrease) in net assets from operations (35,857,738) 617,955,599 ----------------- ----------------- Distributions to shareholders from: Net investment income Class III (5,762,802) (16,459,478) Net realized gains Class III (60,980,918) (30,034,700) ----------------- ----------------- (66,743,720) (46,494,178) ----------------- ----------------- Net share transactions (Note 6): Class III 172,064,253 481,259,656 Purchase premiums and redemption fees (Notes 2 and 6): Class III 4,399,917 3,094,754 ----------------- ----------------- Total increase in net assets resulting from net share transactions and net purchase premiums and redemption fees 176,464,170 484,354,410 ----------------- ----------------- Total increase in net assets 73,862,712 1,055,815,831 NET ASSETS: Beginning of period 1,592,464,085 536,648,254 ----------------- ----------------- End of period (including accumulated undistributed net investment income of $10,894,926 and distributions in excess of net investment income of $5,110,912, respectively) $ 1,666,326,797 $ 1,592,464,085 ================= =================
See accompanying notes to the financial statements. 30 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ------------------------------------------------------------------------------- (UNAUDITED) 2004 2003 2002 2001 2000 ---------------- ----------- ----------- ----------- ----------- ----------- NET ASSET VALUE, BEGINNING OF PERIOD $ 17.09 $ 9.50 $ 10.44 $ 11.68 $ 11.54 $ 11.02 ----------- ----------- ----------- ----------- ----------- ----------- Income from investment operations: Net investment income 0.22 0.20 0.15 0.22 0.23 0.25 Net realized and unrealized gain (loss) (0.42) 7.94 (0.80) (1.11) 1.02 0.83 ----------- ----------- ----------- ----------- ----------- ----------- Total from investment operations (0.20) 8.14 (0.65) (0.89) 1.25 1.08 ----------- ----------- ----------- ----------- ----------- ----------- Less distributions to shareholders: From net investment income (0.06) (0.20) (0.29) (0.35) (0.25) (0.15) From net realized gains (0.58) (0.35) -- (0.00)(a) (0.86) (0.41) ----------- ----------- ----------- ----------- ----------- ----------- Total distributions (0.64) (0.55) (0.29) (0.35) (1.11) (0.56) ----------- ----------- ----------- ----------- ----------- ----------- NET ASSET VALUE, END OF PERIOD $ 16.25 $ 17.09 $ 9.50 $ 10.44 $ 11.68 $ 11.54 =========== =========== =========== =========== =========== =========== TOTAL RETURN (b) (1.28)%**(c) 86.62%(c) (6.30)%(c) (7.57)%(c) 11.09%(c) 9.62% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 1,666,327 $ 1,592,464 $ 536,648 $ 253,612 $ 187,093 $ 173,362 Net expenses to average daily net assets 0.75%* 0.75% 0.75% 0.75% 0.75% 0.75% Net investment income to average daily net assets 1.26%(d)** 1.60% 1.65% 2.02% 2.05% 2.19% Portfolio turnover rate 33%** 46% 44% 34% 60% 55% Fees and expenses reimbursed by the Manager to average daily net assets: 0.10%* 0.13% 0.17% 0.22% 0.22% 0.24% Purchase premiums and redemption fees consisted of the following per share amounts: (e) $ 0.04 $ 0.04 $ 0.06 $ 0.05 $ 0.04 --
See accompanying notes to the financial statements. 31 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS -- (CONTINUED) (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) (a) The distribution from net realized gains was less than $0.01 per share. (b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (c) Calculation excludes purchase premiums and redemption fees which are borne by the shareholder. (d) The ratio for the six months ended August 31, 2004, has not been annualized since the Fund believes it would not be appropriate because the Fund's dividend income is not earned ratably throughout the fiscal year. (e) Effective March 1, 2000, the Fund adopted the provisions of the revised AICPA Audit and Accounting Guide for Investment Companies which require 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. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 32 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION 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 S&P/Citigroup Extended Market Index ("EMI") World ex-U.S. Index. 2. SIGNIFICANT ACCOUNTING POLICIES 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. The values of securities which are primarily traded on foreign exchanges are 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. For other assets, and in cases where market prices are not readily available or the Manager believes established valuation methodologies are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect that security's value. Because many foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after the close but before the close of the NYSE. As a result, foreign equity securities held by the Fund are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available. 33 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 in the Schedule of Investments, and represents the currency exposure the Fund has acquired or hedged through currency contracts as of August 31, 2004. 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. 34 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, 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 the Schedule of Investments for all open futures contracts as of August 31, 2004. 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. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying investment increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of August 31, 2004, 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 closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. As of August 31, 2004, 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 35 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 using standard models that incorporate 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 on swap contracts 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 August 31, 2004, 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. As of August 31, 2004, the Fund had loaned securities having a market value of $198,010,825 collateralized by cash in the amount of $211,014,090, 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 generally withheld in accordance with the applicable country's tax treaty with the United States. 36 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. The Fund is subject to a Contribuicao Provisoria sobre Movimentacoes Financiera ("CPMF") tax which is applied to foreign exchange transactions representing capital inflows or outflows to the Brazilian market. The CPMF tax has been included in the net realized gain on investments throughout the period. The Fund has incurred $1,345 related to the CPMF tax which is included in net realized gain in the Statement of Operations. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. 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 and fee on redemption of Fund shares is 0.60% of the amount invested or 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, it will waive the purchase premium or redemption fee with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived in extraordinary circumstances if the Fund will not incur transaction costs. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the six months ended August 31, 2004 and the year ended February 29, 2004, the 37 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) Fund received $2,337,085 and $2,843,007 in purchase premiums and $2,062,832 and $251,747 in redemption fees, respectively. There is no premium for reinvested distributions. INVESTMENT RISK There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments 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. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.60% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% for Class III shares. GMO has entered into a binding agreement effective until at least June 30, 2005 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 0.60% of average daily net assets. The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $6,676. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004, aggregated $647,770,563 and $539,642,170, respectively. 5. RELATED PARTIES At August 31, 2004, 1.2% of the Fund was held by twenty-three related parties comprised of certain GMO employee accounts. As of August 31, 2004, greater than 10% of the Fund's shares were held by accounts for which the Manager has investment discretion. 38 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------------------- ----------------------------- SHARES AMOUNT SHARES AMOUNT ------------ -------------- ------------ --------------- Class III: Shares sold 30,809,431 $ 525,979,711 48,778,681 $ 652,897,839 Shares issued to shareholders in reinvestment of distributions 3,645,345 60,658,538 2,591,610 38,966,515 Shares repurchased (25,083,051) (414,573,996) (14,670,843) (210,604,698) Purchase premiums and redemption fees -- 4,399,917 -- 3,094,754 ------------ -------------- ------------ --------------- Net increase 9,371,725 $ 176,464,170 36,699,448 $ 484,354,410 ============ ============== ============ ===============
7. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 39 GMO INTERNATIONAL SMALL COMPANIES FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees and other expenses. The following table, assuming a $1,000 investment in a class of shares, discloses the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the class's actual return and actual expenses, and (2) a hypothetical annualized 5% return and the class's actual expenses: Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED* ------------------------------------------------------ 1) Actual $ 1,000.00 $ 987.20 $ 3.76 2) Hypothetical 1,000.00 1,021.42 3.82
*Expenses are calculated using the Class III annualized expense ratio for the six months ended August 31, 2004 of 0.75%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 40 GMO ALPHA ONLY FUND (FORMERLY GMO GLOBAL HEDGED EQUITY FUND) (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO ALPHA ONLY FUND (FORMERLY GMO GLOBAL HEDGED EQUITY FUND) (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
DESCRIPTION % OF NET ASSETS ------------------------------------------------------------------------------------------------ Italy 0.0% United States 90.0 Forward Currency Contracts (0.1) Futures 1.4 Short Term Investments and Other Assets and Liabilities (net) 8.7 ----------------- 100.0% =================
See accompanying notes to the financial statements. 1 GMO ALPHA ONLY FUND (FORMERLY GMO GLOBAL HEDGED EQUITY FUND) (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- MUTUAL FUNDS -- 90.0% UNITED STATES -- 90.0% 588,174 GMO Emerging Markets Fund, Class III 8,687,336 557,610 GMO International Growth Fund, Class III 12,758,117 648,846 GMO International Intrinsic Value Fund, Class III 15,994,043 259,674 GMO International Small Companies Fund, Class III 4,219,706 296,995 GMO Real Estate Fund, Class III 4,594,515 1,739,593 GMO U.S. Core Fund, Class III 22,632,101 664,294 GMO U.S. Quality Equity Fund, Class III 12,933,797 --------------- 81,819,615 --------------- TOTAL MUTUAL FUNDS (COST $71,717,660) 81,819,615 --------------- COMMON STOCKS -- 0.0% ITALY -- 0.0% 12,500 Grassetto SPA *(a) (b) 152 --------------- TOTAL COMMON STOCKS (COST $7,040) 152 --------------- SHORT-TERM INVESTMENTS -- 10.0% CASH EQUIVALENTS -- 5.1% 4,600,000 Societe Generale GC Time Deposit, 1.57%, due 09/01/04 4,600,000 --------------- U.S. GOVERNMENT -- 4.9% 4,500,000 U.S. Treasury Bill, 0.96%, due 9/23/04 (c) (d) 4,497,300 --------------- TOTAL SHORT-TERM INVESTMENTS (COST $9,097,300) 9,097,300 --------------- TOTAL INVESTMENTS -- 100.0% (Cost $80,822,000) 90,917,067 Other Assets and Liabilities (net) -- 0.0% (59,246) --------------- TOTAL NET ASSETS -- 100.0% $ 90,857,821 ===============
See accompanying notes to the financial statements. 2 GMO ALPHA ONLY FUND (FORMERLY GMO GLOBAL HEDGED EQUITY FUND) (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) NOTES TO SCHEDULE OF INVESTMENTS: * Non-income producing security. (a) Bankrupt issuer. (b) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 2). (c) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 2). (d) Rate shown represents yield to maturity. CURRENCY ABBREVIATIONS: AUD - Australian Dollar CHF - Swiss Franc DKK - Danish Krone EUR - Euro GBP - British Pound HKD - Hong Kong Dollar JPY - Japanese Yen NOK - Norwegian Krone NZD - New Zealand Dollar SEK - Swedish Krona SGD - Singapore Dollar See accompanying notes to the financial statements. 3 GMO ALPHA ONLY FUND (FORMERLY GMO GLOBAL HEDGED EQUITY FUND) (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) At August 31, 2004, the approximate 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 ------------------- -------------------- -------------------- ------------------ $ 81,255,815 $ 9,675,610 $ (14,358) $ 9,661,252
At February 29, 2004, GMO Alpha Only Fund (formerly GMO Global Hedged Equity Fund) (the "Fund") had capital loss carryforwards available to offset future capital gains, if any, to the extent permitted by the Internal Revenue Code of $1,571,235, $523,745 and $6,598,186 expiring in 2006, 2007 and 2012, respectively. Utilization of the capital loss carryforwards above could be subject to limitations imposed by the Internal Revenue Code related to share ownership activity. At February 29, 2004, the Fund had elected to defer to March 1, 2004 post-October capital and currency losses of $3,253,391 and $2,236,670, respectively. A summary of outstanding financial instruments at August 31, 2004 is as follows: FORWARD CURRENCY CONTRACTS
NET UNREALIZED SETTLEMENT APPRECIATION DATE DELIVER UNITS OF CURRENCY VALUE (DEPRECIATION) ---------- --------- ------------------- ------------- -------------- Sales 11/26/04 AUD 2,574,782 $ 1,802,736 $ (6,310) 11/26/04 CHF 3,467,201 2,741,965 (12,788) 11/26/04 DKK 1,823,271 297,617 (2,199) 11/26/04 EUR 9,981,515 12,120,878 (71,144) 11/26/04 GBP 5,279,166 9,428,603 (38,825) 11/26/04 HKD 4,419,614 567,904 144 11/26/04 JPY 947,844,153 8,673,293 16,544 11/26/04 NOK 1,490,424 215,678 1,653 11/26/04 NZD 311,539 202,219 (1,055) 11/26/04 SEK 6,665,390 886,477 (8,643) 11/26/04 SGD 519,739 303,860 134 -------------- $ (122,489) ==============
See accompanying notes to the financial statements. 4 GMO ALPHA ONLY FUND (FORMERLY GMO GLOBAL HEDGED EQUITY FUND) (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) FUTURES CONTRACTS
NET UNREALIZED NUMBER OF CONTRACT APPRECIATION CONTRACTS TYPE EXPIRATION DATE VALUE (DEPRECIATION) --------------- -------------- ----------------- ------------- -------------- Sales 96 CAC 40 September 2004 $ 4,208,827 $ 31,776 26 DAX September 2004 2,997,841 128,909 146 FTSE 100 September 2004 11,750,813 (57,944) 10 HANG SENG September 2004 821,672 (2,115) 17 IBEX 35 September 2004 1,629,152 (28,618) 10 MIB30 September 2004 1,647,886 37,967 120 OMX September 2004 1,095,938 (69) 37 SPI 200 September 2004 2,316,207 (50,341) 161 S&P 500 September 2004 44,440,025 998,659 105 TSE TOPIX September 2004 10,811,426 192,446 -------------- $ 1,250,670 ==============
At August 31, 2004, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. See accompanying notes to the financial statements. 5 GMO ALPHA ONLY FUND (FORMERLY GMO GLOBAL HEDGED EQUITY FUND) (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments in affiliated issuers, at value (cost $71,717,660) (Notes 2 and 7) $ 81,819,615 Investments in unaffiliated issuers, at value (cost $9,104,340)(Note 2) 9,097,452 Cash 73,558 Foreign currency, at value (cost $165) (Note 2) 597 Receivable for open forward foreign currency contracts (Note 2) 18,475 Receivable for variation margin on open futures contracts (Note 2) 30,213 Receivable for expenses reimbursed by Manager (Note 3) 47,748 ------------- Total assets 91,087,658 ------------- LIABILITIES: Payable to affiliate for (Note 3): Management fee 38,262 Shareholder service fee 11,479 Trustees fee 131 Payable for open forward foreign currency contracts (Note 2) 140,964 Accrued expenses 39,001 ------------- Total liabilities 229,837 ------------- NET ASSETS $ 90,857,821 ============= NET ASSETS CONSIST OF: Paid-in capital $ 92,607,857 Accumulated undistributed net investment loss (342,005) Accumulated net realized loss (12,631,711) Net unrealized appreciation 11,223,680 ------------- $ 90,857,821 ============= NET ASSETS ATTRIBUTABLE TO: Class III shares $ 90,857,821 ============= SHARES OUTSTANDING: Class III 9,067,166 ============= NET ASSET VALUE PER SHARE:
See accompanying notes to the financial statements. 6 GMO ALPHA ONLY FUND (FORMERLY GMO GLOBAL HEDGED EQUITY FUND) (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) Class III $ 10.02 =============
See accompanying notes to the financial statements. 7 GMO ALPHA ONLY FUND (FORMERLY GMO GLOBAL HEDGED EQUITY FUND) (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends from affiliated issuers (Note 7) $ 429,446 Interest 52,707 ------------- Total income 482,153 ------------- EXPENSES: Management fee (Note 3) 214,063 Shareholder service fee (Note 3) - Class III 64,219 Custodian fees 41,584 Transfer agent fees 15,272 Audit and tax fees 15,548 Legal fees 1,104 Trustees fees and related expenses (Note 3) 620 Registration fees 1,932 Miscellaneous 368 ------------- Total expenses 354,710 Fees and expenses reimbursed by Manager (Note 3) (34,224) Indirectly incurred fees waived or borne by Manager (Note 3) (178,053) Shareholder service fee waived (Note 3) - Class III (57,097) ------------- Net expenses 85,336 ------------- Net investment income 396,817 ------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments in affiliated issuers 1,912,141 Realized gains distributions from affiliated issuers (Note 7) 580,199 Closed futures contracts (3,548,351) Foreign currency, forward contracts and foreign currency related transactions (1,022,730) ------------- Net realized loss (2,078,741) ------------- Change in net unrealized appreciation (depreciation) on: Investments (3,895,379) Open futures contracts 4,528,442 Foreign currency, forward contracts and foreign currency related transactions 1,385,537 ------------- Net unrealized gain 2,018,600 ------------- Net realized and unrealized loss (60,141) -------------
See accompanying notes to the financial statements. 8 GMO ALPHA ONLY FUND (FORMERLY GMO GLOBAL HEDGED EQUITY FUND) (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 336,676 =============
See accompanying notes to the financial statements. 9 GMO ALPHA ONLY FUND (FORMERLY GMO GLOBAL HEDGED EQUITY FUND) (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29,2004 ---------------- ---------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 396,817 $ 811,481 Net realized loss (2,078,741) (8,452,936) Change in net unrealized appreciation (depreciation) 2,018,600 9,566,735 ---------------- ---------------- Net increase in net assets from operations 336,676 1,925,280 ---------------- ---------------- Net share transactions (Note 6): Class III 15,660,010 46,535,284 Purchase premiums and redemption fees (Notes 2 and 6): Class III 20,587 50,819 ---------------- ---------------- Total increase in net assets resulting from net share transactions and net purchase premiums and redemption fees 15,680,597 46,586,103 ---------------- ---------------- Total increase in net assets 16,017,273 48,511,383 NET ASSETS: Beginning of period 74,840,548 26,329,165 ---------------- ---------------- End of period (including accumulated undistributed net investment loss of $342,005 and distributions in excess of net investment income of $738,822, respectively) $ 90,857,821 $ 74,840,548 ================ ================
See accompanying notes to the financial statements. 10 GMO ALPHA ONLY FUND (FORMERLY GMO GLOBAL HEDGED EQUITY FUND) (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 --------------------------------------------------------------------- (UNAUDITED) 2004 2003 2002 2001 2000 ---------------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 9.99 $ 9.63 $ 9.23 $ 8.73 $ 7.72 $ 7.59 ---------------- ---------- ---------- ---------- ---------- ---------- Income from investment operations: Net investment income (a) 0.05+ 0.17+ 0.20+ 0.17+ 0.15 0.16 Net realized and unrealized gain (0.02) 0.19 0.49 0.96 1.68 0.20 ---------------- ---------- ---------- ---------- ---------- ---------- Total from investment operations 0.03 0.36 0.69 1.13 1.83 0.36 ---------------- ---------- ---------- ---------- ---------- ---------- Less distributions to shareholders: From net investment income -- -- (0.29) (0.63) (0.82) (0.23) ---------------- ---------- ---------- ---------- ---------- ---------- Total distributions -- -- (0.29) (0.63) (0.82) (0.23) ---------------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 10.02 $ 9.99 $ 9.63 $ 9.23 $ 8.73 $ 7.72 ================ ========== ========== ========== ========== ========== TOTAL RETURN (b) 0.30%** 3.74% 7.61% 13.32% 24.84% 4.74% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 90,858 $ 74,841 $ 26,329 $ 16,628 $ 56,499 $ 46,718 Net expenses to average daily net assets (c) 0.20%* 0.26% 0.64% 0.37% 0.25% 0.21% Net investment income to average daily net assets (a) 0.93%* 1.72% 2.06% 1.88% 1.80% 1.89% Portfolio turnover rate 17%** 11% 111% 22% 15% 13% Fees and expenses reimbursed by the Manager to average daily net assets: 0.63%* 0.72% 0.94% 0.78% 0.64% 0.54% Purchase and redemption fees consisted of the following per share amounts: + $ 0.00(d)+ $ 0.01+ -- -- -- --
(a) Recognition of net investment income is affected by the timing of the declaration of dividends by the underlying funds in which the fund invests. (b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder. (c) Net expenses exclude expenses incurred indirectly through investment in underlying funds. See Note 3. (d) Purchase premiums and redemption fees were less than $0.01 per share. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 11 GMO ALPHA ONLY FUND (FORMERLY GMO GLOBAL HEDGED EQUITY FUND) (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION GMO Alpha Only Fund (the "Fund") (formerly GMO Global Hedged Equity 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 will pursue its objective by investing in Class III shares of domestic equity, international equity, and fixed income funds of the Trust. The Fund's benchmark is the Citigroup 3-Month Treasury Bill Index. The financial statements of the underlying funds should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request by calling (617) 346-7646 or by visiting GMO's website at www.gmo.com. 2. SIGNIFICANT ACCOUNTING POLICIES 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. The values of securities which are primarily traded on foreign exchanges are 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 funds of the Trust ("underlying funds") and other mutual funds are valued at their net asset value as reported on each business day. For other assets, and in cases where market prices are not readily available or the Manager believes established valuation methodologies are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value. Because many foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign securities in those 12 GMO ALPHA ONLY FUND (FORMERLY GMO GLOBAL HEDGED EQUITY FUND) (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, foreign equity securities held by the Fund are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available. 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 in the Schedule of Investments and represents the currency exposure the Fund has acquired or hedged through currency contracts as of August 31, 2004. 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 13 GMO ALPHA ONLY FUND (FORMERLY GMO GLOBAL HEDGED EQUITY FUND) (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, 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 the Schedule of Investments for all open futures contracts as of August 31, 2004. 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. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying investment increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of August 31, 2004, 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 closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. As of August 31, 2004, there were no open purchased option contracts. 14 GMO ALPHA ONLY FUND (FORMERLY GMO GLOBAL HEDGED EQUITY FUND) (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 using standard models that incorporate 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 on swap contracts 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 August 31, 2004, 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. 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. 15 GMO ALPHA ONLY FUND (FORMERLY GMO GLOBAL HEDGED EQUITY FUND) (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. 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. In addition, the Fund will also incur fees and expenses indirectly as a shareholder in the underlying funds. Because the underlying funds have varied expense and fee levels and the Fund may own different proportions of underlying funds at different times, the amount of fees and expenses indirectly incurred by the Fund will vary. PURCHASES AND REDEMPTIONS OF FUND SHARES Effective June 30, 2003, the Fund began to charge purchase and redemption fees on Fund shares. The Fund's purchase premium and redemption fee is approximately equal to the weighted average of the purchase premiums and redemption fees, if any, of the underlying funds in which the Fund was invested as of June 30, 2004. The level of purchase premium and redemption fee for the Fund will be adjusted approximately annually to account for changes in the Fund's investments (i.e. changes in the percentage of Fund assets allocated to each underlying fund). The premiums on cash purchases and fees on redemption of Fund shares are each 0.11% of the amount invested or redeemed. The redemption fee is only applicable to shares purchased on or after June 30, 2003 and is subject to adjustment based upon purchase premiums and redemption fees of the underlying Funds in which it invests and the estimated transaction costs of investing directly in securities. If the Manager determines that any portion of a cash purchase or redemption is offset by a corresponding cash redemption or purchase occurring on the same day, it will waive the purchase premium or redemption fee with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived in extraordinary circumstances if the Fund will not incur transaction costs. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in capital. For the six months ended August 31, 2004 and the year ended February 29, 2004, the Fund received $20,267 and $50,819 in purchase premiums and $320 and $0 in redemption fees, respectively. There is no premium for reinvested distributions. 16 GMO ALPHA ONLY FUND (FORMERLY GMO GLOBAL HEDGED EQUITY FUND) (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 may be more volatile than securities of comparable U.S. companies and U.S. securities markets. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.50% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% for Class III shares. 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. GMO has entered into a binding agreement effective until at least June 30, 2005 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees, custody 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")) 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 the underlying funds, exceed 0.50% of the Fund's average daily net assets. Because GMO will not reimburse expenses incurred indirectly by the Fund to the extent they exceed 0.50% of the Fund's average daily net assets, 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)) and investment-related expenses incurred indirectly by the Fund through its investment in the underlying funds may exceed 0.50% of the Fund's average daily net assets. 17 GMO ALPHA ONLY FUND (FORMERLY GMO GLOBAL HEDGED EQUITY FUND) (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) The Fund incurs fees and expenses indirectly as a shareholder in the underlying funds. For the six months ended August 31, 2004, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
INDIRECT OPERATING INDIRECT INVESTMENT-RELATED EXPENSES (EXCLUDING EXPENSES (INCLUDING, BUT NOT MANAGEMENT FEES, LIMITED TO, INTEREST EXPENSE, SHAREHOLDER SERVICE FEES INDIRECT FOREIGN AUDIT EXPENSE, AND TOTAL INDIRECT NET AND INVESTMENT-RELATED SHAREHOLDER INVESTMENT-RELATED LEGAL INDIRECT MANAGEMENT FEES EXPENSES) SERVICE FEES EXPENSE) EXPENSES ---------------------------------------------------------------------------------------------------- 0.377% 0.054% 0.133% LESS THAN 0.001% 0.564%
The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $344. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASE AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004 aggregated $29,515,241 and $12,655,596, respectively. 5. PRINCIPAL SHAREHOLDERS AND RELATED PARTIES At August 31, 2004, 85.7% 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. At August 31, 2004, 1.8% of the Fund was held by five related parties comprised of certain GMO employee accounts. As of August 31, 2004, substantially all of the Fund's shares were held by accounts for which the Manager has investment discretion. 18 GMO ALPHA ONLY FUND (FORMERLY GMO GLOBAL HEDGED EQUITY FUND) (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ------------------------------ ------------------------------ SHARES AMOUNT SHARES AMOUNT ------------- ------------- ------------- ------------- Class III: Shares sold 1,832,461 $ 18,217,445 6,051,869 $ 59,087,158 Shares issued to shareholders in reinvestment of distributions -- -- -- -- Shares repurchased (259,568) (2,557,435) (1,291,067) (12,551,874) Purchase premiums and redemption fees -- 20,587 -- 50,819 ------------- ------------- ------------- ------------- Net increase 1,572,893 $ 15,680,597 4,760,802 $ 46,586,103 ============= ============= ============= =============
19 GMO ALPHA ONLY FUND (FORMERLY GMO GLOBAL HEDGED EQUITY FUND) (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 7. INVESTMENTS IN AFFILIATED ISSUERS A summary of the Fund's transactions in the securities of these issuers during the six months ended August 31, 2004, is set forth below:
VALUE, REALIZED BEGINNING OF SALES DIVIDEND GAIN VALUE, END AFFILIATE PERIOD PURCHASES PROCEEDS INCOME DISTRIBUTIONS OF PERIOD --------------------------------------------------------------------------------------------------------------------- GMO Emerging Markets $ 6,618,501 $ 2,439,003 $ -- $ 38,454 $ 549 $ 8,687,336 Fund, Class III GMO International Growth Fund, Class III 10,798,156 2,304,286 -- 49,041 105,244 12,758,117 GMO International Intrinsic Value Fund, Class III 13,345,605 2,380,703 -- 80,703 -- 15,994,043 GMO International Small Companies Fund, Class III 3,355,286 1,040,197 -- 12,104 128,092 4,219,706 GMO Real Estate Fund, Class III 2,639,124 1,640,451 -- 40,451 -- 4,594,515 GMO Small Cap Value Fund, Class III 1,593,583 1,555,325 2,705,596 9,012 346,314 -- GMO U.S. Core Fund, Class III 28,592,950 5,214,009 9,950,000 183,600 -- 22,632,101 GMO U.S. Quality Equity Fund, Class III -- 12,941,267 -- 16,081 -- 12,933,797 ------------- ------------- ------------- ---------- ------------- ------------ Totals $ 66,943,205 $ 29,515,241 $ 12,655,596 $ 429,446 $ 580,199 $ 81,819,615 ============= ============= ============= ========== ============= ============
8. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 20 GMO ALPHA ONLY FUND (FORMERLY GMO GLOBAL HEDGED EQUITY FUND) (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees, and other expenses. The following table, assuming a $1,000 investment in a class of shares, discloses the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the class's actual return and actual expenses, and (2) a hypothetical annualized 5% return and the class's actual expense: Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * ---------------------------------------------------------- 1) Actual $ 1,000.00 $ 1,003.00 $ 3.84 2) Hypothetical 1,000.00 1,021.37 3.87
*Expenses are calculated using the Class III annualized expense ratio for the six months ended August 31, 2004 of 0.76%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 21 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
DESCRIPTION % OF NET ASSETS - -------------------------------------------------------------------------------------------- Asset-Backed Securities 12.1% Corporate Debt 2.2 Foreign Government Obligations 1.5 U.S. Government 3.7 Mutual Funds 79.5 Put Options Purchased 0.1 Forward Currency Contracts (0.3) Futures (0.2) Swaps 0.8 Short-Term Investments and Other Assets and Liabilities (net) 0.6 ----------------- 100.0% =================
See accompanying notes to the financial statements. 1 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 19.5% AUSTRALIA -- 1.8% ASSET-BACKED SECURITIES -- 1.8% USD 2,474,135 Medallion Trust Series 03-1G Class A, Variable Rate, 3 mo. LIBOR + .19%, 1.74%, due 12/21/33 2,476,856 ------------- AUSTRIA -- 2.2% CORPORATE DEBT -- 2.2% USD 2,500,000 Bank Austria Creditanstalt, AG, Series EMTN, 144A, 7.25%, due 02/15/17 2,996,250 ------------- CANADA -- 1.5% FOREIGN GOVERNMENT OBLIGATIONS -- 1.5% GBP 1,000,000 Province of Quebec, 8.63%, due 11/04/11 2,114,666 ------------- UNITED KINGDOM -- 10.3% ASSET-BACKED SECURITIES -- 10.3% GBP 4,000,000 RMAC Series 03-NS1A Class A2A, 144A, AMBAC, Variable Rate, 3 mo. GBP LIBOR + .45%, 5.26%, due 06/12/35 7,234,028 GBP 4,000,000 RMAC Series 03-NS2A Class A2A, 144A, AMBAC, Variable Rate, 3 mo. GBP LIBOR + .40%, 5.21%, due 09/12/35 7,213,502 ------------- 14,447,530 ------------- Total United Kingdom 14,447,530 -------------
See accompanying notes to the financial statements. 2 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE/ PRINCIPAL AMOUNT/SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------- UNITED STATES -- 3.7% U.S. GOVERNMENT -- 3.7% USD 3,469,770 U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09 (a) (b) 3,907,286 USD 1,127,410 U.S. Treasury Inflation Indexed Note, 4.25%, due 01/15/10 (b) 1,309,733 ------------- 5,217,019 ------------- Total United States 5,217,019 ------------- TOTAL DEBT OBLIGATIONS (COST $24,966,859) 27,252,321 ------------- PUT OPTIONS PURCHASED -- 0.1% CROSS CURRENCY OPTIONS -- 0.1% JPY 2,490,000,000 JPY Put/USD Call, Expires 11/19/2004, Strike 112.40 154,978 ------------- TOTAL PUT OPTIONS PURCHASED (COST $635,366) 154,978 ------------- MUTUAL FUNDS -- 79.5% 407,383 GMO Emerging Country Debt Fund, Class III (c) 4,420,110 4,107,853 GMO Short-Duration Collateral Fund (c) 104,092,993 45,838 GMO Special Purpose Holding Fund (c) 806,295 1,824,030 Merrimac Cash Series, Premium Class 1,824,030 ------------- TOTAL MUTUAL FUNDS (COST $109,217,206) 111,143,428 ------------- TOTAL INVESTMENTS -- 99.1% (Cost $134,819,431) 138,550,727 Other Assets and Liabilities (net) -- 0.9% 1,310,015 ------------- TOTAL NET ASSETS -- 100.0% $ 139,860,742 =============
See accompanying notes to the financial statements. 3 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 Variable rates - The rates shown on Variable rate notes are the current interest rates at August 31, 2004, 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 margin requirements on open financial futures contracts and open swap contracts (Note 2). (b) Indexed security in which price and/or coupon is linked to prices of other securities, securities indices, or other financial indicators (Note 2). (c) Affiliated issuer. CURRENCY ABBREVIATIONS: AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc EUR - Euro GBP - British Pound JPY - Japanese Yen NOK - Norwegian Krone NZD - New Zealand Dollars SEK - Swedish Krona USD - United States Dollar At August 31, 2004, the approximate 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 --------------- ---------------- ---------------- -------------- $ 134,915,061 $ 4,116,054 $ (480,388) $ 3,635,666
At February 29, 2004, GMO Global Bond Fund (the "Fund") had a capital loss carryforward available to offset future capital gains, if any, to the extent permitted by the Internal Revenue Code, of $12,091,181 expiring in 2012. Utilization of the capital loss carryforward above could be subject to limitations imposed by the Internal Revenue Code related to share ownership activity. At February 29, 2004, the Fund elected to defer to March 1, 2004 post-October losses of $55,732. See accompanying notes to the financial statements. 4 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) A summary of outstanding financial instruments at August 31, 2004 is as follows: FORWARD CURRENCY CONTRACTS
NET UNREALIZED SETTLEMENT APPRECIATION DATE DELIVER/RECEIVE UNITS OF CURRENCY VALUE (DEPRECIATION) - ------------ ------------------ -------------------- ------------------ ------------------ Buys 10/12/04 AUD 12,300,000 $ 8,650,123 $ 30,783 11/02/04 CAD 3,400,000 2,578,257 18,325 9/07/04 CHF 25,700,000 20,270,790 (473,251) 9/14/04 EUR 27,100,000 32,929,752 (140,082) 11/16/04 GBP 7,800,000 13,943,369 59,369 9/28/04 JPY 4,160,000,000 37,951,362 (195,585) 9/21/04 NZD 8,500,000 5,563,849 30,453 ------------------ $ (669,988) ================== Sales 10/12/04 AUD 2,900,000 $ 2,039,460 $ (8,474) 9/07/04 CHF 9,000,000 7,098,719 52,694 9/14/04 EUR 5,000,000 6,075,600 22,970 9/28/04 JPY 800,000,000 7,298,339 5,657 ------------------ $ 72,847 ==================
FORWARD CROSS CURRENCY CONTRACTS
NET UNREALIZED SETTLEMENT APPRECIATION DATE DELIVER/UNITS OF CURRENCY RECEIVE/IN EXCHANGE FOR (DEPRECIATION) - ------------ -------------------------------- ------------------------- ------------------ 10/05/04 CHF 35,100,540 EUR 23,000,000 $ 228,859 10/12/04 NOK 29,583,750 EUR 3,500,000 (29,837) 10/12/04 EUR 4,300,000 NOK 35,928,750 (23,692) 11/09/04 EUR 12,000,000 SEK 110,057,860 65,561 ------------------ $ 240,891 ==================
See accompanying notes to the financial statements. 5 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) FUTURES CONTRACTS
NET UNREALIZED NUMBER OF CONTRACT APPRECIATION CONTRACTS TYPE EXPIRATION DATE VALUE (DEPRECIATION) ----------- -------------------------------------- ------------------- ------------ ---------------- Buys 176 Canadian Government Bond 10 Yr. December 2004 $ 14,637,279 $ 67,602 26 Euro BOBL September 2004 3,547,485 12,033 191 Euro Euribor 3 Month March 2005 56,704,576 224,488 150 Federal Fund 30 Day October 2004 61,439,290 2,263 1 Japanese Government Bond 10 Yr. (LIF) September 2004 1,255,456 32 1 Swiss Federal Bond September 2004 100,706 2,202 5 U.S. Long Bond December 2004 556,562 7,420 ---------------- $ 316,040 ================ Sales 50 Australian Government Bond 10 Yr. September 2004 $ 3,654,171 $ (44,181) 101 Australian Government Bond 3 Yr. September 2004 7,259,042 (20,132) 16 Euro Bund September 2004 2,259,097 (19,002) 191 Euro Euribor 3 Month March 2006 56,272,249 (301,540) 4 Japanese Government Bond 10 Yr. September 2004 5,017,085 (97,304) 8 U.S. Treasury Note 10 Yr. December 2004 898,500 (1,210) 63 U.S. Treasury Note 5 Yr. December 2004 6,972,328 (44,867) ---------------- $ (528,236) ================
At August 31, 2004, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. See accompanying notes to the financial statements. 6 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) -------------- ------------ ---------------------------------------------------------------------- -------------- INTEREST RATE SWAPS 36,400,000 EUR 3/13/06 Agreement with Citibank N.A. dated 3/09/04 to pay the notional amount $ 50,416 multiplied by 2.34% and to receive the notional amount multiplied by the 6 month Floating Rate EURIBOR. 11,200,000 EUR 6/5/06 Agreement with Citibank N.A. dated 6/01/04 to pay the notional amount (78,614) multiplied by 2.824% and to receive the notional amount multiplied by the 6 month Floating Rate EURIBOR. 13,600,000 USD 6/5/06 Agreement with Citibank N.A. dated 6/01/04 to receive the notional 77,092 amount multiplied by 2.9835% and to pay the notional amount multiplied by the 3 month LIBOR. 9,800,000 CAD 6/8/06 Agreement with JP Morgan Chase Bank dated 6/08/04 to receive the 47,957 notional amount multiplied by 3.41% and to pay the notional amount multiplied by the 3 month Floating Rate Canadian Dollar Offering Rate. 9,800,000 CAD 6/10/06 Agreement with JP Morgan Chase Bank dated 6/10/04 to receive the 51,443 notional amount multiplied by 3.44% and to pay the notional amount multiplied by the 3 month Floating Rate Canadian Dollar Offering Rate. 9,800,000 CAD 6/14/06 Agreement with JP Morgan Chase Bank dated 6/14/04 to receive the 68,547 notional amount multiplied by 3.5725% and to pay the notional amount multiplied by the 3 month Floating Rate Canadian Dollar Offering Rate. 7,600,000 GBP 7/1/06 Agreement with JP Morgan Chase Bank dated 7/01/04 to pay the notional (44,022) amount multiplied by 5.3375% and to receive the notional amount multiplied by the 6 month Floating Rate British LIBOR.
See accompanying notes to the financial statements. 7 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) -------------- ------------ ---------------------------------------------------------------------- -------------- 13,800,000 USD 7/6/06 Agreement with JP Morgan Chase Bank dated 7/01/04 to receive the $ 109,182 notional amount multiplied by 3.129% and to pay the notional amount multiplied by the 3 month LIBOR. 8,100,000 GBP 8/4/06 Agreement with Deutsche Bank AG dated 8/04/04 to pay the notional (67,223) amount multiplied by 5.42% and to receive the notional amount multiplied by the 6 month Floating Rate British LIBOR. 14,800,000 USD 8/6/06 Agreement with JP Morgan Chase Bank dated 8/04/04 to receive the 87,172 notional amount multiplied by 3.04% and to pay the notional amount multiplied by the 3 month LIBOR. 25,000,000 SEK 8/30/07 Agreement with Deutsche Bank AG dated 8/26/04 to receive the notional 5,595 amount multiplied by 3.6% and to pay the notional amount multiplied by the 3 month Floating Rate Swedish LIBOR. 15,300,000 EUR 3/11/09 Agreement with Citibank N.A. dated 3/09/04 to receive the notional (35,373) amount multiplied by 3.21% and to pay the notional amount multiplied by the 6 month Floating Rate EURIBOR. 3,000,000 SEK 5/22/09 Agreement with Citibank N.A. dated 5/21/04 to receive the notional 4,327 amount multiplied by 4.3775% and to pay the notional amount multiplied by the 3 month Floating Rate Swedish LIBOR. 19,600,000 SEK 7/15/11 Agreement with Citibank N.A. dated 7/13/04 to receive the notional 27,062 amount multiplied by 4.615% and to pay the notional amount multiplied by the 3 month Floating Rate Swedish LIBOR. 1,800,000 CHF 10/23/13 Agreement with JP Morgan Chase Bank dated 10/21/03 to pay the notional (28,871) amount multiplied by 3.0275% and to receive the notional amount multiplied by the 6 month Floating Rate Swiss LIBOR.
See accompanying notes to the financial statements. 8 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) -------------- ------------ ---------------------------------------------------------------------- -------------- 3,700,000 CHF 2/26/14 Agreement with Deutsche Bank AG dated 2/24/04 to pay the notional $ 10,450 amount multiplied by 2.77% and to receive the notional amount multiplied by the 6 month Floating Rate Swiss LIBOR. 2,800,000 CHF 4/21/14 Agreement with JP Morgan Chase Bank dated 4/19/04 to pay the notional 2,858 amount multiplied by 2.81% and to receive the notional amount multiplied by the 6 month Floating Rate Swiss LIBOR. 1,100,000 SEK 5/21/14 Agreement with Citibank N.A. dated 5/18/04 to receive the notional 3,969 amount multiplied by 5.0725% and to pay the notional amount multiplied by the 3 month Floating Rate Swedish LIBOR. 12,700,000 SEK 6/4/14 Agreement with JP Morgan Chase Bank dated 6/02/04 to receive the 49,159 notional amount multiplied by 5.1% and to pay the notional amount multiplied by the 3 month Floating Rate Swedish LIBOR. 3,100,000 EUR 6/18/14 Agreement with Citibank N.A. dated 6/18/04 to pay the notional amount (101,193) multiplied by 4.4725% and to receive the notional amount multiplied by the 6 month Floating Rate EURIBOR. 3,800,000 USD 6/18/14 Agreement with JP Morgan Chase Bank dated 6/16/04 to receive the 206,051 notional amount multiplied by 5.229% and to pay the notional amount multiplied by the 3 month LIBOR. 3,800,000 USD 7/19/14 Agreement with JP Morgan Chase Bank dated 7/15/04 to receive the 124,431 notional amount multiplied by 4.9675% and to pay the notional amount multiplied by the 3 month LIBOR. 5,400,000 AUD 7/21/14 Agreement with Citibank N.A. dated 7/15/04 to pay the notional amount (52,322) multiplied by 6.1225% and to receive the notional amount multiplied by the 6 month Floating Rate Australian BBSW.
See accompanying notes to the financial statements. 9 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) -------------- ------------ ---------------------------------------------------------------------- -------------- 5,200,000 CAD 8/16/14 Agreement with JP Morgan Chase Bank dated 8/16/04 to receive the $ 22,026 notional amount multiplied by 4.9825% and to pay the notional amount multiplied by the 3 month Floating Rate Canadian Dollar Offering Rate. 5,400,000 AUD 8/17/14 Agreement with Deutsche Bank AG dated 8/16/04 to pay the notional (25,249) amount multiplied by 6.0475% and to receive the notional amount multiplied by the 6 month Floating Rate Australian BBSW. 5,300,000 USD 8/25/14 Agreement with Citibank N.A. dated 8/20/04 to receive the notional 33,807 amount multiplied by 4.6525% and to pay the notional amount multiplied by the 3 month LIBOR. 3,000,000 EUR 3/21/30 Agreement with UBS AG dated 3/17/00 to receive the notional amount 549,421 multiplied by 5.895% and to pay the notional amount multiplied by the 3 month Floating Rate EURIBOR. 1,300,000 CAD 6/8/34 Agreement with JP Morgan Chase Bank dated 6/08/04 to pay the notional (80,176) amount multiplied by 5.9775% and to receive the notional amount multiplied by the 3 month Floating Rate Canadian Dollar Offering Rate. 2,900,000 USD 6/10/34 Agreement with Citibank N.A. dated 6/08/04 to pay the notional amount (268,882) multiplied by 5.89% and to receive the notional amount multiplied by the 3 month LIBOR. 1,300,000 CAD 6/10/34 Agreement with JP Morgan Chase Bank dated 6/10/04 to pay the notional (60,116) amount multiplied by 5.96% and to receive the notional amount multiplied by the 3 month Floating Rate Canadian Dollar Offering Rate. 1,300,000 CAD 6/14/34 Agreement with JP Morgan Chase Bank dated 6/14/04 to pay the notional (63,038) amount multiplied by 5.98% and to receive the notional amount multiplied by the 3 month Floating Rate Canadian Dollar Offering Rate.
See accompanying notes to the financial statements. 10 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) -------------- ------------ ---------------------------------------------------------------------- -------------- TOTAL RETURN SWAPS 31,000,000 USD 7/26/05 Agreement with JP Morgan Chase Bank dated 7/01/03 to receive the $ 148,039 notional amount multiplied by the return on the JP Morgan Non-U.S. Hedged 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 9/24/05 Agreement with JP Morgan Chase Bank dated 9/02/03 to receive the 373,345 notional amount multiplied by the return on the JP Morgan Non-U.S. Hedged Traded Total Return Government Bond Index Hedged in USD and to pay the notional amount multiplied by the 1 month LIBOR adjusted by a specified spread. -------------- $ 1,147,270 ==============
See accompanying notes to the financial statements. 11 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments in unaffiliated issuers, at value (cost $27,426,255) (Note 2) $ 29,231,329 Investments in affiliated issuers, at value (cost $107,393,176) (Notes 2 and 7) 109,319,398 Interest receivable 325,427 Receivable for open forward foreign currency contracts (Note 2) 514,671 Receivable for variation margin on open futures contracts (Note 2) 20,311 Net receivable for open swap contracts (Note 2) 1,147,270 Periodic payments from open swap agreements (Note 2) 272,881 Receivable for expenses reimbursed by Manager (Note 3) 14,017 -------------- Total assets 140,845,304 -------------- LIABILITIES: Foreign currency due to custodian 28,497 Payable to affiliate for (Note 3): Management fee 22,527 Shareholder service fee 17,784 Trustees fee 290 Payable for open forward foreign currency contracts (Note 2) 870,921 Accrued expenses 44,543 -------------- Total liabilities 984,562 -------------- NET ASSETS $ 139,860,742 ============== NET ASSETS CONSIST OF: Paid-in capital $ 145,993,384 Accumulated undistributed net investment income 2,590,934 Accumulated net realized loss (13,085,004) Net unrealized appreciation 4,361,428 -------------- $ 139,860,742 ============== NET ASSETS ATTRIBUTABLE TO: Class III shares $ 139,860,742 ============== SHARES OUTSTANDING: Class III 16,079,922 ============== NET ASSET VALUE PER SHARE: Class III $ 8.70 ==============
See accompanying notes to the financial statements. 12 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Interest (including securities lending income of $28) $ 876,782 Dividends from affiliated issuers (Note 7) 723,590 -------------- Total income 1,600,372 -------------- EXPENSES: Management fee (Note 3) 131,654 Shareholder service fee (Note 3) - Class III 103,937 Custodian and transfer agent fees 38,088 Audit and tax fees 23,920 Legal fees 2,576 Trustees fees and related expenses (Note 3) 943 Registration fees 2,852 Miscellaneous 736 -------------- Total expenses 304,706 Fees and expenses reimbursed by Manager (Note 3) (67,436) Indirectly incurred fees waived or borne by Manager (Note 3) (8,528) Shareholder service fee waived (Note 3) - Class III (3,137) -------------- Net expenses 225,605 -------------- Net investment income 1,374,767 -------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments in unaffiliated issuers (108,818) Investments in affiliated issuers (1,468,983) Realized gains distributions from affiliated issuers (Note 7) 82,546 Closed futures contracts (590,085) Closed swap contracts 414,026 Foreign currency, forward contracts and foreign currency related transactions 769,598 -------------- Net realized loss (901,716) -------------- Change in net unrealized appreciation (depreciation) on: Investments (2,532,176) Open futures contracts 575,741 Open swap contracts 192,458 Foreign currency, forward contracts and foreign currency related transactions 918,699 -------------- Net unrealized loss (845,278) -------------- Net realized and unrealized loss (1,746,994) -------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (372,227) ==============
See accompanying notes to the financial statements. 13 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 1,374,767 $ 2,150,798 Net realized gain (loss) (901,716) 18,177,765 Change in net unrealized appreciation (depreciation) (845,278) 5,658,991 ---------------- ----------------- Net increase (decrease) in net assets from operations (372,227) 25,987,554 ---------------- ----------------- Distributions to shareholders from: Net realized gains Class III -- (35,881,030) Return of capital Class III -- (2,133,668) ---------------- ----------------- -- (38,014,698) ---------------- ----------------- Net share transactions (Note 6): Class III 1,548,629 (85,130,892) ---------------- ----------------- Total increase (decrease) in net assets 1,176,402 (97,158,036) NET ASSETS: Beginning of period 138,684,340 235,842,376 ---------------- ----------------- End of period (including accumulated undistributed net investment income of $2,590,934 and $1,216,167, respectively) $ 139,860,742 $ 138,684,340 ================ =================
See accompanying notes to the financial statements. 14 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 -------------------------------------------------------------------------- (UNAUDITED) 2004(a) 2003(a) 2002(a) 2001(a)(b) 2000(a) --------------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 8.73 $ 9.20 $ 9.33 $ 10.04 $ 9.41 $ 9.87 --------------- ---------- ---------- ---------- ---------- ---------- Income from investment operations: Net investment income 0.09(c)+ 0.12(c)+ 0.09(c)+ 0.52(c)+ 0.50(c)+ 0.51 Net realized and unrealized gain (loss) (0.12) 1.42 1.49 (0.65) 0.13 (0.71) --------------- ---------- ---------- ---------- ---------- ---------- Total from investment operations (0.03) 1.54 1.58 (0.13) 0.63 (0.20) --------------- ---------- ---------- ---------- ---------- ---------- Less distributions to shareholders: From net investment income -- -- (1.51) (0.39) -- (0.26) From net realized gains -- (1.90) (0.20) (0.19) -- -- Return of capital -- (0.11) -- -- -- -- --------------- ---------- ---------- ---------- ---------- ---------- Total distributions -- (2.01) (1.71) (0.58) -- (0.26) --------------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 8.70 $ 8.73 $ 9.20 $ 9.33 $ 10.04 $ 9.41 =============== ========== ========== ========== ========== ========== TOTAL RETURN (d) (0.34)%** 20.21% 17.76% (1.34)% 6.70% (2.07)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 139,861 $ 138,684 $ 235,842 $ 273,074 $ 291,11 $ 182,73 Net operating expenses to average daily net assets 0.33%(e)* 0.32%(e) 0.33%(e) 0.32%(e) 0.33%(e) 0.34% Interest expense to average daily net assets -- -- -- -- -- 0.16%(f) Total net expenses to average daily net assets 0.33%* 0.32% 0.33% 0.32% 0.33% 0.50% Net investment income to average daily net assets 1.98%(c)* 1.44%(c) 1.10%(c) 5.36%(c) 5.34%(c) 5.09% Portfolio turnover rate 22%** 45% 50% 28% 35% 116% Fees and expenses reimbursed and/or waived by the Manager to average daily net assets: 0.11%* 0.12% 0.08% 0.08% 0.08% 0.08%
See accompanying notes to the financial statements. 15 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS -- (CONTINUED) (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) (a) As a result of changes in generally accepted accounting principles, the Fund reclassified periodic payments made under interest rate swap agreements, previously included within interest income, as a component of realized gain (loss) in the Statement of Operations. The effect of this reclassification was to decrease the net investment income ratio for the year ending February 29, 2004 by 0.17% and net investment income per share by $0.02. For consistency, similar reclassifications have been made to prior year amounts, resulting in increases (reductions) to the net investment income ratio of (0.16%), (0.05%), (0.11%) and 0.07% and to net investment income per share of $(0.02), $(0.01), $(0.01) and less than $0.00 in the fiscal years ending February 28/29, 2003, 2002, 2001 and 2000, respectively. (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 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. (c) Net investment income is affected by the timing of the declaration of dividends by other Funds of the Trust in which the Fund invests. (d) The total returns would have been lower had certain expenses not been reimbursed and/or waived during the periods shown. (e) Net expenses exclude expenses incurred indirectly through investment in underlying funds (See Note 3). (f) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 16 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION GMO Global Bond Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in global bond and currency markets, primarily by investing in GMO Short-Duration Collateral Fund and "synthetic" bonds (created by the Manager by combining a futures contract, swap contract, or option, on a fixed income security with cash, a cash equivalent, or another fixed income security). The Fund's benchmark is the J.P. Morgan Global Government Bond Index. At August 31, 2004, 74.4% of the Fund was invested in the GMO Short-Duration Collateral Fund and 0.6% of the Fund was invested in the GMO Special Purpose Holding Fund, separate funds of GMO Trust managed by GMO. Shares of the GMO Special Purpose Holding Fund and the GMO Short-Duration Collateral Fund are not publicly available for direct purchase. At August 31, 2004, 3.2% 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 Special Purpose Holding 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. These financial statements are available without charge, upon request by calling (617) 346-7646. 2. SIGNIFICANT ACCOUNTING POLICIES 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. CHANGE IN ACCOUNTING PRINCIPLE For the year ended February 29, 2004, as a result of a FASB Emerging Issues Task Force consensus (and subsequent related SEC staff guidance), the Fund reclassified periodic payments made under interest rate swap agreements, previously included within interest income, as a component of realized gain (loss) in the Statement of Operations. For consistency, similar reclassifications have been made to the per share amounts in all prior year financial highlights presented. Prior year net investment income ratios in the financial highlights have also been modified accordingly. This reclassification decreased net investment 17 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) income and increased net realized gains by $259,581 for the year ended February 29, 2004. This change had no effect on the Fund's net asset value, either in total or per share, or its total increase (decrease) in net assets from operations during any period. 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 funds of the Trust ("underlying funds") and other 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 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. 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 18 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 the Schedule of Investments and represents the currency exposure the Fund has acquired or hedged through forward currency contracts as of August 31, 2004. 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. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the 19 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) contracts or the imposition of price limits, 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 the Schedule of Investments for all open futures contracts as of August 31, 2004. 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. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying investment increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of August 31, 2004, 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 closing 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 August 31, 2004. 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. See the Schedule of Investments for all indexed securities held as of August 31, 2004. 20 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 using standard models that incorporate 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 on swap contracts 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 interest rates. See the Schedule of Investments for a summary of open swap agreements as of August 31, 2004. 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 21 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) repurchase agreements, if the seller defaults or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. At August 31, 2004, there were no open repurchase agreements. 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. The market value of the securities the Fund has sold is determined daily and any additional required collateral is allocated to or sent by the fund on the next business day. As of August 31, 2004, there were no open reverse repurchase agreements. SECURITY LENDING The Fund may lend its securities to certain qualified brokers. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of 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 August 31, 2004, 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 generally 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. 22 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. Dividend income, net of applicable withholding taxes, is recorded on the ex-dividend date and 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. 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. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.19% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% 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 GMO Special Purpose Holding Fund and GMO Short-Duration Collateral Fund ("SCDF"). GMO has entered into a binding agreement effective until at least June 30, 2005 to reimburse the Fund to the extent that the Fund's total direct annual operating expenses plus the amount of indirect fees and operating expenses incurred through its investment in underlying funds exceed 0.19% of the average daily net assets. For purposes of this calculation, the Fund's total direct annual operating expenses excludes shareholder service fees, fees and expenses of the independent Trustees of the Trust (including legal fees) ("Trustees fees"), and the following investment-related costs: brokerage commissions, hedging transaction 23 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) fees, extraordinary, non-recurring and certain other unusual expenses (including taxes), securities lending fees and expenses, interest expense and transfer taxes. Additionally, the indirect fees and operating expenses incurred through investment in underlying funds excludes investment-related expenses and Trustees fees. Through June 29, 2004, the indirect Trustees fees incurred by the Fund through its investment in ECDF were not excluded. The Fund incurs fees and expenses indirectly as a shareholder in GMO Special Purpose Holding Fund, SDCF and ECDF. For the six months ended August 31, 2004, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
INDIRECT OPERATING INDIRECT INVESTMENT-RELATED EXPENSES (EXCLUDING EXPENSES (INCLUDING, BUT NOT MANAGEMENT FEES, LIMITED TO, INTEREST EXPENSE, SHAREHOLDER SERVICE FEES INDIRECT FOREIGN AUDIT EXPENSE, AND INDIRECT NET AND INVESTMENT-RELATED SHAREHOLDER INVESTMENT-RELATED LEGAL TOTAL INDIRECT MANAGEMENT FEES EXPENSES) SERVICE FEES EXPENSE) EXPENSES ---------------------------------------------------------------------------------------------------------- (0.009%) 0.023% 0.005% 0.002% 0.021%
The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $575. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004, aggregated $34,139,997 and $29,108,439, respectively. 5. PRINCIPAL SHAREHOLDERS AND RELATED PARTY At August 31, 2004, 74.6% 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. At August 31, 2004, less than 0.1% of the Fund was held by one related party comprised of certain GMO employee accounts. 24 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 -------------------------------- -------------------------------- SHARES AMOUNT SHARES AMOUNT -------------- -------------- -------------- -------------- Class III: Shares sold 378,648 $ 3,215,641 1,369,413 $ 12,108,168 Shares issued to shareholders in reinvestment of distributions -- -- 4,723,894 38,014,698 Shares repurchased (193,412) (1,667,012) (15,828,993) (135,253,758) -------------- -------------- -------------- -------------- Net increase (decrease) 185,236 $ 1,548,629 (9,735,686) $ (85,130,892) ============== ============== ============== ==============
7. INVESTMENTS IN AFFILIATED ISSUERS A summary of the Fund's transactions in the shares of these issuers during the six months ended August 31, 2004, is set forth below:
VALUE, REALIZED BEGINNING OF SALES DIVIDEND GAIN VALUE, END OF AFFILIATE PERIOD PURCHASES PROCEEDS INCOME DISTRIBUTIONS PERIOD ------------------------------------------------------------------------------------------------------------------------- GMO Emerging Country Debt Fund, Class III $ 4,141,507 $ 135,161 $ -- $ 105,213 $ 29,948 $ 4,420,110 GMO Short-Duration Collateral Fund 81,381,945 33,398,597 11,300,000 12,138 52,598 104,092,993 GMO Special Purpose Holding Fund 18,270,533 606,239 17,333,861 606,239 -- 806,295* -------------- -------------- -------------- -------------- -------------- -------------- Totals $ 103,793,985 $ 34,139,997 $ 28,633,861 $ 723,590 $ 82,546 $ 109,319,398 ============== ============== ============== ============== ============== ==============
* After effect of return of capital distribution of $706,551 on June 10, 2004. 8. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 25 GMO GLOBAL BOND FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees, 12b-1 fees and other expenses. The following table, assuming a $1,000 investment in a class of shares, discloses the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the class's actual return and actual expenses, and (2) a hypothetical annualized 5% return and the class's actual expenses: Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * --------------------------------------------------------- 1) Actual $ 1,000.00 $ 996.60 $ 1.76 2) Hypothetical 1,000.00 1,023.44 1.79
*Expenses are calculated using the Class III annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2004 of 0.35%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 26 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
DESCRIPTION % OF NET ASSETS - -------------------------------------------------------------------------------- Argentina 0.7% Brazil 12.0 Chile 1.5 China 6.0 Czech Republic 0.4 Egypt 0.4 Hungary 0.8 India 3.4 Indonesia 1.6 Israel 1.0 Malaysia 4.5 Mexico 7.2 Peru 0.1 Philippines 0.8 Poland 1.3 Russia 3.8 South Africa 9.9 South Korea 24.9 Taiwan 13.0 Thailand 1.6 Turkey 3.3 Venezuela 0.2 Short-Term Investments and Other Assets and Liabilities (net) 1.6 ----------------- 100.0% =================
See accompanying notes to the financial statements. 1 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- COMMON STOCKS -- 85.7% ARGENTINA -- 0.7% 25,300 IRSA Inversiones y Representaciones SA GDR * 180,136 44,031 Petrobras Energia Participaciones SA ADR * 414,332 26,301 Telecom Argentina SA ADR * 239,865 13,093 Tenaris SA ADR 504,735 73,700 Transportadora de Gas del Sur ADR * 316,910 --------------- 1,655,978 --------------- BRAZIL -- 4.7% 257,118 Banco do Brasil SA 2,125,848 27,662 Banco do Brasil SA (Receipt Shares) * 228,709 28,101,328 Compania Saneamento Basico SAO PA 1,334,933 290,538 Compania Siderurgica Nacional SA 4,492,294 24,722,000 Electrobas (Centro) 338,842 28,400 Petroleo Brasileiro SA (Petrobras) 875,336 26,500 Petroleo Brasileiro SA (Petrobras) ADR 814,875 104,423 Souza Cruz (Registered) 1,025,360 --------------- 11,236,197 --------------- CHILE -- 1.5% 27,200 Banco de Chile ADR 930,240 10,900 Banco Santander Chile SA ADR 297,570 8,900 Compania Cervecerias ADR 210,040 12,100 Empresa Nacional de Electricidad SA ADR 183,073 191,800 Enersis SA ADR 1,269,716 12,200 Lan Chile SA 267,790 53,150 Quinenco SA ADR 522,996 --------------- 3,681,425 --------------- CHINA -- 6.0% 227,000 Bengang Steel Plates Co Ltd Class B 80,783 616,000 China Everbright Ltd 253,991 203,120 China International Marine Containers Co Ltd Class B 282,872 780,000 China Mobile Ltd 2,281,705
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) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- CHINA -- CONTINUED 9,600 China Mobile Ltd ADR 140,352 719,900 China Petroleum & Chemical Corp Class H 282,803 460,000 China Resources Enterprise Ltd 612,830 54,000 China Telecom Corp Ltd ADR 1,740,420 255,880 Chongqing Changan Automobile Co Ltd Class B 165,585 1,228,000 CNOOC Ltd 575,857 5,800 CNOOC Ltd ADR 270,860 2,817,538 Denway Motors Ltd 1,116,800 3,470,100 Guangdong Investments Ltd * 562,738 7,200 Huaneng Power International Inc ADR 214,920 355,200 Huaneng Power International Inc Class H 265,213 616,000 Maanshan Iron & Steel Co Ltd Class H 216,541 8,567,896 PetroChina Co Ltd Class H 4,334,724 98,000 Shanghai Industrial Holdings Ltd 180,791 2,442,000 Stone Group Holdings Ltd 176,013 186,000 Yanzhou Coal Mining Co Ltd Class H 202,865 594,000 Zhejiang Southeast Electric Power Co Class B 387,169 --------------- 14,345,832 --------------- CZECH REPUBLIC -- 0.4% 21,355 Ceski Telecom AS 271,174 33,779 CEZ AS 264,936 2,825 Komercni Banka AS 302,951 77 Philip Morris CR AS 43,852 12,000 Unipetrol * 37,823 --------------- 920,736 --------------- EGYPT -- 0.4% 83,696 Commercial International Bank 338,027 5,100 Eastern Tobacco Co 71,522 25,659 MobiNil-Egyptian Mobile Services Co 392,678 2,900 Orascom Construction Industries 58,614 7,800 Orascom Telecommunications * 178,350 --------------- 1,039,191 ---------------
See accompanying notes to the financial statements. 3 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- HUNGARY -- 0.8% 4,600 Egis Rt 205,421 8,200 MOL Magyar Olaj es Gazipari Rt (New Shares) 356,446 62,900 OTP Bank 1,371,512 --------------- 1,933,379 --------------- INDIA -- 3.4% 108,359 Bharat Heavy Electricals Ltd 1,291,165 275,909 Bharti Televentures * 833,763 36,275 Cipla Ltd 186,507 52,550 Hero Honda Motors Ltd 502,784 7,300 Hindalco Industries Ltd GDR 187,245 1,200 Hindalco Industries Ltd GDR 144A 30,780 9,400 Infosys Technologies Inc 320,479 31,922 Larsen & Toubro Ltd GDR 563,423 700 Larson & Toubro Ltd 12,625 82,757 Mahanagar Telephone Nigam 219,542 63,900 Maruti Udyog Ltd 526,699 21,159 Patni Computer Systems Ltd 144,499 107,800 Reliance Industries Ltd 1,106,972 22,191 Reliance Industries Ltd GDR 144A 473,556 49,731 Satyam Computer Services Ltd 364,627 24,194 State Bank of India GDR 518,134 16,600 Tata Consultancy Services Ltd * 353,813 219 Ultratech Cemco Ltd * 1,259 7,347 Ultratech Cemco Ltd GDR * 108,624 135,000 Union Bank of India 193,047 24,100 Wipro Ltd 301,243 --------------- 8,240,786 --------------- INDONESIA -- 1.6% 237,186 Astra International Tbk 161,690 5,486,102 Bank Central Asia Tbk 1,058,064 121,000 Gudang Garam 165,311 410,000 Indonesian Satellite Corp Tbk PT 183,775 1,834,000 PT Bank Mandiri 245,326
See accompanying notes to the financial statements. 4 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- INDONESIA -- CONTINUED 8,722,000 PT Matahari Putra Prima Tbk 469,009 732,000 Ramayana Lestari Sentosa 307,477 1,671,112 Telekomunikasi Indonesia Tbk PT 1,368,368 --------------- 3,959,020 --------------- ISRAEL -- 1.0% 497,700 Bank Leumi Le-Israel 1,003,301 25,100 Check Point Software Technologies * 440,254 44,700 Israel Chemicals Ltd 81,799 500 Israel Corp Ltd (The) * 89,328 5,800 Taro Pharmaceuticals Industries * 120,234 200 Teva Pharmaceutical 5,479 21,800 Teva Pharmaceutical Industries ADR 594,050 --------------- 2,334,445 --------------- MALAYSIA -- 4.5% 1,496,000 Commerce Asset Holdings Berhad 1,809,136 112,000 Genting Berhad 468,446 316,000 Hong Leong Bank Berhad 414,276 210,000 IOI Corp Berhad 478,115 101,000 Kuala Lumpur Kepong Berhad 172,436 382,000 Magnum Corp Berhad 240,931 691,000 Malakoff Berhad 1,148,096 418,600 Malaysian International Shipping Berhad (Foreign Registered) 1,376,434 446,600 Maxis Communications Berhad 1,003,628 318,000 Proton Holdings Berhad * 648,553 695,500 Public Bank Bhd 1,142,761 196,000 Sime Darby Berhad 285,526 552,600 Telekom Malaysia Berhad 1,540,896 74,000 Tenaga Nasional Berhad 194,630 --------------- 10,923,864 ---------------
See accompanying notes to the financial statements. 5 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- MEXICO -- 7.2% 677,800 Alfa SA de CV Class A 2,226,492 77,900 America Movil SA de CV Class L ADR 2,668,075 229,023 Carso Global Telecom Class A * 335,524 56,508 Cemex SA de CV CPO 320,521 47,000 Fomento Economico Mexicano SA de CV 203,266 531,900 Grupo Financiero Banorte SA de CV 2,094,804 441,580 Grupo Mexico SA Class B * 1,574,647 571,000 Grupo Televisa SA (Participating Certificates) 1,374,151 196,700 Organizacion Soriana SA de CV Class B 578,758 181,500 Telefonos de Mexico Class L ADR 5,878,785 --------------- 17,255,023 --------------- PERU -- 0.1% 11,200 Cia de Minas Buenaventura SA ADR 254,464 --------------- PHILIPPINES -- 0.8% 7,810,754 Ayala Land Inc 738,278 249,400 Equitable PCI Bank * 186,706 814,902 Ginebra San Miguel Inc 421,534 22,436 Philippine Long Distance Telephone * 506,597 4,200 Philippine Long Distance Telephone ADR * 95,214 --------------- 1,948,329 --------------- POLAND -- 1.3% 263,400 Bank Millennium SA * 209,941 8,150 BRE Bank SA * 221,094 54,300 Optimus SA * 163,790 275,000 Polski Koncern Naftowy Orlen 2,432,680 --------------- 3,027,505 --------------- RUSSIA -- 3.7% 22,800 AO Mosenergo ADR 250,800 31,825 Lukoil ADR 3,755,350 1,500 Lukoil ADR 144A 177,000 8,500 MMC Norilsk Nickel ADR 478,125
See accompanying notes to the financial statements. 6 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- RUSSIA -- CONTINUED 4,500 Mobile Telesystems ADR 582,120 68,000 OAO Gazprom ADR 2,244,000 1,550 Sberbank RF 607,600 7,300 Vimpel-Communications ADR * 716,130 --------------- 8,811,125 --------------- SOUTH AFRICA -- 9.9% 108,400 ABSA Group Ltd 899,105 56,000 AECI Ltd 282,030 34,000 Amalgamated Beverage Industries Ltd 429,379 30,563 Edgars Consolidated Stores Ltd 767,068 86,000 Foschini Ltd 311,153 36,000 Investec Ltd 645,465 903,767 Iscor Ltd 6,255,500 201,400 MTN Group Ltd 925,658 39,700 Naspers Ltd Class N 292,369 1,066,238 Old Mutual Plc 2,039,921 13,700 Pretoria Portland Cement Co Ltd 355,711 286,100 Remgro Ltd 3,486,042 1,268,000 Sanlam Ltd 1,712,193 157,000 Sasol Ltd 2,684,566 96,439 Telkom SA Ltd 1,151,239 52,600 Venfin Ltd 158,081 1,219,000 Woolworths Holdings Ltd 1,453,643 --------------- 23,849,123 --------------- SOUTH KOREA -- 19.6% 1,700 Amorepacific Corp 323,836 54,470 Cheil Industries Inc 745,163 84,100 Daesang Corp 220,440 47,150 Daewoo Shipbuilding & Marine Engineering Co Ltd 532,676 22,800 Dongbu Steel Co 168,937 52,100 Hana Bank 1,176,140 104,000 Hanjin Heavy Industry 468,932 16,500 Hanjin Shipping 288,120 36,400 Hynix Semiconductor * 331,602
See accompanying notes to the financial statements. 7 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- SOUTH KOREA -- CONTINUED 10,500 Hyundai Heavy Industries 237,927 19,100 Hyundai Industrial Development 208,788 19,500 Hyundai Mobis 961,399 110,480 Hyundai Motor Co 4,809,423 83,500 Industrial Bank of Korea 545,427 390,400 KIA Motors Corp 3,435,976 50,100 Korean Air Lines * 713,012 54,400 KT Corp 1,724,383 17,700 KT Freetel 278,237 130,000 KT&G Corp 3,316,282 14,500 KT&G Corp GDR 144A 183,425 29,400 LG Electronics Inc 1,410,362 16,200 LG Engineering & Construction Ltd 305,736 109,540 LG International Corp 843,598 27,200 LG Investment & Securities Co Ltd * 181,065 86,000 LG Telecom Co Ltd * 273,995 3,500 NCSoft Corp * 254,363 2,400 NHN Corp 206,499 16,700 POSCO 2,395,096 24,234 Samsung Electronics 9,537,084 1,614 Samsung Electronics GDR 144A (Non Voting) 205,785 39,500 Samsung Heavy Industries Co Ltd 174,379 23,200 Samsung SDI Co Ltd 2,391,429 41,763 Shinhan Financial Group Co Ltd 709,827 800 Shinsegae Co Ltd 210,152 164,836 SK Corp 6,279,000 12,100 SK Networks Co Ltd * 141,694 151,600 Woori Finance Holdings Co Ltd 978,589 --------------- 47,168,778 --------------- TAIWAN -- 13.0% 1,713,207 Acer Inc 2,290,196 1,856,627 Asustek Computer Inc 4,162,101 1,078,800 Benq Corp 1,107,602 1,277,000 Chang Hwa Commercial Bank * 697,732 8,908,533 China Development Financial Holding Corp * 3,970,264
See accompanying notes to the financial statements. 8 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- TAIWAN -- CONTINUED 895,000 China Motor Corp Ltd 1,047,610 467,628 China Steel Corp 438,241 730,146 Chinatrust Financial Holding Co 773,037 2,342,019 Chunghwa Picture Tubes Ltd * 1,022,783 947,000 Chunghwa Telecom Co Ltd 1,505,121 31,050 Chunghwa Telecom Co Ltd ADR 529,713 234,682 Compal Electronics Inc 223,033 576,584 Far Eastern Textile Co Ltd 343,593 38,000 First Financial Holding Co Ltd * 26,563 10,200 First Financial Holding Co Ltd GDR 144A * 139,230 166,749 Hon Hai Precision Industry Co Ltd 547,755 487,200 International Bank of Taipei 323,901 2,284,138 Inventec Co Ltd 1,227,489 2,038,000 Macronix International * 520,378 16,359 MediaTek Inc 115,748 1,527,000 Mega Financial Holdings Co Ltd 928,029 231,000 Micro-Star International Co Ltd 185,689 286,250 Nan Ya Plastic Corp 396,616 688,564 Ritek Corp 264,256 1,005,167 Sinopac Holdings Co 506,679 788,000 Taiwan Cellular Corp 743,542 3,021,309 Taiwan Cement Corp 1,515,536 739,500 Taiwan Pulp & Paper Corp * 209,578 736,452 Taiwan Semiconductor Manufacturing Co Ltd 1,025,092 1,718,000 Tatung Co * 717,785 886,433 United Microelectronics Corp * 599,832 4,292,000 Walsin Lihwa Corp * 2,115,840 1,154,960 Yageo Corp * 481,955 471,975 Yulon Motor Co Ltd 467,555 --------------- 31,170,074 --------------- THAILAND -- 1.6% 659,900 Advanced Info Service Pcl (Foreign Registered) (a) 1,497,252 30,300 Bangkok Dusit Medical Service Pcl (Foreign Registered) (a) 9,385 113,000 Banpu Pcl (Foreign Registered) (a) 385,231 407,600 Kasikornbank Pcl (Foreign Registered) * 469,743
See accompanying notes to the financial statements. 9 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- THAILAND -- CONTINUED 37,000 Kasikornbank Pcl NVDR * 41,531 54,640 PTT Exploration & Production Pcl (Foreign Registered) (a) 367,328 93,902 PTT Pcl (Foreign Registered) (a) 338,182 388,400 Thai Airways International (Foreign Registered) (a) 498,905 345,200 Thai Union Frozen Products Pcl (Foreign Registered) 198,915 --------------- 3,806,472 --------------- TURKEY -- 3.3% 648,531,343 Akbank TAS 2,765,233 22,372,000 Aksa Akrilik Kimya Sanayii * 190,136 147,871,000 Dogan Sirketler Grubu Holdings AS * 253,547 205,333,200 Is Gayrimenkul Yatirim Ortakligi AS * 235,084 80,228,731 Tupras Turkiye Petrol Rafine 618,496 168,314,508 Turkcell Iletisim Hizmet AS 615,418 371,919,508 Turkiye Garanti Bankasi Class C * 1,218,714 455,506,599 Turkiye IS Bankasi Class C 1,508,421 191,070,000 Yapi ve Kredi Bankasi * 456,779 --------------- 7,861,828 --------------- VENEZUELA -- 0.2% 31,100 Compania Anonima Nacional Telefonos de Venezuela (CANTV) ADR 616,402 --------------- TOTAL COMMON STOCKS (COST $171,834,930) 206,039,976 --------------- PREFERRED STOCKS -- 12.7% BRAZIL -- 7.3% 13,230,000 Banco Itau Holding Financeira SA 1,339,690 81,983,000 Compania Energetica de Minas Gerais 2.88% 1,509,404 79,914 Gerdau SA 1,320,093 2,315,080 Investimentos Itau SA 2.68% 2,833,664 53,118,000 Lojas Americanas SA 642,016 255,028 Petroleo Brasileiro SA (Petrobras) 3.01% 7,130,002 46,270,163 Siderurgica de Tubarao 3.50% 1,932,525 250,484,000 Tele Centro Oeste Celular Participacoes SA 6.78% 783,136 --------------- 17,490,530 ---------------
See accompanying notes to the financial statements. 10 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES / PAR VALUE ($) DESCRIPTION VALUE ($) - ----------------------------------------------------------------------------------------------------- RUSSIA -- 0.1% 325 Transneft 269,750 --------------- SOUTH KOREA -- 5.3% 33,000 Dongbu Steel Co 11.70% 146,354 10,200 Hyundai Motor Co 5.05% 225,265 47,260 Samsung Electronics (Non Voting) 4.08% 12,243,136 3,000 Samsung SDI Co Ltd 3.63% 170,169 --------------- 12,784,924 --------------- TOTAL PREFERRED STOCKS (COST $18,925,294) 30,545,204 --------------- RIGHTS AND WARRANTS -- 0.0% THAILAND -- 0.0% 116,526 Telecomasia Corp Pcl Warrants, Expires 4/03/08 *(a) -- --------------- TOTAL RIGHTS AND WARRANTS (COST $0) -- --------------- SHORT-TERM INVESTMENT -- 1.4% CASH EQUIVALENT -- 1.4% 3,400,000 Societe Generale GC Time Deposit, 1.57%, due 09/01/04 3,400,000 --------------- TOTAL SHORT-TERM INVESTMENT (COST $3,400,000) 3,400,000 --------------- TOTAL INVESTMENTS -- 99.8% (Cost $194,160,224) 239,985,180 Other Assets and Liabilities (net) -- 0.2% 384,322 --------------- TOTAL NET ASSETS -- 100.0% $ 240,369,502 ===============
See accompanying notes to the financial statements. 11 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 Foreign Registered - Shares issued to foreign investors in markets that have foreign ownership limits. GDR - Global Depository Receipt NVDR - Non-Voting Depository Receipt * Non-income producing security. (a) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 2). At August 31, 2004, the approximate 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 --------------------- -------------------- -------------------- ------------------ $ 194,362,243 $ 52,881,102 $ (7,258,165) $ 45,622,937
At February 29, 2004, GMO Emerging Countries Fund had capital loss carryforwards available to offset future capital gains, if any, to the extent permitted by the Internal Revenue Code of $4,100,655 and $156,212 expiring in 2010 and 2011, respectively. Utilization of the capital loss carryforwards above could be subject to limitations imposed by the Internal Revenue Code related to share ownership activity. See accompanying notes to the financial statements. 12 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY (SHOWING PERCENTAGE OF EQUITY INVESTMENTS) AUGUST 31, 2004 (UNAUDITED) At August 31, 2004, industry sector diversification of the Fund's equity investments was as follows:
INDUSTRY SECTOR ------------------------------------------------------------------------- Financials 19.9% Information Technology 17.9 Energy 15.5 Telecommunication Services 13.4 Consumer Discretionary 10.0 Materials 10.0 Industrials 6.2 Consumer Staples 3.4 Utilities 3.2 Health Care 0.5 ------ 100.0% ======
See accompanying notes to the financial statements. 13 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments, at value (cost $194,160,224) (Note 2) $ 239,985,180 Cash 39,977 Foreign currency, at value (cost $1,799,282) (Note 2) 1,796,092 Receivable for investments sold 1,229,857 Receivable for Fund shares sold 139,875 Dividends and interest receivable 867,972 Foreign taxes receivable 214,754 Receivable for expenses reimbursed by Manager (Note 3) 25,763 ---------------- Total assets 244,299,470 ---------------- LIABILITIES: Payable for investments purchased 385,887 Payable for Fund shares repurchased 3,093,763 Payable to affiliate for (Note 3): Management fee 131,835 Shareholder service fee 23,700 Administration fee - Class M 8,965 Trustees fee 690 Payable for 12b-1 fee - Class M 22,419 Accrued expenses 262,709 ---------------- Total liabilities 3,929,968 ---------------- NET ASSETS $ 240,369,502 ================ NET ASSETS CONSIST OF: Paid-in capital $ 169,412,250 Accumulated undistributed net investment income 1,858,815 Accumulated net realized gain 23,272,156 Net unrealized appreciation 45,826,281 ---------------- $ 240,369,502 ================ NET ASSETS ATTRIBUTABLE TO: Class III shares $ 186,043,673 ================ Class M shares $ 54,325,829 ================ SHARES OUTSTANDING: Class III 14,085,387 ================ Class M 4,143,617 ================ NET ASSET VALUE PER SHARE: Class III $ 13.21 ================ Class M $ 13.11 ================
See accompanying notes to the financial statements. 14 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends (net of withholding taxes of $585,574) $ 5,146,630 Interest 23,144 ---------------- Total income 5,169,774 ---------------- EXPENSES: Management fee (Note 3) 899,273 Shareholder service fee (Note 3) - Class III 165,149 12b-1 fee (Note 3) - Class M 70,625 Administration fee (Note 3) - Class M 56,500 Custodian fees 450,432 Transfer agent fees 23,920 Audit and tax fees 29,808 Legal fees 4,508 Trustees fees and related expenses (Note 3) 2,081 Registration fees 11,960 Miscellaneous 1,565 ---------------- Total expenses 1,715,821 Fees and expenses reimbursed by Manager (Note 3) (69,467) ---------------- Net expenses 1,646,354 ---------------- Net investment income 3,523,420 ---------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (net of foreign capital gains tax and CPMF tax of $25,967 and $5,268, respectively) (Note 2) 28,029,857 Foreign currency, forward contracts and foreign currency related transactions (292,590) ---------------- Net realized gain 27,737,267 ---------------- Change in net unrealized appreciation (depreciation) on: Investments (52,794,913) Foreign currency, forward contracts and foreign currency related transactions (7,590) ---------------- Net unrealized loss (52,802,503) ---------------- Net realized and unrealized loss (25,065,236) ---------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (21,541,816) ================
See accompanying notes to the financial statements. 15 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------- ---------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 3,523,420 $ 3,583,705 Net realized gain 27,737,267 24,788,985 Change in net unrealized appreciation (depreciation) (52,802,503) 98,631,771 ---------------- ---------------- Net increase (decrease) in net assets from operations (21,541,816) 127,004,461 ---------------- ---------------- Distributions to shareholders from: Net investment income Class III (228,052) (3,419,674) Class M (39,720) (662,571) ---------------- ---------------- Total distributions from net investment income (267,772) (4,082,245) ---------------- ---------------- Net realized gains Class III (12,029,726) (3,567,682) Class M (3,352,333) (770,686) ---------------- ---------------- Total distributions from net realized gains (15,382,059) (4,338,368) ---------------- ---------------- (15,649,831) (8,420,613) ---------------- ---------------- Net share transactions (Note 6): Class III (33,955,685) 59,346,080 Class M 3,326,757 40,639,294 ---------------- ---------------- Increase (decrease) in net assets resulting from net share transactions (30,628,928) 99,985,374 ---------------- ---------------- Total increase (decrease) in net assets (67,820,575) 218,569,222 NET ASSETS: Beginning of period 308,190,077 89,620,855 ---------------- ---------------- End of period (including accumulated undistributed net investment income of $1,858,815 and overdistributed net investment income of $1,396,833, respectively) $ 240,369,502 $ 308,190,077 ================ ================
See accompanying notes to the financial statements. 16 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ------------------------------------------------------------------------ (UNAUDITED) 2004 2003 2002 2001 2000 ---------------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 14.99 $ 8.54 $ 9.65 $ 8.81 $ 11.41 $ 5.74 ---------- ---------- ---------- ---------- ---------- ---------- Income from investment operations: Net investment income 0.19 0.18 0.08 0.14 0.08 0.05 Net realized and unrealized gain (loss) (1.11) 6.71 (1.04) 0.77 (2.48) 5.63 ---------- ---------- ---------- ---------- ---------- ---------- Total from investment operations (0.92) 6.89 (0.96) 0.91 (2.40) 5.68 ---------- ---------- ---------- ---------- ---------- ---------- Less distributions to shareholders: From net investment income (0.02) (0.22) (0.15) (0.07) -- -- From net realized gains (0.84) (0.22) -- -- (0.20) (0.01) ---------- ---------- ---------- ---------- ---------- ---------- Total distributions (0.86) (0.44) (0.15) (0.07) (0.20) (0.01) ---------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 13.21 $ 14.99 $ 8.54 $ 9.65 $ 8.81 $ 11.41 ========== ========== ========== ========== ========== ========== TOTAL RETURN (a) (5.88)%** 81.45% (10.15)%(b) 10.49%(b) (21.27)%(b) 98.96% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 186,044 $ 249,844 $ 89,042 $ 72,405 $ 52,239 $ 65,191 Net expenses to average daily net assets 1.13%* 1.16% 1.27% 1.40% 1.40% 1.28% Net investment income to average daily net assets 1.31%(c)** 1.82% 0.78% 2.12% 0.91% 0.54% Portfolio turnover rate 30%** 57% 108% 109% 98% 157% Fees and expenses reimbursed by the Manager to average daily net assets: 0.05%* 0.06% 0.31% 0.17% 0.15% 0.17% Purchase premiums and redemption fees consisted of the following per share amounts: (d) -- -- $ 0.00(e) $ 0.04 $ 0.02 --
(a) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (b) Calculations exclude purchase premiums and redemption fees which are borne by the shareholder. (c) The ratio for the six months ended August 31, 2004, has not been annualized since the Fund believes it would not be appropriate because the Fund's dividend income is not earned ratably throughout the fiscal year. (d) Effective March 1, 2000, the Fund adopted the provision 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. (e) Purchase premiums and redemption fees were less than $0.01 per share. The purchase premiums and redemption fees were rescinded effective April 1, 2002. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 17 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS M SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ----------------------------- (UNAUDITED) 2004 2003(a) ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 14.91 $ 8.51 $ 9.85 ------------ ------------ ------------ Income from investment operations: Net investment income 0.17 0.11 0.01 Net realized and unrealized gain (loss) (1.12) 6.71 (1.35) ------------ ------------ ------------ Total from investment operations (0.95) 6.82 (1.34) ------------ ------------ ------------ Less distributions to shareholders: From net investment income (0.01) (0.20) -- From net realized gains (0.84) (0.22) -- ------------ ------------ ------------ Total distributions (0.85) (0.42) -- ------------ ------------ ------------ NET ASSET VALUE, END OF PERIOD $ 13.11 $ 14.91 $ 8.51 ============ ============ ============ TOTAL RETURN (b) (6.09)%** 80.98% (13.60)%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 54,326 $ 58,346 $ 579 Net expenses to average daily net assets 1.43%* 1.45% 1.57%* Net investment income to average daily net assets 1.17%(c)** 1.27% 0.20%* Portfolio turnover rate 30%** 57% 108% Fees and expenses reimbursed by the Manager to average daily net assets: 0.05%* 0.06% 0.41%*
(a) Period from July 9, 2002 (commencement of operations) through February 28, 2003. (b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (c) The ratio for the six months ended August 31, 2004, has not been annualized since the Fund believes it would not be appropriate because the Fund's dividend income is not earned ratably throughout the fiscal year. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 18 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION GMO Emerging Countries Fund (the "Fund") is a series of GMO Trust (the "Trust"). The Fund is registered under the Investment Company Act of 1940, as amended, as an open-end, non-diversified management investment company. The Fund is advised and managed by Grantham, Mayo, Van Otterloo & Co. LLC (the "Manager" or "GMO"). The Trust was established as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on June 24, 1985. The Declaration of Trust permits the Trustees to create an unlimited number of series ("Funds"), each of which issues a separate series of shares, and to subdivide a series of shares into classes. The Fund seeks high total return through investment in equity securities traded in the securities markets of emerging countries of Asia, Latin America, the Middle East, Africa and Europe. The Fund's benchmark is the S&P/IFCI (Investable) Composite Index. Throughout the six months ended August 31, 2004, the Fund had two classes of shares outstanding: Class III and Class M. The principal economic difference between the classes of shares is Class III shares bear a shareholder service fee while Class M shares bear an administration fee and a 12b-1 fee (See Note 3). 2. SIGNIFICANT ACCOUNTING POLICIES 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. The values of securities which are primarily traded on foreign exchanges are 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. For other assets, and in cases where market prices are not readily available or the Manager believes established valuation methodologies are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value. Because many foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur 19 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) after that close but before the close of the NYSE. As a result, foreign equity securities held by the Fund are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available. 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. As of August 31, 2004, there were no outstanding forward foreign currency contracts. 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. 20 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, 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 August 31, 2004, 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. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying investment increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of August 31, 2004, 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 closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. As of August 31, 2004, 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. 21 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. As of August 31, 2004, the Fund held no indexed securities. 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 using standard models that incorporate 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 on swap contracts 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 August 31, 2004, 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 22 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) income are generally 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. The Fund has recorded a foreign tax receivable in respect to repatriation of capital gains taxes paid on foreign securities of $213,178 at August 31, 2004. The Fund has incurred $25,967 related to capital gain taxes which is included in net realized gain in the Statement of Operations. The Fund is subject to a Contribuicao Provisoria sobre Movimentacoes Financiera ("CPMF") tax which is applied to foreign exchange transactions representing capital inflows or outflows to the Brazilian market. The CPMF tax has been included in the net realized gain (loss) on investments throughout the year. The Fund has incurred $5,268 related to the CPMF tax which is included in net realized gain in the Statement of Operations. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. 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. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of return of capital is conclusively determined. 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 between the classes of shares of the Fund 23 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) based on the relative net assets of each class. Shareholder service, 12b-1, and administration fees, which are directly attributable to a class of shares, are charged to that class's operations. 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. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.65% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets at the annual rate of 0.15% for Class III shares. Class M shares of the Fund pay GMO an administration fee monthly at an annual rate of 0.20% 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, 2005 to reimburse the Fund to the extent that the Fund's total annual operating expenses (excluding shareholder service fees (Class III only), administration 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 and transfer taxes) exceed 1.00% of the Fund's average daily net assets. Prior to June 30, 2003, GMO agreed 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) exceeded 1.25% and 1.55% of the Fund's average daily net assets for Class III and Class M, respectively. 24 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $1,253. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004 aggregated $79,448,816 and $117,390,739, respectively. 5. PRINCIPAL SHAREHOLDERS AND RELATED PARTIES At August 31, 2004, 31.5% 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. At August 31, 2004, less than 0.1 % of the Fund was held by eleven related parties comprised of certain GMO employee accounts. As of August 31, 2004, greater than 10% of the Fund's shares were held by accounts for which the Manager has investment discretion. 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 --------------------------- -------------------------- SHARES AMOUNT SHARES AMOUNT ----------- -------------- ----------- ------------- Class III: Shares sold 1,162,445 $ 16,156,443 12,332,933 $ 125,864,439 Shares issued to shareholders in reinvestment of distributions 803,026 10,150,248 398,921 5,181,351 Shares repurchased (4,543,687) (60,262,376) (6,500,805) (71,699,710) ----------- -------------- ----------- ------------- Net increase (decrease) (2,578,216) $ (33,955,685) 6,231,049 $ 59,346,080 =========== ============== =========== =============
25 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED)
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 --------------------------- -------------------------- SHARES AMOUNT SHARES AMOUNT ----------- -------------- ----------- ------------- Class M: Shares sold 1,142,111 $ 15,961,021 5,942,439 $ 63,088,565 Shares issued to shareholders in reinvestment of distributions 270,283 3,392,052 110,703 1,433,257 Shares repurchased (1,183,046) (16,026,316) (2,206,847) (23,882,528) ----------- -------------- ----------- ------------- Net increase 229,348 $ 3,326,757 3,846,295 $ 40,639,294 =========== ============== =========== =============
7. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 26 GMO EMERGING COUNTRIES FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees, 12b-1 fees and other expenses. The following tables, assuming a $1,000 investment in a class of shares, disclose the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the classes' actual return and actual expenses, and (2) a hypothetical annualized 5% return and the classes' actual expenses: Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * -------------------------------------------------------- 1) Actual $ 1,000.00 $ 941.20 $ 5.53 2) Hypothetical 1,000.00 1,019.51 5.75
*Expenses are calculated using the Class III annualized expense ratio for the six months ended August 31, 2004 of 1.13%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. Class M
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * -------------------------------------------------------- 1) Actual $ 1,000.00 $ 939.10 $ 6.99 2) Hypothetical 1,000.00 1,018.00 7.27
*Expenses are calculated using the Class M annualized expense ratio for the six months ended August 31, 2004 of 1.43%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 27 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
DESCRIPTION % OF NET ASSETS ----------------------------------------------------------------------------------------------- Argentina 1.2% Brazil 15.5 Chile 0.7 China 5.9 Czech Republic 0.2 Egypt 0.6 Hungary 0.3 India 3.7 Indonesia 3.3 Kazakhstan 0.0 Lebanon 0.0 Malaysia 3.0 Mexico 6.0 Philippines 1.1 Poland 1.4 Russia 1.1 South Africa 7.3 South Korea 25.1 Sri Lanka 0.0 Taiwan 13.4 Thailand 1.6 Turkey 4.7 Ukraine 0.0 United States 0.7 Venezuela 0.5 Swaps (0.0) Short-Term Investments and Other Assets and Liabilities (net) 2.7 ---------------- 100.0% ================
See accompanying notes to the financial statements. 1 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------------------- COMMON STOCKS -- 81.0% ARGENTINA -- 1.2% 3,084,120 Grupo Financiero Galicia SA ADR 15,667,329 2,835,900 Petrobras Energia Participaciones SA ADR * (a) 26,685,819 1,716,350 Telecom Argentina SA ADR * 15,653,112 617,298 Tenaris SA ADR 23,796,838 ---------------- 81,803,098 ---------------- BRAZIL -- 4.6% 5,543,899 Banco do Brasil SA 45,836,874 534,121 Banco do Brasil SA (Receipt Shares) * 4,416,104 333,000 Compania de Concessoes Rodoviarias 4,144,050 550,260,498 Compania Saneamento Basico SAO PA 26,139,719 7,236,672 Compania Siderurgica Nacional SA 111,893,309 2,246,668,000 Electrobas (Centro) 30,793,063 1,707,600 Petroleo Brasileiro SA (Petrobras) 52,631,108 200,000 Petroleo Brasileiro SA (Petrobras) ADR 6,150,000 3,045,204 Souza Cruz (Registered) 29,901,764 795,750 Vale Do Rio Doce 15,193,317 ---------------- 327,099,308 ---------------- CHILE -- 0.7% 166,700 Banco de Chile ADR 5,701,140 515,200 Banco Santander Chile SA ADR 14,064,960 57,800 Cristalerias de Chile SA ADR 1,606,840 880,381 Enersis SA ADR 5,828,122 214,200 Lan Chile SA 4,701,690 327,300 Masisa SA ADR 5,380,812 799,775 Quinenco SA ADR 7,869,786 72,900 Sociedad Quimica y Minera de Chile ADR 3,260,088 ---------------- 48,413,438 ---------------- CHINA -- 5.9% 10,635,000 Angang New Steel Co Class H 3,946,019 23,868,000 China Everbright Ltd 9,841,329
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) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------------------- CHINA -- CONTINUED 21,845,000 China Mobile Ltd 63,902,356 284,800 China Mobile Ltd ADR 4,163,776 41,771,000 China Petroleum & Chemical Corp Class H 16,409,146 8,135,000 China Resources Enterprise Ltd 10,837,767 50,800,000 China Telecom Corp Ltd 16,367,474 899,500 China Telecom Corp Ltd ADR 28,990,885 15,925,461 Chongqing Changan Automobile Co Ltd Class B 10,305,677 33,392,000 CNOOC Ltd 15,658,808 52,000 CNOOC Ltd ADR 2,428,400 63,000 Cosco Pacific Ltd 94,929 100,980,826 Denway Motors Ltd 40,026,208 63,502,000 Guangdong Investments Ltd * 10,297,974 14,063,000 Huaneng Power International Inc Class H 10,500,260 23,604,000 Maanshan Iron & Steel Co Ltd Class H 8,297,464 211,360,889 PetroChina Co Ltd Class H 106,933,037 11,379,000 Shanghai Industrial Holdings Ltd 20,992,055 7,700,000 Top Form International Ltd 1,143,951 5,954,000 Weiqiao Textile Co 9,530,278 10,778,000 Yanzhou Coal Mining Co Ltd Class H 11,755,281 2,698,000 Yip's Chemical Holdings Ltd 540,641 13,558,000 Zhejiang Expressway Co Ltd 9,229,755 10,459,918 Zhejiang Southeast Electric Power Co Class B 6,817,775 ---------------- 419,011,245 ---------------- CZECH REPUBLIC -- 0.2% 99,000 Ceske Radiokomunikace * 1,651,578 170,400 Ceski Telecom AS 2,163,803 385,200 CEZ AS 3,021,206 42,600 Komercni Banka AS 4,568,396 900 Philip Morris CR AS 512,562 ---------------- 11,917,545 ---------------- EGYPT -- 0.6% 2,562,388 Commercial International Bank 10,348,841 238,416 Eastern Tobacco Co 3,343,551 1,436,873 Egyptian International Pharmaceuticals Industries Co 2,194,721
See accompanying notes to the financial statements. 3 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------------------- EGYPT -- CONTINUED 1,128,157 MobiNil-Egyptian Mobile Services Co 17,264,993 573,960 Orascom Telecommunications * 13,123,797 ---------------- 46,275,903 ---------------- HUNGARY -- 0.3% 42,700 Egis Rt 1,906,840 89,300 MOL Magyar Olaj es Gazipari Rt (New Shares) 3,881,783 699,800 OTP Bank 15,258,889 ---------------- 21,047,512 ---------------- INDIA -- 3.1% 275,000 Amtek Auto Ltd 3,185,681 5,244,265 Andhra Bank Ltd 4,930,469 2,200,458 Arvind Mills Ltd * 3,855,177 774,895 Bharat Electronics Ltd 8,225,559 5,344,686 Bharti Televentures * 16,150,973 11,000,000 Centurion Bank Ltd * 1,709,990 3,000 Cipla Ltd (Shares Under Objection) * (b) 1 28,120 Crompton Greaves Ltd 114,662 239,963 Divi's Laboratories Ltd 6,085,438 700,000 D-Link India Ltd 1,804,110 203,900 Galaxy Entertainment Corp Ltd * 154,319 596,722 Gammon India Ltd 6,183,740 187,092 Geodesic Information Systems Ltd 1,678,062 200 HCL Infosystems Ltd (Shares Under Objection) * (b) -- 155,789 Hero Honda Motors Ltd 1,490,545 383,500 Hexaware Technologies Ltd 4,216,013 308,420 Hughes Software Systems 3,611,326 7,074,779 Indian Overseas Bank 6,826,792 200,000 ING Vysya Bank Ltd 1,246,049 100 ITC Ltd (Shares Under Objection) * (b) -- 2,855,774 Jain Irrigation Systems Ltd * 5,450,107 12,269,719 Jaiprakash Associates Ltd 37,276,436 1,189,522 Jindal Steel & Power Ltd 15,051,294 1,745,000 KEC International Ltd * 3,444,618
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) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------------------- INDIA -- CONTINUED 421,797 Lupin Ltd 6,119,931 477,050 Maharashtra Seamless Ltd 2,228,873 87 Mahindra GESCO Developers Ltd * 54 476,089 Maruti Udyog Ltd 3,924,190 15,956 NIIT Technologies * 64,158 872,010 Omax Autos Ltd 1,473,325 1,150,000 Patni Computer Systems Ltd 7,853,598 900 Reliance Energy Ltd (Shares Under Objection) (b) -- 7,133 Reliance Industries Ltd (Shares Under Objection) * (b) 2 179,500 Reliance Industries Ltd GDR 144A 3,830,530 2,382,199 Sakthi Sugars Ltd * 1,767,212 677,900 SAW Pipes Ltd 2,726,504 910,000 Shasun Chemicals & Drugs Ltd (c) 8,282,188 720,490 Sintex Industries Ltd 3,262,905 192,040 Sterlite Industries India 2,150,110 395,100 Tata Consultancy Services Ltd * 8,421,184 470,192 Thermax Ltd (Preference Shares) 98,918 3,065,000 Union Bank of India 4,382,881 1,344,635 United Phosphorus Ltd 18,424,383 5,604,372 Vijaya Bank India 5,549,846 1,900,000 Welspun India Ltd * 3,986,954 4,707,800 Welspun-Gujarat Stahl Ltd * 3,588,543 600 Wockhardt Ltd 3,818 ---------------- 220,831,468 ---------------- INDONESIA -- 3.3% 51,004,613 Astra International Tbk 34,769,953 195,863,514 Bank Central Asia Tbk 37,774,762 72,657,000 Bank NISP Tbk PT * 4,169,704 9,506,400 Bimantara Citra Tbk PT 2,457,855 163,629,000 Bumi Resources Tbk PT * 10,990,062 8,207,000 Ciputra Surya Tbk PT 857,747 21,555,500 HM Sampoerna Tbk 12,253,302 80,582,500 Indofood Sukses Makmur Tbk 5,830,822 29,943,000 Indonesian Satellite Corp Tbk PT 13,421,395
See accompanying notes to the financial statements. 5 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------------------- INDONESIA -- CONTINUED 186,900 Indonesian Satellite Corp Tbk PT ADR (a) 4,164,132 7,178,000 International Nickel 6,231,620 12,744,600 Limas Stokhomindo Tbk PT * 666,012 57,307,000 Mayora Indah Tbk 5,424,115 50,952,000 PT Bank Mandiri 6,815,628 111,057,500 PT Matahari Putra Prima Tbk 5,971,909 90,214,780 Telekomunikasi Indonesia Tbk PT 73,871,206 301,969 Telekomunikasi Indonesia Tbk PT ADR 4,910,016 ---------------- 230,580,240 ---------------- LEBANON -- 0.0% 12,059 Banque Libanaise pour le Commerce Sal * (b) 35,695 ---------------- MALAYSIA -- 3.0% 40,214,000 Arab-Malaysian Corp Berhad * 13,107,647 15,366,000 Berjaya Sports Toto 13,879,542 32,421,000 Commerce Asset Holdings Berhad 39,207,227 5,104,100 Edaran Otomobil Berhad 4,015,315 4,554,923 EON Capital Berhad 6,225,861 7,502,000 Highlands and Lowlands Berhad 7,107,553 12,539,600 IJM Corp Berhad 15,842,135 10,484,000 Malaysian International Shipping Berhad (Foreign Registered) 34,473,323 11,261,100 Maxis Communications Berhad 25,306,655 3,491,700 Saship Holdings * (b) (d) 9,189 18,366,000 Telekom Malaysia Berhad 51,212,624 ---------------- 210,387,071 ---------------- MEXICO -- 6.0% 11,702,900 Alfa SA de CV Class A 38,442,621 1,317,510 America Movil SA de CV Class L ADR 45,124,718 6,157,289 Carso Global Telecom Class A * 9,020,560 74,555 Cemex SA de CV ADR (Participating Certificates) 2,109,907 6,308,037 Cemex SA de CV CPO 35,779,986 1,576,334 Consorcio ARA SA de CV * 4,222,756 27,519,500 Corporacion GEO SA de CV Series B * 35,845,082
See accompanying notes to the financial statements. 6 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------------------- MEXICO -- CONTINUED 3,065,000 Fomento Economico Mexicano SA de CV 13,255,509 7,584,000 Grupo Cementos de Chihuahua SA de CV 12,422,959 9,597,900 Grupo Financiero Banorte SA de CV 37,799,819 8,232,755 Grupo Financiero Serfin SA de CV Class B * (b) (d) 7,231 9,040,000 Grupo Mexico SA Class B * 32,236,090 4,548,000 Grupo Televisa SA (Participating Certificates) 10,945,079 4,495,400 Telefonos de Mexico Class L ADR 145,606,006 1,669,735 Wal-Mart de Mexico SA de CV Class V 5,316,226 ---------------- 428,134,549 ---------------- PHILIPPINES -- 1.1% 142,979,950 Ayala Land Inc 13,514,564 4,614,240 Bank of the Philippine Islands 3,409,412 17,836,528 First Philippine Holdings * 7,711,032 164,212 Globe Telecom Inc 2,559,452 1,334,467 Philippine Long Distance Telephone * 30,131,809 278,900 Philippine Long Distance Telephone ADR * (a) 6,322,663 50,000 Philippine Long Distance Telephone GDR 144A * 2,400,000 6,699,851 San Miguel Corp Class B 8,217,923 60,408,199 SM Prime Holdings 6,119,644 ---------------- 80,386,499 ---------------- POLAND -- 0.5% 137,900 Bank Pekao SA 4,429,013 298,600 BRE Bank SA * 8,100,438 2,771,600 Polski Koncern Naftowy Orlen 24,517,881 ---------------- 37,047,332 ---------------- RUSSIA -- 0.8% 308,900 Lukoil ADR 36,450,200 135,000 Russia Petroleum * 405,000 19,368,800 Silovye Mashiny * 794,121 141,150 Tatneft ADR 3,682,604 2,400 Udmurtneft * 398,400
See accompanying notes to the financial statements. 7 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------------------- RUSSIA -- CONTINUED 16,500 United Heavy Machinery ADR 144A * 74,250 625,380 United Heavy Machinery Uralmash-Izhora Group ADR * 2,814,210 136,500 Vimpel-Communications ADR * 13,390,650 ---------------- 58,009,435 ---------------- SOUTH AFRICA -- 7.3% 5,759,140 ABSA Group Ltd 47,768,178 1,977,800 AECI Ltd 9,960,713 9,484,030 African Bank Investments Ltd 16,928,985 852,000 Anglo American Corp Plc 19,284,058 4,339,890 Foschini Ltd 15,701,975 160,000 Impala Platinum Holdings Ltd 13,411,193 12,159,376 Iscor Ltd 84,162,154 4,597,900 MTN Group Ltd 21,132,484 1,195,000 Naspers Ltd Class N 8,800,532 27,365,000 Old Mutual Plc 52,354,564 2,793,200 Premier Group Ltd * 4,196 5,323,770 Remgro Ltd 64,868,533 30,750,257 Sanlam Ltd 41,522,375 3,877,410 Sasol Ltd 66,300,405 1,370,000 Standard Bank Investment Corp * 9,140,805 2,414,341 Telkom SA Ltd 28,821,165 505,000 Tiger Brands Ltd 7,254,854 1,217,200 Tongaat-Hulett Group 8,358,445 ---------------- 515,775,614 ---------------- SOUTH KOREA -- 22.2% 66,280 Amorepacific Corp 12,625,777 1,192,700 Cheil Industries Inc 16,316,426 1,080,191 Clover Hitech Co Ltd * 5,748,092 50,800 Daekyo Co Ltd 2,284,534 529,220 Daelim Industrial Co Ltd 20,159,985 3,327,500 Daesang Corp 8,721,934 1,424,200 Daewoo Engineering & Construction Co Ltd 6,036,002
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) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------------------- SOUTH KOREA -- CONTINUED 1,539,800 Daewoo Heavy Industries & Machinery Ltd * 12,006,450 3,886,500 Daewoo Securities Co Ltd * 11,753,438 1,455,400 Daewoo Shipbuilding & Marine Engineering Co Ltd 16,442,353 2,030,400 Dongwon Financial Holding Co Ltd 10,670,971 352,635 GS Holdings Corp * 6,612,767 971,700 Hana Bank 21,935,801 196,765 Hanil Cement Manufacturing 8,337,009 882,500 Hanjin Shipping 15,410,036 145,300 Hankuk Electric Glass Co Ltd 5,688,032 4,715,600 Hanwha Chemical Corp 32,487,138 3,143,948 Hanwha Corp 25,196,527 858,561 Hyosung Corp 7,002,625 1,184,790 Hyundai Industrial Development 12,951,326 1,575,300 Hyundai Merchant Marine * 14,466,735 719,949 Hyundai Mipo Dockyard * 12,950,029 612,800 Hyundai Mobis 30,212,590 2,064,980 Hyundai Motor Co 89,892,853 4,454,700 Industrial Bank of Korea 29,098,383 630,800 INI Steel Co 6,587,194 1,988,900 Jusung Engineering Co Ltd * 14,813,789 8,381,100 KIA Motors Corp 73,763,470 334,713 Korea Information Service Inc 6,476,892 1,821,200 Korean Air Lines * 25,918,902 1,050,500 KT Corp 33,298,982 2,620,100 KT&G Corp 66,838,386 576,000 KT&G Corp GDR 144A 7,286,400 966,900 Kumho Industrial Co Ltd 6,685,089 961,300 LG Cable & Machinery Ltd 13,829,831 654,894 LG Chemical 8,668,405 522,110 LG Electronics Inc 25,046,399 234,800 LG Engineering & Construction Ltd 4,431,287 166,923 LG Home Shopping Inc 6,736,174 1,383,260 LG Industrial Systems Co Ltd * 19,763,852 1,390,690 LG International Corp 10,710,088 1,636,100 LG Investment & Securities Co Ltd * 10,891,184
See accompanying notes to the financial statements. 9 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------------------- SOUTH KOREA -- CONTINUED 200,700 NCSoft Corp * 14,585,883 1,119,800 Poongsan Corp 10,636,181 719,376 POSCO 103,172,151 1,093,050 Samsung Electronics 430,160,494 459,100 Samsung SDI Co Ltd 47,323,496 771,370 Shinhan Financial Group Co Ltd 13,110,623 61,000 Shinsegae Co Ltd 16,024,124 2,333,970 SK Corp 88,906,529 48,400 SK Telecom Co Ltd 7,286,451 2,219,500 SK Telecom Co Ltd ADR (a) 41,948,550 613,500 SODIFF Advanced Materials Co Ltd 9,004,654 2,295,700 Woori Finance Holdings Co Ltd 14,818,910 ---------------- 1,573,732,183 ---------------- SRI LANKA -- 0.0% 333,600 Lanka Walltile Ltd 124,143 ---------------- TAIWAN -- 13.4% 40,454,585 Acer Inc 54,079,247 12,732,153 Advanced Semiconductor Engineering Inc * 9,313,473 12,342,290 Ambassador Hotel * 5,850,115 45,088,374 Asustek Computer Inc 101,077,035 25,463,100 Benq Corp 26,142,914 8,739,000 Cathay Financial Holding Co Ltd 15,337,125 24,365,000 Cathay Real Estate Development Co Ltd 12,665,362 24,793,851 Chang Hwa Commercial Bank * 13,546,955 21,108,820 Cheng Loong Corp 7,127,451 70,039,000 China Bills Finance Corp 20,957,998 135,406,651 China Development Financial Holding Corp * 60,346,655 30,940,506 China Life Insurance Co * 16,106,333 15,503,000 China Manmade Fibers * 7,405,962 24,958,000 China Motor Corp Ltd 29,213,691 13,740,830 China Steel Corp 12,877,305 25,483,371 Chinatrust Financial Holding Co 26,980,332 32,169,108 Chung Hung Steel Corp * 13,919,754
See accompanying notes to the financial statements. 10 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------------------- TAIWAN -- CONTINUED 15,071,290 Chunghwa Picture Tubes Ltd * 6,581,779 34,066,000 Chunghwa Telecom Co Ltd 54,143,023 845,220 Chunghwa Telecom Co Ltd ADR 14,419,453 12,036,294 Compal Electronics Inc 11,438,828 10,682,323 Far Eastern Textile Co Ltd 6,365,711 2,829,600 Formosa Chemicals & Fibre Co 4,545,855 5,912,000 Fubon Financial Holding Co Ltd 5,446,960 13,681,302 GigaByte Technology Co Ltd 17,090,133 9,823,456 Hon Hai Precision Industry Co Ltd 32,269,129 18,070,500 International Bank of Taipei 12,013,644 34,153,016 Inventec Co Ltd 18,353,734 10,121,100 Lite-On Technology Corp 9,486,361 81,127,000 Macronix International * 20,714,793 345,579 MediaTek Inc 2,445,148 39,583,000 Mega Financial Holdings Co Ltd 24,056,440 13,326,500 Micro-Star International Co Ltd 10,712,486 6,592,238 Nan Ya Plastic Corp 9,133,929 1,841,000 Optimax Technology Corp 4,427,107 4,679,000 Oriental Union Chemical 4,662,120 156,916 Prodisc Technology Inc 78,826 2,485,870 Quanta Computer Inc 4,250,604 9,068,197 Realtek Semiconductor Corp 10,620,233 6,632,000 Shin Kong Financial Holdings 4,916,837 14,544,073 Sinopac Holdings Co 7,331,298 3,849,000 Taiwan Cellular Corp 3,631,844 51,959,949 Taiwan Cement Corp 26,063,929 7,431,767 Taiwan Semiconductor Manufacturing Co Ltd 10,344,522 135,781 Taiwan Semiconductor Manufacturing Co Ltd ADR 1,025,147 64,784,000 Tatung Co * 27,066,923 107,999,125 United Microelectronics Corp * 73,080,889 796,221 United Microelectronics Corp ADR * (a) 3,025,640 70,113,000 Walsin Lihwa Corp * 34,563,814 5,423,841 Wintek Corp 5,702,363 30,657,040 Yageo Corp * 12,792,920 6,491,000 Yieh Phui Enterprise 4,596,311 18,121,105 Yulon Motor Co Ltd 17,951,393 ---------------- 948,297,833 ----------------
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) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------------------- THAILAND -- 1.6% 23,772,500 Advanced Info Service Pcl (Foreign Registered) (b) 53,937,605 1,709,700 Bangkok Dusit Medical Service Pcl (Foreign Registered) (b) 529,535 21,627,000 Central Pattana Pcl (Foreign Registered) (b) 4,413,673 662,562 Golden Land Property (Foreign Registered) * (b) 138,398 21,068,557 Golden Land Property NVDR * 4,400,875 13,394,100 Home Product Center Pcl (Foreign Registered) (b) 1,369,961 12,869,250 Krungthai Card Pcl (Foreign Registered) (b) 7,353,857 7,766,000 Land & House Pcl (Foreign Registered) 1,845,940 22,539,300 Land & House Pcl NVDR 4,924,553 6,128,900 PTT Pcl (Foreign Registered) (b) 22,072,869 16,716,000 Saha Pathana International Holdings Pcl (Foreign Registered) (b) 5,618,824 40,518,166 Sansiri Pcl (Foreign Registered) (b) 3,385,431 3,108,050 Star Block Co Ltd (Foreign Registered) * (b) (d) 746 26,796,000 Vanachai Group Pcl (Foreign Registered) (b) 6,015,429 ---------------- 116,007,696 ---------------- TURKEY -- 4.7% 1,852,764,700 Ak Enerji Elektrik Uretim * 8,138,453 20,412,734,158 Akbank TAS 87,036,590 844,339,600 Anadolu Isuzu Otomotiv Sanay * 5,090,363 12,306,903,682 Dogan Sirketler Grubu Holdings AS * 21,102,011 2,989,144,700 Doktas Dokumculuk Ticaret * 4,136,180 16,434,960,681 Finansbank * 19,159,572 81,588,000 Galatasaray Sportif Sinai ve Ticari Yatirimlar AS 3,901,079 42,150,000 Medya Holding AS * (b) (d) -- 5,675,723,287 Trakya Cam Sanayii 14,486,673 2,218,842,663 Tupras Turkiye Petrol Rafine 17,105,396 5,581,801,644 Turkcell Iletisim Hizmet AS 20,409,069 14,733,413,675 Turkiye Garanti Bankasi Class C * 48,278,766 18,025,326,765 Turkiye IS Bankasi Class C 59,691,310 5,860,796,200 Vestel Elektronik Sanayi * 21,266,153 ---------------- 329,801,615 ----------------
See accompanying notes to the financial statements. 12 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------------------- VENEZUELA -- 0.5% 1,703,012 Compania Anonima Nacional Telefonos de Venezuela (CANTV) ADR 33,753,698 ---------------- TOTAL COMMON STOCKS (COST $4,993,608,284) 5,738,473,120 ---------------- PREFERRED STOCKS -- 14.0% BRAZIL -- 10.9% 392,851 Banco Bradesco SA 19,113,480 547,762,997 Banco Itau Holding Financeira SA 55,467,307 25,598,000 Belgo Mineira (Registered) 10,394,551 1,249,931,635 Brasil Telecom Participacoes SA 2.19% 8,084,283 4,500 Brasil Telecom Participacoes SA ADR 146,835 47,358,998 Caemi Mineracao e Metalurgica SA 25,350,708 2,660,492,860 Centrais Electricas Brasileiras SA Class B 9.83% 34,478,464 127,210,000 Compania de Gas de Sao Paulo 9,368,346 1,895,760,000 Compania Energetica de Minas Gerais 2.88% 34,903,185 4,072,811,000 Compania Paranaense de Energia 13,886,161 866,700 Compania Vale do Rio Doce Class A 14,166,246 3,494,726 Gerdau SA 57,729,108 64,821,925 Investimentos Itau SA 2.68% 79,342,213 8,746,913 Petroleo Brasileiro SA (Petrobras) 3.01% 244,543,766 521,700 Petroleo Brasileiro SA ADR 6.93% 14,550,213 10,261,823 Sadia SA 17,493,732 1,448,188,248 Siderurgica de Tubarao 3.50% 60,485,189 13,527,828,000 Tele Centro Oeste Celular Participacoes SA 6.78% 42,294,641 407,300 Tele Centro Oeste Celular SA ADR 2.38% 3,869,350 477,603 Telemar Norte Leste SA 8,746,013 16,756,437 Unipar, Class B 2.52% 19,310,180 ---------------- 773,723,971 ---------------- INDIA -- 0.1% 1,705,060 CBAY Systems Ltd Series E (c) 3,290,766 ----------------
See accompanying notes to the financial statements. 13 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------------------- RUSSIA -- 0.1% 100,800 Red October 144A 201,600 5,325 Transneft 4,419,750 ---------------- 4,621,350 ---------------- SOUTH KOREA -- 2.9% 584,700 Hyundai Motor Co 5.05% 12,913,001 679,400 LG Electronics Inc 17,987,481 678,453 Samsung Electronics (Non Voting) 4.08% 175,759,466 ---------------- 206,659,948 ---------------- TOTAL PREFERRED STOCKS (COST $641,688,072) 988,296,035 ---------------- PRIVATE EQUITY SECURITIES -- 0.9% INDIA -- 0.0% 524,200 U TV Software Comm Ltd * (b) (c) 282,771 ---------------- POLAND -- 0.9% 21,635,077 CHP Investors (Multimedia) * (b) (c) 40,799,428 25,091,031 MHP Investors (Tri Media Holdings Ltd) * (b) (c) 13,930,540 9,204,400 Polimex Investment Partners (Polimex Construction) * (b) (c) 7,271,476 ---------------- 62,001,444 ---------------- RUSSIA -- 0.0% 124,330 Divot Holdings NV * (b) (c) (d) 1,243 90,000 Divot Holdings NV * (b) (c) (d) 900 46,624 Divot Holdings NV, Convertible Securities * (b) (c) (d) 466 ---------------- 2,609 ---------------- SRI LANKA -- 0.0% 1,591,169 Millenium Information Technology * (b) (c) 787,470 ---------------- TOTAL PRIVATE EQUITY SECURITIES (COST $65,609,989) 63,074,294 ----------------
See accompanying notes to the financial statements. 14 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
UNITS/ PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------------------------ DEBT OBLIGATIONS -- 0.7% UNITED STATES -- 0.7% 5,815,000 U.S. Treasury Inflation Indexed Note, 4.25%, due 01/15/10 (h) (g) 7,616,871 33,070,000 U.S. Treasury Inflation Indexed Note, 3.88%, due 01/15/09 (g) 43,066,862 ---------------- 50,683,733 ---------------- TOTAL DEBT OBLIGATIONS (COST $50,258,582) 50,683,733 ---------------- RIGHTS AND WARRANTS -- 0.4% INDIA -- 0.4% 4,331,067 Arvind Warrants, Expires 12/6/04 (Goldman Sachs) * (f) (g) 7,607,053 2,000,000 CBAY Systems Ltd Warrants, Expires 12/31/05 * (b) (c) -- 4,400,000 Centurion Bank Ltd Rights, Expires 9/17/04 * 303,808 542,835 Hero Honda Motors Ltd Warrants, Expires 5/5/06 (Merrill Lynch) (f) (g) 5,177,108 354,315 Hughes Software Systems Warrants, Expires 7/8/05 (JP Morgan Chase) * (f) (g) 4,161,737 294,128 ING Vysya Bank Ltd Warrants, Expires 1/25/05 (Goldman Sachs) (f) (g) 1,862,091 161,000 Reliance Industries Ltd Warrants, Expires 4/4/05 (JP Morgan Chase) (f) (g) 1,697,153 96,020 Sterlite Industries India Rights, Expires 9/6/04 * -- 32,542 Uniphos Enterprises Ltd Warrants, Expires 1/28/09 (Merrill Lynch) * (f) (g) 6,846 476,330 United Phosphorus Ltd Warrants, Expires 1/28/09 (Merrill Lynch) * (f) (g) 6,526,476 ---------------- 27,342,272 ---------------- THAILAND -- 0.0% 2,689,393 Telecomasia Corp Pcl Warrants, Expires 4/03/08 * (b) -- ---------------- TOTAL RIGHTS AND WARRANTS (COST $17,304,655) 27,342,272 ----------------
See accompanying notes to the financial statements. 15 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
UNITS/ PAR VALUE ($) DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------------------- INVESTMENT FUNDS -- 0.3% INDIA -- 0.1% 170 SPG Infinity Technology Fund I (b) (c) 891,310 1,371,900 TDA India Technology Fund II LP * (b) (c) 763,709 10,400 UTI Masterplus 1991 Units * 5,689 100 UTI Masterplus 1991 Units (Shares Under Objection) * (b) -- ---------------- 1,660,708 ---------------- KAZAKHSTAN -- 0.0% 450,000 Kazakhstan Investment Fund * (b) (c) 399,721 ---------------- POLAND -- 0.0% 1,749,150 The Emerging Europe Fund II, LP * (b) (c) 340,942 ---------------- RUSSIA -- 0.2% 9,500,000 NCH Eagle Fund LP * (b) (c) 15,391,699 ---------------- UKRAINE -- 0.0% 16,667 Societe Generale Thalmann Ukraine Fund * (b) (c) 83,244 ---------------- TOTAL INVESTMENT FUNDS (COST $17,443,773) 17,876,314 ---------------- MUTUAL FUNDS -- 0.0% UNITED STATES -- 0.0% 8,064 GMO Special Purpose Holding Fund (e) 141,852 ---------------- TOTAL MUTUAL FUNDS (COST $72,016) 141,852 ---------------- CONVERTIBLE SECURITIES -- 0.0% MALAYSIA -- 0.0% 911,400 Berjaya Sports Toto Berhad, 8.00%, due 06/25/12 762,698 ----------------
See accompanying notes to the financial statements. 16 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - -------------------------------------------------------------------------------------------------------- RUSSIA -- 0.0% 56,000 Lukinter Finance BV, 3.50%, due 11/29/07 * 87,080 ---------------- TOTAL CONVERTIBLE SECURITIES (COST $775,821) 849,778 ---------------- SHORT-TERM INVESTMENTS -- 2.5% CASH EQUIVALENTS -- 2.5% 140,500,000 Royal Bank Canada Time Deposit, 1.55%, due 09/01/04 140,500,000 40,063,496 The Boston Global Investment Trust (i) 40,063,496 ---------------- 180,563,496 ---------------- TOTAL SHORT-TERM INVESTMENTS (COST $180,563,496) 180,563,496 ---------------- TOTAL INVESTMENTS -- 99.8% (Cost $5,967,324,688) 7,067,300,894 Other Assets and Liabilities (net) -- 0.2% 14,683,308 ---------------- TOTAL NET ASSETS -- 100.0% $ 7,081,984,202 ================
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 Foreign Registered - Shares issued to foreign investors in markets that have foreign ownership limits. GDR - Global Depository Receipt NVDR - Non-Voting Depository Receipt See accompanying notes to the financial statements. 17 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) * Non-income producing security. (a) All or a portion of this security is out on loan (Note 2). (b) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 2). (c) Direct placement securities are restricted as to resale. (d) Bankrupt issuer. (e) Affiliated issuer. (f) Structured warrants with risks similar to equity swaps. (g) Indexed security in which price and/or coupon is linked to prices of other securities, securities indices, or other financial indicators (Note 2). (h) All or a portion of this security is held as collateral for open swap contracts (Note 2). (i) Investment of security lending collateral (Note 2). Additional information on each restricted security is as follows:
MARKET VALUE AS A PERCENTAGE MARKET ACQUISITION ACQUISITION OF FUND'S VALUE AS OF ISSUER, DESCRIPTION DATE COST NET ASSETS AUGUST 31, 2004 -------------------------------------------------- ------------------ -------------- -------------- --------------- CBAY Systems Ltd Series E 05/06/03 $ 3,444,220 0.05% $ 3,290,766 CBAY Systems Ltd Warrants, Expires 12/31/05 01/02/04 0 0.00 0 CHP Investors (Multimedia) 12/13/99 - 3/05/01 22,825,006 0.58 40,799,428 Divot Holdings NV, Private Equity Securities 9/21/01 124,330 0.00 1,243 Divot Holdings NV, Private Equity Securities 6/26/00 1,502,100 0.00 900 Divot Holdings NV, Convertible Securities 3/27/02 46,624 0.00 466 Kazakhstan Investment Fund 10/16/97 3,285,000 0.01 399,721 MHP Investors (Tri Media Holdings Ltd) 11/27/01 26,147,396 0.20 13,930,540 Millenium Information Technology 10/21/99 2,252,570 0.01 787,470 NCH Eagle Fund LP 1/21/97 9,500,000 0.22 15,391,699 Polimex Investment Partners (Polimex Construction) 7/07/99 - 9/21/01 9,707,005 0.10 7,271,476 Shasun Chemicals & Drugs Ltd 11/06/03 4,901,004 0.12 8,282,188 Societe Generale Thalmann Ukraine Fund 7/15/97 1,123,189 0.00 83,244 SPG Infinity Technology Fund I 12/23/99 1,190,000 0.01 891,310 TDA India Technology Fund II LP 2/23/00 - 3/23/04 1,371,900 0.01 763,709 The Emerging Europe Fund II, LP 12/05/97 - 3/17/00 1,749,150 0.00 340,942 U TV Software Comm Ltd 2/29/00 3,004,959 0.00 282,771
See accompanying notes to the financial statements. 18 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) At August 31, 2004, the approximate 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 ------------------ ---------------- ---------------- ---------------- $ 5,987,027,337 $ 1,328,308,573 $ (248,035,016) $ 1,080,273,557
A summary of outstanding financial instruments at August 31, 2004 is as follows: SWAP AGREEMENTS
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------ ---------- -------------------------------------------------- ---------------- TOTAL RETURN SWAPS 13,201,889 USD 9/13/04 Agreement with Merrill Lynch International dated $ (690,641) 9/09/03 to receive the notional amount multiplied by the return on the MSCI Taiwan Index and to pay the notional amount multiplied by the 3 month LIBOR adjusted by a specified spread. 10,240,014 USD 5/5/05 Agreement with Merrill Lynch International dated 219,453 5/20/04 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. 9,989,889 USD 7/8/05 Agreement with Deutsche Bank AG dated 6/30/04 to (677,845) receive return on shares of OAO Gazprom and to pay the weekly LIBOR adjusted by a specified spread. 9,942,630 USD 7/11/05 Agreement with Deutsche Bank AG dated 7/01/04 to (944,357) receive return on shares of OAO Gazprom and to pay the weekly LIBOR adjusted by a specified spread. 5,052,720 USD 7/12/05 Agreement with Deutsche Bank AG dated 7/02/04 to (406,887) receive return on shares of OAO Gazprom and to pay the weekly LIBOR adjusted by a specified spread. ---------------- $ (2,500,277) ================
See accompanying notes to the financial statements. 19 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY (SHOWING PERCENTAGE OF EQUITY INVESTMENTS) AUGUST 31, 2004 (UNAUDITED) At August 31, 2004, industry sector diversification of the Fund's equity investments was as follows:
INDUSTRY SECTOR ---------------------------------------------------------------------- Financials 19.0% Information Technology 17.6 Telecommunication Services 14.5 Materials 13.1 Energy 11.5 Consumer Discretionary 9.5 Industrials 7.2 Consumer Staples 3.2 Utilities 2.8 Health Care 0.4 Miscellaneous 1.2 --------- 100.0% =========
See accompanying notes to the financial statements. 20 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments in unaffiliated issuers, at value, including securities on loan of $38,367,078 (cost $5,967,252,672) (Note 2) $ 7,067,159,042 Investments in affiliated issuers, at value (cost $72,016) (Notes 2 and 7) 141,852 Cash 977,197 Foreign currency, at value (cost $20,890,232) (Note 2) 20,864,679 Receivable for investments sold 41,438,701 Receivable for Fund shares sold 3,703,580 Dividends and interest receivable 24,151,068 Foreign taxes receivable 3,677,436 Receivable for expenses reimbursed by Manager (Note 3) 40,114 ---------------- Total assets 7,162,153,669 ---------------- LIABILITIES: Payable for investments purchased 21,047,693 Payable upon return of securities loaned (Note 2) 40,063,496 Payable for Fund shares repurchased 500,000 Accrued capital gain and repatriation taxes payable (Note 2) 6,732,233 Payable to affiliate for (Note 3): Management fee 4,697,356 Shareholder service fee 680,027 Trustees fee 15,247 Net payable for open swap contracts (Note 2) 2,187,962 Accrued expenses 4,245,453 ---------------- Total liabilities 80,169,467 ---------------- NET ASSETS $ 7,081,984,202 ================ NET ASSETS CONSIST OF: Paid-in capital $ 5,511,430,086 Accumulated undistributed net investment income 45,939,993 Accumulated net realized gain 433,811,036 Net unrealized appreciation 1,090,803,087 ---------------- $ 7,081,984,202 ================
See accompanying notes to the financial statements. 21 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) -- (CONTINUED) NET ASSETS ATTRIBUTABLE TO: Class III shares $ 3,376,519,601 ================ Class IV shares $ 2,269,655,905 ================ Class V shares $ 108,327,234 ================ Class VI shares $ 1,327,481,462 ================ SHARES OUTSTANDING: Class III 228,672,628 ================ Class IV 153,941,712 ================ Class V 7,340,206 ================ Class VI 89,986,232 ================ NET ASSET VALUE PER SHARE: Class III $ 14.77 ================ Class IV $ 14.74 ================ Class V $ 14.76 ================ Class VI $ 14.75 ================
See accompanying notes to the financial statements. 22 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends (net of withholding taxes of $13,679,661) $ 130,524,558 Interest (including securities lending income of $79,984) 2,080,897 Dividends from affiliated issuers (Note 7) 106,656 ---------------- Total income 132,712,111 ---------------- EXPENSES: Management fee (Note 3) 27,937,537 Shareholder service fee (Note 3) - Class III 2,761,732 Shareholder service fee (Note 3) - Class IV 1,002,112 Shareholder service fee (Note 3) - Class V 137,566 Shareholder service fee (Note 3) - Class VI 270,429 Custodian fees 5,327,536 Transfer agent fees 33,764 Audit and tax fees 81,328 Legal fees 114,356 Trustees fees and related expenses (Note 3) 50,840 Registration fees 19,320 Miscellaneous 35,144 ---------------- Total expenses 37,771,664 Fees and expenses reimbursed by Manager (Note 3) (239,108) ---------------- Net expenses 37,532,556 ---------------- Net investment income 95,179,555 ---------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments (net of foreign capital gains tax and CPMF tax of $2,333,717 and $136,557, respectively) 465,700,511 Closed swap contracts 2,743,798 Foreign currency, forward contracts and foreign currency related transactions (5,596,339) ---------------- Net realized gain 462,847,970 ---------------- Change in net unrealized appreciation (depreciation) on: Investments (net of foreign capital gains tax accrual of $6,732,233) (Note 2) (987,831,780) Open swap contracts (6,060,869) Foreign currency, forward contracts and foreign currency related transactions (154,393) ---------------- Net unrealized loss (994,047,042) ----------------
See accompanying notes to the financial statements. 23 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) Net realized and unrealized loss (531,199,072) ---------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (436,019,517) ================
See accompanying notes to the financial statements. 24 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 95,179,555 $ 81,745,351 Net realized gain 462,847,970 380,067,313 Change in net unrealized appreciation (depreciation) (994,047,042) 2,185,930,521 ----------------- ----------------- Net increase (decrease) in net assets from operations (436,019,517) 2,647,743,185 ----------------- ----------------- Distributions to shareholders from: Net investment income Class III (17,112,235) (59,919,466) Class IV (9,863,192) (27,150,683) Class V (1,769,486) (1,361,896) Class VI (5,039,818) (8,877,816) ----------------- ----------------- Total distributions from net investment income (33,784,731) (97,309,861) ----------------- ----------------- Net realized gains Class III (244,461) -- Class IV (136,989) -- Class V (24,240) -- Class VI (69,039) -- ----------------- ----------------- Total distributions from net realized gains (474,729) -- ----------------- ----------------- (34,259,460) (97,309,861) ----------------- ----------------- Net share transactions (Note 6): Class III (397,346,306) 1,301,379,499 Class IV 553,090,727 43,777,851 Class V (236,251,325) 311,516,561 Class VI 487,239,510 695,037,226 ----------------- ----------------- Increase in net assets resulting from net share transactions 406,732,606 2,351,711,137 ----------------- -----------------
See accompanying notes to the financial statements. 25 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS -- (CONTINUED)
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ----------------- ----------------- Purchase premiums and redemption fees (Notes 2 and 6): Class III $ 2,488,182 $ 15,077,204 Class IV 277,907 3,088,281 Class V -- 1,500 Class VI 1,827,080 1,018,454 ----------------- ----------------- Increase in net assets resulting from net purchase premiums and redemption fees 4,593,169 19,185,439 ----------------- ----------------- Total increase in net assets resulting from net share transactions and net purchase premiums and redemption fees 411,325,775 2,370,896,576 ----------------- ----------------- Total increase (decrease) in net assets (58,953,202) 4,921,329,900 NET ASSETS: Beginning of period 7,140,937,404 2,219,607,504 ----------------- ----------------- End of period (including accumulated undistributed net investment income of $45,939,993 and distributions in excess of net investment income of $15,454,831, respectively) $ 7,081,984,202 $ 7,140,937,404 ================= =================
See accompanying notes to the financial statements. 26 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 --------------------------------------------------------------------------- (UNAUDITED) 2004 2003 2002 2001 2000 --------------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 15.78 $ 8.82 $ 9.84 $ 9.04 $ 11.16 $ 6.31 --------------- ---------- ---------- ---------- ---------- ---------- Income from investment operations: Net investment income + 0.20 0.23 0.11 0.18 0.17 0.13 Net realized and unrealized gain (loss) (1.14) 6.97 (1.00) 0.80 (2.27) 4.77 --------------- ---------- ---------- ---------- ---------- ---------- Total from investment operations (0.94) 7.20 (0.89) 0.98 (2.10) 4.90 --------------- ---------- ---------- ---------- ---------- ---------- Less distributions to shareholders: From net investment income (0.07) (0.24) (0.13) (0.18) (0.02) (0.05) From net realized gains (0.00)(a) -- -- -- -- -- --------------- ---------- ---------- ---------- ---------- ---------- Total distributions (0.07) (0.24) (0.13) (0.18) (0.02) (0.05) --------------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 14.77 $ 15.78 $ 8.82 $ 9.84 $ 9.04 $ 11.16 =============== ========== ========== ========== ========== ========== TOTAL RETURN (b) (5.93)%(c)** 82.10%(c) (9.14)%(c) 11.15%(c) (18.79)%(c) 77.43% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 3,376,520 $4,079,172 $1,215,653 $ 826,960 $ 560,205 $ 727,197 Net expenses to average daily net assets 1.12%* 1.12% 1.16% 1.19%(d) 1.23% 1.18% Net investment income to average daily net assets 1.38%(e)** 1.85% 1.12% 2.32% 1.69% 1.41% Portfolio turnover rate 34%** 46% 59% 74% 90% 73% Fees and expenses reimbursed by the Manager to average daily net assets: 0.01%* 0.02% 0.02% 0.02% 0.02% 0.03% Purchase premiums and redemption fees consisted of the following per share amounts: (f) $ 0.01 $ 0.06 $ 0.05 $ 0.05 $ 0.03 --
See accompanying notes to the financial statements. 27 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS -- (CONTINUED) (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) (a) Distributions from net realized gains were less than $0.01 per share. (b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (c) Calculation excludes purchase premiums and redemption fees which are borne by the shareholder. (d) Includes stamp duties and transfer taxes not reimbursed by the Manager, which approximate 0.035% of average daily net assets. (e) The ratio for the six months ended August 31, 2004, has not been annualized since the Fund believes it would not be appropriate because the Fund's dividend income is not earned ratably throughout the fiscal year. (f) Effective March 1, 2000, the Fund adopted the provision of the revised AICPA Audit and Accounting Guide for Investment Companies which requires the disclosure of the per share effect of purchase premiums 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. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 28 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 --------------------------------------------------------------------------- (UNAUDITED) 2004 2003 2002 2001 2000 --------------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 15.75 $ 8.81 $ 9.83 $ 9.03 $ 11.16 $ 6.31 --------------- ---------- ---------- ---------- ---------- ---------- Income from investment operations: Net investment income + 0.20 0.24 0.11 0.17 0.17 0.13 Net realized and unrealized gain (loss) (1.14) 6.94 (0.99) 0.82 (2.28) 4.77 --------------- ---------- ---------- ---------- ---------- ---------- Total from investment operations (0.94) 7.18 (0.88) 0.99 (2.11) 4.90 --------------- ---------- ---------- ---------- ---------- ---------- Less distributions to shareholders: From net investment income (0.07) (0.24) (0.14) (0.19) (0.02) (0.05) --------------- ---------- ---------- ---------- ---------- ---------- From net realized gains (0.00)(a) -- -- -- -- -- --------------- ---------- ---------- ---------- ---------- ---------- Total distributions (0.07) (0.24) (0.14) (0.19) (0.02) (0.05) --------------- ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 14.74 $ 15.75 $ 8.81 $ 9.83 $ 9.03 $ 11.16 =============== ========== ========== ========== ========== ========== TOTAL RETURN (b) (5.92)%(c)** 81.97%(c) (9.09)%(c) 11.22%(c) (18.82)%(c) 77.76% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 2,269,656 $1,799,736 $1,003,594 $ 735,455 $ 467,619 $ 480,208 Net expenses to average daily net assets 1.07%* 1.08% 1.12% 1.14%(d) 1.18% 1.13% Net investment income to average daily net assets 1.39%(e)** 2.05% 1.16% 2.27% 1.73% 1.45% Portfolio turnover rate 34%** 46% 59% 74% 90% 73% Fees and expenses reimbursed by the Manager to average daily net assets: 0.01%* 0.02% 0.02% 0.02% 0.02% 0.03% Purchase premiums and redemption fees consisted of the following per share amounts: (f) $ 0.00(g) $ 0.05 $ 0.02 $ 0.03 $ 0.03 --
See accompanying notes to the financial statements. 29 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS -- (CONTINUED) (FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD) (a) Distributions from net realized gains were less than $0.01 per share. (b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (c) Calculation excludes purchase premiums and redemption fees which are borne by the shareholder. (d) Includes stamp duties and transfer taxes not reimbursed by the Manager, which approximate 0.035% of average daily net assets. (e) The ratio for the six months ended August 31, 2004, has not been annualized since the Fund believes it would not be appropriate because the Fund's dividend income is not earned ratably throughout the fiscal year. (f) Effective March 1, 2000, the Fund adopted the provision of the revised AICPA Audit and Accounting Guide for Investment Companies which requires the disclosure of the per share effect of purchase premiums 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. (g) Purchase premiums and redemption fees were less than $0.01 per share. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 30 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS V SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PERIOD FROM AUGUST 4, 2003 SIX MONTHS ENDED (COMMENCEMENT AUGUST 31, 2004 OF OPERATIONS) THROUGH (UNAUDITED) FEBRUARY 29, 2004 ---------------- ---------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 15.77 $ 10.81 ------------ ------------ Income from investment operations: Net investment income + 0.20 0.13 Net realized and unrealized gain (loss) (1.14) 5.02 ------------ ------------ Total from investment operations (0.94) 5.15 ------------ ------------ Less distributions to shareholders: From net investment income (0.07) (0.19) From net realized gains (0.00)(a) -- ------------ ------------ Total distributions (0.07) (0.19) ------------ ------------ NET ASSET VALUE, END OF PERIOD $ 14.76 $ 15.77 ============ ============ TOTAL RETURN (b) (5.91)%** 47.82%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 108,327 $ 382,193 Net expenses to average daily net assets 1.05%* 1.07%* Net investment income to average daily net assets 1.38%(c)** 1.69%* Portfolio turnover rate 34%** 46% Fees and expenses reimbursed by the Manager to average daily net assets: 0.01%* 0.02%* Purchase premiums and redemption fees consisted of the following per share amounts: $ 0.00 $ 0.03
(a) Distributions from net realized gains were less than $0.01 per share. (b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder. (c) The ratio for the six months ended August 31, 2004, has not been annualized since the Fund believes it would not be appropriate because the Fund's dividend income is not earned ratably throughout the fiscal year. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 31 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS V SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PERIOD FROM AUGUST 4, 2003 SIX MONTHS ENDED (COMMENCEMENT AUGUST 31, 2004 OF OPERATIONS) THROUGH (UNAUDITED) FEBRUARY 29, 2004 ---------------- ---------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 15.76 $ 10.45 --------------- --------------- Income from investment operations: Net investment income + 0.21 0.14 Net realized and unrealized gain (loss) (1.15) 5.42 --------------- --------------- Total from investment operations (0.94) 5.56 --------------- --------------- Less distributions to shareholders: From net investment income (0.07) (0.25) From net realized gains (0.00)(a) -- --------------- --------------- Total distributions (0.07) (0.25) --------------- --------------- NET ASSET VALUE, END OF PERIOD $ 14.75 $ 15.76 =============== =============== TOTAL RETURN (b) (5.91)%** 53.62%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 1,327,481 $ 879,837 Net expenses to average daily net assets 1.03%* 1.04%* Net investment income to average daily net assets 1.44%(c)** 1.54%* Portfolio turnover rate 34%** 46% Fees and expenses reimbursed by the Manager to average daily net assets: 0.01%* 0.02%* Purchase premiums and redemption fees consisted of the following per share amounts: $ 0.03 $ 0.04
(a) Distributions from net realized gains were less than $0.01 per share. (b) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. Calculation excludes purchase premiums and redemption fees which are borne by the shareholder. (c) The ratio for the six months ended August 31, 2004, has not been annualized since the Fund believes it would not be appropriate because the Fund's dividend income is not earned ratably throughout the fiscal year. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 32 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION 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 emerging countries in Asia, Latin America, the Middle East, Africa, and Europe ("Emerging Markets"). The Fund's benchmark is the S&P/IFCI (Investable) Composite Index. Throughout the six months ended August 31, 2004, the Fund had four classes of shares outstanding: Class III, Class IV, Class V and Class VI. 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 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. At August 31, 2004, less than 0.1% of the Fund was invested in the GMO Special Purpose Holding Fund, a separate fund of GMO Trust managed by GMO. Shares of the GMO Special Purpose Holding Fund are not publicly available for direct purchase. The financial statements of the GMO Special Purpose Holding Fund should be read in conjunction with the Fund's financial statements. These financial statements are available, without charge, upon request, by calling (617) 346-7646. 2. SIGNIFICANT ACCOUNTING POLICIES 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. The values of securities which are primarily traded on foreign exchanges are 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 funds of the Trust ("underlying funds") and other mutual 33 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) funds are valued at their net asset value as reported on each business day. For other assets, and in cases where market prices are not readily available or the Manager believes established valuation methodologies are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect its value. Because many foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after that close but before the close of the NYSE. As a result, foreign equity securities held by the Fund are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available. 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. 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 0.02% of the Fund's total assets as of August 31, 2004. The valuation of this possible claim and all matters relating to the Fund's response to these allegations are subject to supervision and control of the Trust's Board of Trustees, and all costs in respect of this matter 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 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 34 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 at August 31, 2004. 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. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, 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 August 31, 2004, 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 35 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) currency underlying the written option. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying investment increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of August 31, 2004, 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 closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. As of August 31, 2004, 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. See the Schedule of Investments for indexed securities held by the Fund at August 31, 2004. 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 using standard models that incorporate quotations from market makers 36 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Payments received or made on swap contracts 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 the Schedule of Investments for a summary of all open swap agreements at August 31, 2004. 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. As of August 31, 2004, the Fund had loaned securities having a market value of $38,367,078 collateralized by cash in the amount of $40,063,496 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 generally 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Dividends received by shareholders of the Fund which are derived from foreign source income and foreign taxes paid by the Fund are to be treated, to the extent allowable under the Code, as if received and paid by the shareholders of the Fund. The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which it invests. The Fund has recorded a deferred tax liability in respect of unrealized appreciation on foreign 37 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) securities of $6,732,233 for potential capital gains and repatriation taxes at August 31, 2004. The accrual for capital gains and repatriation taxes is included in net unrealized loss in the Statement of Operations. The Fund has incurred $2,333,717 related to capital gain taxes which is included in net realized gain in the Statement of Operations. The Fund is subject to a Contribuicao Provisoria sobre Movimentacoes Financiera ("CPMF") tax which is applied to foreign exchange transactions representing capital inflows or outflows to the Brazilian market. The Fund has incurred $136,557 related to CPMF tax which is included in the net realized gain (loss) on investments in the Statement of Operations. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. 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. 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. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. 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's operations. PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases and fees on redemptions of Fund shares are each 0.80%. If the Manager determines that any portion of a cash purchase or redemption is offset by a corresponding cash redemption or purchase occurring on the same day, it will waive the purchase premium or redemption fee with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived in extraordinary circumstances if the Fund will not incur transaction costs. 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's net assets on the share transaction date. For the six months ended August 38 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 31, 2004 and the year ended February 29, 2004, the Fund received $3,961,097 and $18,802,646 in purchase premiums and $632,072 and $382,793 in redemption fees, respectively. There is no premium for reinvested distributions or in-kind transactions. 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 in emerging countries are typically less liquid than those of developed markets. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.81% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of 0.15% for Class III shares, 0.105% for Class IV shares, 0.085% for Class V shares and 0.055% for Class VI shares. GMO has entered into a binding agreement effective until at least June 30, 2005 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 0.81% of average daily net assets. The Fund incurs fees and expenses indirectly as a shareholder in GMO Special Purpose Holding Fund. For the six months ended August 31, 2004, these indirect fees and expenses expressed as a percentage of the Fund's average daily net assets were as follows:
INDIRECT OPERATING INDIRECT INVESTMENT-RELATED EXPENSES (EXCLUDING EXPENSES (INCLUDING, BUT NOT MANAGEMENT FEES, LIMITED TO, INTEREST EXPENSE, SHAREHOLDER SERVICE FEES INDIRECT FOREIGN AUDIT EXPENSE, AND TOTAL INDIRECT NET AND INVESTMENT-RELATED SHAREHOLDER INVESTMENT-RELATED LEGAL INDIRECT MANAGEMENT FEES EXPENSES) SERVICE FEES EXPENSE) EXPENSES -------------------------------------------------------------------------------------------------------------------- LESS THAN (0.001%) LESS THAN 0.001% 0.000% LESS THAN 0.001% LESS THAN 0.001%
39 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $30,876. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004 were as follows:
PURCHASES SALES -------------------- ----------------- U.S. Government securities $ 40,193,922 $ 20,577,163 Investments (non-U.S. Government securities) 2,730,835,216 2 ,235,457,515
5. RELATED PARTIES At August 31, 2004, 0.4% of the Fund was held by thirty nine related parties comprised of certain GMO employee accounts. As of August 31, 2004, greater than 10% of the Fund's shares were held by accounts for which the Manager has investment discretion. 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------------------------- ---------------------------------- SHARES AMOUNT SHARES AMOUNT --------------- --------------- --------------- --------------- Class III: Shares sold 18,742,109 $ 288,556,504 185,551,403 $ 2,162,900,945 Shares issued to shareholders in reinvestment of distributions 902,389 12,651,569 3,408,649 46,031,174 Shares repurchased (49,529,969) (698,554,379) (68,200,572) (907,552,620) Purchase premiums and redemption fees -- 2,488,182 -- 15,077,204 --------------- --------------- --------------- --------------- Net increase (decrease) (29,885,471) $ (394,858,124) 120,759,480 $ 1,316,456,703 =============== =============== =============== ===============
40 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED)
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------------------------- ---------------------------------- SHARES AMOUNT SHARES AMOUNT --------------- --------------- --------------- --------------- CLASS IV: Shares sold 39,182,034 $ 546,232,407 70,116,457 $ 879,159,968 Shares issued to shareholders in reinvestment of distributions 682,044 9,548,621 1,571,635 21,070,260 Shares repurchased (175,520) (2,690,301) (71,415,775) (856,452,377) Purchase premiums and redemption fees -- 277,907 -- 3,088,281 --------------- --------------- --------------- --------------- Net increase 39,688,558 $ 553,368,634 272,317 $ 46,866,132 =============== =============== =============== ===============
SIX MONTHS ENDED PERIOD FROM AUGUST 4, 2003 AUGUST 31, 2004 (COMMENCEMENT OF OPERATIONS) (UNAUDITED) THROUGH FEBRUARY 29, 2004 ---------------------------------- ---------------------------------- SHARES AMOUNT SHARES AMOUNT --------------- --------------- --------------- --------------- Class V: Shares sold -- $ -- 50,310,591 $ 612,794,696 Shares issued to shareholders in reinvestment of distributions 39,776 557,259 95,841 1,361,896 Shares repurchased (16,939,098) (236,808,584) (26,166,904) (302,640,031) Purchase premiums and redemption fees -- -- -- 1,500 --------------- --------------- --------------- --------------- Net increase (decrease) (16,899,322) $ (236,251,325) 24,239,528 $ 311,518,061 =============== =============== =============== ===============
SIX MONTHS ENDED PERIOD FROM JUNE 30, 2003 AUGUST 31, 2004 (COMMENCEMENT OF OPERATIONS) (UNAUDITED) THROUGH FEBRUARY 29, 2004 ---------------------------------- ---------------------------------- SHARES AMOUNT SHARES AMOUNT --------------- --------------- --------------- --------------- Class VI: Shares sold 35,681,362 $ 510,887,046 57,429,557 $ 718,658,880 Shares issued to shareholders in reinvestment of distributions 227,101 3,181,683 293,748 4,033,903 Shares repurchased (1,752,418) (26,829,219) (1,893,118) (27,655,557) Purchase premiums and redemption fees -- 1,827,080 -- 1,018,454 --------------- --------------- --------------- --------------- Net increase 34,156,045 $ 489,066,590 55,830,187 $ 696,055,680 =============== =============== =============== ===============
41 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 7. INVESTMENTS IN AFFILIATED ISSUERS A summary of the Fund's transactions in the shares of these issuers during the six months ended August 31, 2004, is set forth below:
VALUE, BEGINNING OF SALES DIVIDEND VALUE, END AFFILIATE PERIOD PURCHASES PROCEEDS INCOME OF PERIOD --------------------------------------------------------------------------------------------------------------------- GMO Special Purpose Holding Fund $ 3,214,348 $ 106,656 $ 3,049,559 $ 106,656 $ 141,852 GMO Short-Duration Collateral Fund -- 3,049,559 3,049,559 -- --* --------------- ---------------- -------------- ------------ ------------ Totals $ 3,214,348 $ 3,156,215 $ 6,099,118 $ 106,656 $ 141,852 =============== ================ ============== ============ ============
* After effect of return of capital distribution of $124,304 on June 10, 2004. 8. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 42 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees, other expenses and indirect expenses incurred by its investment in underlying funds. The following tables, assuming a $1,000 investment in a class of shares, disclose the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the classes' actual return and actual expenses, and (2) a hypothetical annualized 5% return and the classes' actual expenses: Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * --------------------------------------------------------- 1) Actual $ 1,000.00 $ 940.70 $ 5.48 2) Hypothetical 1,000.00 1,019.56 5.70
*Expenses are calculated using the Class III annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2004 of 1.12%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. Class IV
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * --------------------------------------------------------- 1) Actual $ 1,000.00 $ 940.80 $ 5.26 2) Hypothetical 1,000.00 1,019.79 5.47
*Expenses are calculated using the Class IV annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2004 of 1.075%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. Class V
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * --------------------------------------------------------- 1) Actual $ 1,000.00 $ 940.90 $ 5.11 2) Hypothetical 1,000.00 1,019.94 5.32
*Expenses are calculated using the Class V annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2004 of 1.045%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. 43 GMO EMERGING MARKETS FUND (A SERIES OF GMO TRUST) FUND EXPENSES -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) Class VI
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * --------------------------------------------------------- 1) Actual $ 1,000.00 $ 940.90 $ 5.01 2) Hypothetical 1,000.00 1,020.04 5.22
*Expenses are calculated using the Class VI annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2004 of 1.025%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 44 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
DESCRIPTION % OF NET ASSETS - ----------------------------------------------------------------------------------- Asset-Backed Securities 3.2% Corporate Debt 1.3 Foreign Government Obligations 65.3 Foreign Government Agency 0.5 U.S. Government 4.1 Call Options Purchased 0.4 Loan Assignments 7.0 Loan Participations 8.3 Mutual Funds 5.7 Promissory Notes 0.2 Put Options Purchased 0.1 Rights & Warrants 0.1 Forward Currency Contracts 0.1 Reverse Repurchase Agreements (4.2) Swaps 3.0 Short-Term Investments and Other Assets and Liabilities (net) 4.9 --------------- 100.0% ===============
See accompanying notes to the financial statements. 1 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 74.4% ARGENTINA -- 2.7% FOREIGN GOVERNMENT OBLIGATIONS -- 2.7% USD 31,390,000 Argentina Government International Bond, Reg S, 9.00%, due 04/06/49 (a) 7,533,600 USD 2,000,000 Republic of Argentina Pro 4, 0.00%, due 12/28/10 (a) 291,400 DEM 20,000,000 Argentina Government International Bond, 5.87%, due 03/31/23 (a) 6,338,005 USD 6,931,000 Argentina Government International Bond, 12.00%, due 02/01/20 (a) 1,940,680 ARS 8,048,134 Central Bank Argentina, 2.00%, due 02/04/18 (a) 1,901,737 USD 32,000,000 Republic of Argentina Discount Bond Series L-GL, Variable Rate, 6 mo. LIBOR + .81%, 2.44%, due 03/31/23 (a) 16,320,000 DEM 3,830,000 Republic of Argentina Discount Bond, Variable Rate, 6 mo. DEM LIBOR + .81%, 3.00%, due 03/31/23 (a) 1,094,735 USD 3,540,000 Republic of Argentina Global Bond, 8.88%, due 03/01/29 (a) 786,340 DEM 5,000,000 Republic of Argentina Global Bond, 9.00%, due 11/19/08 (a) (b) 781,377 USD 8,000,000 Republic of Argentina Global Bond, 9.00%, due 09/19/27 (a) 2,200,000 USD 26,545,000 Republic of Argentina Global Bond, 12.13%, due 02/25/19 (a) 7,631,687 USD 3,433,525 Republic of Argentina Global Bond Series 2018, 12.25%, due 06/19/18 (a) 987,138 USD 198,230 Republic of Argentina Global Bond, Series 2008, 15.50%, due 12/19/08 (a) 57,784 EUR 3,500,000 Republic of Argentina Global Bond, Series FEB, 8.00%, due 02/26/08 (a) 1,116,557 USD 96,602 Republic of Argentina Pro 4 Coupon Certificates, 2.00%, due 12/28/49 (a) (b) -- EUR 2,500,000 Republic of Argentina Series EMTN, Variable Rate, 3 mo. EURIBOR +5.10%, 7.22%, due 12/22/04 (a) (b) 733,737 USD 64,800,000 Republic of Argentina, 12.00% Capitalization Bond, PIK, due 06/19/31 (a) 18,630,000 ------------- 68,344,777 ------------- Total Argentina 68,344,777 ------------- BELIZE -- 0.1% FOREIGN GOVERNMENT OBLIGATIONS -- 0.1% USD 2,000,000 Belize Government International Bond, 9.50%, due 08/15/12 1,500,000 ------------- BOSNIA & HERZEGOVINA -- 0.4% FOREIGN GOVERNMENT OBLIGATIONS -- 0.4% DEM 25,244,000 Bosnia & Herzegovina Series A, Step Up, 3.00%, due 12/11/17 10,823,299 -------------
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) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- BRAZIL -- 20.3% FOREIGN GOVERNMENT OBLIGATIONS -- 20.3% EUR 2,000,000 Brazilian Government International Bond, 11.50%, due 04/02/09 2,749,616 USD 23,748,622 Brazil Capitalization Bond Series L, PIK, 8.00%, due 04/15/14 23,243,964 USD 163,765,320 Brazil DCB (Bearer), Variable Rate, 6 mo. LIBOR + .88%, 2.13%, due 04/15/12 147,798,201 USD 49,525,000 Brazil Discount ZL Bond, Variable Rate, 6 mo. LIBOR + .81%, 2.06%, due 04/15/24 41,848,625 USD 17,169,529 Brazil FLIRB (Registered), Variable Rate, Step Up, 6 mo LIBOR + .81%, 2.06%, due 04/15/09 16,482,748 USD 178,847,602 Brazil Capitalization Bond, PIK, 8.00%, due 04/15/14 (c) 175,047,091 USD 65,412,010 Brazil DCB (Registered) Series RG, Variable Rate, 6 mo. LIBOR + .88%, 2.13%, due 04/15/12 59,034,339 USD 12,797,774 Brazil MYDFA Trust Certificates Reg S, Variable Rate, 6 mo. LIBOR + .81%, 2.00%, due 09/15/07 12,429,838 USD 12,508,405 Brazilian Government International Exit Bonds, 6.00%, due 09/15/13 11,273,200 USD 626,164 Brazilian Government International Exit Bonds Odd Lot, 6.00%, due 09/15/13 551,808 USD 21,000,000 Republic of Brazil, 11.00%, due 08/17/40 22,438,500 ------------ 512,897,930 ------------ Total Brazil 512,897,930 ------------ BULGARIA -- 0.5% FOREIGN GOVERNMENT OBLIGATIONS -- 0.5% USD 10,822,000 Republic of Bulgaria Reg S, 8.25%, due 01/15/15 13,243,422 ------------ CHINA -- 0.3% FOREIGN GOVERNMENT OBLIGATIONS -- 0.3% USD 7,500,000 China Government International Bond, 6.80%, due 05/23/11 8,516,761 ------------
See accompanying notes to the financial statements. 3 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- COLUMBIA -- 0.4% FOREIGN GOVERNMENT OBLIGATIONS -- 0.4% USD 8,000,000 Republic of Colombia, 8.70%, due 02/15/16 7,360,000 USD 2,000,000 Republic of Colombia, 11.85%, due 03/09/28 2,040,000 ------------ 9,400,000 ------------ Total Columbia 9,400,000 ------------ COSTA RICA -- 0.3% FOREIGN GOVERNMENT OBLIGATIONS -- 0.3% USD 3,710,000 Costa Rica Government International Bond, 10.00%, due 08/01/20 4,034,625 USD 3,000,000 Republic of Costa Rica, Reg S, 8.05%, due 01/31/13 3,045,000 ------------ 7,079,625 ------------ Total Costa Rica 7,079,625 ------------ DOMINICAN REPUBLIC -- 1.4% FOREIGN GOVERNMENT OBLIGATIONS -- 1.4% USD 42,557,000 Dominican Republic Discount Bond, Variable Rate, 6 mo. LIBOR + .81%, 2.44%, due 08/30/24 28,087,620 USD 3,600,000 Dominican Republic International Bond RegS, 9.04%, due 01/23/13 2,502,000 USD 5,000,000 Dominican Republic Reg S, 9.50%, due 09/27/06 (c) 3,800,000 ------------ 34,389,620 ------------ Total Dominican Republic 34,389,620 ------------ ECUADOR -- 0.9% FOREIGN GOVERNMENT OBLIGATIONS -- 0.9% USD 2,900,628 Republic of Ecuador PDI (Global Bearer Capitalization Bond), PIK, Variable Rate, 6 mo. LIBOR + .81%, 2.81%, due 02/27/15 (b) 1,568,756 USD 27,587,000 Republic of Ecuador Reg S, Variable Rate, Step Up, 8.00%, due 08/15/30 21,655,795 ------------ 23,224,551 ------------ Total Ecuador 23,224,551 ------------
See accompanying notes to the financial statements. 4 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- EL SALVADOR -- 0.5% FOREIGN GOVERNMENT OBLIGATIONS -- 0.5% USD 11,000,000 El Salvador Government International Bond, 8.50%, due 07/25/11 12,100,000 ------------ IVORY COAST -- 0.9% FOREIGN GOVERNMENT OBLIGATIONS -- 0.9% FRF 37,500,000 Ivory Coast Discount Bond, Series Ff, Variable Rate, Step Up, 4.00%, due 03/31/28 (a) 2,014,825 FRF 85,905,000 Ivory Coast FLIRB, Variable Rate, Step Up, 2.00%, due 03/29/18 (a) 2,466,938 FRF 256,889,500 Ivory Coast PDI, Series Ff, Variable Rate, Step Up, 1.90%, due 03/29/18 (a) 7,853,051 USD 69,850,000 Ivory Coast FLIRB Series YR20, Variable Rate, Step Up, 0.00%, due 03/29/18 (a) 11,001,375 ------------ 23,336,189 ------------ Total Ivory Coast 23,336,189 ------------ JORDAN -- 0.0% FOREIGN GOVERNMENT OBLIGATIONS -- 0.0% USD 1,065,788 Hashemite Kingdom of Jordan IAB, Variable Rate, 6 mo. LIBOR + .81%, 2.69%, due 12/23/05 1,065,788 ------------ KAZAKHSTAN -- 0.2% FOREIGN GOVERNMENT OBLIGATIONS -- 0.2% USD 4,000,000 Kaztransoil Reg S, 8.50%, due 07/06/06 4,310,600 ------------ MACEDONIA -- 0.7% FOREIGN GOVERNMENT OBLIGATIONS -- 0.7% USD 20,895,923 Macedonia Capitalization Bond, PIK, Variable Rate, 6 mo. LIBOR + .81%, 2.65%, due 07/13/12 17,448,095 ------------
See accompanying notes to the financial statements. 5 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- MALAYSIA -- 0.4% FOREIGN GOVERNMENT OBLIGATIONS -- 0.4% USD 8,000,000 Malaysia Global Bond, 7.50%, due 07/15/11 9,376,803 ------------ MEXICO -- 7.2% CORPORATE DEBT -- 1.3% USD 12,000,000 Pemex Project Funding Master Trust, 8.63%, due 02/01/22 13,680,000 USD 16,500,000 Petroleos Mexicanos, 9.50%, due 09/15/27 20,047,500 ------------ 33,727,500 ------------ FOREIGN GOVERNMENT OBLIGATIONS -- 5.9% DEM 23,000,000 Mexico Government International Bond, 8.25%, due 02/24/09 16,658,670 USD 57,500,000 Mexico Global Bond Series MTN, 8.30%, due 08/15/31 65,923,750 DEM 20,000,000 Mexico Government International Bond, 8.00%, due 07/23/08 14,210,652 EUR 14,000,000 Mexico Government International Bond, Reg S, 7.50%, due 03/08/10 19,476,089 ITL 36,000,000,000 Mexico Government International Bond, Series EMTN, 11.00%, due 05/08/17 32,650,358 ------------ 148,919,519 ------------ Total Mexico 182,647,019 ------------ NICARAGUA -- 0.3% FOREIGN GOVERNMENT OBLIGATIONS -- 0.3% USD 10,194,188 Republic of Nicaragua BPI Series E, 5.00%, due 02/01/11 7,485,490 ------------ NIGERIA -- 1.0% FOREIGN GOVERNMENT OBLIGATIONS -- 1.0% USD 27,000,000 Central Bank of Nigeria Par Bond Series WW, Step Up, 6.25%, due 11/15/20 24,975,000 ------------
See accompanying notes to the financial statements. 6 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- PANAMA -- 1.1% FOREIGN GOVERNMENT OBLIGATIONS -- 1.1% USD 5,000,000 Republic of Panama, 9.38%, due 07/23/12 5,687,500 USD 4,000,000 Republic of Panama, 9.38%, due 01/16/23 4,340,000 USD 5,000,000 Republic of Panama, 9.63%, due 02/08/11 5,725,000 USD 14,317,875 Republic of Panama PDI Bond, Variable Rate, 6 mo. LIBOR + .81%, 2.75%, due 07/17/16 12,814,498 ------------ 28,566,998 ------------ Total Panama 28,566,998 ------------ PERU -- 2.9% FOREIGN GOVERNMENT OBLIGATIONS -- 2.9% USD 40,381,000 Peru Discount Bond, Variable Rate, 6 mo. LIBOR + .81%, 2.06%, due 03/07/27 31,497,180 USD 12,925,000 Peru FLIRB, Series 20YR, Variable Rate, Step Up, 4.50%, due 03/07/17 11,180,125 USD 25,000,000 Peru Par Bond, Series 30YR, Variable Rate, Step Up, 3.00%, due 03/07/27 13,750,000 USD 8,617,182 Peru Trust II Series 98-A LB, 0.00%, due 02/28/16 5,548,604 USD 20,337,557 Peru Trust Series 97-I-P Class A3, 0.00%, due 12/31/15 12,409,977 ------------ 74,385,886 ------------ Total Peru 74,385,886 ------------ PHILIPPINES -- 4.2% FOREIGN GOVERNMENT OBLIGATIONS -- 4.2% USD 59,501,000 Central Bank of the Philippines Series A, 8.60%, due 06/15/27 49,088,325 USD 4,310,000 Central Bank of the Philippines Series B, Variable Rate, Step Up, 6.50%, due 12/01/17 3,879,000 USD 8,500,000 National Power Corp Global Bond, 8.40%, due 12/15/16 7,140,000 EUR 12,000,000 Philippine Government International Bond, Reg S, 9.13%, due 02/22/10 15,185,173 USD 2,200,000 Philippine Government International Bond, Series 92-B, 2.44%, due 12/01/09 1,980,000 USD 27,843,000 Republic of Philippines, 8.38%, due 02/15/11 (c) 28,225,841 ------------ 105,498,339 ------------ Total Philippines 105,498,339 ------------
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) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- POLAND -- 0.7% FOREIGN GOVERNMENT OBLIGATIONS -- 0.7% USD 10,000,000 Delphes Co No. 2 Ltd Reg S, 7.75%, due 05/05/09 11,564,700 USD 6,000,000 Poland Government International Bond, 6.25%, due 07/03/12 6,667,500 ------------ 18,232,200 ------------ Total Poland 18,232,200 ------------ QATAR -- 0.8% FOREIGN GOVERNMENT OBLIGATIONS -- 0.8% USD 14,700,000 Qatar Government International Bond, 9.75%, due 06/15/30 20,910,750 ------------ RUSSIA -- 8.7% FOREIGN GOVERNMENT OBLIGATIONS -- 8.7% EUR 45,000,000 Aries Vermogensverwaltungs, 7.75%, due 10/25/09 58,379,974 USD 64,500,000 Aries Vermogensverwaltungs, 9.60%, due 10/25/14 72,240,000 USD 94,709,434 Russian Federation Reg S, Variable Rate, Step Up, 5.00%, due 03/31/30 90,684,283 ------------ 221,304,257 ------------ Total Russia 221,304,257 ------------ SOUTH KOREA -- 0.3% FOREIGN GOVERNMENT AGENCY -- 0.3% USD 6,000,000 Export Import Bank of Korea, 7.10%, due 03/15/07 6,545,783 ------------ THAILAND -- 0.2% FOREIGN GOVERNMENT AGENCY -- 0.2% USD 5,000,000 PTT Public Co Ltd, 5.75%, due 08/01/14 5,171,000 ------------ TUNISIA -- 0.1% FOREIGN GOVERNMENT OBLIGATIONS -- 0.1% JPY 360,000,000 Banque Centrale De Tunisie Series 6RG, 4.35%, due 08/15/17 3,526,357 ------------
See accompanying notes to the financial statements. 8 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- TURKEY -- 1.4% FOREIGN GOVERNMENT OBLIGATIONS -- 1.4% USD 26,000,000 Republic of Turkey, 11.88%, due 01/15/30 (c) 35,295,000 ------------ UKRAINE -- 0.1% FOREIGN GOVERNMENT OBLIGATIONS -- 0.1% USD 1,120,020 Ukraine Government International Bond Series, Reg S, 11.00%, due 03/15/07 1,209,622 ------------ UNITED KINGDOM -- 0.6% ASSET-BACKED SECURITIES -- 0.6% GBP 4,000,000 RMAC Series 03-NS1A Class A2A, 144A, AMBAC, Variable Rate, 3 mo. GBP LIBOR + .45%, 5.26%, due 06/12/35 7,234,028 GBP 5,000,000 RMAC Series 03-NS2A Class A2A, 144A, AMBAC, Variable Rate, 3 mo. GBP LIBOR + .40%, 5.21%, due 09/12/35 9,016,877 ------------ 16,250,905 ------------ Total United Kingdom 16,250,905 ------------ UNITED STATES -- 6.7% ASSET-BACKED SECURITIES -- 2.6% USD 4,000,000 Aircraft Finance Trust Series 99-1A Class A1, Variable Rate, 1 mo. LIBOR + .48%, 2.08%, due 05/15/24 2,840,000 USD 6,770,322 Chyps CBO Series 97-1A Class A2A, 144A, 6.72%, due 01/15/10 5,077,742 USD 1,637,679 Rhyno CBO Delaware Corp Series 97-1 Class A-2, 144A, Step Up, 6.33%, due 09/15/09 1,676,001 USD 18,994,419 SHYPPCO Finance Co Series 1I Class A-2B, 144A, 6.64%, due 06/15/10 18,139,670 USD 4,861,156 CNL Commercial Mortgage Loan Trust Series 03-2A Class A1, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .44%, 2.06%, due 10/25/30 4,886,434 USD 5,000,000 Golden Securites Corp Series 03-A Class A1, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .30%, 1.79%, due 12/02/13 5,002,450 USD 7,020,739 Quest Trust Series 03-X4 Class A, 144A, AMBAC, Variable Rate, 1 mo LIBOR + .43%, 2.05%, due 12/25/33 7,020,732 USD 3,124,744 Chevy Chase Mortgage Funding Corp Series 03-4, 144A, AMBAC, Variable Rate, 1 mo. LIBOR + .34%, 1.44%, due 10/25/34 3,129,138
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) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- UNITED STATES -- CONTINUED ASSET-BACKED SECURITIES -- CONTINUED USD 3,024,148 California Infrastructure PG&E Series 97-1 Class A7, 6.42%, due 09/25/08 3,139,562 USD 15,000,000 Huntsman International Asset-Backed Securities Ltd Series 1 Class A1, Variable Rate, 1 mo. LIBOR + .39%, 1.99%, due 03/15/07 14,924,850 ------------ 65,836,579 ------------ U.S. GOVERNMENT-- 4.1% USD 95,101,290 U.S. Treasury Inflation Indexed Note, 3.63%, due 01/15/08 (d) (e) 104,566,845 ------------ Total United States 170,403,424 ------------ URUGUAY -- 1.4% FOREIGN GOVERNMENT OBLIGATIONS -- 1.4% USD 5,250,000 Banco Central Del Uruguay Series B, 6.75%, due 03/21/21 4,462,500 JPY 1,550,000,000 Uruguay Government International Bond, 2.50%, due 03/14/11 9,745,318 USD 1,606,000 Uruguay Government International Bond, 7.00%, due 04/07/08 1,381,160 USD 1,000,000 Uruguay Government International Bond, 7.50%, due 03/15/15 (c) 832,500 USD 84,000 Uruguay Government International Bond, 7.63%, due 01/20/12 60,060 USD 27,315,352 Uruguay Government International Bond, 7.88%, due 01/15/33 (c) 19,940,206 ------------ 36,421,744 ------------ Total Uruguay 36,421,744 ------------ VENEZUELA -- 5.7% FOREIGN GOVERNMENT OBLIGATIONS -- 5.7% EUR 3,000,000 Republic of Venezuela, 11.00%, due 03/05/08 4,046,949 DEM 24,500,000 Republic of Venezuela Par Bond, 6.66%, due 03/31/20 13,358,743 USD 4,285,524 Republic of Venuzuela FLIRB Series A, Variable Rate, 6 mo. LIBOR + .88%, 2.06%, due 03/31/07 4,226,598 USD 722,003 Republic of Venezuela DCB DL Odd Lot, Variable Rate, 6 mo. LIBOR + .88%, 2.75%, due 12/18/07 (b) 671,463 USD 6,456,522 Republic of Venezuela DCB IL, Variable Rate, 6 mo. LIBOR + .88%, 2.75%, due 12/18/08 6,069,131 USD 19,107,000 Republic of Venezuela Discount Bond Series W-A, Variable Rate, 6 mo. LIBOR + .81%, 2.19%, due 03/31/20 15,858,810
See accompanying notes to the financial statements. 10 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- VENEZUELA -- CONTINUED FOREIGN GOVERNMENT OBLIGATIONS -- CONTINUED CHF 11,428,497 Republic of Venezuela FLIRB Series Sfr, Variable Rate, CHF 6 mo. LIBOR + .88%, 1.19%, due 03/31/07 8,201,516 USD 102,884 Republic of Venezuela New Money Bond Series A Odd Lot, Variable Rate, 6 mo. LIBOR + 1%, 2.44%, due 12/18/05 (b) 97,740 USD 2,088,989 Republic of Venezuela New Money Bond Series A Odd Lot, Variable Rate, 6 mo. LIBOR + 1%, 2.88%, due 12/18/05 (b) 1,984,539 USD 1,535,294 Republic of Venezuela New Money Bond Series A, Variable Rate, 6 mo. LIBOR + 1%, 2.88%, due 12/18/05 1,535,294 USD 459,532 Republic of Venezuela New Money Bond Series B Odd Lot, Variable Rate, 6 mo. LIBOR + .88%, 2.75%, due 12/18/05 (b) 436,556 USD 176,471 Republic of Venezuela New Money Bond Series B-NP, Variable Rate, 6 mo. LIBOR + .88%, 2.75%, due 12/18/05 176,471 FRF 54,175,000 Republic of Venezuela Par Bond, 7.71%, due 03/31/20 9,510,126 USD 15,000,000 Republic of Venezuela, 2.63%, due 04/20/11 12,562,500 USD 5,000,000 Republic of Venezuela, 5.38%, due 08/07/10 4,367,500 USD 29,000,000 Republic of Venezuela, 9.38%, due 01/13/34 26,593,000 USD 5,225,000 Republic of Venezuela Discount Bond Series W-B, Variable Rate, 6 mo. LIBOR + .81%, 2.44%, due 03/31/20 4,336,750 DEM 34,500,000 Republic of Venezuela Discount Bond, Variable Rate, 6 mo. LIBOR + .81%, 2.94%, due 03/31/20 16,935,522 DEM 23,440,000 Republic of Venezuela Global Bond, Step Down, 7.38%, due 10/29/08 12,425,417 DEM 320,000 Republic of Venezuela New Money Bond Series B-NP, Variable Rate, 6 mo. DEM LIBOR + .88%, 3.13%, due 12/18/05 169,013 ------------ 143,563,638 ------------ Total Venezuela 143,563,638 ------------ VIETNAM -- 0.9% FOREIGN GOVERNMENT OBLIGATIONS -- 0.9% USD 4,000,000 Vietnam Discount Bond, Variable Rate, 6 mo. LIBOR + .81%, 2.00%, due 03/13/28 3,400,000 USD 6,000,000 Vietnam PDI, Variable Rate, Step Up, 4.00%, due 03/12/16 5,535,000 USD 19,750,000 Vietnam Par Bond, Variable Rate, Step Up, 3.75%, due 03/12/28 13,430,000 ------------ 22,365,000 ------------ Total Vietnam 22,365,000 ------------
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) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- YUGOSLAVIA -- 0.1% FOREIGN GOVERNMENT OBLIGATIONS -- 0.1% USD 4,000,000 Second Emerging Markets Series EMTN, 0.00%, due 07/15/06 1,840,000 ------------- TOTAL DEBT OBLIGATIONS (COST $1,814,221,308) 1,883,655,872 ------------- LOAN ASSIGNMENTS -- 7.0% ALGERIA -- 1.5% JPY 562,500,000 Algeria Tranche 3 Loan Agreement, JPY Long Term Prime +.8125%, (2.3875%), due 03/04/10 4,987,890 JPY 3,637,616,761 Algeria Tranche 3 Loan Agreement, JPY LIBOR + .8125%, (0.9375%), due 03/04/10 32,234,565 JPY 190,550,044 Algeria Tranche 1 Loan Agreement, JPY 6 mo. LIBOR + .8125%, (0.9375%), due 09/04/06 1,697,231 ------------ 38,919,686 ------------ ARGENTINA -- 0.0% ARS 15,432,863 Argentina INDER Certificates (a) 614,226 ------------ CONGO REPUBLIC (BRAZZAVILLE) -- 0.3% FRF 102,097,963 Republic of Congo Loan Agreement * 2,837,373 USD 8,496,466 Republic of Congo Loan Agreement * 1,274,470 EUR 6,987,247 Republic of Congo Loan Agreement * 1,273,740 EUR 14,565,612 Republic of Congo Loan Agreement * 2,655,238 ------------ 8,040,821 ------------ INDONESIA -- 2.0% EUR 4,828,205 Paris Club Loan Agreement 4,899,545 USD 2,850,000 Republic of Indonesia Loan Agreement, dated March 25, 1997 LIBOR + .625%, (2.28%), due 03/01/05 2,649,652 USD 2,850,000 Republic of Indonesia Loan Agreement, dated March 25, 1997 LIBOR + .625%, (2.28%), due 03/01/05 2,649,652 USD 3,800,000 Republic of Indonesia Loan Agreement, dated March 25, 1997 LIBOR + .625%, (2.28%), due 03/01/05 3,532,869 USD 8,120,000 Republic of Indonesia Loan Agreement, dated May 21, 1996 LIBOR + .625%, (2.35%), due 05/21/05 7,669,922
See accompanying notes to the financial statements. 12 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- INDONESIA -- CONTINUED USD 6,090,000 Republic of Indonesia Loan Agreement, dated May 21, 1996 LIBOR + .625%, (2.35%), due 05/21/05 5,752,442 USD 6,090,000 Republic of Indonesia Loan Agreement, dated May 21, 1996 LIBOR + .625%, (2.35%), due 05/21/05 5,752,442 JPY 244,620,000 Republic of Indonesia Loan Agreement, dated January 1, 1994 (0.94625%), due 03/28/13 1,861,203 USD 5,005,000 Republic of Indonesia Loan Agreement, dated January 1, 1994 (2.60%), due 03/29/13 4,404,400 USD 3,884,400 Republic of Indonesia Loan Agreement, dated June 14, 1995 LIBOR + .625%, (2.13%), due 12/14/19 3,125,499 USD 3,884,400 Republic of Indonesia Loan Agreement, dated June 14, 1995 LIBOR + .625%, (2.13%), due 12/14/19 3,125,499 USD 5,179,200 Republic of Indonesia Loan Agreement, dated June 14, 1995 LIBOR + .625%, (2.13%), due 12/14/19 4,167,332 ------------ 49,590,457 ------------ JAMAICA -- 0.0% USD 19,318 Jamaica Refinancing Agreement Tranche B, LIBOR + .8125%, (1.94%), due 11/15/04 18,280 ------------ MOROCCO -- 0.4% USD 9,204,545 Morocco Restructuring and Consolidating Agreement Tranche A, 6 mo. LIBOR + .8125% (2.78), due 01/01/09 9,031,960 ------------ RUSSIA -- 2.7% ATS 1,203,022 Russia Foreign Trade Obligations * (b) 107,706 FRF 3,660,000 Russia Foreign Trade Obligations * (b) 618,217 FRF 3,660,000 Russia Foreign Trade Obligations * (b) 528,641 FRF 3,660,000 Russia Foreign Trade Obligations * (b) 492,567 ATS 964,717 Russia Foreign Trade Obligations * (b) 82,809 ATS 1,738,698 Russia Foreign Trade Obligations * (b) 143,748 ATS 447,177 Russia Foreign Trade Obligations * (b) 44,609 ATS 631,501 Russia Foreign Trade Obligations * (b) 47,831 FRF 3,660,000 Russia Foreign Trade Obligations * (b) 566,953 FRF 3,660,000 Russia Foreign Trade Obligations * (b) 464,697 FRF 71,883,000 Russia Foreign Trade Obligations * (b) 14,059,661 CHF 231,420 Russia Foreign Trade Obligations * (b) 142,259
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) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- RUSSIA -- CONTINUED USD 10,840,000 Russia Foreign Trade Obligations * (b) 12,381,448 NLG 495,100 Russia Foreign Trade Obligations * (b) 278,798 USD 33,641,081 Russia Foreign Trade Obligations * (b) 36,954,727 DEM 2,503,894 Russia Foreign Trade Obligations * (b) 1,223,989 ------------ 68,138,660 ------------ SERBIA -- 0.1% USD 2,899,940 Serbia New Financing Agreement * 2,175,797 ------------ TOTAL LOAN ASSIGNMENTS (COST $155,387,130) 176,529,887 ------------ LOAN PARTICIPATIONS -- 8.3% ALGERIA -- 0.4% JPY 1,008,947,370 Algeria Tranche S1, JPY Long Term Prime + .1875%, (2.3625%), (Participation with Merrill Lynch), due 03/04/10 8,963,722 JPY 150,000,000 Algeria Tranche 3 Loan Agreement, JPY Long Term Prime +.8125%, (2.3875%), (Participation with Salomon), due 03/04/10 1,325,895 ------------ 10,289,617 ------------ INDONESIA -- 1.1% USD 715,658 Republic of Indonesia Loan Agreement, 6 mo. LIBOR +.70%, (2.42%), (Participation with Deutsche Bank), due 10/05/05 687,032 USD 558,000 Republic of Indonesia Loan Agreement, dated March 25, 1997 LIBOR + .625%, (2.28%), (Participation with Salomon), due 03/01/05 519,788 USD 558,000 Republic of Indonesia Loan Agreement, dated March 25, 1997 LIBOR + .625%, (2.28%), (Participation with Salomon), due 03/01/05 519,788 USD 744,000 Republic of Indonesia Loan Agreement, dated March 25, 1997 LIBOR + .625%, (2.28%), (Participation with Salomon), due 03/01/05 693,051 USD 570,000 Republic of Indonesia Loan Agreement, dated May 21, 1996 LIBOR + .625%, (2.35%), (Participation with Salomon), due 05/21/05 541,258 USD 570,000 Republic of Indonesia Loan Agreement, dated May 21, 1996 LIBOR + .625%, (2.35%), (Participation with Salomon), due 05/21/05 541,258 USD 760,000 Republic of Indonesia Loan Agreement, dated May 21, 1996 LIBOR + .625%, (2.35%), (Participation with Salomon), due 05/21/05 721,678 USD 27,142,920 Republic of Indonesia Loan Agreement, 3 mo. LIBOR + 1.25%, (2.51%), (Participation with Deutsche Bank), due 02/12/13 23,139,339
See accompanying notes to the financial statements. 14 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- INDONESIA -- CONTINUED USD 478,080 Republic of Indonesia Loan Agreement, dated June 14, 1995 LIBOR + .625%, (1.635%), (Participation with Salomon), due 12/14/19 386,298 USD 478,080 Republic of Indonesia Loan Agreement, dated June 14, 1995 LIBOR + .625%, (2.13%), (Participation with Salomon), due 12/14/19 386,298 USD 637,440 Republic of Indonesia Loan Agreement, dated June 14, 1995 LIBOR + .625%, (2.13%), (Participation with Salomon), due 12/14/19 515,063 ------------ 28,650,851 ------------ JAMAICA -- 0.0% USD 31,250 Jamaica Refinancing Agreement Tranche B, LIBOR + .8125%, (1.94%), (Participation with JP Morgan Chase), due 11/15/04 29,663 USD 312,500 Jamaica Refinancing Agreement Tranche B, LIBOR + .8125%, (1.94%), (Participation with Salomon), due 11/15/04 296,971 ------------ 326,634 ------------ POLAND -- 1.1% JPY 2,820,000,000 Poland Paris Club (Participation with Deutsche Bank) 26,166,167 ------------ RUSSIA -- 5.3% DEM 10,399,680 Russia Foreign Trade Obligations, (Participation with Deutsche Bank), due 02/19/05 * (b) 6,082,757 USD 214,371 Russia Foreign Trade Obligations, (Participation with Deutsche Bank), due 02/19/05 * (b) 232,014 USD 81,965 Russia Foreign Trade Obligations, (Participation with Deutsche Bank), due 02/19/05 * (b) 93,284 DEM 2,625,598 Russia Foreign Trade Obligations, (Participation with Deutsche Bank), due 02/19/05 * (b) 1,659,863 USD 9,449,683 Russian Paris Club Debt, (Participation with Deutsche Bank), due 08/16/20 7,253,576 USD 25,138,982 Russian Paris Club Debt, (Participation with Deutsche Bank), due 08/16/20 19,296,683 EUR 43,727,298 Russian Paris Club Debt, (Participation with Deutsche Bank), due 08/20/20 47,816,979 EUR 10,527,237 Russian Paris Club Debt, (Participation with Deutsche Bank), due 08/20/20 11,316,073 EUR 15,370,068 Russian Paris Club Debt, (Participation with Deutsche Bank), due 08/20/20 16,854,281 EUR 10,820,097 Russian Paris Club Debt, (Participation with Deutsche Bank), due 08/20/20 11,632,192 USD 10,000,000 Russia Foreign Trade Obligations, (Participation with Banca Lombardi), due 12/29/49 * (b) 11,389,000 USD 531,297 Russia Foreign Trade Obligations, (Participation with Deutsche Bank), due 02/19/05 * (b) 644,410 ------------ 134,271,112 ------------
See accompanying notes to the financial statements. 15 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE / PRINCIPAL AMOUNT DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- SERBIA -- 0.4% USD 6,952,861 Serbia New Financing Agreement (Participation with JP Morgan Chase) 5,219,535 USD 6,000,000 Serbia New Financing Agreement (Participation with UBS) 4,494,269 USD 3,000,000 Serbia Trade & Deposit Facility Agreement (Participation with JP Morgan Chase) * 900,000 ------------ 10,613,804 ------------ TOTAL LOAN PARTICIPATIONS (COST $162,118,203) 210,318,185 ------------ PROMISSORY NOTES -- 0.2% NIGERIA -- 0.2% USD 12,000,000 Central Bank of Nigeria Promissory Notes Series RC, 5.09%, due 1/5/2010 4,410,000 ------------ TOTAL PROMISSORY NOTES (COST $5,581,518) 4,410,000 ------------ CALL OPTIONS PURCHASED -- 0.4% OPTIONS ON BONDS -- 0.1% USD 20,000,000 Brazilian Government International Bond, 11.00%, due 08/17/40, Expires 09/02/04, Strike 107.00 92,068 USD 12,000,000 Brazilian Government International Bond, 11.00%, due 08/17/40, Expires 09/17/04, Strike 102.90 482,935 USD 26,000,000 Brazilian Government International Bond, 11.00%, due 08/17/40, Expires 09/23/04, Strike 105.50 607,090 USD 4,000,000 Brazilian Government International Bond, 11.00%, due 08/17/40, Expires 09/23/04, Strike 105.50 91,701 USD 20,000,000 Mexico Global Bond, 7.50%, due 04/08/33, Expires 09/09/04, Strike 104.00 384,150 USD 2,000,000 Qatar Government International Bond, 9.75%, due 06/15/30, Expires 01/10/05, Strike 141.00 56,003 USD 2,000,000 Qatar Government International Bond, 9.75%, due 06/15/30, Expires 01/13/05, Strike 141.00 55,747 USD 2,000,000 Qatar Government International Bond, 9.75%, due 06/15/30, Expires 01/27/05, Strike 141.00 57,238
See accompanying notes to the financial statements. 16 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PRINCIPAL AMOUNT DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- OPTIONS ON BONDS -- CONTINUED USD 5,000,000 Qatar Government International Bond, 9.75%, due 06/15/30, Expires 02/10/05, Strike 141.75 155,645 USD 2,000,000 Qatar Government International Bond, 9.75%, due 06/15/30, Expires 09/15/04, Strike 137.00 99,444 USD 4,000,000 Qatar Government International Bond, 9.75%, due 06/15/30, Expires 09/16/04, Strike 137.00 198,457 USD 2,000,000 Qatar Government International Bond, 9.75%, due 06/15/30, Expires 10/14/04, Strike 141.50 38,763 USD 2,000,000 Qatar Government International Bond, 9.75%, due 06/15/30, Expires 10/18/04, Strike 141.00 45,409 USD 2,000,000 Qatar Government International Bond, 9.75%, due 06/15/30, Expires 10/20/04, Strike 141.00 44,912 USD 2,000,000 Qatar Government International Bond, 9.75%, due 06/15/30, Expires 10/27/04, Strike 140.00 56,607 USD 2,000,000 Qatar Government International Bond, 9.75%, due 06/15/30, Expires 10/29/04, Strike 139.00 70,023 USD 2,000,000 Qatar Government International Bond, 9.75%, due 06/15/30, Expires 11/02/04, Strike 140.50 53,054 USD 10,000,000 Qatar Government International Bond, 9.75%, due 06/15/30, Expires 11/29/04, Strike 142.00 231,000 USD 2,000,000 Qatar Government International Bond, 9.75%, due 06/15/30, Expires 11/30/04, Strike 145.00 30,400 USD 13,000,000 Republic of Turkey Bond, 11.875%, due 01/15/30, Expires 09/30/04, Strike 135.50 261,300 USD 12,000,000 Republic of Venezuela, 9.25%, due 09/15/27, Expires 09/30/04, Strike 93.50 154,800 USD 16,000,000 Russia Federation Bond, 5.0%, due 03/31/30, Expires 09/20/04, Strike 94.125 318,392 ----------- 3,585,138 ----------- OPTIONS ON INTEREST RATE SWAPS -- 0.3% USD 61,146,497 KRW Swaption, Expires 02/24/09, Strike 6.05 530,630 USD 61,146,497 KRW Swaption, Expires 02/24/09, Strike 6.05 3,011,928 USD 63,119,137 KRW Swaption, Expires 04/08/09, Strike 6.20 501,284 USD 63,119,137 KRW Swaption, Expires 04/08/09, Strike 6.20 3,364,436 USD 50,000,000 KRW Swaption, Expires 06/01/05, Strike 7.5 -- USD 75,000,000 KRW Swaption, Expires 06/07/05, Strike 7.42 -- ----------- 7,408,278 ----------- TOTAL CALL OPTIONS PURCHASED (COST $10,766,077) 10,993,416 -----------
See accompanying notes to the financial statements. 17 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PRINCIPAL AMOUNT DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- PUT OPTIONS PURCHASED -- 0.1% OPTIONS ON BONDS -- 0.1% USD 60,000,000 Brazilian Government International Bond, 11.00%, due 08/17/40, Expires 09/07/04, Strike 99.25 2,022 USD 18,000,000 Brazilian Government International Bond, 11.00%, due 08/17/40, Expires 09/17/04, Strike 103.90 116,815 USD 10,000,000 Qatar Government International Bond, 9.75%, due 06/15/30, Expires 01/04/05, Strike 135.00 166,838 USD 2,000,000 Qatar Government International Bond, 9.75%, due 06/15/30, Expires 01/13/05, Strike 135.00 35,539 USD 2,000,000 Qatar Government International Bond, 9.75%, due 06/15/30, Expires 01/27/05, Strike 135.00 40,043 USD 2,000,000 Qatar Government International Bond, 9.75%, due 06/15/30, Expires 10/14/04, Strike 135.00 4,367 USD 2,000,000 Qatar Government International Bond, 9.75%, due 06/15/30, Expires 10/20/04, Strike 134.00 3,856 USD 10,000,000 Qatar Government International Bond, 9.75%, due 06/15/30, Expires 10/25/04, Strike 130.00 3,954 USD 2,000,000 Qatar Government International Bond, 9.75%, due 06/15/30, Expires 10/27/04, Strike 130.00 907 USD 2,000,000 Qatar Government International Bond, 9.75%, due 06/15/30, Expires 10/29/04, Strike 134.00 6,353 USD 2,000,000 Qatar Government International Bond, 9.75%, due 06/15/30, Expires 11/02/04, Strike 136.00 13,119 USD 2,000,000 Qatar Government International Bond, 9.75%, due 06/15/30, Expires 11/10/2004, Strike 138.00 27,574 USD 2,000,000 Qatar Government International Bond, 9.75%, due 06/15/30, Expires 11/22/04, Strike 138.00 32,242 USD 2,000,000 Qatar Government International Bond, 9.75%, due 06/15/30, Expires 11/23/04, Strike 138.00 34,238 USD 2,000,000 Qatar Government International Bond, 9.75%, due 06/15/30, Expires 11/30/04, Strike 139.00 41,000 USD 25,000,000 Republic of Turkey Bond, 8.00%, due 02/14/34, Expires 09/28/04, Strike 100.00 935,215 USD 12,000,000 Republic of Venezuela, 9.25%, due 09/15/27, Expires 09/30/04, Strike 93.50 240,000 ------------ 1,704,082 ------------ TOTAL PUT OPTIONS PURCHASED (COST $5,026,600) 1,704,082 ------------
See accompanying notes to the financial statements. 18 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------------------------------- MUTUAL FUNDS -- 5.7% 3,464,874 GMO Short-Duration Collateral Fund (f) 87,799,918 21,409 GMO Special Purpose Holding Fund (f) 376,589 56,950,944 Merrimac Cash Series, Premium Class 56,950,944 ----------------- TOTAL MUTUAL FUNDS (COST $144,697,859) 145,127,451 ----------------- RIGHTS AND WARRANTS -- 0.1% MEXICO -- 0.1% 33,077,000 Mexico Par Bond Series C Warrants, Expires 6/30/05 ** 893,079 33,077,000 Mexico Par Bond Series D Warrants, Expires 6/30/06 ** 777,310 30,104,000 United Mexican States Warrants, Expires 12/31/09 ** 778,975 ----------------- 2,449,364 ----------------- NIGERIA -- 0.0% 25,000 Central Bank of Nigeria Warrants, Expires 11/15/20** (b) -- ----------------- URUGUAY -- 0.0% 4,000,000 Banco Central Del Uruguay Warrants, Expires 11/15/20 ** (b) -- ----------------- VENEZUELA -- 0.0% 262,360 Republic of Venezuela Recovery Warrants, Expires 4/15/20 ** (b) -- 164,215 Republic of Venezuela Bond Warrants, Expires 4/18/20 ** (b) -- ----------------- -- ----------------- TOTAL RIGHTS AND WARRANTS (COST $0) 2,449,364 -----------------
See accompanying notes to the financial statements. 19 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE DESCRIPTION VALUE ($) - ---------------------------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS -- 6.9% COMMERCIAL PAPER -- 6.9% USD 50,000,000 BMW US Capital Corp., 1.56%, due 09/01/04 50,000,000 USD 50,000,000 Rabobank USA, 1.5%, due 09/01/04 50,000,000 USD 74,800,000 UBS Finance (Delaware) Inc, 1.47%, due 09/01/04 74,800,000 ----------------- 174,800,000 ----------------- TOTAL SHORT-TERM INVESTMENTS (COST $174,800,000) 174,800,000 ----------------- TOTAL INVESTMENTS -- 103.1% (Cost $2,472,598,695) 2,609,988,257 Other Assets and Liabilities (net) -- (3.1%) (79,217,237) ----------------- TOTAL NET ASSETS -- 100.0% $ 2,530,771,020 =================
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 BPI - Indemnification payment bonds DCB - Debt Conversion Bond EMTN - Euromarket Medium Term Note FLIRB - Front Loaded Interest Reduction Bond IAB - Interest Arrears Bond MTN - Medium-term Note 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 August 31, 2004, which are subject to change based on the terms of the security, including varying reset dates. See accompanying notes to the financial statements. 20 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) NOTES TO SCHEDULE OF INVESTMENTS: * Non-performing. Borrower not currently paying interest. ** Non-income producing security. (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 2). (c) All or a portion of this security has been segregated to cover collateral requirements on reverse repurchase agreements (Note 2). (d) All or a portion of this security is held as collateral for open swap contracts (Note 2). (e) Indexed security in which price and/or coupon is linked to prices of other securities, securities indices, or other financial indicators (Note 2). (f) Affiliated issuer. CURRENCY ABBREVIATIONS: ARS - Argentine Peso ATS - Austrian Schilling 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 - Korean Won NLG - Netherlands Guilder USD - United States Dollar At August 31, 2004, the approximate cost for U.S. federal income tax purposes and gross unrealized appreciation and depreciation in value of investments were as follows:
GROSS UNREALIZED GROSS UNREALIZED NET UNREALIZED AGGREGATE COST APPRECIATION DEPRECIATION APPRECIATION ----------------- ------------------ ---------------- ---------------- $ 2,481,504,636 $ 253,112,967 $ (124,629,346) $ 128,483,621
See accompanying notes to the financial statements. 21 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) A summary of outstanding financial instruments at August 31, 2004 is as follows: FORWARD CURRENCY CONTRACTS
NET UNREALIZED SETTLEMENT APPRECIATION DATE DELIVER/RECEIVE UNITS OF CURRENCY VALUE (DEPRECIATION) -------------- ------------------- ------------------- --------------- --------------- Buys 9/14/04 EUR 20,000,000 $ 24,302,400 $ 230,400 =============== Sales 9/07/04 CHF 3,000,000 $ 2,366,240 $ 55,244 9/14/04 EUR 254,300,000 309,005,016 1,207,218 11/16/04 GBP 9,000,000 16,088,503 (68,503) 10/12/05 HKD 422,400,000 54,467,933 532,067 9/28/04 JPY 8,500,000,000 77,544,850 436,801 --------------- $ 2,162,827 ===============
See accompanying notes to the financial statements. 22 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) REVERSE REPURCHASE AGREEMENTS
FACE VALUE DESCRIPTION MARKET VALUE ---------------- ------------------------------------------------------------------------ --------------- USD 3,780,561 JP Morgan Chase & Co., 0.80%, dated 6/17/04, to be repurchased on demand by JP Morgan Chase & Co., at face value plus accrued interest. $ 3,786,946 USD 39,682,778 JP Morgan Chase & Co., 0.85%, dated 7/02/04, to be repurchased on demand by JP Morgan Chase & Co., at face value plus accrued interest. 39,739,932 USD 702,325 JP Morgan Chase & Co., 0.95%, dated 7/27/04, to be repurchased on demand by JP Morgan Chase & Co., at face value plus accrued interest. $ 702,992 USD 2,107,701 JP Morgan Chase & Co., 1.00%, dated 8/13/04, to be repurchased on demand by JP Morgan Chase & Co., at face value plus accrued interest. $ 2,108,814 USD 853,333 JP Morgan Chase & Co., 0.85%, dated 8/13/04, to be repurchased on demand by JP Morgan Chase & Co., at face value plus accrued interest. $ 853,716 USD 59,661,742 JP Morgan Chase & Co., 0.95%, dated 7/27/04, to be repurchased on demand by JP Morgan Chase & Co., at face value plus accrued interest. $ 59,665,719 --------------- $ 106,858,119 =============== Average balance outstanding $ 105,940,664 Average interest rate 0.74% Maximum balance outstanding $ 151,341,646 Average shares outstanding 220,172,603 Average balance per share outstanding $ .48
See accompanying notes to the financial statements. 23 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ------------------------------------------------------------ --------------- CREDIT DEFAULT SWAPS 30,000,000 USD 12/20/04 Agreement with Deutsche Bank AG dated 4/16/03 to $ 685,416 receive 5.25% per year times the notional amount. In exchange for that periodic payment, upon a default event by Gazprom Loan Facility, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Gazprom Loan Facility to the Fund. 5,000,000 USD 12/20/04 Agreement with UBS AG dated 4/16/04 to pay 1.25% (14,455) per year times the notional amount. In exchange for that periodic payment, upon a default event by Gazprom Loan Facility, UBS AG agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issue by Gazprom Loan Facility to UBS AG. 10,000,000 USD 12/20/04 Agreement with UBS AG dated 4/23/04 to pay 1.60% (46,372) per year times the notional amount. In exchange for that periodic payment, upon a default event by Gazprom Loan Facility, UBS AG agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issue by Gazprom Loan Facility to UBS AG. 15,000,000 USD 2/20/05 Agreement with JP Morgan Chase Bank dated 1/28/04 (49,156) to pay 1.40% per year times the notional amount. In exchange for that periodic payment, upon a default event in Brazil, JP Morgan Chase Bank agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by Brazil to JP Morgan Chase Bank.
See accompanying notes to the financial statements. 24 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ------------------------------------------------------------ --------------- 2,000,000 USD 4/23/05 Agreement with Deutsche Bank AG dated 4/22/03 to $ (98,666) pay 6.25% per year times the notional amount. In exchange for that periodic payment, upon a default event in Lebanon, Deutsche Bank AG agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by Lebanon to Deutsche Bank AG. 5,000,000 USD 6/18/05 Agreement with Deutsche Bank AG dated 6/13/02 to (55,023) pay 2.35% per year times the notional amount. In exchange for that periodic payment, upon a default event in the Philippines, Deutsche Bank AG agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by the Philippines to Deutsche Bank AG. 5,000,000 USD 7/15/05 Agreement with Banque Paribas dated 10/18/02 to (258,843) pay 10.00% per year times the notional amount. In exchange for that periodic payment, upon a default event by Banco Latinoamericano de Exportaciones SA Euro Medium Term Notes, Banque Paribas agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by Banco Latinoamericano de Exportaciones SA Euro Medium Term Notes to Banque Paribas. 15,000,000 USD 7/16/05 Agreement with UBS AG dated 7/15/04 to pay 2.10% (141,728) per year times the notional amount. In exchange for that periodic payment, upon a default event by Gazprom Loan Facility, UBS AG agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by Gazprom Loan Facility to UBS AG.
See accompanying notes to the financial statements. 25 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ------------------------------------------------------------ --------------- 15,000,000 USD 7/24/05 Agreement with Merrill Lynch International dated $ (51,944) 3/03/04 to pay 1.12% per year times the notional amount. In exchange for that periodic payment, upon a default event in Russia, Merrill Lynch International agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by Russia to Merrill Lynch International. 7,000,000 USD 8/5/05 Agreement with Deutsche Bank AG dated 7/31/02 to (122,185) pay 3.35% per year times the notional amount. In exchange for that periodic payment, upon a default event in the Philippines, Deutsche Bank AG agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by the Philippines to Deutsche Bank AG. 10,000,000 USD 11/6/05 Agreement with JP Morgan Chase Bank dated 11/05/02 (1,247,789) to pay 9.30% per year times the notional amount. In exchange for that periodic payment, upon a default event in Columbia, JP Morgan Chase Bank agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by Columbia to JP Morgan Chase Bank. 10,000,000 USD 12/20/05 Agreement with UBS AG dated 12/10/03 to pay 2.03% (73,197) per year times the notional amount. In exchange for that periodic payment, upon a default event in Brazil, UBS AG agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by Brazil to UBS AG.
See accompanying notes to the financial statements. 26 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ------------------------------------------------------------ --------------- 15,000,000 USD 1/21/06 Agreement with Deutsche Bank AG dated 7/18/03 to $ 821,760 receive 5.40% per year times the notional amount. In exchange for that periodic payment, upon a default event by Gazprom Loan Facility, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Gazprom Loan Facility to the Fund. 15,000,000 USD 4/3/06 Agreement with Morgan Guaranty Trust Company dated (45,905) 3/29/01 to pay 0.25% per year times the notional amount. In exchange for that periodic payment, upon a default event by Banco Santander Senior Bonds or Loans, Morgan Guaranty Trust Company agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by Banco Santander Senior Bonds or Loans to Morgan Guaranty Trust Company. 15,000,000 USD 4/6/06 Agreement with Morgan Guaranty Trust Company dated (48,709) 4/03/01 to pay 0.26% per year times the notional amount. In exchange for that periodic payment, upon a default event by Banco Santander Senior Bonds or Loans, Morgan Guaranty Trust Company agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by Banco Santander Senior Bonds or Loans to Morgan Guaranty Trust Company. 10,000,000 USD 4/10/06 Agreement with Morgan Guaranty Trust Company dated (32,446) 4/04/01 to pay 0.26% per year times the notional amount. In exchange for that periodic payment, upon a default event by Banco Santander Senior Bonds or Loans, Morgan Guaranty Trust Company agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by Banco Santander Senior Bonds or Loans to Morgan Guaranty Trust Company.
See accompanying notes to the financial statements. 27 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ------------------------------------------------------------ --------------- 30,000,000 USD 4/10/06 Agreement with Morgan Guaranty Trust Company dated $ (104,469) 4/05/01 to pay 0.275% per year times the notional amount. In exchange for that periodic payment, upon a default event by Banco Santander Senior Bonds or Loans, Morgan Guaranty Trust Company agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by Banco Santander Senior Bonds or Loans to Morgan Guaranty Trust Company. 25,000,000 USD 4/30/06 Agreement with Morgan Guaranty Trust Company dated (88,285) 4/25/01 to pay 0.27% per year times the notional amount. In exchange for that periodic payment, upon a default event by Banco Bilbao Vizcaya Senior Bonds or Loans, Morgan Guaranty Trust Company agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issue by Banco Bilbao Vizcaya Senior Bonds or Loans to Morgan Guaranty Trust Company. 15,000,000 USD 6/8/06 Agreement with Morgan Guaranty Trust Company dated 749,703 6/05/01 to receive 2.95% per year times the notional amount. In exchange for that periodic payment, upon a default event in Mexico, the Fund agrees to pay Morgan Guaranty Trust Company the notional amount of the swap. To receive that payment, Morgan Guaranty Trust Company must deliver a bond (with par value equal to the notional amount of the swap) issued by Mexico to the Fund. 35,000,000 USD 7/5/06 Agreement with Deutsche Bank AG dated 7/01/03 to 2,072,113 receive 5.00% per year times the notional amount. In exchange for that periodic payment, upon a default event by Gazprom Loan Facility, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Gazprom Loan Facility to the Fund.
See accompanying notes to the financial statements. 28 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ------------------------------------------------------------ --------------- 35,000,000 USD 7/5/06 Agreement with UBS AG dated 5/20/04 to pay 3.40% $ (995,535) per year times the notional amount. In exchange for that periodic payment, upon a default event by Gazprom Loan Facility, UBS AG agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by Gazprom Loan Facility to UBS AG. 20,000,000 USD 8/9/06 Agreement with JP Morgan Chase Bank dated 8/06/02 (138,742) to pay 0.42% per year times the notional amount. In exchange for that periodic payment, upon a default event by Banco Bilbao Vizcaya Argentaria SA, JP Morgan Chase Bank agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by Banco Bilbao Vizcaya Argentaria SA to JP Morgan Chase Bank. 15,000,000 USD 8/21/06 Agreement with Deutsche Bank AG dated 7/18/03 to 951,255 receive 5.45% per year times the notional amount. In exchange for that periodic payment, upon a default event by Gazprom Loan Facility, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Gazprom Loan Facility to the Fund. 5,000,000 USD 9/27/06 Agreement with Merrill Lynch International dated (1,291,783) 11/01/02 to receive 5.70% per year times the notional amount. In exchange for that periodic payment, upon a default event in The Dominican Republic, the Fund agrees to pay Merrill Lynch International the notional amount of the swap. To receive that payment, Merrill Lynch International must deliver a bond (with par value equal to the notional amount of the swap) issued by The Dominican Republic to the Fund.
See accompanying notes to the financial statements. 29 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ------------------------------------------------------------ --------------- 15,000,000 USD 11/20/06 Agreement with Deutsche Bank AG dated 11/04/03 to $ (671,865) pay 4.55% per year times the notional amount. In exchange for that periodic payment, upon a default event in Brazil, Deutsche Bank AG agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by Brazil to Deutsche Bank AG. 10,000,000 USD 11/20/06 Agreement with Deutsche Bank AG dated 11/05/03 to (412,238) pay 4.40% per year times the notional amount. In exchange for that periodic payment, upon a default event in Brazil, Deutsche Bank AG agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by Brazil to Deutsche Bank AG. 20,000,000 USD 12/20/06 Agreement with JP Morgan Chase Bank dated 11/03/03 (883,918) to pay 4.75% per year times the notional amount. In exchange for that periodic payment, upon a default event in Brazil, JP Morgan Chase Bank agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by Brazil to JP Morgan Chase Bank. 10,000,000 USD 2/18/07 Agreement with JP Morgan Chase Bank dated 2/13/02 (743,242) to pay 4.60% per year times the notional amount. In exchange for that periodic payment, upon a default event in Russia, JP Morgan Chase Bank agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by Russia to JP Morgan Chase Bank.
See accompanying notes to the financial statements. 30 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ------------------------------------------------------------ --------------- 10,000,000 USD 2/26/07 Agreement with Salomon Brothers International $ (388,236) Limited dated 2/21/02 to pay 2.15% per year times the notional amount. In exchange for that periodic payment, upon a default event in South Africa, Salomon Brothers International Limited agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by South Africa to Salomon Brothers International Limited. 10,000,000 USD 6/27/07 Agreement with JP Morgan Chase Bank dated 6/24/02 (77,006) to pay 0.33% times the notional amount. In exchange for that periodic payment, upon a default event by Banco Bilbao Vizcaya Argentaria SA, JP Morgan Chase Bank agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by Banco Bilbao Vizcaya Argentaria SA to JP Morgan Chase Bank. 10,000,000 USD 7/2/07 Agreement with Citibank N.A. dated 6/27/02 to pay (124,976) 0.64% per year times the notional amount. In exchange for that periodic payment, upon a default event by Bank of China bonds or loans, Citibank N.A. agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by Bank of China bonds or loans to Citibank N.A. 3,000,000 USD 7/2/07 Agreement with Deutsche Bank AG dated 6/27/02 to (37,712) pay 0.64% per year times the notional amount. In exchange for that periodic payment, upon a default event by Bank of China bonds or loans, Deutsche Bank AG agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by Bank of China bonds or loans to Deutsche Bank AG.
See accompanying notes to the financial statements. 31 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ------------------------------------------------------------ --------------- 15,000,000 USD 9/27/07 Agreement with JP Morgan Chase Bank dated 9/26/02 $ (119,599) to pay 0.33% per year times the notional amount. In exchange for that periodic payment, upon a default event by HSBC Bank Plc, JP Morgan Chase Bank agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by HSBC Bank Plc to JP Morgan Chase Bank. 10,000,000 USD 10/10/07 Agreement with JP Morgan Chase Bank dated 10/09/02 (198,110) to pay 0.70% per year times the notional amount. In exchange for that periodic payment, upon a default event by Banco Bilbao Vizcaya Argentaria SA, JP Morgan Chase Bank agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by Banco Bilbao Vizcaya Argentaria SA to JP Morgan Chase Bank. 8,000,000 USD 10/19/07 Agreement with Deutsche Bank AG dated 10/18/02 to (2,919,806) pay 15.0% per year times the notional amount. In exchange for that periodic payment, upon a default event in Venezuela, Deutsche Bank AG agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by Venezuela to Deutsche Bank AG. 5,000,000 USD 10/22/07 Agreement with JP Morgan Chase Bank dated 10/21/02 (73,804) to pay 0.54% per year times the notional amount. In exchange for that periodic payment, upon a default event by Banco Bilbao Vizcaya Argentaria SA, JP Morgan Chase Bank agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by Banco Bilbao Vizcaya Argentaria SA to JP Morgan Chase Bank.
See accompanying notes to the financial statements. 32 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ------------------------------------------------------------ --------------- 5,000,000 USD 10/23/07 Agreement with JP Morgan Chase Bank dated 10/22/02 $ (64,359) to pay 0.48% per year times the notional amount. In exchange for that periodic payment, upon a default event by Banco Bilbao Vizcaya Argentaria SA, JP Morgan Chase Bank agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by Banco Bilbao Vizcaya Argentaria SA to JP Morgan Chase Bank. 5,000,000 USD 10/30/07 Agreement with Deutsche Bank AG dated 10/29/02 to (57,918) pay 0.44% per year times the notional amount. In exchange for that periodic payment, upon a default event by Banco Bilbao Vizcaya Argentaria SA, Deutsche Bank AG agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by Banco Bilbao Vizcaya Argentaria SA to Deutsche Bank AG. 10,000,000 USD 11/23/07 Agreement with Deutsche Bank AG dated 11/22/02 to (345,086) pay 1.15% per year times the notional amount. In exchange for that periodic payment, upon a default event by Endesa SA of Spain, Deutsche Bank AG agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by Endesa SA of Spain to Deutsche Bank AG. 15,000,000 USD 11/27/07 Agreement with JP Morgan Chase Bank dated 11/26/02 (487,661) to pay 1.10% per year times the notional amount. In exchange for that periodic payment, upon a default event by Endesa SA of Spain, JP Morgan Chase Bank agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by Endesa SA of Spain to JP Morgan Chase Bank.
See accompanying notes to the financial statements. 33 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ------------------------------------------------------------ --------------- 5,000,000 USD 5/7/08 Agreement with JP Morgan Chase Bank dated 5/06/03 $ 1,023,412 to receive 9.65% per year times the notional amount. In exchange for that periodic payment, upon a default event in Brazil, the Fund agrees to pay JP Morgan Chase Bank the notional amount of the swap. To receive that payment, JP Morgan Chase Bank must deliver a bond (with par value equal to the notional amount of the swap) issued by Brazil to the Fund. 10,000,000 USD 5/20/08 Agreement with Deutsche Bank AG dated 5/19/04 to 414,836 receive 4.20% per year times the notional amount. In exchange for that periodic payment, upon a default event by Gazprom Loan Facility, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Gazprom Loan Facility to the Fund. 5,000,000 USD 5/30/08 Agreement with JP Morgan Chase Bank dated 5/29/03 1,016,901 to receive 8.65% per year times the notional amount. In exchange for that periodic payment, upon a default event in Turkey, the Fund agrees to pay JP Morgan Chase Bank the notional amount of the swap. To receive that payment, JP Morgan Chase Bank must deliver a bond (with par value equal to the notional amount of the swap) issued by Turkey to the Fund. 5,000,000 USD 8/6/08 Agreement with Bear Stearns International Limited 118,130 dated 8/05/03 to receive 1.10% per year times the notional amount. In exchange for that periodic payment, upon a default event in Trinidad and Tobago, the Fund agrees to pay Bear Stearns International Limited the notional amount of the swap. To receive that payment, Bear Stearns International Limited must deliver a bond (with par value equal to the notional amount of the swap) issued by Trinidad and Tobago to the Fund.
See accompanying notes to the financial statements. 34 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ------------------------------------------------------------ --------------- 10,000,000 USD 9/20/08 Agreement with Morgan Stanley Capital Services, $ 839,146 Inc., dated 7/09/03 to receive 5.15% per year times the notional amount. In exchange for that periodic payment, upon a default event in Columbia, the Fund agrees to pay Morgan Stanley Capital Services, Inc. the notional amount of the swap. To receive that payment, Morgan Stanley Capital Services, Inc. must deliver a bond (with par value equal to the notional amount of the swap) issued by Columbia to the Fund. 2,000,000 USD 9/20/08 Agreement with UBS AG dated 6/26/03 to receive (318,932) 9.20% per year times the notional amount. In exchange for that periodic payment, upon a default event in the Dominican Republic, the Fund agrees to pay UBS AG the notional amount of the swap. To receive that payment, UBS AG must deliver a bond (with par value equal to the notional amount of the swap) issued by the Dominican Republic to the Fund. 25,000,000 USD 10/17/08 Agreement with UBS AG dated 4/16/04 to receive 752,190 3.90% per year times the notional amount. In exchange for that periodic payment, upon a default event by Gazprom Loan Facility, the Fund agrees to pay UBS AG the notional amount of the swap. To receive that payment, UBS AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Gazprom Loan Facility to the Fund. 4,000,000 USD 10/20/08 Agreement with Deutsche Bank AG dated 10/01/03 to 36,769 receive 8.50% per year times the notional amount. In exchange for that periodic payment, upon a default event in Uruguay, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Uruguay to the Fund.
See accompanying notes to the financial statements. 35 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ------------------------------------------------------------ --------------- 15,000,000 USD 11/20/08 Agreement with Deutsche Bank AG dated 11/04/03 to $ 936,608 receive 5.80% per year times the notional amount. In exchange for that periodic payment, upon a default event in Brazil, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Brazil to the Fund. 10,000,000 USD 11/20/08 Agreement with Deutsche Bank AG dated 11/05/03 to 586,133 receive 5.70% per year times the notional amount. In exchange for that periodic payment, upon a default event in Brazil, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Brazil to the Fund. 9,000,000 USD 11/20/08 Agreement with Deutsche Bank AG dated 11/17/03 to 522,689 receive 4.77% per year times the notional amount. In exchange for that periodic payment, upon a default event in Columbia, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment Deutsche Bank AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Columbia to the Fund. 14,000,000 USD 12/20/08 Agreement with Deutsche Bank AG dated 10/22/03 to (267,251) pay 0.79% per year times the notional amount. In exchange for that periodic payment, upon a default event by Korea Deposit Insurance Corporation, Deutsche Bank AG agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by Korea Deposit Insurance Corporation to Deutsche Bank AG.
See accompanying notes to the financial statements. 36 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ------------------------------------------------------------ --------------- 20,000,000 USD 12/20/08 Agreement with JP Morgan Chase Bank dated 11/03/03 $ 1,234,320 to receive 5.95% per year times the notional amount. In exchange for that periodic payment, upon a default event in Brazil, the Fund agrees to pay JP Morgan Chase Bank the notional amount of the swap. To receive that payment, JP Morgan Chase Bank must deliver a bond (with par value equal to the notional amount of the swap) issued by Brazil to the Fund. 5,000,000 USD 1/20/09 Agreement with Lehman Brothers dated 1/02/04 to 189,938 receive 5.45% per year times the notional amount. In exchange for that periodic payment, upon a default event in Venezuela, the Fund agrees to pay Lehman Brothers the notional amount of the swap. To receive that payment, Lehman Brothers must deliver a bond (with par value equal to the notional amount of the swap) issued by Venezuela to the Fund. 5,000,000 USD 3/20/09 Agreement with JP Morgan Chase Bank dated 12/23/03 450 to receive 2.85% per year times the notional amount. In exchange for that periodic payment, upon a default event in Peru, the Fund agrees to pay JP Morgan Chase Bank the notional amount of the swap. To receive that payment, JP Morgan Chase Bank must deliver a bond (with par value equal to the notional amount of the swap) issued by Peru to the Fund. 10,000,000 USD 3/20/09 Agreement with JP Morgan Chase Bank dated 12/23/03 111,651 to receive 4.30% per year times the notional amount. In exchange for that periodic payment, upon a default event in the Philippines, the Fund agrees to pay JP Morgan Chase Bank the notional amount of the swap. To receive that payment, JP Morgan Chase Bank must deliver a bond (with par value equal to the notional amount of the swap) issued by the Philippines to the Fund.
See accompanying notes to the financial statements. 37 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ------------------------------------------------------------ --------------- 10,000,000 USD 4/17/09 Agreement with Deutsche Bank AG dated 4/16/04 to $ 242,589 receive 3.90% per year times the notional amount. In exchange for that periodic payment, upon a default event by Gazprom Loan Facility, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Gazprom Loan Facility to the Fund. 5,000,000 USD 5/20/09 Agreement with UBS AG dated 5/20/04 to receive 204,033 4.40% per year times the notional amount. In exchange for that periodic payment, upon a default event by Gazprom Loan Facility, the Fund agrees to pay UBS AG the notional amount of the swap. To receive that payment, UBS AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Gazprom Loan Facility to the Fund. 25,000,000 USD 5/21/09 Agreement with UBS AG dated 5/20/04 to receive 1,122,242 4.50% per year times the notional amount. In exchange for that periodic payment, upon a default event by Gazprom Loan Facility, the Fund agrees to pay UBS AG the notional amount of the swap. To receive that payment, UBS AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Gazprom Loan Facility to the Fund. 25,000,000 USD 6/20/09 Agreement with JP Morgan Chase Bank dated 6/14/04 3,518,422 to receive 8.01% per year times the notional amount. In exchange for that periodic payment, upon a default event in Brazil, the Fund agrees to pay JP Morgan Chase Bank the notional amount of the swap. To receive that payment, JP Morgan Chase Bank must deliver a bond (with par value equal to the notional amount of the swap) issued by Brazil to the Fund.
See accompanying notes to the financial statements. 38 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ------------------------------------------------------------ --------------- 7,000,000 USD 8/5/09 Agreement with Deutsche Bank AG dated 7/07/04 to $ 153,538 receive 4.85% per year times the notional amount. In exchange for that periodic payment, upon a default event in Ukraine, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Ukraine to the Fund. 7,000,000 USD 2/5/10 Agreement with Deutsche Bank AG dated 7/07/04 to 135,881 receive 4.85% per year times the notional amount. In exchange for that periodic payment, upon a default event in Ukraine, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Ukraine to the Fund. 12,000,000 USD 3/5/10 Agreement with Deutsche Bank AG dated 3/04/03 to 3,399,116 receive 9.10% per year times the notional amount. In exchange for that periodic payment, upon a default event in Turkey, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Turkey to the Fund. 3,000,000 USD 3/29/10 Agreement with JP Morgan Chase Bank dated 3/28/03 422,537 to receive 4.70% per year times the notional amount. In exchange for that periodic payment, upon a default event in Egypt, the Fund agrees to pay JP Morgan Chase Bank the notional amount of the swap. To receive that payment, JP Morgan Chase Bank must deliver a bond (with par value equal to the notional amount of the swap) issued by Egypt to the Fund.
See accompanying notes to the financial statements. 39 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ------------------------------------------------------------ --------------- 7,000,000 USD 8/5/10 Agreement with Deutsche Bank AG dated 7/07/04 to $ 139,082 receive 4.90% per year times the notional amount. In exchange for that periodic payment, upon a default event in Ukraine, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Ukraine to the Fund. 7,000,000 USD 2/7/11 Agreement with Deutsche Bank AG dated 7/07/04 to 144,549 receive 4.95% per year times the notional amount. In exchange for that periodic payment, upon a default event in Ukraine, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Ukraine to the Fund. 9,000,000 USD 7/17/11 Agreement with UBS AG dated 7/16/04 to receive 208,548 5.05% per year times the notional amount. In exchange for that periodic payment, upon a default event in Ukraine, the Fund agrees to pay UBS AG the notional amount of the swap. To receive that payment, UBS AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Ukraine to the Fund. 7,000,000 USD 8/5/11 Agreement with Deutsche Bank AG dated 7/07/04 to 152,702 receive 5.00% per year times the notional amount. In exchange for that periodic payment, upon a default event in Ukraine, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Ukraine to the Fund.
See accompanying notes to the financial statements. 40 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ------------------------------------------------------------ --------------- 5,000,000 USD 7/30/12 Agreement with JP Morgan Chase Bank dated 7/25/02 $ 804,182 to receive 3.05% per year times the notional amount. In exchange for that periodic payment, upon a default event in Chile, the Fund agrees to pay JP Morgan Chase Bank the notional amount of the swap. To receive that payment, JP Morgan Chase Bank must deliver a bond (with par value equal to the notional amount of the swap) issued by Chile to the Fund. 10,000,000 USD 10/4/12 Agreement with JP Morgan Chase Bank dated 10/03/02 1,656,722 to receive 2.95% per year times the notional amount. In exchange for that periodic payment, upon a default event in Chile, the Fund agrees to pay JP Morgan Chase Bank the notional amount of the swap. To receive that payment, JP Morgan Chase Bank must deliver a bond (with par value equal to the notional amount of the swap) issued by Chile to the Fund. 5,000,000 USD 11/5/12 Agreement with Deutsche Bank AG dated 11/04/02 to (831,956) receive 6.50% per year times the notional amount. In exchange for that periodic payment, upon a default event in Jamaica, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Jamaica to the Fund. 10,000,000 USD 1/8/13 Agreement with Deutsche Bank AG dated 1/07/03 to 1,559,287 receive 7.15% per year times the notional amount. In exchange for that periodic payment, upon a default event in Columbia, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Columbia to the Fund.
See accompanying notes to the financial statements. 41 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ------------------------------------------------------------ --------------- 10,000,000 USD 1/9/13 Agreement with Deutsche Bank AG dated 1/08/03 to $ 2,483,855 receive 8.25% per year times the notional amount. In exchange for that periodic payment, upon a default event in Turkey, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Turkey to the Fund. 7,000,000 USD 1/10/13 Agreement with JP Morgan Chase Bank dated 1/09/03 1,227,437 to receive 7.50% per year times the notional amount. In exchange for that periodic payment, upon a default event in Columbia, the Fund agrees to pay JP Morgan Chase Bank the notional amount of the swap. To receive that payment, JP Morgan Chase Bank must deliver a bond (with par value equal to the notional amount of the swap) issued by Columbia to the Fund. 10,000,000 USD 2/7/13 Agreement with JP Morgan Chase Bank dated 2/06/03 2,156,820 to receive 8.30% per year times the notional amount. In exchange for that periodic payment, upon a default event in Columbia, the Fund agrees to pay JP Morgan Chase Bank the notional amount of the swap. To receive that payment, JP Morgan Chase Bank must deliver a bond (with par value equal to the notional amount of the swap) issued by Columbia to the Fund. 15,000,000 USD 2/11/13 Agreement with JP Morgan Chase Bank dated 2/10/03 1,597,807 to receive 3.05% per year times the notional amount. In exchange for that periodic payment, upon a default event in Mexico, the Fund agrees to pay JP Morgan Chase Bank the notional amount of the swap. To receive that payment, JP Morgan Chase Bank must deliver a bond (with par value equal to the notional amount of the swap) issued by Mexico to the Fund.
See accompanying notes to the financial statements. 42 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ------------------------------------------------------------ --------------- 10,000,000 USD 6/6/13 Agreement with Deutsche Bank AG dated 6/05/03 to $ 2,352,871 receive 9.40% per year times the notional amount. In exchange for that periodic payment, upon a default event in Brazil, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Brazil to the Fund. 5,000,000 USD 6/7/13 Agreement with Citibank N.A. dated 6/06/03 to 162,434 receive 3.15% per year times the notional amount. In exchange for that periodic payment, upon a default event in Russia, the Fund agrees to pay Citibank N.A. the notional amount of the swap. To receive that payment, Citibank N.A. must deliver a bond (with par value equal to the notional amount of the swap) issued by Russia to the Fund. 10,000,000 USD 6/11/13 Agreement with Citibank N.A. dated 6/10/03 to 367,255 receive 3.22% per year times the notional amount. In exchange for that periodic payment, upon a default event in Russia, the Fund agrees to pay Citibank N.A. the notional amount of the swap. To receive that payment, Citibank N.A. must deliver a bond (with par value equal to the notional amount of the swap) issued by Russia to the Fund. 20,000,000 USD 6/12/13 Agreement with Deutsche Bank AG dated 6/11/03 to 4,307,977 receive 9.08% per year times the notional amount. In exchange for that periodic payment, upon a default event in Brazil, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Brazil to the Fund.
See accompanying notes to the financial statements. 43 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ------------------------------------------------------------ --------------- 20,000,000 USD 6/13/13 Agreement with Deutsche Bank AG dated 6/12/03 to $ 768,646 receive 3.25% per year times the notional amount. In exchange for that periodic payment, upon a default event in Russia, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Russia to the Fund. 10,000,000 USD 6/24/13 Agreement with JP Morgan Chase Bank dated 6/23/03 420,533 to receive 3.32% per year times the notional amount. In exchange for that periodic payment, upon a default event in Russia, the Fund agrees to pay JP Morgan Chase Bank the notional amount of the swap. To receive that payment, JP Morgan Chase Bank must deliver a bond (with par value equal to the notional amount of the swap) issued by Russia to the Fund. 5,000,000 USD 6/24/13 Agreement with JP Morgan Chase Bank dated 6/23/03 220,133 to receive 3.35% per year times the notional amount. In exchange for that periodic payment, upon a default event in Russia, the Fund agrees to pay JP Morgan Chase Bank the notional amount of the swap. To receive that payment, JP Morgan Chase Bank must deliver a bond (with par value equal to the notional amount of the swap) issued by Russia to the Fund. 10,000,000 USD 9/20/13 Agreement with Deutsche Bank AG dated 6/23/03 to 521,117 receive 3.35% per year times the notional amount. In exchange for that periodic payment, upon a default event in Russia, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Russia to the Fund.
See accompanying notes to the financial statements. 44 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ------------------------------------------------------------ --------------- 10,000,000 USD 12/20/13 Agreement with Deutsche Bank AG dated 12/15/03 to $ 298,922 receive 10.5% per year times the notional amount. In exchange for that periodic payment, upon a default event in Ecuador, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Ecuador to the Fund. 10,000,000 USD 12/24/13 Agreement with JP Morgan Chase Bank dated 12/23/03 (158,168) to receive 3.80% per year times the notional amount. In exchange for that periodic payment, upon a default event in Turkey, the Fund agrees to pay JP Morgan Chase Bank the notional amount of the swap. To receive that payment, JP Morgan Chase Bank must deliver a bond (with par value equal to the notional amount of the swap) issued by Turkey to the Fund. 10,000,000 USD 1/20/14 Agreement with Citibank N.A. dated 12/23/03 to 233,242 receive 4.94% per year times the notional amount. In exchange for that periodic payment, upon a default event in Columbia, the Fund agrees to pay Citibank N.A. the notional amount of the swap. To receive that payment, Citibank N.A. must deliver a bond (with par value equal to the notional amount of the swap) issued by Columbia to the Fund. 10,000,000 USD 1/20/14 Agreement with Deutsche Bank AG dated 1/05/04 to (658,951) receive 4.28% per year times the notional amount. In exchange for that periodic payment, upon a default event in Brazil, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Brazil to the Fund.
See accompanying notes to the financial statements. 45 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ------------------------------------------------------------ --------------- 10,000,000 USD 1/20/14 Agreement with Deutsche Bank AG dated 12/23/03 to $ 170,874 receive 1.77% per year times the notional amount. In exchange for that periodic payment, upon a default event in Mexico, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Mexico to the Fund. 15,000,000 USD 3/20/14 Agreement with JP Morgan Chase Bank dated 1/05/04 (772,071) to receive 4.30% per year times the notional amount. In exchange for that periodic payment, upon a default event in Brazil, the Fund agrees to pay JP Morgan Chase Bank the notional amount of the swap. To receive that payment, JP Morgan Chase Bank must deliver a bond (with par value equal to the notional amount of the swap) issued by Brazil to the Fund. 5,000,000 USD 3/20/14 Agreement with JP Morgan Chase Bank dated 1/05/04 (251,282) to receive 4.32% per year times the notional amount. In exchange for that periodic payment, upon a default event in Brazil, the Fund agrees to pay JP Morgan Chase Bank the notional amount of the swap. To receive that payment, JP Morgan Chase Bank must deliver a bond (with par value equal to the notional amount of the swap) issued by Brazil to the Fund. 5,000,000 USD 3/20/14 Agreement with JP Morgan Chase Bank dated 12/23/03 183,928 to receive 4.90% per year times the notional amount. In exchange for that periodic payment, upon a default event in Columbia, the Fund agrees to pay JP Morgan Chase Bank the notional amount of the swap. To receive that payment, JP Morgan Chase Bank must deliver a bond (with par value equal to the notional amount of the swap) issued by Columbia to the Fund.
See accompanying notes to the financial statements. 46 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ------------------------------------------------------------ --------------- 20,000,000 USD 4/20/14 Agreement with Lehman Brothers Special Financing $ 123,865 Inc. dated 4/15/04 to receive 1.58% per year times the notional amount. In exchange for that periodic payment, upon a default event in Mexico, the Fund agrees to pay Lehman Brothers Special Financing Inc. the notional amount of the swap. To receive that payment, Lehman Brothers Special Financing Inc. must deliver a bond (with par value equal to the notional amount of the swap) issued by Mexico to the Fund. 20,000,000 USD 4/20/14 Agreement with Goldman Sachs dated 4/16/04 to 138,428 receive 1.59% per year times the notional amount. In exchange for that periodic payment, upon a default event in Mexico, the Fund agrees to pay Goldman Sachs the notional amount of the swap. To receive that payment, Goldman Sachs must deliver a bond (with par value equal to the notional amount of the swap) issued by Mexico to the Fund. 10,000,000 USD 5/14/14 Agreement with Deutsche Bank AG dated 5/13/04 to 1,709,934 receive 6.64% per year times the notional amount. In exchange for that periodic payment, upon a default event in Turkey, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Turkey to the Fund. 5,000,000 USD 5/19/14 Agreement with Deutsche Bank AG dated 5/18/04 to 779,541 receive 6.42% per year times the notional amount. In exchange for that periodic payment, upon a default event in Turkey, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Turkey to the Fund.
See accompanying notes to the financial statements. 47 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS -- CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) ------------------- ---------- ------------------------------------------------------------ --------------- 5,000,000 USD 5/20/14 Agreement with Deutsche Bank AG dated 5/19/04 to $ 194,207 receive 2.03% per year times the notional amount. In exchange for that periodic payment, upon a default event in Mexico, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Mexico to the Fund. 10,000,000 USD 5/20/14 Agreement with JP Morgan Chase Bank dated 4/29/04 453,748 to receive 2.10% per year times the notional amount. In exchange for that periodic payment, upon a default event in Mexico, the Fund agrees to pay JP Morgan Chase Bank the notional amount of the swap. To receive that payment, JP Morgan Chase Bank must deliver a bond (with par value equal to the notional amount of the swap) issued by Mexico to the Fund. 10,000,000 USD 5/20/14 Agreement with JP Morgan Chase Bank dated 5/03/04 451,304 to receive 2.10% per year times the notional amount. In exchange for that periodic payment, upon a default event in Mexico, the Fund agrees to pay JP Morgan Chase Bank the notional amount of the swap. To receive that payment, JP Morgan Chase Bank must deliver a bond (with par value equal to the notional amount of the swap) issued by Mexico to the Fund. 7,000,000 USD 5/20/14 Agreement with JP Morgan Chase Bank dated 5/07/04 1,027,778 to receive 6.25% per year times the notional amount. In exchange for that periodic payment, upon a default event in Turkey, the Fund agrees to pay JP Morgan Chase Bank the notional amount of the swap. To receive that payment, JP Morgan Chase Bank must deliver a bond (with par value equal to the notional amount of the swap) issued by Turkey to the Fund.
See accompanying notes to the financial statements. 48 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS--(CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS--CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) - ------------------- ---------- --------------------------------------------------- ------------- 10,000,000 USD 5/20/14 Agreement with UBS AG dated 4/29/04 to receive $ 453,748 2.10% per year times the notional amount. In exchange for that periodic payment, upon a default event in Mexico, the Fund agrees to pay UBS AG the notional amount of the swap. To receive that payment, UBS AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Mexico to the Fund. 10,000,000 USD 6/16/14 Agreement with Deutsche Bank AG dated 6/15/04 to 1,383,712 receive 6.22% per year times the notional amount. In exchange for that periodic payment, upon a default event in Turkey, the Fund agrees to pay Deutsche Bank AG the notional amount of the swap. To receive that payment, Deutsche Bank AG must deliver a bond (with par value equal to the notional amount of the swap) issued by Turkey to the Fund. 10,000,000 USD 6/20/14 Agreement with JP Morgan Chase Bank dated 5/24/04 437,405 to receive 2.10% per year times the notional amount. In exchange for that periodic payment, upon a default event in Mexico, the Fund agrees to pay JP Morgan Chase Bank the notional amount of the swap. To receive that payment, JP Morgan Chase Bank must deliver a bond (with par value equal to the notional amount of the swap) issued by Mexico to the Fund. 10,000,000 USD 6/20/14 Agreement with JP Morgan Chase Bank dated 5/25/04 436,935 to receive 2.10% per year times the notional amount. In exchange for that periodic payment, upon a default event in Mexico, the Fund agrees to pay JP Morgan Chase Bank the notional amount of the swap. To receive that payment, JP Morgan Chase Bank must deliver a bond (with par value equal to the notional amount of the swap) issued by Mexico to the Fund.
See accompanying notes to the financial statements. 49 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS--(CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS--CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) - ------------------- ---------- --------------------------------------------------- ------------- 10,000,000 USD 6/20/14 Agreement with JP Morgan Chase Bank dated 6/03/04 $ 470,014 to receive 2.15% per year times the notional amount. In exchange for that periodic payment, upon a default event in Mexico, the Fund agrees to pay JP Morgan Chase Bank the notional amount of the swap. To receive that payment, JP Morgan Chase Bank must deliver a bond (with par value equal to the notional amount of the swap) issued by Mexico to the Fund. 10,000,000 USD 7/20/14 Agreement with JP Morgan Chase Bank dated 6/22/04 342,372 to receive 2.00% per year times the notional amount. In exchange for that periodic payment, upon a default event in Mexico, the Fund agrees to pay JP Morgan Chase Bank the notional amount of the swap. To receive that payment, JP Morgan Chase Bank must deliver a bond (with par value equal to the notional amount of the swap) issued by Mexico to the Fund. 35,000,000 USD 7/20/14 Agreement with JP Morgan Chase Bank dated 6/23/04 1,223,578 to receive 2.01% per year times the notional amount. In exchange for that periodic payment, upon a default event in Mexico, the Fund agrees to pay JP Morgan Chase Bank the notional amount of the swap. To receive that payment, JP Morgan Chase Bank must deliver a bond (with par value equal to the notional amount of the swap) issued by Mexico to the Fund. 2,000,000 USD 8/24/14 Agreement with Deutsche Bank AG dated 8/23/04 to (358) pay 4.25% per year times the notional amount. In exchange for that periodic payment, upon a default event in Lebanon, Deutsche Bank AG agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by Lebanon to Deutsche Bank AG.
See accompanying notes to the financial statements. 50 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS--(CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS--CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) - ------------------- ---------- --------------------------------------------------- ------------- 10,000,000 USD 10/7/17 Agreement with JP Morgan Chase Bank dated 10/04/02 $ 2,442,901 to receive 4.20% per year times the notional amount. In exchange for that periodic payment, upon a default event in Mexico, the Fund agrees to pay JP Morgan Chase Bank the notional amount of the swap. To receive that payment, JP Morgan Chase Bank must deliver a bond (with par value equal to the notional amount of the swap) issued by Mexico to the Fund. 20,000,000 USD 3/20/19 Agreement with JP Morgan Chase Bank dated 12/23/03 672,202 to receive 1.90% per year times the notional amount. In exchange for that periodic payment, upon a default event in Mexico, the Fund agrees to pay JP Morgan Chase Bank the notional amount of the swap. To receive that payment, JP Morgan Chase Bank must deliver a bond (with par value equal to the notional amount of the swap) issued by Mexico to the Fund. 30,000,000 USD 8/15/31 Agreement with Goldman Sachs dated 8/24/04 to pay (272,806) 1.84% per year times the notional amount. In exchange for that periodic payment, upon a default event in Mexico, Goldman Sachs agrees to pay the Fund the notional amount of the swap. To receive that payment, the Fund must deliver a bond (with par value equal to the notional amount of the swap) issued by Mexico to Goldman Sachs. INTEREST RATE SWAPS 15,000,000 EUR 2/22/07 Agreement with UBS AG dated 2/18/00 to pay the (1,290,430) notional amount multiplied by 5.76% and to receive the notional amount multiplied by the 6 month EURIBOR. 6,000,000,000 JPY 3/10/08 Agreement with Deutsche Bank AG dated 3/06/03 to 378,877 pay the notional amount multiplied by 0.285% and to receive the notional amount multiplied by the 6 month Japanese LIBOR . 6,000,000,000 JPY 3/26/08 Agreement with JP Morgan Chase Bank dated 3/24/03 428,127 to pay the notional amount multiplied by 0.27% and to receive the notional amount multiplied by the 6 month
See accompanying notes to the financial statements. 51 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS--(CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS--CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) - ------------------- ---------- --------------------------------------------------- ------------- Japanese LIBOR. 6,000,000,000 JPY 4/16/08 Agreement with Citibank N.A. dated 4/14/03 to pay $ 457,118 the notional amount multiplied by 0.27% and to receive the notional amount multiplied by the 6 month Japanese LIBOR. 6,000,000,000 JPY 5/9/08 Agreement with Citibank N.A. dated 5/07/03 to pay 568,801 the notional amount multiplied by 0.23% and to receive the notional amount multiplied by the 6 month Japanese LIBOR. 6,000,000,000 JPY 5/29/08 Agreement with Deutsche Bank AG dated 5/27/03 to 458,078 pay the notional amount multiplied by 0.215% and to receive the notional amount multiplied by the 6 month Japanese LIBOR. 6,000,000,000 JPY 6/11/08 Agreement with JP Morgan Chase Bank dated 6/09/03 694,635 to pay the notional amount multiplied by 0.1925% and to receive the notional amount multiplied by the 6 month Japanese LIBOR. 6,000,000,000 JPY 6/12/08 Agreement with Deutsche Bank AG dated 6/10/03 to 706,932 pay the notional amount multiplied by 0.1875% and to receive the notional amount multiplied by the 6 month Japanese LIBOR. 6,000,000,000 JPY 12/17/09 Agreement with Citibank N.A. dated 12/13/02 to pay 822,721 the notional amount multiplied by 0.5475% and to receive the notional amount multiplied by the 6 month Japanese LIBOR. 26,000,000 USD 3/31/10 Agreement with UBS AG dated 3/29/00 to receive the 4,601,388 notional amount multiplied by 7.406% and to pay the notional amount multiplied by the 3 month LIBOR. 35,000,000 USD 9/13/10 Agreement with Bear Stearns Bank Plc dated 9/08/00 5,684,714 to receive the notional amount multiplied by 7.01% and to pay the notional amount multiplied by the 3 month LIBOR. 20,000,000 USD 1/24/11 Agreement with UBS AG dated 1/22/01 to receive the 2,327,010
See accompanying notes to the financial statements. 52 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS--(CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS--CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) - ------------------- ---------- --------------------------------------------------- ------------- notional amount multiplied by 6.12% and to pay the notional amount multiplied by the 3 month LIBOR. 30,000,000 USD 1/25/11 Agreement with Bear Stearns Bank Plc dated 1/23/01 $ 3,634,024 to receive the notional amount multiplied by 6.201% and to pay the notional amount multiplied by the 3 month LIBOR. 50,000,000 USD 7/17/13 Agreement with JP Morgan Chase Bank dated 7/15/03 (498,857) to receive the notional amount multiplied by 4.3175% and to pay the notional amount multiplied by the 3 month LIBOR. 50,000,000 USD 7/23/13 Agreement with JP Morgan Chase Bank dated 7/21/03 322,244 to receive the notional amount multiplied by 4.54% and to pay the notional amount multiplied by the 3 month LIBOR. 50,000,000 USD 12/10/13 Agreement with Goldman Sachs International dated 552,332 12/08/03 to receive the notional amount multiplied by 4.65% and to pay the notional amount multiplied by the 3 month LIBOR. 36,000,000,000 KRW 3/16/14 Agreement with Deutsche Bank AG dated 8/23/04 to (77,193) pay the notional amount multiplied by 5.03% and to receive the notional amount multiplied by the Korean bond rate for 91 day certificates of deposit. 50,000,000 USD 4/20/14 Agreement with JP Morgan Chase Bank dated 4/16/04 961,079 to receive the notional amount multiplied by 4.7875% and to pay the notional amount multiplied by the 3 month LIBOR. 100,000,000 USD 5/10/14 Agreement with Citibank N.A. dated 5/06/04 to 668,870 receive the notional amount multiplied by 4.63% and to pay the notional amount multiplied by the 3 month LIBOR. 150,000,000 USD 5/12/14 Agreement with Citibank N.A. dated 5/07/04 to 9,077,188 receive the notional amount multiplied by 5.305% and to pay the notional amount multiplied by the 3 month LIBOR. 50,000,000 USD 8/4/18 Agreement with Deutsche Bank AG dated 7/31/03 to 2,651,101 receive the notional amount multiplied by 5.4475% and to
See accompanying notes to the financial statements. 53 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS--(CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS--CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) - ------------------- ---------- --------------------------------------------------- ------------- pay the notional amount multiplied by the 3 month LIBOR. 40,000,000 USD 4/29/19 Agreement with JP Morgan Chase Bank dated 4/27/04 $ 1,327,080 to receive the notional amount multiplied by 5.289% and to pay the notional amount multiplied by the 3 month LIBOR. 25,000,000 USD 12/2/23 Agreement with JP Morgan Chase Bank dated 1/28/03 488,928 to receive the notional amount multiplied by 5.341% and to pay the notional amount multiplied by the 3 month LIBOR. TOTAL RETURN SWAPS 10,000,000 USD 6/20/09 Agreement with Citibank N.A. dated 4/27/04 to 17,264 receive the notional amount multiplied by the return on the IBOXX Index +2.65% and to pay in the event of a default within the Index, the Fund makes a proportionate payment of the notational amount. 5,000,000 USD 6/20/09 Agreement with Deutsche Bank AG dated 4/02/04 to 8,632 receive the notional amount multiplied by the return on the IBOXX Index +2.65% and to pay in the event of a default within the Index, the Fund makes a proportionate payment of the notational amount. 40,000,000 USD 6/20/09 Agreement with Deutsche Bank AG dated 4/15/04 to 69,056 receive the notional amount multiplied by the return on the IBOXX Index +2.65% and to pay in the event of a default within the Index, the Fund makes a proportionate payment of the notational amount. 10,000,000 USD 6/20/09 Agreement with Deutsche Bank AG dated 4/27/04 to 17,264 receive the notional amount multiplied by the return on the IBOXX Index +2.65% and to pay in the event of a default within the Index, the Fund makes a proportionate payment of the notational amount. 10,000,000 USD 6/20/09 Agreement with JP Morgan Chase Bank dated 4/27/04 17,264 to receive the notional amount multiplied by the return on the IBOXX Index +2.65% and to pay in the event of a default within the Index, the Fund makes a proportionate payment
See accompanying notes to the financial statements. 54 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS--(CONTINUED) AUGUST 31, 2004 (UNAUDITED) SWAP AGREEMENTS--CONTINUED
NET UNREALIZED NOTIONAL EXPIRATION APPRECIATION AMOUNT DATE DESCRIPTION (DEPRECIATION) - ------------------- ---------- --------------------------------------------------- ------------- of the notational amount. 10,500,000 USD 6/20/09 Agreement with JP Morgan Chase Bank dated 6/23/04 $ (18,127) to pay the notional amount multiplied by the return on the IBOXX Index +2.65% and to receive in the event of a default within the Index, the Fund receives a proportionate payment of the notational amount. 10,000,000 USD 6/20/09 Agreement with JP Morgan Chase Bank dated 6/23/04 17,264 to receive the notional amount multiplied by the return on the IBOXX Index +2.65% and to pay in the event of a default within the Index, the Fund makes a proportionate payment of the notational amount. 10,000,000 USD 6/20/09 Agreement with Lehman Brothers Special Financing 17,264 Inc. dated 5/12/04 to receive the notional amount multiplied by the return on the IBOXX Index +2.65% and to pay in the event of a default within the Index, the Fund makes a proportionate payment of the notational amount. 10,000,000 USD 6/20/09 Agreement with UBS AG dated 5/04/04 to receive the 17,264 notional amount multiplied by the return on the IBOXX Index +2.65% and to pay in the event of a default within the Index, the Fund makes a proportionate payment of the notational amount. ------------- $ 76,207,742 =============
See accompanying notes to the financial statements. 55 GMO Emerging Country Debt Fund (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004(UNAUDITED)
Assets: Investments in unaffiliated issuers, at value (cost $2,384,851,780) (Note 2) $ 2,521,811,750 Investments in affiliated issuers, at value (cost $87,746,915) (Notes 2 and 7) 88,176,507 Foreign currency, at value (cost $193,912) (Note 2) 188,257 Receivable for investments sold 28,066,478 Interest receivable 32,506,058 Receivable for open forward foreign currency contracts (Note 2) 2,461,730 Net receivable for open swap contracts (Note 2) 76,207,742 Periodic payments from open swap agreements (Note 2) 7,688,219 --------------- Total assets 2,757,106,741 --------------- Liabilities: Payable for investments purchased 116,890,944 Payable for Fund shares repurchased 1,249,992 Payable to affiliate for (Note 3): Management fee 734,461 Shareholder service fee 251,380 Trustees fee 4,477 Payable for open forward foreign currency contracts (Note 2) 68,503 Payable for reverse repurchase agreements (Note 2) 106,858,119 Accrued expenses 277,845 --------------- Total liabilities 226,335,721 --------------- Net assets $ 2,530,771,020 =============== Net assets consist of: Paid-in capital $ 2,230,063,469 Accumulated undistributed net investment income 45,123,398 Accumulated net realized gain 37,899,491 Net unrealized appreciation 217,684,662 --------------- $ 2,530,771,020 =============== Net assets attributable to: Class III shares $ 1,000,048,463 =============== Class IV shares $ 1,530,722,557 =============== Shares outstanding: Class III 92,139,096 =============== Class IV 140,997,454 =============== Net asset value per share: Class III $ 10.85 =============== Class IV $ 10.86 ===============
See accompanying notes to the financial statements. 56 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS--SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED)
INVESTMENT INCOME: Interest $ 104,497,194 Dividends from affiliated issuers (Note 7) 292,058 --------------- Total income 104,789,252 --------------- EXPENSES: Management fee (Note 3) 4,046,898 Shareholder service fee (Note 3) - Class III 714,728 Shareholder service fee (Note 3) - Class IV 679,771 Custodian fees 538,384 Audit and tax fees 54,464 Legal fees 44,712 Trustees fees and related expenses (Note 3) 15,641 Registration fees 13,984 Interest expense (Note 2) 362,141 Miscellaneous 11,410 --------------- Net expenses 6,482,133 --------------- Net investment income 98,307,119 --------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments in unaffiliated issuers 12,892,333 Investments in affiliated issuers (782,651) Realized gains distributions from affiliated issuers (Note 7) 38,596 Closed swap contracts 30,164,358 Written options 810,852 Foreign currency, forward contracts and foreign currency related transactions 2,240,777 --------------- Net realized gain 45,364,265 --------------- Change in net unrealized appreciation (depreciation) on: Investments (13,815,608) Open swap contracts 26,424,087 Written options (305,726) Foreign currency, forward contracts and foreign currency related transactions 736,491 --------------- Net unrealized gain 13,039,244 --------------- Net realized and unrealized gain 58,403,509 --------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 156,710,628 ===============
See accompanying notes to the financial statements. 57 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 98,307,119 $ 156,780,592 Net realized gain 45,364,265 99,540,914 Change in net unrealized appreciation (depreciation) 13,039,244 151,981,226 --------------- --------------- Net increase in net assets from operations 156,710,628 408,302,732 --------------- --------------- Distributions to shareholders from: Net investment income Class III (23,648,340) (86,269,522) Class IV (35,285,521) (63,685,202) --------------- --------------- Total distributions from net investment income (58,933,861) (149,954,724) --------------- --------------- Net realized gains Class III (6,731,363) (61,434,321) Class IV (10,006,342) (43,781,757) --------------- --------------- Total distributions from net realized gains (16,737,705) (105,216,078) --------------- --------------- (75,671,566) (255,170,802) --------------- --------------- Net share transactions (Note 6): Class III 42,982,330 14,504,507 Class IV 241,016,681 553,244,628 --------------- --------------- Increase in net assets resulting from net share transactions 283,999,011 567,749,135 --------------- --------------- Purchase premiums and redemption fees (Notes 2 and 6): Class III 619,832 2,690,168 Class IV 874,639 2,413,222 --------------- --------------- Increase in net assets resulting from net purchase premiums and redemption fees 1,494,471 5,103,390 --------------- --------------- Total increase in net assets resulting from net share transactions and net purchase premiums and redemption fees 285,493,482 572,852,525 --------------- --------------- Total increase in net assets 366,532,544 725,984,455 NET ASSETS: Beginning of period 2,164,238,476 1,438,254,021 --------------- --------------- End of period (including accumulated undistributed net investment income of $45,123,398 and $5,750,140, respectively) $ 2,530,771,020 $ 2,164,238,476 =============== ===============
See accompanying notes to the financial statements. 58 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ----------------------------------------------------------------------------- (UNAUDITED) 2004(a) 2003(a) 2002(a) 2001(a)(b) 2000(a) ---------- ---------- ---------- ---------- -------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.51 $ 9.51 $ 9.30 $ 8.96 $ 8.74 $ 6.89 ---------- ---------- ---------- ---------- -------- ---------- Income from investment operations: Net investment income + 0.45 1.01 0.90 0.97 1.14 0.84 Net realized and unrealized gain 0.24 1.81 0.49 0.56 0.40 2.20 ---------- ---------- ---------- ---------- -------- ---------- Total from investment operations 0.69 2.82 1.39 1.53 1.54 3.04 ---------- ---------- ---------- ---------- -------- ---------- Less distributions to shareholders: From net investment income (0.27) (1.06) (0.99) (1.19) (1.32) (1.07) From net realized gains (0.08) (0.76) (0.19) -- -- (0.12) ---------- ---------- ---------- ---------- -------- ---------- Total distributions (0.35) (1.82) (1.18) (1.19) (1.32) (1.19) ---------- ---------- ---------- ---------- -------- ---------- NET ASSET VALUE, END OF PERIOD $ 10.85 $ 10.51 $ 9.51 $ 9.30 $ 8.96 $ 8.74 ========== ========== ========== ========== ========== ========== TOTAL RETURN 6.73%**(d) 30.46%(d) 15.94%(c)(d) 18.53%(c)(d) 18.78%(c)(d) 46.81%(c) RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $1,000,048 $ 925,517 $ 822,080 $ 570,459 $430,003 $ 378,593 Net operating expenses to average daily net assets 0.56%*(e) 0.57%(e) 0.57%(e) 0.57%(e) 0.56% 0.56% Interest expense to average daily net assets 0.03%*(f) 0.08%(f) 0.08%(f) 0.14%(f) -- -- Total net expenses to average daily net assets 0.59%* 0.65% 0.65% 0.71% 0.56% 0.56% Net investment income to average daily net assets 8.48%* 9.44% 9.78% 10.78% 12.64% 10.85% Portfolio turnover rate 40%** 119% 121% 130% 139% 123% Fees and expenses reimbursed by the Manager to average daily net assets: --(g) --(g) 0.01%(g) 0.02% 0.03% 0.03% Purchase premiums and redemption fees consisted of the following per share amounts: (h) + $ 0.01 $ 0.03 $ 0.01 --(i) $ 0.01 N/A
See accompanying notes to the financial statements. 59 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS -- (CONTINUED) (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD) (a) As a result of recent changes in generally accepted accounting principles, the Fund has reclassified periodic payments made under interest rate swap agreements, previously included within interest income, as a component of realized gain (loss) in the Statement of Operations. The effect of this reclassification was to decrease the net investment income ratio for the year ending February 29, 2004 by 0.46% and net investment income per share by $0.05. For consistency, similar reclassifications have been made to prior year amounts, resulting in increases (reductions) to the net investment income ratio of (0.43%), (0.39%), 0.07% and 0.03% and to net investment income per share of $(0.04), $(0.04), $0.01 and less than $0.01 in the fiscal years ending February 28/29, 2003, 2002, 2001 and 2000, respectively. This reclassification had no effect on total return. (b) Effective March 1, 2000, the Fund adopted the provisions of the AICPA Audit and Accounting Guide for Investments 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) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (d) Calculation excludes purchase premiums and redemption fees which are borne by shareholders. (e) Net expenses exclude expenses incurred indirectly through investment in underlying funds. (See Note 3). (f) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income. (g) Effective June 30, 2002, the Fund ceased reimbursing any Fund fees or expenses. (See Note 3.) (h) Effective March 1, 2000, the Fund adopted the provision 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 the change. Amounts calculated using average shares outstanding throughout the period. (i) Purchase and redemption fees were less than $0.01 per share. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 60 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ----------------------------------------------------------------------------- (UNAUDITED) 2004(a) 2003(a) 2002(a) 2001(a)(b) 2000(a) ---------- ---------- ---------- ---------- -------- ---------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.51 $ 9.52 $ 9.29 $ 8.95 $ 8.74 $ 6.90 ---------- ---------- ---------- ---------- -------- ---------- Income from investment operations: Net investment income + 0.45 1.06 0.91 0.98 1.15 0.84 Net realized and unrealized gain 0.25 1.75 0.50 0.55 0.39 2.20 ---------- ---------- ---------- ---------- -------- ---------- Total from investment operations 0.70 2.81 1.41 1.53 1.54 3.04 ---------- ---------- ---------- ---------- -------- ---------- Less distributions to shareholders: From net investment income (0.27) (1.06) (0.99) (1.19) (1.33) (1.08) From net realized gains (0.08) (0.76) (0.19) -- -- (0.12) ---------- ---------- ---------- ---------- -------- ---------- Total distributions (0.35) (1.82) (1.18) (1.19) (1.33) (1.20) ---------- ---------- ---------- ---------- -------- ---------- NET ASSET VALUE, END OF PERIOD $ 10.86 $ 10.51 $ 9.52 $ 9.29 $ 8.95 $ 8.74 ========== ========== ========== ========== ======== ========== TOTAL RETURN 6.83%**(d) 30.38%(d) 16.25%(c)(d) 18.60%(c)(d) 18.71%(c)(d) 47.00%(c) RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $1,530,723 $1,238,209 $ 616,174 $ 489,615 $579,912 $ 545,869 Net operating expenses to average daily net assets 0.51%*(e) 0.52%(e) 0.52%(e) 0.52%(e) 0.51% 0.51% Interest expense to average daily net assets 0.03%*(f) 0.08%(f) 0.08%(f) 0.14%(f) -- -- Total net expenses to average daily net assets 0.54%* 0.60% 0.60% 0.66% 0.51% 0.51% Net investment income to average daily net assets 8.52%* 9.95% 9.89% 10.83% 12.69% 10.90% Portfolio turnover rate 40%** 119% 121% 130% 139% 123% Fees and expenses reimbursed by the Manager to average daily net assets: --(g) --(g) 0.01%(g) 0.02% 0.03% 0.03% Purchase premiums and redemption fees consisted of the following per share amounts: (h) + $ 0.01 $ 0.04 $ 0.01 --(i) $ 0.01 N/A
See accompanying notes to the financial statements. 61 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS -- (CONTINUED) (FOR A CLASS IV SHARE OUTSTANDING THROUGHOUT EACH PERIOD) (a) As a result of recent changes in generally accepted accounting principles, the Fund has reclassified periodic payments made under interest rate swap agreements, previously included within interest income, as a component of realized gain (loss) in the Statement of Operations. The effect of this reclassification was to decrease the net investment income ratio for the year ending February 29, 2004 by 0.47% and net investment income per share by $0.05. For consistency, similar reclassifications have been made to prior year amounts, resulting in increases (reductions) to the net investment income ratio of (0.43%), (0.39%), 0.07% and 0.03% and to net investment income per share of $(0.04), $(0.03), $0.01 and less than $0.01 in the fiscal years ending February 28/29, 2003, 2002, 2001 and 2000, respectively. This reclassification has no effect on total return. (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) The total returns would have been lower had certain expenses not been reimbursed during the periods shown. (d) Calculation excludes purchase premiums and redemption fees which are borne by shareholders. (e) Net expenses exclude expenses incurred indirectly through investment in underlying funds. See Note 2. (f) Interest expense incurred as a result of entering into reverse repurchase agreements is included in the Fund's net expenses. Income earned on investing proceeds from reverse repurchase agreements is included in interest income. (g) Effective June 30, 2002, the Fund ceased reimbursing any Fund fees or expenses. See Note 2. (h) Effective March 1, 2000, the Fund adopted the provision 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. (i) Purchase and redemption fees were less than $0.01 per share. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 62 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION 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 high total return through direct and indirect investment 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 (EMBIG). Throughout the six months ended August 31, 2004, 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 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. At August 31, 2004, 3.5% of the Fund was invested in GMO Short-Duration Collateral Fund and less than 0.1% of the Fund was invested in GMO Special Purpose Holding Fund, each a separate fund of GMO Trust managed by GMO. Shares of GMO Short-Duration Collateral Fund and GMO Special Purpose Holding Fund are not publicly available for direct purchase. The financial statements of GMO Short-Duration Collateral Fund and GMO Special Purpose Holding Fund should be read in conjunction with the Fund's financial statements. These financial statements are available, upon request, without charge by calling (617) 346-7646. 2. SIGNIFICANT ACCOUNTING POLICIES 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. CHANGE IN ACCOUNTING PRINCIPLE For the year ended February 29, 2004, as a result of a FASB Emerging Issues Task Force consensus (and subsequent related SEC staff guidance), the Fund reclassified periodic payments made under interest rate swap agreements, previously included within interest income, as a component of realized gain (loss) in the Statement of Operations. For consistency, similar reclassifications have been made to the per share amounts in all prior year financial highlights presented. Prior year net investment income ratios in the 63 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) financial highlights have also been modified accordingly. This reclassification decreased net investment income and increased net realized gains by $7,512,545 for the year ended February 29, 2004. This change had no effect on the Fund's net asset value, either in total or per share, or its total increase (decrease) in net assets from operations during any period. 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 funds of the Trust ("underlying funds") and other 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 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 August 31, 2004, the total value of the securities represented 21.8% of net assets. FOREIGN CURRENCY TRANSLATION The accounting records of the Fund are maintained in U.S. dollars. The market values of foreign securities, currency holdings and other assets and liabilities are translated to U.S. dollars based on the current exchange rates each business day. Income and expenses denominated in foreign currencies are translated at current exchange rates when accrued or incurred. The Fund does not isolate realized and unrealized gains and losses attributable to changes in exchange rates from gains and losses that arise from 64 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 in the Schedule of Investments and represents the currency exposure the Fund has acquired or hedged through forward currency contracts as of August 31, 2004. 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. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the 65 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) contracts or the imposition of price limits, 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 August 31, 2004, 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 unfavorable change in the price of the future, security or currency underlying the written option. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying investment increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of August 31, 2004, the Fund held 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 closing 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 August 31, 2004. 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 66 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. See the Schedule of Investments for all loan agreements held by the Fund as of August 31, 2004. 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. See the Schedule of Investments for all indexed securities held by the Fund as of August 31, 2004. 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 using standard models that incorporate 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 on swap contracts 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 67 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 the Schedule of Investments for a summary of open swap agreements as of August 31, 2004. 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 or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. As of August 31, 2004, the Fund had no open repurchase agreements. 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. The market value of the securities the Fund has sold is determined daily and any additional required collateral is allocated to or sent by the Fund on the next business day. At August 31, 2004, the Fund had entered into reverse repurchase agreements having a market value of $106,858,119, collateralized by securities with a market value of $112,176,250. See the Schedule of Investments for a summary of the open reverse repurchase agreements as of August 31, 2004. 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. As of August 31, 2004, the Fund did not hold any delayed delivery commitments. 68 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. As of August 31, 2004, 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. 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions are determined in accordance with U.S. federal income tax regulations which may differ from U.S. GAAP. 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 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 these securities is recorded as interest income. 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 between 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. 69 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) PURCHASES AND REDEMPTIONS OF FUND SHARES The premium on cash purchases of Fund shares is 0.50% of the amount invested. In the case of cash redemptions, the fee is 0.25% of the amount redeemed. If the Manager determines that any portion of a cash purchase or redemption is offset by a corresponding cash redemption or purchase occurring on the same day, it will waive the purchase premium or redemption fee with respect to that portion. In addition, the purchase premium or redemption fee charged by the Fund may be waived in extraordinary circumstances if the Fund will not incur transaction costs. All purchase premiums and redemption fees are paid to and recorded by the Fund as paid-in-capital. For the six months ended August 31, 2004 and the year ended February 29, 2004, the Fund received $1,359,372 and $3,970,806 in purchase premiums and $135,099 and $1,132,584 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 typically less liquid than those of developed markets. The 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 the Fund as of August 31, 2004, has sold more of such default protection than it has purchased. In addition, 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. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.35% of average daily net assets. The Fund has adopted a Shareholder Service Plan under which the Fund pays GMO a shareholder service fee for client and shareholder service, reporting, and other support. Pursuant to the Shareholder Service Plan, the shareholder service fee is calculated based on the average daily net assets of each class at the annual rate of 0.15% for Class III shares and 0.10% for Class IV shares. 70 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) The Fund incurs fees and expenses indirectly as a shareholder in GMO Special Purpose Holding Fund and GMO Short-Duration Collateral Fund. For the six months ended August 31, 2004, these indirect fees and expenses expressed as an annualized percentage of the Fund's average daily net assets were as follows:
INDIRECT INVESTMENT- INDIRECT OPERATING RELATED EXPENSES EXPENSES (EXCLUDING (INCLUDING, BUT NOT LIMITED MANAGEMENT FEES, TO, INTEREST EXPENSE, SHAREHOLDER SERVICE FEES INDIRECT FOREIGN AUDIT EXPENSE, AND INDIRECT NET AND INVESTMENT-RELATED SHAREHOLDER INVESTMENT-RELATED TOTAL INDIRECT MANAGEMENT FEES EXPENSES) SERVICE FEES LEGAL EXPENSE) EXPENSES --------------------------------------------------------------------------------------------------------------- (0.001)% 0.001% 0.000% LESS THAN 0.001% LESS THAN 0.001%
The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004, was $9,569. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004, aggregated $1,168,865,826 and $886,564,615 respectively. 5. PRINCIPAL SHAREHOLDERS AND RELATED PARTIES At August 31, 2004, 24.1% 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. At August 31, 2004, 0.4% of the Fund was held by thirty-eight related parties comprised of GMO employee accounts. As of August 31, 2004, greater than 10% of the Fund's shares were held by accounts for which the Manager has investment discretion. 71 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 6 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------------------------- ---------------------------------- SHARES AMOUNT SHARES AMOUNT --------------- --------------- --------------- --------------- Class III: Shares sold 10,063,612 $ 104,725,229 27,702,974 $ 297,509,031 Shares issued to shareholders in reinvestment of distributions 2,462,371 24,968,440 12,149,941 126,408,551 Shares repurchased (8,441,356) (86,711,339) (38,201,416) (409,413,075) Purchase premiums and redemption fees -- 619,832 -- 2,690,168 --------------- --------------- --------------- --------------- Net increase 4,084,627 $ 43,602,162 1,651,499 $ 17,194,675 =============== =============== =============== =============== SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------------------------- ---------------------------------- SHARES AMOUNT SHARES AMOUNT --------------- --------------- --------------- --------------- Class IV: Shares sold 18,943,350 $ 198,030,083 63,468,362 $ 668,495,060 Shares issued to shareholders in reinvestment of distributions 4,244,196 43,078,589 10,137,250 105,372,058 Shares repurchased (8,507) (91,991) (20,533,687) (220,622,490) Purchase premiums and redemption fees -- 874,639 -- 2,413,222 --------------- --------------- --------------- --------------- Net increase 23,179,039 $ 241,891,320 53,071,925 $ 555,657,850 =============== =============== =============== ===============
72 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 7. INVESTMENTS IN AFFILIATED ISSUERS A summary of the Fund's transactions in the shares of these issuers during the six months ended August 31, 2004, is set forth below:
VALUE, BEGINNING SALES DIVIDEND CAPITAL GAIN VALUE, END AFFILIATE OF PERIOD PURCHASES PROCEEDS INCOME DISTRIBUTIONS OF PERIOD ------------------------ -------------- -------------- -------------- -------------- -------------- -------------- GMO Special Purpose Holding Fund $ 8,533,467 $ 283,151 $ 8,095,984 $ 283,151 $ 0 $ 376,589 GMO Short-Duration Collateral Fund 38,729,606 48,643,487 0 8,907 38,596 87,799,918* -------------- -------------- -------------- -------------- -------------- -------------- Totals $ 47,263,073 $ 48,926,638 $ 8,095,984 $ 292,058 $ 38,596 $ 88,176,507 ============== ============== ============== ============== ============== ==============
* After effect of return of capital distribution of $330,003 on June 10, 2004. 8. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 73 GMO EMERGING COUNTRY DEBT FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees, other expenses and indirect expenses incurred by its investment in underlying funds. The following table, assuming a $1,000 investment in a class of shares, discloses the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the classes' actual return and actual expenses, and (2) a hypothetical annualized 5% return and the classes' actual expenses:
CLASS III --------------------------------------------------------- OPERATING BEGINNING ENDING EXPENSE AMOUNT VALUE INCURRED * --------------------------------------------------------- 1) Actual $ 1,000.00 $ 1,067.30 $ 3.07 2) Hypothetical 1,000.00 1,022.23 3.01
*Expenses are calculated using the Class III annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2004 of 0.59%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year.
CLASS IV ----------------------------------------------------------- OPERATING BEGINNING ENDING EXPENSE AMOUNT VALUE INCURRED * ----------------------------------------------------------- 1) Actual $ 1,000.00 $ 1,068.30 $ 2.82 2) Hypothetical 1,000.00 1,022.48 2.75
*Expenses are calculated using the Class IV annualized expense ratio (including indirect expenses incurred) for the six months ended August 31, 2004 of 0.54%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 74 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
DESCRIPTION % OF NET ASSETS - -------------------------------------------------------------------------------- Australia 2.6% Austria 1.5 Belgium 3.3 Canada 0.4 Finland 0.9 France 4.1 Germany 8.8 Hong Kong 1.5 Ireland 0.9 Italy 3.1 Japan 23.7 Netherlands 5.9 Norway 3.2 Singapore 1.7 Spain 2.7 Sweden 2.8 Switzerland 3.3 United Kingdom 22.3 Forward Currency Contracts (0.0) Futures (0.1) Short-Term Investments and Other Assets and Liabilities (net) 7.4 ------ 100.0% ======
See accompanying notes to the financial statements. 1 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------------------- COMMON STOCKS -- 92.3% AUSTRALIA -- 2.6% 83,267 Australia and New Zealand Banking Group Ltd 1,082,566 242,117 BHP Billiton Ltd 2,258,697 220,486 General Property Trust Units 555,555 111,434 National Australia Bank Ltd 2,102,180 326,836 Telstra Corp Ltd 1,108,302 102,608 Westfield Group * 1,118,006 113,027 Woodside Petroleum Ltd 1,446,533 ----------------- 9,671,839 ----------------- AUSTRIA -- 1.5% 15,573 Austrian Airlines * 200,601 4,215 Boehler Uddeholm (Bearer) 352,916 15,484 Erste Bank Der Oesterreichischen Sparkassen AG 589,845 5,512 Flughafen Wien AG 316,545 6,229 Generali Holding Vienna AG 189,519 5,860 Mayr-Melnhof Karton AG (Bearer) 775,924 927 Oesterreichische Elektrizitaetswirtschafts AG Class A 167,922 7,719 OMV AG 1,766,876 4,858 VA Technologie AG (Bearer) * 316,509 6,758 Voestalpine AG 331,489 13,204 Wienerberger AG 478,980 ----------------- 5,487,126 ----------------- BELGIUM -- 3.3% 21,324 Almanij NV 1,336,336 3,029 Bekaert SA 190,127 16,162 Delhaize Group 909,698 95,509 Dexia 1,650,406 5,807 Electrabel SA 1,949,284 122,427 Fortis 2,734,068 27,008 KBC Bancassurance Holding 1,628,898 35,748 UCB SA 1,744,068 ----------------- 12,142,885 -----------------
See accompanying notes to the financial statements. 2 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------------------- CANADA -- 0.4% 16,300 EnCana Corp 663,827 20,500 National Bank of Canada 672,131 ----------------- 1,335,958 ----------------- FINLAND -- 0.9% 42,800 Fortum Oyj 601,260 143,600 Nokia Oyj 1,696,411 69,500 Sampo Oyj Class A 687,076 26,800 UPM-Kymmene Oyj 513,131 ----------------- 3,497,878 ----------------- FRANCE -- 4.1% 3,567 Air Liquide 560,223 8,377 Assurances Generales de France 480,170 38,726 Axa 796,050 13,165 BNP Paribas 800,715 22,249 Cie de Saint-Gobain 1,122,638 96,392 Havas SA 461,165 10,734 Michelin SA Class B 569,999 5,238 Pernod Ricard 648,204 18,508 Peugeot SA 1,113,932 8,695 Sanofi-Aventis (Foreign Registered) 618,442 9,896 Societe Generale 849,076 83,824 Suez SA 1,632,029 27,071 Total SA 5,296,420 ----------------- 14,949,063 ----------------- GERMANY -- 8.4% 8,105 Adidas-Salomon AG 1,043,517 16,291 Altana AG 886,773 134,187 Bankgesellschaft Berlin AG * 328,454 33,790 Bayer AG 872,968 14,069 Continental AG 731,518 31,607 DaimlerChrysler AG (Registered) 1,318,449 3,900 Degussa AG 138,421
See accompanying notes to the financial statements. 3 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------------------- GERMANY -- CONTINUED 25,747 Deutsche Bank AG (Registered) 1,764,099 55,105 E. On AG 3,926,593 37,095 MAN AG 1,264,610 11,053 Merck KGaA 582,810 6,287 Puma AG Rudolf Dassler Sport 1,540,780 48,421 RWE AG 2,376,274 16,513 SAP AG 2,406,386 51,611 Schering AG 2,871,653 63,809 Siemens AG (Registered) 4,399,424 10,526 Suedzucker AG 196,787 76,432 ThyssenKrupp AG 1,430,844 38,329 TUI AG 708,729 50,572 Volkswagen AG 1,956,436 ----------------- 30,745,525 ----------------- HONG KONG -- 1.5% 513,000 BOC Hong Kong Holdings Ltd 924,248 194,000 CLP Holdings Ltd 1,122,859 176,000 Hang Lung Group Co Ltd 272,141 372,000 Hong Kong Electric Holdings Ltd 1,663,113 104,000 Sun Hung Kai Properties Ltd 970,345 229,500 Yue Yuen Industrial Holdings 553,661 ----------------- 5,506,367 ----------------- IRELAND -- 0.9% 67,417 Anglo Irish Bank Corp 1,125,056 84,567 Bank of Ireland 1,135,337 40,696 CRH Plc 924,832 ----------------- 3,185,225 ----------------- ITALY -- 3.1% 167,896 Enel SPA 1,299,454 370,264 ENI SPA 7,606,943 89,248 Parmalat Finanziaria SPA *(a) (b) 1,085 1,039,031 Telecom Italia SPA 2,285,675 ----------------- 11,193,157 -----------------
See accompanying notes to the financial statements. 4 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------------------- JAPAN -- 23.7% 20,050 Acom Co Ltd 1,323,126 12,100 Advantest Corp 769,400 56,000 Asahi Glass Co Ltd 542,527 77,000 Asahi Kasei Corp 345,719 42,000 Canon Sales Co Inc * 546,624 85,600 Chubu Electric Power Co Inc 1,880,742 15,500 Chugoku Electric Power Co Inc 272,430 154,000 Cosmo Oil Co Ltd 449,674 86,200 Daiichi Pharmaceuticals Co Ltd 1,495,256 17,800 Daito Trust Construction Co Ltd 676,444 40,000 Daiwa House Industry Co Ltd 415,561 34,000 Eisai Co Ltd 971,077 13,700 Fast Retailing Co Ltd 989,083 235,000 Fuji Heavy Industries Ltd 1,186,817 19,000 Fuji Photo Film Co Ltd 597,331 123,000 Fujitsu Ltd 762,540 315,000 Furukawa Electric Co Ltd * 1,275,116 261,000 Hitachi Ltd 1,643,565 13,400 Honda Motor Co Ltd 667,753 10,500 Hoya Corp 1,013,421 358,000 Isuzu Motors Ltd * 843,264 369,000 Itochu Corp * 1,525,939 34,000 Ito-Yokado Co Ltd 1,258,371 367,000 Kajima Corp 1,271,230 73,600 Kansai Electric Power Co Inc 1,350,985 89,000 Kao Corp 2,189,819 659,000 Kawasaki Heavy Industries Ltd 998,750 169 KDDI Corp 814,280 64,000 Kirin Brewery Co Ltd 577,817 536,000 Kobe Steel Ltd 775,088 24,600 Konami Corp 551,369 235 Konica Minolta Holdings Inc 3,040 33,500 Kyocera Corp 2,458,501 34,900 Kyushu Electric Power Co Inc 665,946 387,000 Marubeni Corp 924,765 370,000 Mazda Motor Corp 1,200,808
See accompanying notes to the financial statements. 5 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------------------- JAPAN -- CONTINUED 77 Millea Holdings Inc 1,063,750 169,000 Mitsubishi Electric Corp 818,903 549,000 Mitsubishi Materials Corp 1,167,366 346,000 Mitsubishi Motors Corp * 298,372 338 Mitsubishi Tokyo Finance Group Inc 3,051,329 398 Mizuho Financial Group Inc 1,615,951 21,000 Murata Manufacturing Co Ltd 1,041,757 4,100 Nintendo Co Ltd 441,803 144,000 Nippon Express Co Ltd 740,878 190,500 Nippon Mining Holdings Inc 878,452 20,200 Nitto Denko Corp 887,838 19,300 Ono Pharmaceutical Co Ltd 860,093 14,400 ORIX Corp 1,479,696 22,750 Promise Co 1,447,052 85,000 Sankyo Co Ltd 1,782,634 106,000 Sekisui Chemical Co Ltd 799,615 76,000 Sharp Corp 1,062,896 7,200 Shikoku Electric Power Co Inc 128,926 237,000 Shimizu Corp 1,049,046 88,000 Sompo Japan Insurance Inc 825,106 37,400 Sony Corp 1,295,922 314,000 Taiheiyo Cement Corp 748,317 357,000 Taisei Corp 1,226,277 80,000 Taisho Pharmaceutical Co Ltd 1,528,035 185,400 Takeda Pharmaceutical Co Ltd 8,381,964 15,750 Takefuji Corp 1,101,489 63,300 Tohoku Electric Power Co Inc 1,081,037 70,200 Tokyo Electric Power Co Inc 1,619,734 16,200 Tokyo Electron Ltd 831,645 137,000 TonenGeneral Sekiyu KK 1,142,732 145,000 Toppan Printing Co Ltd 1,502,914 174,800 Toyota Motor Corp 6,900,370 20,500 Trend Micro Inc 894,250 139 Yahoo Japan Corp * 1,341,062 19,000 Yamato Transport Co Ltd 289,627 ----------------- 86,561,016 -----------------
See accompanying notes to the financial statements. 6 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------------------- NETHERLANDS -- 5.9% 228,423 ABN Amro Holdings NV 4,864,289 136,289 Aegon NV 1,459,831 31,896 Akzo Nobel NV 1,076,144 9,457 DSM NV 461,148 300,040 ING Groep NV 7,348,963 281,537 Koninklijke Ahold NV * 1,747,165 103,681 Philips Electronics NV 2,404,739 26,403 Royal Dutch Petroleum 1,337,461 22,931 Royal Numico NV * 722,292 410 Wolters Kluwer NV 6,768 ----------------- 21,428,800 ----------------- NORWAY -- 3.2% 215,400 DNB Holdings Class A 1,640,968 7,500 Elkem ASA Class A 243,770 9,500 Frontline Ltd 355,424 43,340 Norsk Hydro ASA 2,704,913 20,900 Norske Skogindustrier ASA Class A 348,585 66,700 Orkla ASA 1,686,285 158,900 Statoil ASA 2,028,520 78,400 Tandberg ASA 702,263 298,600 Telenor ASA 2,163,089 ----------------- 11,873,817 ----------------- SINGAPORE -- 1.7% 161,000 Chartered Semiconductor Manufacturing Ltd * 102,601 191,000 DBS Group Holdings Ltd 1,745,384 1,798 Haw Par Corp Ltd 5,255 188,928 Oversea-Chinese Banking Corp 1,470,703 143,500 Singapore Press Holdings Ltd 362,846 1,915,000 Singapore Telecom Ltd * 2,563,435 ----------------- 6,250,224 -----------------
See accompanying notes to the financial statements. 7 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------------------- SPAIN -- 2.7% 44,014 Altadis SA 1,372,447 90,738 Banco Bilbao Vizcaya Argentaria SA 1,212,660 130,109 Banco Santander Central Hispano SA 1,279,392 124,388 Endesa SA 2,307,455 24,123 Gas Natural SDG SA 575,337 73,954 Iberdrola SA 1,511,306 72,202 Repsol YPF SA 1,496,386 ----------------- 9,754,983 ----------------- SWEDEN -- 2.8% 37,000 Electrolux AB 678,758 272,500 Nordea AB 2,093,982 158,000 Swedish Match AB 1,603,178 15,900 Tele2 AB Class B 601,961 1,996,000 Telefonaktiebolaget LM Ericsson * 5,411,979 ----------------- 10,389,858 ----------------- SWITZERLAND -- 3.3% 37,160 Credit Suisse Group * 1,161,658 288 Logitech International SA * 13,047 3,219 Nestle SA (Registered) 761,847 4,286 Roche Holding AG (Bearer) 521,201 47,748 Roche Holding AG (Non Voting) 4,637,033 7,929 Swisscom AG (Registered) 2,622,716 23,808 UBS AG (Registered) 1,602,801 5,588 Zurich Financial Services AG * 782,189 ----------------- 12,102,492 ----------------- UNITED KINGDOM -- 22.3% 43,269 Abbey National Plc 466,573 30,683 Alliance & Leicester Plc 496,896 190,117 Allied Domecq Plc 1,524,582 18,369 AstraZeneca Plc 846,763 316,655 Aviva Plc 3,038,438 59,700 BAA Plc 597,247
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) AUGUST 31, 2004 (UNAUDITED)
SHARES DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------------------- UNITED KINGDOM -- CONTINUED 352,693 BAE Systems Plc 1,277,456 288,697 Barclays Plc 2,671,804 107,022 Barratt Developments Plc 1,140,724 315,114 BG Group Plc 1,948,574 221,172 BHP Billiton Plc 2,089,015 149,415 Boots Group Plc 1,826,106 941,734 BP Plc 8,367,997 92,999 British American Tobacco Plc 1,404,287 467,204 BT Group Plc 1,538,745 57,133 Bunzl Co 438,231 124,921 Cadbury Schweppes Plc 1,004,393 25,885 Carnival Plc 1,248,001 485,623 Centrica Plc 2,154,326 638,611 Dixons Group Plc (New Shares) 1,816,759 76,852 Gallaher Group Plc 915,027 267,735 GlaxoSmithKline Plc 5,459,314 53,763 Hanson Plc 367,050 150,220 HBOS Plc 1,841,890 148,318 Hilton Group Plc 698,713 159,987 HSBC Holdings Plc 2,491,156 198,057 Imperial Chemical Industries Plc 790,440 129,438 Imperial Tobacco Group Plc 2,861,315 2,293,486 Invensys Plc * 611,041 156,450 J Sainsbury Plc 735,024 40,880 Land Securities Group Plc 847,134 740,979 Lloyds TSB Group Plc 5,572,807 1,027,846 mmO2 Plc * 1,666,358 190,728 National Grid Transco Plc 1,598,138 76,192 Next Plc 2,045,814 35,180 Provident Financial Plc 377,172 48,046 Reckitt Benckiser Plc 1,264,384 196,797 Rentokil Initial Plc 533,095 38,128 Rio Tinto Plc 952,267 54,558 RMC Group Plc 626,689 258,587 Rolls-Royce Group Plc 1,082,672 87,306 SABMiller Plc 1,087,352
See accompanying notes to the financial statements. 9 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
SHARES PAR VALUE ($) DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------------------- UNITED KINGDOM -- CONTINUED 166,944 Scottish & Southern Energy Plc 2,219,814 147,260 Scottish Power Plc 1,068,316 117,579 Smith (WH) Group Plc 646,845 71,552 Tate & Lyle Plc 462,910 113,546 Taylor Woodrow Plc 560,499 507,499 Tesco Plc 2,435,335 768,016 THUS Group Plc * 207,934 55,332 Whitbread Plc 813,895 107,746 William Hill Plc 1,054,530 110,144 Wimpey (George) 835,116 61,069 Wolseley Plc 937,271 ----------------- 81,564,234 ----------------- TOTAL COMMON STOCKS (COST $320,294,489) 337,640,447 ----------------- PREFERRED STOCKS -- 0.4% GERMANY -- 0.4% 916 Porsche AG (Non Voting) 0.83% 558,101 2,710 RWE AG 4.35% 112,580 34,503 Volkswagen AG 5.30% 915,708 ----------------- 1,586,389 ----------------- TOTAL PREFERRED STOCKS (COST $1,731,625) 1,586,389 ----------------- SHORT-TERM INVESTMENTS -- 6.9% CASH EQUIVALENTS -- 5.9% 17,700,000 HSBC Bank USA Time Deposit, 1.56%, due 09/01/04 17,700,000 4,000,000 ING Bank GC Time Deposit, 1.57%, due 09/01/04 4,000,000 ----------------- 21,700,000 -----------------
See accompanying notes to the financial statements. 10 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - --------------------------------------------------------------------------------------------------- U.S. GOVERNMENT -- 1.0% 3,500,000 U.S. Treasury Bill, 0.96%, due 9/23/04 (c) (d) 3,497,958 ----------------- TOTAL SHORT-TERM INVESTMENTS (COST $25,197,958) 25,197,958 ----------------- TOTAL INVESTMENTS -- 99.6% (Cost $347,224,072) 364,424,794 Other Assets and Liabilities (net)-- 0.4% 1,291,587 ----------------- TOTAL NET ASSETS -- 100.0% $ 365,716,381 =================
NOTES TO SCHEDULE OF INVESTMENTS: Foreign Registered - Shares issued to foreigner investors in markets that have foreign ownership limits. * Non-income producing security. (a) Bankrupt issuer. (b) Security valued at fair value using methods determined in good faith by or at the direction of the Trustees (Note 2). (c) All or a portion of this security has been segregated to cover margin requirements on open financial futures contracts (Note 2). (d) Rate shown represents yield to maturity. CURRENCY ABBREVIATIONS: AUD - Australian Dollar CAD - Canadian Dollar CHF - Swiss Franc EUR - Euro GBP - British Pound JPY - Japanese Yen NOK - Norwegian Krone NZD - New Zealand Dollars SEK - Swedish Krona SGD - Singapore Dollar See accompanying notes to the financial statements. 11 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) At August 31, 2004, the approximate 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 ----------------- ---------------- ---------------- -------------- $ 347,324,913 $ 26,515,903 $ (9,416,022) $ 17,099,881
A summary of outstanding financial instruments at August 31, 2004 is as follows: FORWARD CURRENCY CONTRACTS
NET UNREALIZED SETTLEMENT APPRECIATION DATE DELIVER/RECEIVE UNITS OF CURRENCY VALUE (DEPRECIATION) ---------- --------------- ----------------- ------------ -------------- Buys 11/26/2004 AUD 4,138,332 $ 2,897,456 $ 11,983 11/26/2004 CAD 6,350,430 4,813,871 (37,155) 11/26/2004 CHF 11,728,908 9,275,568 33,611 11/26/2004 EUR 1,384,929 1,681,764 (21,696) 11/26/2004 JPY 1,746,514,198 15,981,562 (9,841) 11/26/2004 NOK 11,517,500 1,666,689 (34,985) 11/26/2004 NZD 476,704 309,427 1,614 11/26/2004 SEK 59,308,073 7,887,796 36,311 11/26/2004 SGD 1,188,289 694,719 (24) ---------- $ (20,182) ========== Sales 11/26/2004 AUD 3,213,188 $ 2,249,716 $ 29,668 11/26/2004 EUR 8,930,584 10,844,698 (27,153) 11/26/2004 GBP 10,507,282 18,766,032 (93,745) 11/26/2004 NOK 8,930,090 1,292,267 9,904 ---------- $ (81,326) ==========
See accompanying notes to the financial statements. 12 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) FUTURES CONTRACTS
NET UNREALIZED NUMBER OF APPRECIATION CONTRACTS TYPE EXPIRATION DATE CONTRACT VALUE (DEPRECIATION) --------- -------------- --------------- -------------- -------------- Buys 39 CAC 40 September 2004 $ 1,709,836 $ (13,352) 57 DAX September 2004 6,572,190 (233,633) 58 FTSE 100 September 2004 4,668,131 (8,165) 5 HANG SENG September 2004 410,836 (38) 6 IBEX 35 September 2004 574,995 401 5 MIB30 September 2004 823,943 (371) 131 MSCI September 2004 3,544,944 2,653 40 OMX September 2004 365,313 (330) 48 TSE TOPIX September 2004 4,942,366 75,721 ---------- $ (177,114) ========== Sales 16 S&P Toronto 60 September 2004 $ 1,128,597 $ (23,412) 11 SPI 200 September 2004 688,602 (11,689) ---------- $ (35,101) ==========
At August 31, 2004, the Fund had sufficient cash and/or securities to cover any commitments or margin requirements of the relevant broker or exchange. See accompanying notes to the financial statements. 13 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) SCHEDULE OF INVESTMENTS -- INDUSTRY SECTOR SUMMARY (SHOWING PERCENTAGE OF EQUITY INVESTMENTS) AUGUST 31, 2004 (UNAUDITED) At August 31, 2004, industry sector diversification of the Fund's equity investments was as follows:
INDUSTRY SECTOR ---------------------------------------------------------------------------- Financials 22.0% Consumer Discretionary 12.9 Energy 11.3 Health Care 10.0 Utilities 10.0 Consumer Staples 8.8 Industrials 7.8 Information Technology 6.9 Materials 5.7 Telecommunication Services 4.6 ----- 100.0% =====
See accompanying notes to the financial statements. 14 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED) ASSETS: Investments, at value (cost $347,224,072) (Note 2) $ 364,424,794 Cash 97,273 Foreign currency, at value (cost $228,087) (Note 2) 299,616 Dividends and interest receivable 1,064,436 Foreign taxes receivable 195,444 Receivable for open forward foreign currency contracts (Note 2) 123,091 Receivable for expenses reimbursed by Manager (Note 3) 53,506 --------------- Total assets 366,258,160 --------------- LIABILITIES: Payable to affiliate for (Note 3): Management fee 118,510 Shareholder service fee 37,140 Trustees fee 311 Payable for open forward foreign currency contracts (Note 2) 224,599 Payable for variation margin on open futures contracts (Note 2) 100,354 Accrued expenses 60,865 --------------- Total liabilities 541,779 --------------- NET ASSETS $ 365,716,381 =============== NET ASSETS CONSIST OF: Paid-in capital $ 337,787,583 Accumulated undistributed net investment income 5,295,129 Accumulated net realized gain 5,678,523 Net unrealized appreciation 16,955,146 --------------- $ 365,716,381 =============== NET ASSETS ATTRIBUTABLE TO: Class III shares $ 220,478,128 =============== Class IV shares $ 145,238,253 =============== SHARES OUTSTANDING: Class III 8,381,509 =============== Class IV 5,521,720 =============== NET ASSET VALUE PER SHARE: Class III $ 26.31 =============== Class IV $ 26.30 ===============
See accompanying notes to the financial statements. 15 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED) INVESTMENT INCOME: Dividends (net of withholding taxes of $931,438) $ 6,691,927 Interest 93,754 --------------- Total income 6,785,681 --------------- EXPENSES: Management fee (Note 3) 687,601 Shareholder service fee (Note 3) - Class III 153,921 Shareholder service fee (Note 3) - Class IV 62,357 Custodian fees 191,360 Transfer agent fees 21,712 Audit and tax fees 21,896 Legal fees 3,864 Trustees fees and related expenses (Note 3) 1,950 Registration fees 4,876 Miscellaneous 1,472 --------------- Total expenses 1,151,009 Fees and expenses reimbursed by Manager (Note 3) (245,180) --------------- Net expenses 905,829 --------------- Net investment income 5,879,852 --------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments 4,288,650 Closed futures contracts 1,593,947 Foreign currency, forward contracts and foreign currency related transactions (171,005) --------------- Net realized gain 5,711,592 --------------- Change in net unrealized appreciation (depreciation) on: Investments (14,081,897) Open futures contracts (257,515) Foreign currency, forward contracts and foreign currency related transactions (229,970) --------------- Net unrealized loss (14,569,382) --------------- Net realized and unrealized loss (8,857,790) --------------- NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (2,977,938) ===============
See accompanying notes to the financial statements. 16 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 5,879,852 $ 1,919,465 Net realized gain 5,711,592 4,683,512 Change in net unrealized appreciation (depreciation) (14,569,382) 37,517,308 --------------- --------------- Net increase (decrease) in net assets from operations (2,977,938) 44,120,285 --------------- --------------- Distributions to shareholders from: Net investment income Class III (495,345) (2,437,505) Class IV (385,644) (241,771) --------------- --------------- Total distributions from net investment income (880,989) (2,679,276) --------------- --------------- Net realized gains Class III (388,655) -- Class IV (280,969) -- --------------- --------------- Total distributions from net realized gains (669,624) -- --------------- --------------- (1,550,613) (2,679,276) --------------- --------------- Net share transactions (Note 6): Class III 22,270,032 94,641,702 Class IV 122,507,399 21,338,161 --------------- --------------- Increase in net assets resulting from net share transactions 144,777,431 115,979,863 --------------- --------------- Total increase in net assets 140,248,880 157,420,872 NET ASSETS: Beginning of period 225,467,501 68,046,629 --------------- --------------- End of period (including accumulated undistributed net investment income of $5,295,129 and $296,266, respectively) $ 365,716,381 $ 225,467,501 =============== ===============
See accompanying notes to the financial statements. 17 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
SIX MONTHS ENDED YEAR ENDED FEBRUARY 28/29, AUGUST 31, 2004 ---------------------------------------------- (UNAUDITED) 2004 2003 2002(a) ------------ ------------ ------------ ------------ NET ASSET VALUE, BEGINNING OF PERIOD $ 26.75 $ 18.04 $ 20.40 $ 20.00 ------------ ------------ ------------ ------------ Income from investment operations: Net investment income + 0.45 0.40 0.37 0.02 Net realized and unrealized gain (loss) (0.77) 8.81 (2.03) 0.38 ------------ ------------ ------------ ------------ Total from investment operations (0.32) 9.21 (1.66) 0.40 ------------ ------------ ------------ ------------ Less distributions to shareholders: From net investment income (0.07) (0.50) (0.70) -- From net realized gains (0.05) -- -- -- ------------ ------------ ------------ ------------ Total distributions (0.12) (0.50) (0.70) -- ------------ ------------ ------------ ------------ NET ASSET VALUE, END OF PERIOD $ 26.31 $ 26.75 $ 18.04 $ 20.40 ============ ============ ============ ============ TOTAL RETURN (b) (1.22)%** 51.46% (8.28)% 2.00%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 220,478 $ 201,333 $ 68,047 $ 47,081 Net expenses to average daily net assets 0.55%* 0.55% 0.55% 0.55%* Net investment income to average daily net assets 1.70%(c)** 1.77% 1.82% 1.56%* Portfolio turnover rate 26%** 43% 64% 0%(d)** Fees and expenses reimbursed by the Manager to average daily net assets: 0.14%* 0.27% 0.39% 1.89%*
(a) Period from January 29, 2002 (commencement of operations) through February 28, 2002. (b) Total return would have been lower had certain expenses not been reimbursed during the periods shown. (c) The ratio for the six months ended August 31, 2004, has not been annualized since the Fund believes it would not be appropriate because the Fund's dividend income is not earned ratably throughout the fiscal year. (d) Portfolio turnover rate was less than 1%. + Computed using average shares outstanding throughout the period. * Annualized. ** Not Annualized. See accompanying notes to the financial statements. 18 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A CLASS III SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PERIOD FROM JUNE 30, 2003 SIX MONTHS ENDED (COMMENCEMENT AUGUST 31, 2004 OF OPERATIONS) THROUGH (UNAUDITED) FEBRUARY 29, 2004 ---------------- ---------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 26.75 $ 21.08 ------------ ------------ Income from investment operations: Net investment income + 0.47 0.16 Net realized and unrealized gain (0.80) 6.03 ------------ ------------ Total from investment operations (0.33) 6.19 ------------ ------------ Less distributions to shareholders: From net investment income (0.07) (0.52) From net realized gains (0.05) -- ------------ ------------ Total distributions (0.12) (0.52) ------------ ------------ NET ASSET VALUE, END OF PERIOD $ 26.30 $ 26.75 ============ ============ TOTAL RETURN (a) (1.24)%** 29.71%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 145,238 $ 24,134 Net expenses to average daily net assets 0.49%* 0.49%* Net investment income to average daily net assets 1.77%(b)** 0.99%* Portfolio turnover rate 26%** 43% Fees and expenses reimbursed by the Manager to average daily net assets: 0.14%* 0.26%*
(a) Total return would have been lower had certain expenses not been reimbursed during the period shown. (b) The ratio for the six months ended August 31, 2004, has not been annualized since the Fund believes it would not be appropriate because the Fund's dividend income is not earned ratably throughout the fiscal year. + Computed using average shares outstanding throughout the period. * Annualized. ** Not Annualized. See accompanying notes to the financial statements. 19 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION GMO International Disciplined 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, 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 in the world's developed markets. The Fund's benchmark is the MSCI EAFE Index (Europe, Australasia and Far East). Throughout the six months ended August 31, 2004, 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 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. 2. SIGNIFICANT ACCOUNTING POLICIES 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. The values of securities which are primarily traded on foreign exchanges are 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. For other assets, and in cases where market prices are not readily available or the Manager believes established valuation methodologies are unreliable, the Fund's investments will be valued at "fair value", as determined in good faith by the Trustees or pursuant to procedures approved by the Trustees. A security's value may be deemed unreliable if, for example, the Manager becomes aware of information or events that would materially affect that security's value. Because many foreign equity securities markets and exchanges close prior to the close of the New York Stock Exchange ("NYSE"), See accompanying notes to the financial statements. 20 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) closing prices for foreign securities in those markets or on those exchanges do not reflect the events that occur after the close but before the close of the NYSE. As a result, foreign equity securities held by the Fund are generally valued using fair value prices based on modeling tools by a third party vendor to the extent that these fair value prices are available. 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 in the Schedule of Investments and represents the currency exposure the Fund has acquired or hedged through currency contracts as of August 31, 2004. 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 21 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, 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 the Schedule of Investments for all open futures contracts as of August 31, 2004. 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. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying investment increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. As of August 31, 2004, 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 closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. As of August 31, 2004, there were no open purchased option contracts. 22 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 using standard models that incorporate 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 on swap contracts 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 August 31, 2004, 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. As of August 31, 2004, 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 23 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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 generally 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 are paid in shares of the Fund, at net asset value, unless the shareholder elects to receive cash distributions. Distributions to shareholders are recorded by the Fund on the ex-dividend date. 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. 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. Dividends representing a return of capital are reflected as a reduction of cost, when the amount of the return of capital is conclusively determined. 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 between the classes of shares of the Fund based on the relative net assets of each class. Shareholder service fees, which are directly attributable to a class of shares, are charged to that class's operations. 24 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 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. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO earns a management fee paid monthly at the annual rate of 0.40% 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 of each class at the annual rate of 0.15% for Class III shares and 0.09% for Class IV shares. GMO has entered into a binding agreement effective until at least June 30, 2005 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 0.40% of average daily net assets. The Fund's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $1,398. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004 aggregated $211,141,264 and $80,713,881, respectively. 5. PRINCIPAL SHAREHOLDERS AND RELATED PARTIES At August 31, 2004, 70.4% 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. At August 31, 2004, less than 0.1% of the Fund was held by two related parties comprised of certain GMO employee accounts. As of August 31, 2004, greater than 10% of the Fund's shares were held by accounts for which the Manager has investment discretion. 25 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) AUGUST 31, 2004 (UNAUDITED) 6. 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:
SIX MONTHS ENDED AUGUST 31, 2004 YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 --------------------------------- --------------------------------- Shares Amount Shares Amount --------------- --------------- --------------- --------------- Class III: Shares sold 985,980 $ 25,681,893 4,203,203 $ 106,210,755 Shares issued to shareholders in reinvestment of distributions 25,631 688,705 39,302 935,929 Shares repurchased (155,953) (4,100,566) (488,341) (12,504,982) --------------- --------------- --------------- --------------- Net increase 855,658 $ 22,270,032 3,754,164 $ 94,641,702 =============== =============== =============== =============== SIX MONTHS ENDED PERIOD FROM JUNE 30, 2003 AUGUST 31, 2004 (COMMENCEMENT OF OPERATIONS) (UNAUDITED) FEBRUARY 29, 2004 --------------------------------- --------------------------------- Shares Amount Shares Amount --------------- --------------- --------------- --------------- Class IV: Shares sold 4,718,831 $ 125,170,104 892,114 $ 21,096,390 Shares issued to shareholders in reinvestment of distributions 12,520 336,295 10,212 241,771 Shares repurchased (111,957) (2,999,000) -- -- --------------- --------------- --------------- --------------- Net increase 4,619,394 $ 122,507,399 902,326 $ 21,338,161 =============== =============== =============== ===============
7. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 26 GMO INTERNATIONAL DISCIPLINED EQUITY FUND (A SERIES OF GMO TRUST) FUND EXPENSES AUGUST 31, 2004 (UNAUDITED) The Fund incurs ongoing operating expenses during the normal course of business, such as management fees, shareholder service fees and other expenses. The following tables, assuming a $1,000 investment in a class of shares, disclose the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the classes' actual return and actual expenses, and (2) a hypothetical annualized 5% return and the classes' actual expenses: Class III
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * ---------------------------------------------------------- 1) Actual $ 1,000.00 $ 987.80 $ 2.76 2) Hypothetical 1,000.00 1,022.43 2.80
*Expenses are calculated using the Class III annualized expense ratio for the six months ended August 31, 2004 of 0.55%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. Class IV
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * ---------------------------------------------------------- 1) Actual $ 1,000.00 $ 987.20 $ 2.45 2) Hypothetical 1,000.00 1,022.74 2.50
*Expenses are calculated using the Class IV annualized expense ratio for the six months ended August 31, 2004 of 0.49%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 27 GMO SPECIAL PURPOSE FUND (FORMERLY GMO ALPHA LIBOR FUND) (A SERIES OF GMO TRUST) SEMI-ANNUAL REPORT AUGUST 31, 2004 For a free copy of the Fund's proxy voting guidelines, shareholders may call 1-617-346-7646 (collect), visit our website at www.gmo.com, or visit the Securities and Exchange Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available on our website at www.gmo.com, or on the Securities and Exchange Commission's website at www.sec.gov. Beginning January 29, 2005, the Fund will be filing its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarter of each fiscal year on Form N-Q, which when filed, will be available on the Commission's website at www.sec.gov. When filed, the Fund's Form N-Q may be reviewed and copied at the Commission's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund also discloses its complete schedule of portfolio holdings on the Fund's website at www.gmo.com. GMO SPECIAL PURPOSE HOLDING FUND (FORMERLY GMO ALPHA LIBOR FUND) (A SERIES OF GMO TRUST) CONSOLIDATED SCHEDULE OF INVESTMENTS -- TABULAR HOLDINGS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
DESCRIPTION % OF NET ASSETS - ------------------------------------------------------------------------------------------ Asset-Backed Securities 112.5% Other Assets and Liabilities (net) (12.5) --------------- 100.0% ===============
See accompanying notes to the financial statements. 1 GMO SPECIAL PURPOSE HOLDING FUND (FORMERLY GMO ALPHA LIBOR FUND) (A SERIES OF GMO TRUST) CONSOLIDATED SCHEDULE OF INVESTMENTS (SHOWING PERCENTAGE OF TOTAL NET ASSETS) AUGUST 31, 2004 (UNAUDITED)
PAR VALUE ($) DESCRIPTION VALUE ($) - ------------------------------------------------------------------------------------------------- DEBT OBLIGATIONS -- 112.5% (a) ASSET-BACKED SECURITIES -- 112.5% HEALTH CARE RECEIVABLES -- 112.5% 49,500,000 NPF VI Inc Series 02-1 Class A, 144A, Variable Rate, 1 mo. LIBOR +.95%, 2.69%, due 02/01/08 3,650,625 56,000,000 NPF XII Inc Series 02-1 Class A, 144A, Variable Rate, 1 mo. LIBOR +.65%, 2.39%, due 05/02/05 5,250,000 22,000,000 NPF XII Inc Series 00-3 Class A, 144A, Variable Rate, 1 mo. LIBOR +.45%, 2.20%, due 12/01/05 2,062,500 ------------ Total Asset-Backed Securities 10,963,125 ------------ TOTAL DEBT OBLIGATIONS (COST $116,569,089) 10,963,125 ------------ TOTAL INVESTMENTS -- 112.5% (Cost $116,569,089) 10,963,125 Other Assets and Liabilities (net) -- (12.5%) (1,218,362) ------------ TOTAL NET ASSETS -- 100.0% $ 9,744,763 ============
NOTES TO SCHEDULE OF INVESTMENTS: 144A - Securities exempt from registration under rule 144A of the Securities Act of 1933. These securities may be sold in transactions exempt from registration, normally to qualified institutional investors. (a) Owned by GMO SPV I, LLC. GMO Special Purpose Holding Fund is an 80.5% subsidiary of GMO SPV I, LLC. See accompanying notes to the financial statements. 2 At August 31, 2004, GMO Special Purpose Holding Fund's (formerly GMO Alpha LIBOR Fund) approximate 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 ---------------- ----------------- ----------------- -------------- $ 97,322,038 -- $ (86,963,200) $ (86,963,200)
See accompanying notes to the financial statements. 3 GMO SPECIAL PURPOSE HOLDING FUND (FORMERLY GMO ALPHA LIBOR FUND) (A SERIES OF GMO TRUST) CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES -- AUGUST 31, 2004 (UNAUDITED)
GMO SPECIAL PURPOSE HOLDING FUND (FORMERLY GMO ALPHA GMO MINORITY CONSOLIDATED LIBOR FUND) SPV 1, LLC INTEREST ELIMINATIONS TOTALS ASSETS: Investments in unaffiliated issuers, at value (cost $97,322,038) (Note 2) $ 9,358,838 $ 10,963,125 $ -- $ (9,358,838) $ 10,963,125 Cash 416,361 687,308 -- -- 1,103,669 Interest receivable 198 294 -- -- 492 Receivable for expenses reimbursed by Manager (Note 3) 16,221 2,423 -- -- 18,644 --------------- --------------- --------------- --------------- --------------- Total assets 9,791,618 11,653,150 -- (9,358,838) 12,085,930 --------------- --------------- --------------- --------------- --------------- LIABILITIES: Payable to affiliate for (Note 3): Trustees fee 3,245 -- -- 3,245 Accrued expenses 43,610 25,414 -- -- 69,024 Minority interest -- -- 2,268,898 -- 2,268,898 --------------- --------------- --------------- --------------- --------------- Total liabilities 46,855 25,414 2,268,898 -- 2,341,167 --------------- --------------- --------------- --------------- --------------- NET ASSETS $ 9,744,763 $ 11,627,736 $ (2,268,898) $ (9,358,838) $ 9,744,763 =============== =============== =============== =============== =============== NET ASSETS CONSIST OF: Paid-in capital $ 151,378,708 $ 15,787,710 $ (3,080,626) $ (12,707,084) $ 151,378,708 Distributions in excess of net investment income (8,875,947) (144,111) 28,120 115,991 (8,875,947) Accumulated net realized loss (44,794,798) (3,553,598) 693,407 2,860,191 (44,794,798) Net unrealized depreciation (87,963,200) (462,265) 90,201 372,064 (87,963,200) --------------- --------------- --------------- --------------- --------------- $ 9,744,763 $ 11,627,736 $ (2,268,898) $ (9,358,838) $ 9,744,763 =============== =============== =============== =============== =============== SHARES OUTSTANDING 554,071 554,071 =============== =============== NET ASSET VALUE PER SHARE 17.59 17.59 =============== ===============
See accompanying notes to the financial statements. 4 CONSOLIDATED STATEMENT OF OPERATIONS -- SIX MONTHS ENDED AUGUST 31, 2004 (UNAUDITED)
GMO SPECIAL PURPOSE HOLDING FUND (FORMERLY GMO ALPHA GMO MINORITY CONSOLIDATED LIBOR FUND) SPV 1, LLC INTEREST ELIMINATIONS TOTALS INVESTMENT INCOME: Interest $ 471,341 $ 12,786 $ -- $ -- $ 484,127 -------------- -------------- -------------- -------------- -------------- Total income 471,341 12,786 -- -- 484,127 -------------- -------------- -------------- -------------- -------------- EXPENSES: Custodian and transfer agent fees 2,768 14,233 -- -- 17,001 Audit and tax fees 26,930 135 -- -- 27,065 Legal fees 5,136 146,732 -- (141,044) 10,824 Trustees fees and related expenses (Note 3) 7,765 1,416 -- -- 9,181 Miscellaneous 583 -- -- -- 583 -------------- -------------- -------------- -------------- -------------- Total expenses 43,182 162,516 -- (141,044) 64,654 Fees and expenses reimbursed by Manager (Note 3) (202,394) (14,622) -- 141,044 (75,972) -------------- -------------- -------------- -------------- -------------- Net expenses (159,212) 147,894 -- -- (11,318) -------------- -------------- -------------- -------------- -------------- Net income 630,553 (135,108) -- -- 495,445 -------------- -------------- -------------- -------------- -------------- Minority Interest -- -- 28,858 -- 28,858 Net investment income after minority interest 630,553 (135,108) 28,858 -- 524,303 -------------- -------------- -------------- -------------- -------------- REALIZED AND UNREALIZED GAIN (LOSS): Net realized gain (loss) on: Investments in affiliated issuers (977,172) -- -- -- (977,172) Investments in unaffiliated issuers 3,956,402 -- -- -- 3,956,402 Closed futures contracts (369,357) -- -- -- (369,357) Closed swap contracts 52,793 -- -- -- 52,793 Foreign currency, forward contracts and foreign currency related transactions (259,901) -- -- -- (259,901) -------------- -------------- -------------- -------------- -------------- Net realized gain 2,402,765 -- -- -- 2,402,765 -------------- -------------- -------------- -------------- -------------- Change in net unrealized appreciation (depreciation) on: Investments 3,658,769 6,540,096 -- (5,157,873) 5,040,992 Open futures contracts 45,241 -- -- -- 45,241 Open swap contracts 37,217 -- -- -- 37,217 Foreign currency, forward contracts and foreign currency related transactions 339,968 -- -- -- 339,968 -------------- -------------- -------------- -------------- -------------- Net unrealized gain 4,081,195 6,540,096 -- (5,157,873) 5,463,418 -------------- -------------- -------------- -------------- -------------- Net realized and unrealized gain 6,483,960 6,540,096 -- (5,157,873) 7,866,183 -------------- -------------- -------------- -------------- -------------- Minority interest in realized and unrealized gain -- -- (1,275,973) -- (1,275,973) NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 7,114,513 $ 6,404,988 $ (1,247,115) $ (5,157,873) $ (7,114,513) ============== ============== ============== ============== ==============
See accompanying notes to the financial statements. 5 CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD SIX MONTHS ENDED DECEMBER 1, 2003 AUGUST 31, 2004 THROUGH YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004 NOVEMBER 30, 2003 ----------------- ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS: Operations (after minority interest): Net investment income $ 524,303 $ 1,242,811 $ 7,482,760 Net realized gain (loss) 2,587,125 (1,228,122) (43,897,574) Change in net unrealized appreciation (depreciation) 4,003,085 2,058,339 38,029,542 ----------------- ----------------- ----------------- Net increase (decrease) in net assets from operations 7,114,513 2,073,028 1,614,728 ----------------- ----------------- ----------------- Distributions to shareholders from: Net Investment income (6,893,402) Return of capital (596,105) -- -- Partnership distribution (8,540,458) -- -- ----------------- ----------------- ----------------- (16,029,965) Fund share transactions: (Note 6) Proceeds from sale of shares -- -- 324,210 Net asset value of shares issued to shareholders in payment of distributions declared 7,489,507 -- -- Cost of shares repurchased (214,556,130) (467,911) (59,532,346) ----------------- ----------------- ----------------- Net increase (decrease) in Fund share transactions (207,066,623) (467,911) (59,208,136) ----------------- ----------------- ----------------- Total increase (decrease) in net assets (215,982,075) 1,605,117 (57,593,408) NET ASSETS: Beginning of period 225,726,838 224,121,721 281,715,129 ----------------- ----------------- ----------------- End of period (including distributions in excess of net investment income of $8,875,947 and undistributed net investment income of $6,523,465, and $6,369,332, respectively) $ 9,744,763 $ 225,726,838 $ 224,121,721 ================= ================= =================
See accompanying notes to the financial statements. 6 GMO SPECIAL PURPOSE HOLDING FUND (FORMERLY GMO ALPHA LIBOR FUND) (A SERIES OF GMO TRUST) FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
PERIOD FROM SIX MONTHS ENDED DECEMBER 1, 2003 YEAR AUGUST 31, 2004 THROUGH ENDED (UNAUDITED) FEBRUARY 29, 2004(a)(b) NOVEMBER 30, 2003(a) ---------------- ----------------------- -------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 24.11 $ 23.89 $ 23.77 ---------------- ----------------------- -------------------- Income from investment operations: Net investment income 0.25+ 0.13+ 0.75+ Net realized and unrealized gain (loss) 9.44 0.09 (0.63) ---------------- ----------------------- -------------------- Total from investment operations 9.69 0.22 0.12 ---------------- ----------------------- -------------------- Less distributions to shareholders: From net investment income (0.74) -- -- From net realized gains -- -- -- From return of capital (0.06) -- -- From partnership distributions (15.41) -- -- ---------------- ----------------------- -------------------- Total distributions (16.21) -- -- ---------------- ----------------------- -------------------- NET ASSET VALUE, END OF PERIOD $ 17.59 $ 24.11 $ 23.89 ================ ======================= ==================== TOTAL RETURN (f) 38.83%** 0.92%** 0.50% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 9,745 $ 225,727 $ 224,113 Net operating expenses to average daily net assets (0.05)%* 0.08%* 0.13% Interest expense to average daily net assets (h) -- 0.04%* --(i) Total net expenses to average daily net assets (0.05)%* 0.12%* 0.13% Net investment income to average daily net assets 2.09%* 0.49 3.11% Portfolio turnover rate 0%** 4%** 80% Fees and expenses reimbursed by the Manager to average daily net assets: 0.30%* 0.11%* 0.10%
See accompanying notes to the financial statements. 7
PERIOD FROM MARCH 1, 2002 YEAR ENDED FEB. 28/29, (a) THROUGH --------------------------------------------------- NOVEMBER 30,2002(a)(c) 2002 2001(d) 2000(e) ----------------------- -------------- -------------- -------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 25.66 $ 26.14 $ 25.29 $ 25.00 ----------------------- -------------- -------------- -------------- Income from investment operations: Net investment income 0.73+ 1.29+ 1.83+ 0.26 Net realized and unrealized gain (loss) (2.39) (0.33) 0.07 0.03 ----------------------- -------------- -------------- -------------- Total from investment operations (1.66) 0.96 1.90 0.29 ----------------------- -------------- -------------- -------------- Less distributions to shareholders: From net investment income (0.15) (1.44) (1.05) -- From net realized gains (0.08) -- -- -- From return of capital -- -- -- -- From partnership distributions -- -- -- -- ----------------------- -------------- -------------- -------------- Total distributions (0.23) (1.44) (1.05) -- -------------- -------------- -------------- NET ASSET VALUE, END OF PERIOD $ 23.77 $ 25.66 $ 26.14 $ 25.29 ======================= ============== ============== ============== TOTAL RETURN (f) (6.53)%** 3.69% 7.61% 1.16%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000's) $ 281,715 $ 1,440,711 $ 1,520,173 $ 338,101 Net operating expenses to average daily net assets 0.01%* --(g) --(g) --*(g) Interest expense to average daily net assets (h) 0.03%* 0.05% 0.20% 0.40%* Total net expenses to average daily net assets 0.04%* 0.05% 0.20% 0.40%* Net investment income to average daily net assets 3.76%* 4.91% 7.05% 6.62%* Portfolio turnover rate 39%** 29% 39% 4%** Fees and expenses reimbursed by the Manager to average daily net assets: 0.02%* 0.02% 0.02% 0.02%*
See accompanying notes to the financial statements. 8 (a) As a result of changes in generally accepted accounting principles, the Fund has reclassified periodic payments made under interest rate swap agreements, previously included within interest income, as a component of realized gain (loss) in the statement of operations. The effect of this reclassification was to increase the net investment income ratio for the year ending February 29, 2004 by 0.06% and net investment income per share by $0.01. For consistency, similar reclassifications have been made to prior year amounts, resulting in increases (reductions) to the net investment income ratio of 0.15%, 0.41%, 0.24%, less than 0.01% and (0.15)% and to net investment income per share of $0.04, $0.08, $0.06, less than $0.01 and less than $(0.01) in the fiscal years/periods ending November 30, 2003, November 30, 2002, February 28, 2002, February 28, 2001 and February 29, 2000, respectively. (b) The Fund changed its fiscal year end from November 30 to February 28. (c) The Fund changed its fiscal year end from February 28 to November 30. (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 7.06% to 7.05%. Per share and ratios/supplemental data for periods prior to March 1, 2000 have not been restated to reflect this change. (e) Period from December 31, 1999 (commencement of operations) to February 29, 2000. (f) The total return would have been lower had certain expenses not been reimbursed during the period shown. (g) Net operating expenses as a percentage of average daily net assets was less than 0.01%. (h) 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. (i) Interest expense as a percentage of average daily net assets was less than 0.01%. + Computed using average shares outstanding throughout the period. * Annualized. ** Not annualized. See accompanying notes to the financial statements. 9 GMO SPECIAL PURPOSE HOLDING FUND (FORMERLY GMO ALPHA LIBOR FUND) (A SERIES OF GMO TRUST) CONSOLIDATED NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2004 (UNAUDITED) 1. ORGANIZATION GMO Special Purpose Holding Fund (formerly GMO Alpha LIBOR 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 consolidated financial statements include the accounts of the Fund and GMO SPV I LLC, its 80.5% owned subsidiary (collectively, the "Fund"). All significant intercompany balances and transactions have been eliminated. Shares of the Fund are not publicly offered and are principally available only to other GMO Funds of the Trust and certain accredited investors. Presently the Fund is closed to new investment. On November 26, 2002, approximately 78% of the Fund's assets were transferred to a new fund, the GMO Short-Duration Collateral Fund ("SDCF"). The Fund retained certain defaulted bonds sponsored by National Century Financial Enterprises (the "NPF Securities") (through its investment in GMO SPV I, LLC ("SPV")) and generally retained other lower quality issues. On January 23, 2004, the trustees of the Trust approved a transaction pursuant to which the Fund contributed its net assets, other than its interest in GMO SPV I, LLC, its claims resulting from its holdings of the NPF Securities, and a fixed amount of cash, such contribution representing $214,143,316 or 94.14% of the Fund's assets, to SDCF in exchange for SDCF shares. The transaction, which was structured as a tax-free reorganization, was consummated after the close of business on March 31, 2004 and the shares received by the Fund were then distributed to the shareholders. After distribution of the SDCF shares, the Fund changed its name to GMO Special Purpose Holding Fund and elected partnership status for Federal income tax purposes. The tax year end of GMO Special Purpose Holding Fund will be determined by reference to the year end of the majority of the partners on the first day of its taxable year, April 1, 2004. For financial reporting purposes, the Fund changed its year end from November 30 to February 28. In April 2004, a plan of liquidation ("the Plan") was approved by the bankruptcy court with respect to the National Century Financial Enterprises and the NPF Securities. Pursuant to the Plan, the Fund received a cash distribution, less expenses associated with the transaction and an interest in additional amounts recovered by the bankruptcy estate. The Fund, together with other creditors, are continuing to pursue various claims resulting from its holdings of the NPF Securities. The ultimate amount of losses and costs associated with the NPF Securities that may be recovered by the Fund (through its investment in SPV) is not known at this time. 10 2. SIGNIFICANT ACCOUNTING POLICIES 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. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the GMO Special Purpose Holding Fund and its majority-owned investment in the GMO SPV I, LLC "(SPV)". The consolidated financial statements include 100% of the assets and liabilities of SPV and the ownership interests of minority participants are recorded as "Minority Interest". All significant fund accounts and transactions have been eliminated in consolidation. CHANGE IN ACCOUNTING PRINCIPLE For the year ended February 29, 2004, as a result of a FASB Emerging Issues Task Force consensus (and subsequent related SEC staff guidance), the Fund has reclassified periodic payments made under interest rate swap agreements, previously included within interest income, as a component of realized gain (loss) in the Statement of Operations. For consistency, similar reclassifications have been made to the per share amounts in all prior year financial highlights presented. Prior year net investment income ratios in the financial highlights have also been modified accordingly. This reclassification increased net investment income and decreased net realized gains by $137,837 for the period ended February 29, 2004. This change had no effect on the Fund's net asset value, either in total or per share, or its total increase (decrease) in net assets from operations during any period. PORTFOLIO VALUATION Shares of investment 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 using fair value prices supplied by an independent pricing service to the extent that such prices are available. 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. The prices provided by the Manager may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. 11 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 were valued solely on the basis of a price provided by the 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 August 31, 2004, the total value of these securities represented 100% of total investments. 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 August 31, 2004, the Fund held no open forward currency contracts. 12 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. Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract can vary from the previous day's settlement price, thereby effectively preventing liquidation of unfavorable positions. Losses may arise from the changes in the value of the underlying instrument, if the Fund is unable to liquidate a futures position due to an illiquid secondary market for the contracts or the imposition of price limits, 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 August 31, 2004, 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 unfavorable change in the price of the future, security or currency underlying the written option. In the event that the Fund writes uncovered call options (i.e. options for investments that the Fund does not own), it bears the risk of incurring substantial losses if the price of the underlying investment increases during the term of the option. There is the risk the Fund may not be able to enter into a closing transaction because of an illiquid market. At August 31, 2004, there were no open written option contracts. 13 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 closing transaction to determine the realized gain or loss. The risk associated with purchasing put and call options is limited to the premium paid. At August 31, 2004, 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. At August 31, 2004, the Fund did not hold any indexed securities. 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 using standard models that incorporate quotations 14 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 on swap contracts 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 interest rates. At August 31, 2004, 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 or enters into insolvency proceedings and the value of the collateral declines, recovery of cash by the Fund may be delayed or limited. At August 31, 2004, there were no open repurchase agreements. 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 August 31, 2004, the Fund had 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 collateral, the risk of delay in recovery or loss of rights in collateral should the borrower of the securities fail financially. The Fund receives compensation for lending its securities. At August 31, 2004, the Fund had no securities on loan. 15 TAXES AND ALLOCATIONS Effective on April 1, 2004, the Fund elected to be taxed as a partnership for federal income tax purposes and, accordingly, the Fund is no longer a "regulated investment company" for federal income tax purposes. The Fund intends to monitor the number of its shareholders so as not to be treated as a "publicly traded partnership" under certain safe harbors provided in Treasury Regulations. As a Partnership for U.S. federal income purposes, the Fund will not be subject to federal and state income tax. Instead, each shareholder is responsible for the tax liability or benefit related to his/her allocable share of taxable income or loss. Accordingly, no provision (benefit) for federal and state income taxes is reflected in the accompanying financial statements. Taxable allocations of taxable income, gain, loss, deductions and credits of the Fund will be done in accordance with the economics of the Fund as determined in the Fund's discretion and as fully described in the Fund's Private Placement Memorandum. The Fund qualified as a regulated investment company until March 31, 2004, under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). Through March 31, 2004, The Fund's policy was to declare and pay distributions from its net investment income annually, and from net realized short-term and long-term capital gains at least annually. All distributions were paid in shares of the Fund, at net asset value, unless the shareholder elected to receive cash distributions. Distributions to shareholders were recorded by the Fund on the ex-dividend date. Income dividends and capital gain distributions were determined in accordance with U.S. federal income tax regulations which may have differed from U.S. GAAP. Distributions in excess of tax basis earnings and profits, if any, were reported in the Fund's financial statements as a return of capital. For the Fund's tax year ended March 31, 2004, the Fund had a return of capital distribution of $596,105. DISTRIBUTIONS Under the Fund's amended Agreement and Declaration of Trust, the Fund will make distributions, at least annually, to the extent of the Fund's net income and gains, if any. In addition, the Fund will distribute proceeds and other cash receipts received from its underlying investments. Distributions made by the Fund, other than a distribution in partial or complete redemption of a shareholder's interest in the Fund, are reported in the Fund's financial statements as partnership distributions. GMO SPV I, LLC is also treated as a partnership for federal income tax purposes and subject to the same rules as the Fund with respect to federal income taxation of partnerships. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME Security transactions are accounted for on trade date. Interest income is recorded on an accrual basis and is adjusted for the amortization of premiums and discounts. Income is not recognized, nor are premium and discount amortized on securities for which collection in the ordinary course of business is not expected. Dividend income is recorded on the ex-dividend date. 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 16 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 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. 3. FEES AND OTHER TRANSACTIONS WITH AFFILIATES GMO does not charge the Fund any management or service fees for its services. In addition, effective until at least June 30, 2005, GMO has contractually agreed to reimburse all of the Fund's 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's portion of the fee paid by the Trust to the independent Trustees during the six months ended August 31, 2004 was $3,979. No remuneration is paid to any Trustee or officer who is affiliated with the Manager. 4. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities, excluding short-term investments, for the six months ended August 31, 2004, aggregated $0 and $207,456,045, respectively. Included in proceeds from sales of securities is $205,024,822 related to the Fund's contribution to SDCF. 5. PRINCIPAL SHAREHOLDERS At August 31, 2004, 61.7% of the outstanding shares of the Fund were held by three shareholders, each holding in excess of 10% of the Fund's outstanding shares. One of the shareholders is another fund of GMO Trust. Investment activities of these shareholders may have a material effect on the Fund. At August 31, 2004, 0.7% of SPV was held by six related party accounts. 17 6. 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:
FOR THE PERIOD SIX MONTHS ENDED DECEMBER 1, 2003 AUGUST 31, 2004 THROUGH YEAR ENDED (UNAUDITED) FEBRUARY 29, 2004* NOVEMBER 30, 2003 ------------------ ------------------ ------------------ Shares sold -- -- 13,488 Shares issued to shareholders In reinvestment of distributions 320,338 -- -- Shares repurchased (9,128,161) (19,584) (2,483,384) ------------------ ------------------ ------------------ Net decrease (8,807,823) (19,584) (2,469,896) Fund shares: Beginning of period 9,361,894 9,381,478 11,851,374 ------------------ ------------------ ------------------ End of period 554,071 9,361,894 9,381,478 ================== ================== ==================
*Change in year end. See Note 1. 7. SUBSEQUENT EVENT Effective October 5, 2004, GMO Trust appointed a Chief Compliance Officer and adopted a compliance plan in accordance with Rule 38a-1 under the Investment Company Act of 1940, as amended. 18 The Fund incurs ongoing operating expenses during the normal course of business, such as custodian and transfer agent fees, audit and tax fees and other expenses. The following table, assuming a $1,000 investment in the Fund, discloses the ending account value and operating expenses incurred for the six months ended August 31, 2004, based on, (1) the Fund's actual return and actual expenses, and (2) a hypothetical annualized 5% return and the Fund's actual expenses:
OPERATING BEGINNING ENDING EXPENSE VALUE VALUE INCURRED * ------------------------------------------------------------------------ 1) Actual $ 1,000.00 $ 1,388.30 $ (0.30) 2) Hypothetical 1,000.00 1,025.46 (0.26)
*Expenses are calculated using the Fund's annualized expense ratio for the six months ended August 31, 2004 of (0.05)%, multiplied by the average account value over the period, multiplied by 184 days in the period, divided by 365 days in the year. You can estimate expenses incurred for the six months ended August 31, 2004 on your investment in a particular class of shares by dividing your investment value at August 31, 2004 by $1,000 and then multiplying that result by the operating expenses of the class owned as calculated above. You can also use this information to compare ongoing expenses of investing in the Fund with those of other mutual funds. 19 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. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable to this filing. ITEM 6. SCHEDULE OF INVESTMENTS Included as part of the report to shareholders filed under Item 1 of this Form ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable to this filing. ITEM 8. PURCHASE OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable to this filing. ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Board of Trustees of the Registrant has adopted procedures by which shareholders may send communications, including recommendations for nominees to the Registrant's Board, to the Trustees. Shareholders who wish to communicate with the Trustees must do so by mailing a communication, addressed as follows: To the Attention of the Board of Trustees, c/o GMO Trust Chief Compliance Officer, GMO Trust, 40 Rowes Wharf, Boston, MA 02110. A shareholder communication must (i) be in writing and be signed by the shareholder, (ii) identify the Fund to which it relates, and (iii) identify the class and number of shares held by the shareholder. ITEM 10. CONTROLS AND PROCEDURES. (a) The Registrant's Principal Executive Officer and Principal Financial Officer have concluded, as of a date within 90 days of the filing of this report, based on their evaluation of the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended,) that the design and operation of such procedures are effective to provide reasonable assurance that information required to be disclosed by the Registrant on Form N-CSR is recorded, processed, summarized, and reported within the time periods specified in the commission's rules and forms. (b) (1) In the period, the Registrant's manager eliminated procedures in place to reconcile all securities holdings and valuations to the records maintained by the Registrant's accounting agent with respect to GMO Emerging Markets Fund, GMO Emerging Countries Fund, GMO Asia Fund, GMO Taiwan Fund, GMO Value Fund, and GMO Real Estate Fund. The Registrant's manager also instituted an oversight function providing a more selective analysis that evaluates only those factors identified by the procedures as material to the calculation of daily net asset values of these funds. (2) In the period, the Registrant's manager instituted procedures designed to monitor the efficacy of and resolve any identified issues relating to fair value prices provided for foreign equity securities by FT Interactive Data on a daily basis pursuant to pricing policies approved by the Trustees of the Trust. The Registrant expresses no view as to whether the changes described in (b)(1) and (b) (2) are material. The Registrant does not believe any controls or procedures can provide absolute assurance of financial reporting accuracy. ITEM 11. EXHIBITS. (a)(1) Code of Ethics Described in Item 2 is Not Applicable to this filing. (a)(2) Certifications of the Principal Executive Officer and Principal Financial Officer of the Registrant as required by Rule 30a-2(a) under the Investment Company Act of 1940 (17 CFR 270.30a-2(a)) are attached hereto as Exhibit 99CERT.302 (b) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto as Exhibit 99CERT.906. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) GMO Trust By (Signature and Title): /s/ Scott Eston -------------------------------------------------- Scott Eston, Chief Executive Officer Date November 8, 2004 ---------------- Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities, and on the dates indicated. By (Signature and Title): /s/ Scott Eston -------------------------------------------------- Scott Eston, Chief Executive Officer Date November 8, 2004 ---------------- By (Signature and Title): /s/ Susan Randall Harbert -------------------------------------------------- Susan Randall Harbert, Chief Financial Officer Date November 8, 2004 ---------------- EX-99.CERT.302 2 a2145256zex-99_cert302.txt EX-99CERT.302 EXHIBIT 99Cert.302 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; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the Registrant as of, and for, the periods presented in this report; 4. The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the Registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and c) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal half-year (the Registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer(s) and I have disclosed to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize, and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: November 8, 2004 ---------------- /s/ Scott Eston ------------------------------------ Scott Eston, Chief Executive Officer EXHIBIT 99Cert.302 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; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the Registrant as of, and for, the periods presented in this report; 4. The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the Registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and c) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal half-year (the Registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer(s) and I have disclosed to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize, and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: November 8, 2004 ----------------- /s/ Susan Randall Harbert ---------------------------------------------- Susan Randall Harbert, Chief Financial Officer EX-99.CERT.906 3 a2145256zex-99_cert906.txt EX-99.CERT.906 EXHIBIT 99Cert.906 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Scott Eston, Chief Executive Officer of GMO Trust (the "Registrant"), certifies to the best of his knowledge that: 1. The Registrant's periodic report on Form N-CSR for the period ended August 31, 2004 (the "Form N-CSR") fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. /s/ Scott Eston ---------------------------- Scott Eston Chief Executive Officer Date November 8, 2004 ----------------------- A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission (the "Commission") or its staff upon request. This certification is being furnished to the Commission solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Form N-CSR with the Commission. EXHIBIT 99Cert.906 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Susan Randall Harbert, Chief Financial Officer of GMO Trust (the "Registrant"), certifies to the best of her knowledge that: 1. The Registrant's periodic report on Form N-CSR for the period ended August 31, 2004 (the "Form N-CSR") fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. /s/ Susan Randall Harbert ------------------------------------ Susan Randall Harbert Chief Financial Officer Date November 8, 2004 ------------------------------- A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission (the "Commission") or its staff upon request. This certification is being furnished to the Commission solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Form N-CSR with the Commission. -----END PRIVACY-ENHANCED MESSAGE-----